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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE #0-9623
UST CORP.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2436093
(State or other (I.R.S.
jurisdiction Employer
of incorporation or Identification
organization) No.)
40 Court Street
Boston, Massachusetts 02108
(Address of principal (Zip Code)
executive offices)
(617) 726-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.625
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by Reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The number of shares of common stock held by nonaffiliates of the registrant
as of March 2, 1998 was 25,328,467 for an aggregate market value of
$687,034,667.
At March 2, 1998, there were issued and outstanding 29,812,477 shares of
common stock, par value $0.625 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 1998 Annual Meeting are
incorporated by reference in Items 10, 11, 12 and 13 of Part III.
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FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Business......................................................... 3
Item 2 Properties....................................................... 11
Item 3 Legal Proceedings................................................ 11
Item 4 Submission of Matters to a Vote of Security Holders.............. 11
PART II
Item 5 Market for the Registrant's Common Stock and Related Security
Holder Matters.................................................. 11
Item 6 Selected Financial Data.......................................... 13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 14
Financial Condition at December 31, 1997
Results of Operations
Item 7a Quantitative and Qualitative Disclosures About Market Risk....... 33
Item 8 Financial Statements and Supplementary Material.................. 34
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 69
PART III
Item 10 Directors and Executive Officers of the Registrant............... 69
Item 11 Executive Compensation........................................... 69
Item 12 Security Ownership of Certain Beneficial Owners and Management... 69
Item 13 Certain Relationships and Related Transactions................... 69
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures.................................................. 70
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PART I
ITEM 1. Business
General Description of Business
UST Corp. (the "Company"), a bank holding company registered with the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), was
organized as a Massachusetts business corporation in 1967. The Company is also
subject to examination by, and is required to file reports with, the
Commissioner of Banks of the Commonwealth of Massachusetts (the "Massachusetts
Commissioner"). As of December 31, 1997, the Company's banking subsidiaries were
USTrust and United States Trust Company ("USTC"), each headquartered in Boston
and chartered under Massachusetts law. USTrust and USTC are sometimes hereafter
collectively referred to as the "Subsidiary Banks". All of the capital stock of
the Subsidiary Banks is owned directly or indirectly by the Company. In
addition, the Company owns, indirectly through its Subsidiary Banks, all of the
outstanding stock of five active nonbanking subsidiaries: Firestone Financial
Corp. (and its Canadian subsidiary, Firestone Financial Canada Ltd.), UST
Leasing Corporation, UST Capital Corp., UST Realty Trust, Inc. and UST Auto
Lease Corp., as well as eight subsidiaries which hold foreclosed real estate and
four subsidiaries which are passive holders of securities. All of the
subsidiaries, except Firestone Financial Canada Ltd. (which was organized under
the laws of the Canadian province of Ontario) were organized under Massachusetts
law.
The Company engages in one line of business, that of providing financial
services through its banking and nonbanking subsidiaries. A broad range of
financial services is provided principally to individuals and small- and
medium-sized companies in New England including those located in low- and
moderate-income neighborhoods within the Company's defined Community
Reinvestment Act assessment area. In addition, an important component of the
Company's financial services is the provision of trust and money management
services to professionals, corporate executives, nonprofit organizations, labor
unions, foundations, mutual funds and owners of closely-held businesses, most of
which are located in the New England region.
As of the close of business on December 31, 1997, the Company's total assets
were approximately $3.84 billion and USTrust, the lead bank, had over $3.8
billion, or 99 percent of the Company's consolidated assets.
The Subsidiary Banks
The Subsidiary Banks are engaged in a general banking business and accept
deposits which are insured by the Federal Deposit Insurance Corporation
("FDIC"). USTrust provides a full range of commercial and consumer financial
services. USTC, which has full banking powers and accepts deposits which are
insured by the FDIC, focuses its activity on trust and money management, venture
capital and other fee-generating businesses.
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Recent Developments
Acquisition of Firestone Financial Corp.
On October 15, 1997, the Company consummated 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
1,180,000 shares of the Company's Common Stock for the 2,000,000 closely held
shares of Firestone common stock. Firestone has one subsidiary, Firestone
Financial Canada Ltd., a Canadian entity which offers similar business equipment
finance services to small business entities in Canada.
Pending Acquisition of Somerset Savings Bank
On December 9, 1997, the Company executed an Affiliation Agreement and Plan
of Reorganization (the "Somerset Agreement") with Somerset Savings Bank of
Somerville, Massachusetts ("Somerset"), pursuant to which Somerset will be
merged with and into USTrust. Somerset, a Massachusetts savings bank which at
December 31, 1997 had consolidated assets of $540 million, serves the consumer
and small business banking needs of its customers through its five branch
offices located in the communities of Somerville and Burlington. The Somerset
transaction, which is structured to qualify as a pooling of interests for
accounting purposes, is subject to the approval of the shareholders of Somerset
as well as to the receipt of federal and state regulatory banking approvals.
Subject to the foregoing conditions, the Somerset transaction is expected to
close during the second or third quarter of 1998.
The Somerset transaction is structured as a tax-free exchange of 0.19 shares
of UST Corp. Common Stock for each share of Somerset common stock outstanding.
At the Company's closing stock price of $29.625 on December 9, 1997, the
Somerset transaction would be valued at approximately $94 million, and Somerset
shareholders would receive a value of $5.63 in the Company's Common Stock for
each share of Somerset common stock. The purchase price represents a multiple of
2.3 times stated book value of Somerset at September 30, 1997. The Company
expects to record a one-time, pre-tax charge of approximately $7.5 million in
acquisition-related costs in connection with the Somerset transaction.
Immediately after execution of the Somerset Agreement on December 9, 1997,
the Company entered into a Stock Option Agreement with Somerset pursuant to
which Somerset granted the Company the option to purchase, under certain
circumstances, up to 2,777,000 shares (or approximately 16.7%) of its
outstanding stock for $4.875 per share and has also agreed to pay the Company
certain additional consideration related to the option.
Following the consummation of the Somerset transaction, Mr. James F. Drew, a
current director of Somerset, will become a director of the Company and Mr.
Nicholas P. Salerno, a current director of Somerset, will become a director of
USTrust. Additionally, pursuant to the terms of an Employment Agreement dated as
of December 9, 1997, Mr. Thomas J. Kelly, currently President and Chief
Executive Officer of Somerset, will become an Executive Vice President of
USTrust.
Pending Acquisition of Affiliated Community Bancorp., Inc.
On December 15, 1997, the Company executed an Affiliation Agreement and Plan
of Reorganization (the "Affiliated Agreement") with Affiliated Community
Bancorp., Inc. of Waltham, Massachusetts ("Affiliated"), pursuant to which the
Company will acquire Affiliated. Affiliated is a $1.2 billion Massachusetts bank
holding company for three community banks, Lexington Savings Bank, The Federal
Savings Bank and Middlesex Bank & Trust Company ("Middlesex") (together, the
"Affiliated Banks") which serve consumer and small business banking needs
through 13 branch offices located in eastern Middlesex County. In the Affiliated
Agreement, the Company has permitted Affiliated to sell all of the shares of
capital stock of Middlesex for not less than
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$8,000,000 prior to the effective date of the Affiliated transaction, which
sale, if consummated, would not have a material effect on Affiliated. At
December 31, 1997, Middlesex has assets of approximately $18.9 million and a net
worth of approximately $7.7 million. The Affiliated transaction, which is
structured to qualify as a pooling of interests for accounting purposes, is
subject to the approval of the shareholders of the Company and Affiliated as
well as to the receipt of federal and state regulatory banking approvals and is
expected to close during the second or third quarter of 1998. While the Company
will first acquire Affiliated, thereby making the Affiliated Banks subsidiaries
of the Company, the Company anticipates merging the Affiliated Banks into
USTrust in 1998.
The Affiliated transaction is structured as a tax-free exchange of 1.41
shares of UST Corp. Common Stock for each share of Affiliated common stock
outstanding. At the Company's closing stock price of $28.3125 on December 12,
1997, the Affiliated transaction would be valued at approximately $259 million,
and Affiliated shareholders would receive a value of $39.92 in UST Corp. Common
Stock for each share of Affiliated common stock. The Company expects to record a
one-time, pre-tax charge of approximately $12 million in acquisition-related
costs in connection with the Affiliated transaction. If the Company's average
stock price during a specified period prior to closing is less than $24.06 per
share and the Company's stock price has declined by more than 15% relative to a
certain bank stock index, Affiliated can terminate the agreement, subject to the
right of the Company to issue additional shares to ensure a per share value of
$33.92 in stock of the Company.
Immediately after execution of the Affiliated Agreement on December 15,
1997, the Company entered into a Stock Option Agreement with Affiliated pursuant
to which Affiliated granted to the Company the option to purchase, under certain
circumstances, up to 1,300,078 shares (or approximately 19.9%) of its
outstanding stock for $32.937 per share.
Following consummation of the Affiliated transaction, Mr. Neal F. Finnegan,
currently President and Chief Executive Officer of the Company and USTrust, will
serve as President and Chief Executive Officer of the Company and Chairman and
Chief Executive Officer of USTrust, and Mr. Timothy J. Hansberry, currently
President and Chief Executive Officer of Affiliated, will serve as Vice Chairman
and Chief Operating Officer of the Company and President and Chief Operating
Officer of USTrust. Additionally, five of the current directors of Affiliated,
including Mr. Hansberry (or such lesser number as may be agreed to by the
Company and Affiliated, and as will represent approximately 20% of the then
existing Board of Directors of the Company) will become directors of the Company
Business Services
The Subsidiary Banks provide a broad range of banking services including
deposit, investment, cash management, payroll, wire transfer, leasing, merchant
credit card and lending services throughout New England. Commercial and
industrial lending takes the form primarily of direct loans and includes lines
of credit, revolving credits, domestic and foreign letters of credit, term
loans, mortgage loans, receivable, inventory and equipment loans and other
specialized lending services. Furthermore, the Company provides additional
services to small business customers through utilization of government sponsored
and assisted loan programs. USTrust is certified by the SBA as a "Small Business
Administration Lender." USTC provides deposit services and other banking
services, but focuses its activities on money management, venture capital and
other fee-generating services. Through Firestone, the Company provides small
business equipment finance services. The Company intends to begin providing a
broader range of cash management services to a larger number of municipalities
during 1998. At December 31, 1997, the combined lending limit to a single
borrower of USTrust was approximately $47 million.
Consumer Services
Consumer services are provided by the Subsidiary Banks to customers in their
geographic areas. These services include savings and checking accounts, NOW and
money market accounts, consumer loans, credit cards (through a private label
arrangement), ATM and debit cards, safe deposit box facilities, travelers'
checks and foreign exchange into several major foreign currencies. Consumer
loans include home equity loans
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and lines of credit, automobile loans, personal loans and loans to finance
education costs as well as open-ended credit. The Company expects to reenter the
residential mortgage origination business in 1998. USTrust also maintains a
residential mortgage servicing capacity for its own portfolio and for third
parties. As of December 31, 1997, the aggregate principal amount of residential
mortgages serviced by the Company for its own account was approximately $698
million. In 1997 the Company began offering automobile leasing services to
customers through UST Auto Lease Corp. Automobile loan and lease volume
increased substantially in 1997 and reached a level of approximately $637
million as of December 31, 1997. The Company's Subsidiary Banks currently have
an aggregate of 66 offices which maintain an automated teller machine system
which, through membership in various networks, provides the Company's customers
with access to their accounts at locations throughout the world. Most of the
Company's proprietary ATM machines provide information to customers in English,
Spanish and Portuguese, and also provide information adapted for the visually
impaired.
Investment Services
The Investment Group located at USTrust was formed in 1994. The Investment
Group, a service of Essex National Securities, Inc. and Essex Insurance Agency
of Massachusetts, Inc., an unaffiliated, licensed broker-dealer, offers mutual
funds (whose investments are managed by nonaffiliated third parties), Treasury
Bills, Treasury Notes, corporate bonds, state, federal and municipal bonds and
discount brokerage services to the customers of USTrust. The Essex Insurance
Agency of Massachusetts, Inc. also offers annuities to USTrust customers at
branch locations.
Real Estate Services
The Subsidiary Banks provide a broad range of industrial and commercial real
estate lending services and other related financial services. In 1998, the
Company intends to begin providing small real estate construction loans to
developers of projects in the cities and towns served by USTrust's branch
system. In addition, as noted above under the caption, "Consumer Services,"
USTrust is engaged in residential mortgage servicing and intends to reenter the
residential mortgage origination business in 1998.
Asset and Money Management and Trust Services
Asset and money management, custodial and trust services are provided by USTC.
In addition, USTC provides services as executor, administrator and trustee of
estates and acts, under the terms of agreements, in various capacities such as
escrow agent, bond trustee and trustee and agent of pension, profit sharing and
other employee benefit trusts. At December 31, 1997, the total assets under
management of USTC were approximately $3.1 billion. Approximately one quarter of
total assets under management are those of clients who have requested that their
assets be managed with specified social as well as financial investment
objectives in mind. USTC also serves as investment adviser to a balanced mutual
fund, the Boston Balanced Fund.
Securities Portfolios Maintained by the Company
The Subsidiary Banks, both directly and through wholly-owned Massachusetts
securities corporations, maintain securities portfolios consisting primarily of
U.S. Treasury, U.S. Government Agency, and corporate and municipal securities.
The Subsidiary Banks own an aggregate of four Massachusetts securities
corporations. As Massachusetts securities corporations, these subsidiaries make
exclusively passive investments and serve by buying, selling, dealing in and
holding securities.
All of the Company's securities are deemed "available-for-sale" which
enhances the liquidity position of the Company and allows for flexibility in
management of interest rate risk. The securities portfolios of the Subsidiary
Banks also include certain other equity investments as allowed within limits
prescribed by Massachusetts and federal law. Such investments currently include,
among others, equity interests in the Massachusetts Housing Investment
Corporation's Limited Partnership Equity Fund for Affordable Housing. The
Treasury Division of the Company provides securities portfolio advisory services
to the Company's Subsidiary Banks. USTrust is also a member of the Federal Home
Loan Bank of Boston. This membership
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provides USTrust with access to an additional source of funds. In February 1998,
USTrust also established UST Realty Trust, Inc., a real estate investment trust.
Principal Nonbanking Subsidiaries
Firestone Financial Corp., organized in 1965 and acquired as a subsidiary of
USTrust in 1997, provides small business equipment financing services to
companies headquartered throughout the United States. Firestone's principal
market consists of small businesses that maintain various types of coin-operated
amusement equipment and vending machines, as well as owners/operators of
dry-cleaning stores and coin operated laundry equipment. Firestone also provides
similar services to Canadian companies through its wholly-owned subsidiary,
Firestone Financial Canada Ltd., a Canadian entity. As of December 31, 1997,
Firestone's total assets were approximately $86 million.
UST Leasing Corporation, a subsidiary of USTrust organized in 1987, provides
a broad range of equipment leasing services to corporations headquartered
throughout the United States. UST Leasing Corporation offers a line of leasing
products designed to meet the needs of the Company's small business customers
and other business entities with similar needs. As of December 31, 1997, UST
Leasing Corporation's total assets were approximately $63 million.
UST Auto Lease Corp., a subsidiary of UST Leasing Corporation organized in
1997, provides automobile leasing services to consumers and corporations
headquartered throughout New England. As of December 31, 1997, UST Auto Lease
Corp.'s total assets were approximately $27 million.
UST Realty Trust, Inc., an indirect subsidiary of USTrust, was organized in
February of 1998. It functions as a real estate investment trust which holds,
and may from time to time originate, real estate loans and participations in
such loans.
UST Capital Corp., organized in 1961 and acquired by the Company in 1969, is
a subsidiary of USTC and is a licensed Small Business Investment Company. It
specializes in equity and long-term debt financing for growth-oriented
companies.
Competitive Conditions
The Company's banking and nonbanking subsidiaries face substantial
competition throughout Massachusetts. This competition is provided by commercial
banks, savings banks, credit unions, consumer finance companies, insurance
companies, mutual funds, government agencies, investment management companies,
investment advisors, brokers and investment bankers. Most of these entities are
actively engaged in marketing various types of loans, deposits, investment
products and other financial services. Quality of service to customers, price of
products, breadth of its range of products and services and ease of
accessibility to facilities are among the principal methods of meeting
competition in the banking and financial services industries.
Supervision and Regulation of the Company and its Subsidiaries
General
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended (the "BHC Act"), the Company is subject to substantial
regulation and supervision by the Federal Reserve Board. As state-chartered
banks, the Subsidiary Banks are subject to substantial regulation and
supervision by the FDIC and the applicable state bank regulatory agencies. Such
activities are often intended primarily for the protection of depositors or are
aimed at carrying out broad public policy goals that may not be directly related
to the financial services provided by the Company and its subsidiaries.
Supervision, regulation and examination of the Subsidiary Banks by the bank
regulatory agencies is not intended for the protection of the Company's security
holders. Federal and state banking and other laws impose a number of
requirements and restrictions on the business operations, investments and other
activities of depository institutions and their affiliates.
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General Supervision and Regulation
The Company, as a bank holding company under the BHC Act, is registered with
the Federal Reserve Board and is regulated under the provisions of the BHC Act.
Under the BHC Act the Company is prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5 percent of the
voting shares of any company which is not a bank and from engaging in any
business other than that of banking, managing or controlling banks or furnishing
services to, or acquiring premises for, its Subsidiary Banks, except that the
Company may engage in and own voting shares of companies engaging in certain
activities determined by the Federal Reserve Board, by order or by regulation,
to be so closely related to banking or to managing or controlling banks "as to
be a proper incident thereto."
The Company is required by the BHC Act to file with the Federal Reserve
Board an annual report and such additional reports and notices as the Federal
Reserve Board may require. The Federal Reserve Board also makes periodic
inspections of the Company and its subsidiaries. The BHC Act requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire substantially all of the assets of any bank, or ownership or
control of any voting shares of any bank, if, after such acquisition, it would
own or control, directly or indirectly, more than 5 percent of the voting shares
of such bank.
Because the Company is also a bank holding company under the Massachusetts
General Laws, the Massachusetts Commissioner has authority to require certain
reports from the Company from time to time and to examine the Company and each
of its subsidiaries. The Massachusetts Commissioner also has enforcement powers
designed to prevent banks from engaging in unfair methods of competition or
unfair or deceptive acts or practices involving consumer transactions. Prior
approval of the Massachusetts Board of Bank Incorporation is also required
before the Company may acquire any additional banks located in Massachusetts or
in other jurisdictions.
The location of nonbank subsidiaries of the Company is not restricted
geographically under the BHC Act. The Riegle-Neal Interstate Banking and
Branching Act of 1994 (the "Riegle-Neal Act"), enacted in 1995, permits
adequately capitalized and managed bank holding companies to acquire control of
banks in any state. Additionally, as of June 1, 1997, the Riegle-Neal Act allows
for banks to branch across state lines, but individual states were given the
right, prior to June 1, 1997, to elect to "opt out" of interstate banking
entirely. In 1996, Massachusetts adopted legislation (the "Massachusetts
Interstate Act") pursuant to which Massachusetts "opted in" to interstate
banking. The Massachusetts Interstate Act also allows Massachusetts banks to
establish and maintain branches through a merger or consolidation with or by the
purchase of the whole or any part of the assets or stock of any out-of-state
bank or through de novo branch establishment in any state other than
Massachusetts.
The Subsidiary Banks, whose deposits are insured by the FDIC, and the
subsidiaries of such banks are subject to a number of regulatory restrictions,
including certain restrictions upon: (i) extensions of credit to the Company and
the Company's nonbanking affiliates (collectively with the Company, the
"Affiliates"); (ii) the purchase of assets from Affiliates; (iii) the issuance
of a guarantee or acceptance of a letter of credit on behalf of Affiliates; and
(iv) investments in stock or other securities issued by Affiliates or acceptance
thereof as collateral for an extension of credit. In addition, all transactions
among the Company and its direct and indirect subsidiaries must be made on an
arm's length basis and valued on fair market terms. The Subsidiary Banks pay
deposit insurance premiums to the FDIC.
Federal Reserve Board policy requires bank holding companies to serve as a
source of strength to their subsidiary banks by standing ready to use available
resources to provide adequate capital funds to subsidiary banks during periods
of financial stress or adversity. A bank holding company also can be liable
under certain provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") for the capital deficiencies of an
undercapitalized bank subsidiary. In the event of a bank holding company's
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be
deemed to have assumed and is required to cure immediately any deficit under any
commitment by the debtor to any of the federal banking agencies to maintain the
capital of an insured depository institution, and any claim for breach of such
obligation will generally have
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priority over most other unsecured claims. Under the cross-guarantee provisions
of the Federal Deposit Insurance Act, if any or all of the Subsidiary Banks were
placed in conservatorship or receivership, the Company, as sole stockholder,
would likely lose its investment in the applicable Subsidiary Bank or Subsidiary
Banks, and, in addition, its investment in its other Subsidiary Bank or
Subsidiary Banks would be at risk.
In addition, under both Section 106 of the 1970 Amendments to the BHC Act
and regulations which have been issued by the Federal Reserve Board, the Company
and its subsidiaries are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit, lease or sale of any property or the
furnishing of any service. Various consumer laws and regulations also affect the
operations of the Subsidiary Banks.
The Subsidiary Banks, which are chartered under Massachusetts law, are
subject to federal requirements to maintain cash reserves against deposits, and
to state mandated restrictions upon the nature and amount of loans which may be
made by the banks (including restrictions upon loans to "insiders" of the
Company and its Subsidiary Banks) as well as to restrictions relating to
dividends, investments, branching and other bank activities.
FDICIA prescribes the supervisory and regulatory actions that will be taken
against undercapitalized insured depository institutions for the purposes of
promptly resolving problems at such institutions at the least possible long-term
loss to the FDIC. Five categories of depository institutions have been
established by FDICIA in accordance with their capital levels: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." The federal banking
agencies have adopted uniform regulations to implement the prompt regulatory
action provisions of FDICIA.
FDICIA requires the appropriate regulatory agencies to take specific actions
against significantly undercapitalized institutions and undercapitalized
institutions that fail to submit acceptable capital restoration plans. An
undercapitalized institution is required to submit a capital restoration plan
for acceptance by the appropriate federal banking agency and will be subject to
close monitoring of both its condition and compliance with, and progress made
pursuant to, its capital restoration plan. An institution that fails to submit
an acceptable plan may be placed into conservatorship or receivership unless its
capital restoration plan is accepted. An undercapitalized institution will also
be subject to restrictions on asset growth, acquisitions, branching, new
activities, capital distributions and the payment of management fees. As of
December 31, 1997, USTrust was "adequately capitalized" and USTC was "well
capitalized". (For further information regarding capitalization, please refer to
Note 15 to Consolidated Financial Statements of this Form 10-K).
An insured institution that receives a less-than-satisfactory rating for
asset quality, management, earnings, liquidity or sensitivity to market risk may
be deemed by its appropriate federal banking regulator to be engaging in an
unsafe or unsound practice for purposes of issuing an order to cease and desist
or to take certain affirmative actions. If the unsafe or unsound practice is
likely to weaken the institution, cause insolvency or substantial dissipation of
assets or earnings or otherwise seriously prejudice the interest of depositors
or the FDIC, a receiver or conservator could be appointed. Finally, subject to
certain exceptions, FDICIA requires critically undercapitalized institutions to
be placed into receivership or conservatorship within 90 days after becoming
critically undercapitalized.
The status of the Company as a registered bank holding company does not
exempt it from certain federal and state laws and regulations applicable to
corporations generally, including, without limitation, certain provisions of the
federal securities laws and the Massachusetts corporate laws. Federal bank
regulatory agencies, including the Federal Reserve Board and the FDIC, have
broad enforcement powers to restrict the activities of financial institutions
and to impose or seek the imposition of civil and/or criminal penalties upon
financial institutions, the individuals who manage or control such institutions
and "institution affiliated parties" of such entities.
Pursuant to the Community Reinvestment Act ("CRA") and similar provisions of
Massachusetts law, regulatory authorities review the performance of the Company
and its Subsidiary Banks in meeting the credit needs of the communities served
by the Subsidiary Banks. The applicable regulatory authorities consider
compliance with this law in connection with applications for, among other
things, approval of branches, branch
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relocations and acquisitions of banks and bank holding companies. Currently the
FDIC's CRA rating of USTrust is "outstanding"; FDIC does not rate USTC which it
regards as a "special purpose" bank. The Massachusetts Commissioner currently
has given each of USTrust and USTC a CRA rating of "satisfactory."
From time to time various proposals are made in the United States Congress,
as well as state legislatures, which would alter the powers of, and place
restrictions on, different types of bank organizations as well as bank and
nonbank activities. Such legislative proposals include proposals related to
expansion of bank powers and increased consumer compliance disclosure
requirements. From time to time, federal legislation is proposed which, if
adopted, would grant bank holding companies broader powers with respect to
insurance and securities activities. Under proposed federal legislation, broader
cross-ownership would be authorized among banking, insurance and securities
companies. At this time it seems unlikely that such legislation (in any form)
will be adopted in the near term.
In 1997 and early 1998, the federal banking regulatory agencies jointly
issued guidance to the banking industry with respect to appropriate measures
which financial institutions should take to address risks associated with the
so-called "Year 2000" issue. In 1998, the agencies are performing on-site
visitations to determine each financial institution's Year 2000 readiness.
Failure to address any Year 2000 risks and concerns raised by the federal bank
regulatory agencies as a result of their visitation could have material adverse
consequences to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000" for a further
discussion of these matters.
Governmental Policies, Economic Conditions and Credit Risk Concentration
The earnings and business of the Company's subsidiaries are and will be
affected by a number of external influences, including general economic
conditions in the United States and particularly in New England and the policies
of various regulatory authorities of the United States, including the Federal
Reserve Board. The Federal Reserve Board regulates the supply of money and of
bank credit to influence general economic conditions within the United States
and throughout the world. From time to time, the Federal Reserve Board takes
specific steps to dampen domestic inflation and to control the country's money
supply. The instruments of monetary policy employed by the Federal Reserve Board
for these purposes (including the level of cash reserves banks, including
nonmember banks such as the Company's Subsidiary Banks, are required to maintain
against deposits) influence in various ways the interest rates paid on
interest-bearing liabilities and the interest received on earning assets, and
the overall level of bank loans, investments and deposits. During 1997, the
Massachusetts economy was extremely robust: employment levels remained high;
interest rates were at historically low levels; levels of disposable income were
high and capital expenditures were strong. There can be no assurance that these
strong local economic conditions will continue. In addition, the impact upon the
future business and earnings of the Company of prospective economic conditions
throughout the United States, and of the policies of the Federal Reserve Board
as well as other federal regulatory authorities, cannot be predicted accurately.
Most of the Company's loans outstanding are from borrowers located in
Community Reinvestment Act delineated communities in Massachusetts and a
substantial portion of these loans are various types of real estate loans; still
others have real estate as additional collateral. At year-end 1997, the
Company's exposure to credit risk from borrowers who had real estate as their
primary collateral support included $1.1 billion of loans. The Base Lending Rate
used by the Company's Subsidiary Banks and the costs they paid for major sources
of funds remained relatively stable in 1996 and 1997.
General
No significant portion of the loans or deposits of any of the Company's
banking subsidiaries results from one or several accounts, the loss of which
would materially affect its business. The Company does not experience
significant seasonal fluctuations in its business.
10
11
Employees
As of December 31, 1997, the Company and its subsidiaries had approximately
1,550 full-time and part-time employees. The Company regards its relations with
its employees as good.
ITEM 2. Properties
USTrust owns and occupies a twelve-story, 119,456 square foot brick and
steel building constructed in 1915 and located at Government Center, 30-40 Court
Street, Boston, Massachusetts which houses the banking premises of USTrust, USTC
and the offices of the Company and most of its nonbanking subsidiaries.
The Company currently leases a three-story brick office building of
approximately 37,900 square feet at 196 Broadway, Cambridge, Massachusetts, all
of which is used by USTrust, as well as 30,487 square feet in an adjacent office
tower at 141 Portland Street, Cambridge, Massachusetts. USTrust also leases
approximately 26,080 square feet of space at 25-55 Court Street, Boston,
Massachusetts, which is used primarily to house staff support services.
All of USTrust's branches are located in the greater Boston, Massachusetts
metropolitan area. Of its branches, thirty-one are owned by USTrust and the
remaining branch offices of USTrust occupy leased premises.
The 1998 annual leasehold commitment for all premises leased by the
Company's subsidiaries totals approximately $6,009,000 not including expenses
related to tax or maintenance escalation provisions. (Refer to Note 17 to the
Notes to Consolidated Financial Statements of this Form 10-K.)
ITEM 3. Legal Proceedings
In the ordinary course of operations, the Company and its subsidiaries
become defendants in a variety of judiciary and administrative proceedings. In
the opinion of management, however, there is no proceeding pending, or to the
knowledge of management threatened, which is 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
None.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The common stock of the Company is traded over the counter and its price is
quoted on the Nasdaq National Market System. During the period January 1, 1996,
to December 31, 1997, the range of high and low sales prices for the Company's
common stock was as follows:
1997 1996
---- ----
LOW HIGH LOW HIGH
------- ------- -------- ------
1st Quarter . . . 18.125 21.9375 13.000 15.125
2nd Quarter . . . 18.625 23.250 12.750 15.125
3rd Quarter . . . 20.9375 26.125 14.250 17.125
4th Quarter . . . 24.250 29.625 16.750 20.625
11
12
Such over-the-counter market quotations reflect interdealer prices, without
retail markup, markdown or commission and may not represent actual transactions.
The number of holders of record of common stock of the Company was 2,603 at
December 31, 1997.
The Company declared cash dividends totaling $0.32 per share to each holder
of its common stock in 1996. During 1997, the Company declared cash dividends
totaling $0.42 per share to each holder of its common stock.
Future dividends will depend upon the financial condition and earnings of
the Company and its subsidiaries, their need for funds and other factors,
including applicable government regulations and the absence of regulatory
objection.
12
13
ITEM 6. SELECTED FINANCIAL DATA
UST CORP.
CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA(1)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Earnings Data:
Interest income.......... $ 285,213 $ 243,213 $ 229,217 $ 201,194 $ 205,359
Interest expense......... 110,008 102,127 90,632 68,698 74,844
----------- ----------- ----------- ----------- -----------
Net interest income...... 175,205 141,086 138,585 132,496 130,515
Provision (credit) for
possible loan losses... 900 (17,300) 14,395 25,674 71,757
----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
possible loan losses... 174,305 158,386 124,190 106,822 58,758
Noninterest income....... 38,023 39,941 36,517 36,888 45,173
Noninterest expense...... 157,082 124,669 118,121 118,705 117,952
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... 55,246 73,658 42,586 25,005 (14,021)
Income tax provision
(benefit).............. 22,853 28,381 15,533 7,732 (6,143)
----------- ----------- ----------- ----------- -----------
Income (loss) before
change in accounting
method ................ 32,393 45,277 27,053 17,273 (7,878)
Cumulative effect of
change in accounting
method (2)............ 2,750
----------- ----------- ----------- ----------- -----------
Net income (loss)........ $ 32,393 $ 45,277 $ 27,053 $ 17,273 $ (5,128)
=========== =========== =========== =========== ===========
Per Share Data:
Basic earnings per
share.................. $ 1.09 $ 1.56 $ 0.94 $ 0.61 $ (.20)
Diluted earnings per
share.................. $ 1.08 $ 1.53 $ 0.92 $ 0.60 $ (.20)
Cash dividend declared
per share.............. $ 0.42 $ 0.32 $ 0.11 $ 0.05 $ 0.01
Weighted average basic shares
outstanding................. 29,615,584 29,015,101 28,733,634 28,282,991 26,124,717
Weighted average diluted
shares outstanding.......... 30,104,451 29,576,005 29,417,172 29,009,100 26,124,717
Consolidated Average
Balances(3):
Total assets............. $ 3,666,743 $ 3,173,831 $ 2,879,692 $ 2,844,832 $ 2,930,810
Loans.................... 2,635,868 2,077,325 1,976,769 1,894,734 1,997,908
Deposits................. 2,808,082 2,292,302 2,246,605 2,251,829 2,328,552
Funds borrowed(4)........ 504,180 557,092 354,553 340,698 349,049
Stockholders' investment 312,433 290,199 253,489 227,942 223,003
Consolidated Ratios:
Net income (loss) to
average total assets... 0.88% 1.43% .94% 0.61% (0.17)%
Net income (loss) to
average stockholders'
investment............. 10.37% 15.60% 10.67% 7.58% (2.30)%
Average stockholders'
investment to average
total assets........... 8.52% 9.14% 8.80% 8.01% 7.61%
Net chargeoffs
(recoveries) to
average loans........... 0.02% (0.07)% 1.07% 1.40% 2.89%
Reserve for possible
loan losses to period
end loans............... 1.8% 2.1% 3.5% 3.9% 4.0%
Average earning assets
to average total
assets.................. 94.10% 94.66% 94.56% 93.78% 93.24%
Dividend payout ratio..... 38.89% 20.92% 11.96% 8.33% not
meaningful
- - ---------------------
(1) This information should be read in connection with Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing
elsewhere in this Form 10-K.
(2) Reflects cumulative effect of change in method of accounting for income
taxes.
(3) Average balances include the effect of fair value adjustments under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
(4) Includes federal funds purchased, repurchase agreements, short-term and
other borrowings.
13
14
ITEM 7. 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 elsewhere in this Form 10-K for
the fiscal year ended December 31, 1997. Certain amounts reported for prior
periods have been reclassified to conform to the 1997 presentation. All
financial data presented has been restated to reflect the 1997 acquisitions of
Walden Bancorp, Inc. ("Walden") and Firestone Financial Corp. ("Firestone") as
poolings of interests. 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" in this Form 10-K for a further discussion.
HIGHLIGHTS
The Company's acquisition activities continued this year with the
completed acquisition of Walden, a $1.0 billion multi-bank holding company, and
the subsequent merger of Walden's subsidiary banks with USTrust. In addition,
the Company completed the acquisition of Firestone, an $85 million small
business equipment finance company. In December 1997, the Company announced the
execution of definitive agreements to acquire Somerset Savings Bank
("Somerset"), a $540 million bank and Affiliated Community Bancorp, Inc.
("Affiliated"), a $1.2 billion multi-bank holding company. Refer to Note 2 to
the Notes to Consolidated Financial Statements for a discussion of acquisitions.
Net income for the year ended December 31, 1997, was $32.4 million, or
$1.08 diluted earnings per share. Results for 1997 included a nonrecurring
charge of $4.4 million for certain nondeductible merger-related expenses and a
pre-tax charge of $11.8 million for restructuring charges related to the
acquisition of Walden. Net interest margin and noninterest fee income improved
substantially over the prior year. The fourth quarter 1996 purchase of twenty
banking branches and assumption of $744 million in deposit liabilities and
repurchase agreements and $508 million in loans from two local banking
subsidiaries of Bank of Boston Corporation (the "Branch Purchase") added
significantly to the Company's net interest income, noninterest income and
noninterest expense. Additional revenue enhancements resulted from Company
initiatives to improve earning asset volume and mix and increase fee-based
businesses. The 1997 results compare with net income of $45.3 million, or $1.53
diluted earnings per share for the year ended December 31, 1996, which included
a number of one-time charges and credits. Such nonrecurring items included a
$6.8 million gain from a sale of a former banking subsidiary, an earnings credit
of $18.6 million recorded through the provision for possible loan losses, a $5.9
million one-time charge for expenses incurred in connection with the Branch
Purchase and other acquisition-related charges, and a one-time charge against
earnings in the amount of $3.0 million to reflect an assessment on certain
deposits insured by the Savings Association Insurance Fund ("SAIF").
FINANCIAL CONDITION AT DECEMBER 31, 1997
ASSETS
Total assets at December 31, 1997 were $3.838 billion, a modest increase
from $3.781 billion a year ago. Loans reflect growth of 12 percent, or $301
million to $2.836 billion at year end. Partially offsetting the increase in
loans was a $105 million decrease in securities and decreases in federal funds
sold and cash balances consistent with lower borrowings. Fixed assets increased
$4 million as a result of the Company's continued investment in computer
hardware and software.
14
15
Loans
The following table presents the composition of the loan portfolio:
DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial and financial...... $1,023,783 $ 900,162 $ 771,044 $ 811,057 $ 839,342
Commercial real estate:
Construction................ 41,834 29,624 49,817 34,691 57,405
Developer, investor and
land...................... 236,263 305,056 363,049 402,842 444,782
Commercial lease financing.... 56,260 46,480 31,663 28,858 29,372
Consumer:
Residential mortgage........ 697,874 804,109 462,021 481,370 398,772
Home equity ................ 111,151 107,310 95,242 91,107 89,398
Indirect automobile
installment(1)............ 605,486 302,044 197,148 90,255 31,848
Other consumer(1)........... 37,048 40,461 31,219 32,606 32,470
Indirect automobile
lease financing........... 26,283
---------- ---------- ---------- ---------- ----------
Total loans(2)...... 2,835,982 2,535,246 2,001,203 1,972,786 1,923,389
Reserve for possible loan
losses...................... (52,230) (51,984) (69,982) (76,743) (76,517)
---------- ---------- ---------- ---------- ----------
$2,783,752 $2,483,262 $1,931,221 $1,896,043 $1,846,872
========== ========== ========== ========== ==========
- - ---------------------
(1) Indirect automobile installment loans represent loans that have been
underwritten by the Company and originated, or sourced, by qualifying
in-market automobile dealers. Automobile loans originated directly by the
Company are not significant and are included with other consumer loans.
(2) Excluded from the loan balances at December 31, 1996 and 1995 were $12.4
million and $13.1 million, respectively, in loans held-for-sale, recorded
at net realizable value and classified as other assets.
During 1997 the consumer loan percentage increased to 52 percent of the
total portfolio while commercial loans decreased from 51 percent last year to 48
percent this year. During 1996 the loan portfolio mix changed significantly from
the previous year as consumer balances increased to 49 percent of the total loan
portfolio from 39 percent a year earlier. The 1996 increase in consumer loan
percentage reflected portfolio growth and consumer loan balances acquired in the
Branch Purchase.
The Company's commercial loan portfolios listed above totaled $1.358
billion at December 31, 1997, a modest growth of 6 percent, or $77 million over
1996. This compares with a net decline in commercial loans of $26 million in
1996 after excluding $111 million in commercial loans acquired in the Branch
Purchase and $19 million in commercial loans sold in the sale of a Connecticut
banking subsidiary.
Residential loans decreased $106 million during the year to $698 million
due to high levels of prepayment and normal amortization. The current relatively
low interest rate environment has accelerated the prepayment rates in this
portfolio and is expected to continue in the near term.
The indirect automobile loan portfolio experienced its third consecutive
year of strong growth in 1997. This portfolio totaled $605 million at December
31, 1997, and reflects growth of 100 percent, or $303 million, this year
compared with growth of 53 percent, or $105 million, in 1996. During the latter
half of 1997 this portfolio's growth was particularly high due to the exiting of
some larger competitors from the market. Management expects future growth in
this portfolio at a more moderate pace. 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 1997, indirect automobile lease financing has been made
available through existing client automobile dealers.
15
16
Loan Maturity Distribution
The following table reflects the maturity and interest sensitivity of
commercial and financial, and commercial real estate loans, at December 31,
1997:
AFTER 1 YEAR
1 YEAR OR LESS THROUGH 5 YEARS AFTER 5 YEARS TOTAL
-------------- --------------- ------------- ----------
(DOLLARS IN THOUSANDS)
Commercial and financial...... $615,647 $325,564 $ 82,572 $1,023,783
Commercial real estate:
Construction............. 13,943 15,547 12,344 41,834
Developer, investor and
land................... 42,495 131,668 62,100 236,263
---------- -------- -------- ----------
$672,085 $472,779 $157,016 $1,301,880
======== ======== ======== ==========
Interest sensitivity of
above loans:
With predetermined
interest rates......... $259,960 $263,002 $ 86,651 $ 609,613
With floating interest
rates.................. 412,125 209,777 70,365 692,267
-------- -------- -------- ----------
$672,085 $472,779 $157,016 $1,301,880
======== ======== ======== ==========
The Company does not have an automatic rollover (renewal) policy for
maturing loans. Renewal requests are reviewed and approved in substantially the
same manner as applications by new customers for extensions of credit.
Additionally, any renewal of a loan rated Substandard or lower in the Company's
credit risk rating profile, requires the Controlled Loan Department head
approval and for certain size loans and circumstances, the approval of the
Senior Credit Committee and Board of Directors.
Securities
Securities totaled $722 million at December 31, 1997, a decrease of $105 million
from a year earlier. The reduction in securities provided funding for loan
growth and reflects a restructuring of the Company's portfolios. Lower-yielding
and securities with a higher risk of prepayment were sold during the year. Early
in 1997, 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, consistent with the Company's historical policy of carrying
all securities as available-for-sale. Excluding pending acquisitions, the
Company expects to maintain the securities available-for-sale portfolio at
approximately its December 31, 1997 level over the next year. However, the
balance could vary as the portfolio is utilized by the Company in managing its
liquidity and interest rate risk.
Partially offsetting the decline in securities due to net sales and
amortization, was a change from an unrealized loss on securities
available-for-sale of $4.4 million at December 31, 1996 to an unrealized gain of
$3.8 million at December 31, 1997, an $8.2 million increase in fair value. The
improvement reflects favorable changes in bond prices and on certain equity
investments during the year. Refer to Note 1 to the Notes to Consolidated
Financial Statements for a further discussion of the unrealized valuation
adjustment to market value of securities available-for-sale as required under
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and Equity Securities."
The change in the market value of securities available-for-sale also had
the effect of increasing stockholders' investment by $4.8 million since year-end
1996. The unrealized loss reported as part of stockholders' investment of $2.6
million, net of tax at December 31, 1996, changed to an unrealized gain of $2.2
million, net of tax at December 31, 1997.
16
17
The Company has a policy of purchasing securities primarily rated A or
better by Moody's Investors Services and U.S. Government securities to minimize
credit risk. As of December 31, 1997, $481.0 million of the Company's
mortgage-backed securities were issued by agencies or sponsored agencies of the
U.S. Government, $9.7 million was investment grade mortgage-backed securities
issued by nongovernment agencies and acquired by the Company through the Walden
acquisition. At December 31, 1997, none of the Company's mortgage-backed
securities would be classified as "high risk" under Federal Financial
Institutions Examination Council guidelines. All securities, however, carry
interest rate risk which affects their market value such that as market yields
increase, the value of the Company's securities declines and vice versa.
Additionally, mortgage-backed securities carry prepayment risk where expected
yields may not be achieved due to an inability to re-invest the proceeds from
prepayment at comparable yields. Moreover, such mortgage-backed securities may
not benefit from price appreciation in periods of declining rates to the same
extent as the remainder of the portfolio. Refer to Note 1 to the Notes to
Consolidated Financial Statements, "Summary of Significant Accounting Policies"
of this Form 10-K for a further discussion of prepayment risk. At December 31,
1997 the aggregate fair value of any individual issuer's securities, other than
an agency or sponsored agency of the U.S. Government, did not exceed 10 percent
of the Company's stockholder investment. The following table sets forth the book
value of the securities owned by the Company:
DECEMBER 31,
-------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
Available-for-sale:
Mortgage-backed securities............... $490,691 $268,245
U.S. Treasury and other U.S. Government
agencies and corporations.............. 105,952 233,509
Obligations of states and political
subdivisions*.......................... 2,024 2,275
Other securities......................... 123,765 177,774
-------- --------
Total available-for-sale.......... $722,432 $681,803
======== ========
Held-to-maturity:
Mortgage-backed securities............... $113,796
U.S. Treasury and other U.S. Government
agencies and corporations.............. 25,468
Obligations of states and political
subdivisions*.......................... 6,300
--------
Total held-to-maturity............ $145,564
========
- - ---------
* Nontaxable
The following table presents maturities for the Company's debt
securities at December 31, 1997, and the approximate weighted tax equivalent
yields (at the statutory federal tax rate of 35 percent). Mortgage-backed
securities are shown at or based on their final maturity but are expected to
have shorter average lives. Considering this, the Company estimates the average
life of the entire portfolio to be 2.5 years. Yields presented in this table
have been computed using the amortized cost of the securities.
SECURITIES MATURING IN
----------------------
AFTER 1 YEAR
1 YEAR OR LESS THROUGH 5 YEARS 5-YRS. THROUGH 10 10 YRS. OR MORE
--------------- ---------------- ---------------- ---------------
BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD
------- ----- ------- ----- -------- ----- ------- -----
(DOLLARS IN THOUSANDS)
Available-for-sale:
Mortgage-backed securities...... $17,896 6.13% $145,233 6.44% $326,848 6.12%
U.S. Treasury and other
U.S. Government agencies
and corporations.............. $1,749 6.12% 79,333 6.26% 25,002 5.47%
Obligations of states
and political subdivisions ... 753 7.98% 805 7.92% 441 8.31%
Other debt securities........... 40,439 6.66% 16,933 5.96%
------ --------- -------- --------
Total..................... $1,749 6.12% $ 138,421 6.37% $187,973 6.28% $327,289 6.12%
====== ========= ======== ========
17
18
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 available-for-sale, 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 December 31, 1997, liquidity, which includes excess cash, federal
funds sold and unpledged securities, totaled approximately $470 million, or 12
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 borrowings. Total deposits increased $122 million, or 4 percent, to
$2.978 billion since December 31, 1996 which reflects the Company's innovative
deposit products and promotion initiatives as well as the synergies of a larger
branch network. Noninterest-bearing deposits increased $108 million while
savings deposit growth, which includes NOW, money market and regular savings,
was $34 million. Higher cost certificates of deposit decreased $20 million. 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. Short-term and other borrowings, which consist
principally of federal funds purchased, securities sold under agreement to
repurchase, and borrowings from the Federal Home Loan Bank, decreased $78
million to $471 million, consistent with the reduction in cash, federal funds
sold, and lower securities balance.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased $44.6 million during 1997. Cash provided by operations
resulted largely from net income earned during the year. Cash used by investing
activities was due to an excess of purchases of securities and increased loan
volume over cash provided by securities sales and maturities, and reduction in
federal funds sold. Cash provided by financing activities was provided primarily
by increases in nontime deposits, partially offset by reductions in certificates
of deposit and borrowings.
At December 31, 1997, the parent company had $6 million in cash and due
from banks and $4 million in short-term securities purchased under agreement to
resell, compared with $1 million and $14 million, respectively, at December 31,
1996. The decrease in excess funds was primarily due to the net of a $20 million
capital contribution to USTrust in connection with USTrust's capital
requirements and the purchase of twenty banking branches, dividends paid to
shareholders, and receipt of $19.5 million in dividends from subsidiaries during
the year.
Deposits
The following table sets forth the remaining maturities of certificates
of deposit in the amount of $100 thousand or more at December 31, 1997:
AMOUNT IN THOUSANDS
-------------------
Less than three months............... $ 97,656
Three to six months.................. 24,877
Six to twelve months................. 23,529
Over twelve months................... 13,582
--------
Total...................... $159,644
========
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19
Short-term Borrowings
The Company's short-term borrowings consist primarily of federal funds
purchased, securities sold under agreements to repurchase and FHLB borrowings.
These instruments generally range from overnight funds to one month in duration.
AT DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
----------------------------- -----------------------------------------------------
WEIGHTED AVERAGE MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
BALANCE INTEREST RATE AT ANY MONTH END OUTSTANDING INTEREST RATE
------- ---------------- ---------------- -------------- ----------------
(DOLLARS IN THOUSANDS)
Federal funds purchased:
1997.............. $ 79,027 5.58% $ 80,071 $ 71,543 5.43%
1996.............. 92,677 5.73% 92,677 68,551 5.35%
1995.............. 57,406 5.63% 57,406 40,020 5.86%
Securities sold under
agreements to repurchase:
1997.............. $272,460 4.65% $284,951 $262,707 4.61%
1996.............. 237,317 4.73% 286,874 228,030 4.70%
1995.............. 173,941 4.73% 173,941 129,004 4.85%
FHLB borrowings:
1997 $ 55,000 5.85% $ 55,000 $ 45,000 5.85%
1996 35,000 5.45% 307,500 59,795 5.46%
1995.............. 111,500 5.55% 111,500 111,500 5.55%
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
the liabilities. Management monitors and adjusts the difference between
interest-sensitive assets and interest-sensitive liabilities ("GAP" position)
within various time frames. An institution with more assets repricing than
liabilities within a given time frame is considered asset sensitive ("positive
GAP") and in time frames with more liabilities repricing than assets it is
liability sensitive ("negative GAP"). 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 22 percent of total assets. The Company has historically managed
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 degree 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 either the prime rate, the London Interbank Offered Rate ("LIBOR") or
treasury bill index. A small increase in market rates during the first quarter
of 1997 was not enough to offset the impact of competitive pressure on loan
pricing, which had the effect of a reduction in the Company's yield on loans.
19
20
The following table summarizes the Company's GAP position at December 31,
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 as 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 December 31, 1997, the one-year cumulative GAP position was
positive at $11 million, or approximately .3 percent of total assets.
INTEREST SENSITIVITY PERIODS
--------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- -------
(DOLLARS IN MILLIONS)
Loans, net of reserve............. $ 981 $ 143 $460 $1,200 $2,784
Federal funds sold................ 68 68
Securities........................ 50 54 120 498 722
Other assets...................... 29 3 232 264
------ ----- ---- ------ ------
Total assets............ $1,128 $ 197 $583 $1,930 $3,838
------ ----- ---- ------ ======
Interest-bearing deposits......... $ 565 $ 200 $442 $1,063 $2,270
Borrowed funds.................... 421 5 36 9 471
Noninterest-bearing
deposits....................... 204 504 708
Other liabilities and
stockholders' equity........... 24 365 389
------ ----- ---- ------ ------
Total liabilities and
equity.............. $1,214 $ 205 $478 $1,941 $3,838
------ ----- ---- ------ ======
GAP for period.................... $ (86) $ (8) $105 $ (11)
====== ----- ---- ------
Cumulative GAP.................... $ (86) $ (94) $ 11 $ 0
====== ===== ==== ======
As a percent of total assets...... (2.24)% (2.45)% .29%
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 table 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:
ESTIMATED EXPOSURE AS A
RATE CHANGE (BASIS POINTS) PERCENTAGE OF NET INTEREST INCOME
-------------------------- ---------------------------------
+200 .5%
-200 (4.0)%
Certain 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 prepayment 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.
On January 31, 1997, the Securities and Exchange Commission issued final
rules governing disclosure requirements for financial instruments, including
derivatives. This new release requires more detailed disclosure than required in
SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value
of Financial Instruments." However, the additional disclosures are only required
when material. As of December 31, 1997, the positive fair value of derivatives
outstanding was immaterial to the Company's financial statements as a whole and,
therefore, these additional disclosures are not presented.
20
21
CAPITAL
There are three capital requirements that banks and bank holding
companies must meet. Two requirements take into consideration risks inherent in
assets for both on- and off-balance sheet items on a risk- weighted basis
("risk-based assets"). Risk weightings are as determined by banking regulators
for the industry as a whole. Under these requirements, the Company must meet
minimum Tier 1 and Total risk-based capital ratios (capital, as defined in the
regulations, divided by risk-based assets) of 4 percent and 8 percent,
respectively. Tier 1 capital is essentially shareholders' investment, net of
intangible assets and Tier 2 capital is the allowable portion of the loan loss
reserve (as defined) and discounted subordinated debt. Total capital is the
combination of Tier 1 and Tier 2. The third requirement is a leverage capital
ratio, defined as Tier 1 capital divided by total average assets, net of
intangibles. All but the most highly-rated banks are required to maintain a
minimum of 4 percent. The Company has not been notified of a specific
requirement above the minimum. All three capital ratios are calculated excluding
the effect of SFAS No. 115 and unrealized gain/loss on securities
available-for-sale. Management believes, as of December 31, 1997, that the
Company and its subsidiary banks meet all of their respective capital adequacy
requirements. Refer to Note 15 to the Notes to Consolidated Financial Statements
of this Form 10-K for a further discussion of capital requirements.
In 1997, the Company declared quarterly cash dividends totaling $12.7
million, or $0.42 per share, to stockholders. Also, during the year the
Company's subsidiaries declared dividends payable to the Company totaling $22.5
million, $1.0 million from USTC, $19.5 million from USTrust and $2 million from
JSA Financial Corporation. The Company contributed capital of $20 million to
USTrust in 1997 in connection with USTrust's capital requirements and the Branch
Purchase.
In 1995, the Company's Board of Directors approved a stock repurchase
program and the Company adopted a shareholder rights plan. The stock repurchase
program was terminated in 1996 and all shares acquired thereunder were reissued.
Refer to Note 15 to the Notes to Consolidated Financial Statements for a
discussion.
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES
Credit quality within all the commercial loan and lease portfolios of
each subsidiary is quantified by a corporate credit rating system designed to
parallel regulatory criteria and categories of loan risk. Lenders monitor their
loans to ensure appropriate rating assignments are made on a timely basis. Risk
ratings and overall loan quality are also assessed on a regular basis by an
independent Loan Review Department which reports to the Company's Board of
Directors and its Asset Quality Committee. Loan Review personnel conduct ongoing
portfolio trend analyses and individual credit reviews to evaluate loan risk and
compliance with corporate lending policies. Results and recommendations from
this process provide senior management and the Board of Directors and its Asset
Quality Committee with independent information on loan portfolio condition. The
Asset Quality Committee monitors asset quality monthly and actively reviews the
large credit exposures. Consumer loan quality is evaluated on the basis of
delinquent data due to the large number of such loans and relatively small size
of individual credits. Historical trend analysis reports are reviewed on a
monthly basis by senior lending officers and the Company's Board of Directors.
At December 31, 1997, substandard loans totaled $36 million, level with
the balance at year-end 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 loans on nonaccrual, 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 December 31, 1997, Substandard and Doubtful loans were $34.3 million
and $1.7 million, respectively. Substandard loans include $21.3 million of
accruing commercial and commercial real estate loans, of which 85 percent were
current with respect to contractual principal and interest payments, and $13.0
million in loans that were on nonaccrual and included in nonperforming assets.
All of the loans rated Doubtful were on nonaccrual and included in nonperforming
assets. Also, at December 31, 1997 loans rated Special Mention in the Company's
21
22
internal risk rating profile amounted to $18.8 million, all of which were
current. Special Mention loans, as defined by the Company, have potential
weaknesses that deserve management's close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for
the assets.
As of year-end 1997, approximately 60 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 35 percent
were collateralized by owner-occupied commercial properties, approximately 55
percent were collateralized by commercial real estate, and approximately 10
percent by residential real estate. The remaining loans were collateralized by
real estate under construction and raw land.
Nonperforming Assets
The following table sets forth the Company's total nonperforming assets
and performance measures regarding key indicators of asset quality:
DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
------ ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Nonperforming assets:
Nonaccruals:
Commercial and financial........... $11,963 $23,927 $15,100 $ 37,969 $ 29,503
Commercial real estate:
Construction..................... 495 256 1,107 1,791
Developer, investor and land..... 4,420 3,790 4,145 21,658 32,218
Commercial lease financing......... 237
Consumer:
Residential mortgage............. 6,029 4,625 4,548 7,476 6,914
Home equity...................... 698 522 831 673 218
Indirect automobile installment.. 1,866 778 446 134 40
Other consumer................... 305 72 128 34 549
------ ------- ------- -------- --------
Total nonaccrual...................... 25,518 34,209 25,454 69,051 71,233
Accruing loans 90 days or more past
due................................ 1,069 998 714 2,289 991
Other property owned (OPO), net(1).... 1,334 1,988 3,920 11,610 18,011
Restructured loans(2)................. 1,264 7,959 19,916 48,320
------ ------- ------- -------- --------
Total nonperforming assets.............. $27,921 $38,459 $38,047 $102,866 $138,555
======= ======= ======= ======== ========
Reserve for possible loan losses........ $52,230 $51,984 $69,982 $ 76,743 $ 76,517
Net chargeoffs (recoveries)............. $ 654 $(1,406) $21,156 $ 24,463 $ 56,975
Other property owned (OPO) reserve...... $ 623 $ 320 $ 568 $ 1,044 $ 4,635
Ratios:
Reserve to nonaccrual loans............. 204.7% 152.0% 274.9% 111.1% 107.4%
Reserve to total of nonaccrual loans,
accruing loans 90 days or more past
due and restructured loans............ 196.4% 142.5% 205.1% 84.1% 63.5%
Reserve to period-end loans............. 1.8% 2.1% 3.5% 3.9% 4.0%
Nonaccrual loans to period-end loans.... 0.9% 1.3% 1.3% 3.5% 3.7%
Nonaccrual loans and accruing loans
over 90 days past due to
period-end loans...................... 0.9% 1.4% 1.3% 3.6% 3.8%
Nonperforming assets to period-end
loans and OPO......................... 1.0% 1.5% 1.9% 5.2% 7.1%
Nonperforming assets to total assets.... 0.7% 1.0% 1.2% 3.6% 4.7%
Net chargeoffs (recoveries) to average
loans................................... 0.0% (0.1)% 1.1% 1.4% 2.9%
OPO reserve to OPO...................... 31.8% 13.9% 12.7% 8.3% 20.5%
- - ----------
(1)Included in other property owned ("OPO") are other real estate owned,
automobiles, and equipment acquired through foreclosure or in settlement of
loans. The balance is stated net of a valuation reserve. Refer to Note 1
to the Notes to Consolidated Financial Statements for a discussion of OPO.
(2) Restructured loans are those where interest rates and/or principal
repayments have been restructured to defer or reduce payment as a result of
financial difficulties of the borrower.
22
23
As exhibited in the preceding table, total nonperforming assets were
reduced $10.5 million in 1997 to $27.9 million. The decrease was led by a
reduction in nonaccrual commercial loans. The nonaccrual residential mortgage
and indirect automobile loans increase from 1996 reflected the substantial
increase in balances outstanding of these loans. The reserve to total nonaccrual
loans improved to 204.7 percent at December 31, 1997 compared with 152.0 percent
a year ago.
The Company's consumer loan delinquency rates (greater than 30 days past
due including nonaccruals) continue to remain at favorable levels. The
delinquency rate for the indirect automobile loans, the largest component of the
Company's consumer loan portfolio excluding residential mortgage loans, was 3.20
percent at December 31, 1997 compared with 2.89 percent at December 31, 1996.
The Company anticipates that the current high growth rate experience in the
indirect automobile loan portfolio will subside in future periods as well as
experience seasonal fluctuations. This factor, combined with the eventual
maturity of the existing portfolio, will likely result in an increase in the
delinquency rate in future periods.
At December 31, 1997, total impaired loans were $16.4 million, comprised
of $2.2 million that required a reserve for possible loan losses of $1.1 million
and $14.2 million that did not require a related reserve. Impaired loans, as
defined in Statement of Financial Accounting Standards No. 114 ("SFAS No. 114"),
"Accounting by Creditors for Impairment of a Loan," are commercial and
commercial real estate loans recognized by the Company as nonaccrual and
restructured. Refer to Notes 1 and 5 to the Notes to Consolidated Financial
Statements of this Form 10-K for a further discussion on SFAS No. 114. The
amount of interest on December 31, 1997 impaired loans that would have been
recorded had the loans been paying in accordance with their original terms
during 1997 was approximately $3.2 million. The amount of interest income on
these loans included in net income in 1997 was approximately $1.2 million.
Reserve for Possible Loan Losses
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 determined
using a consistent, systematic methodology which analyzes the size and risk of
the loan and lease portfolio. Factors 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. The analysis 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 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 and ratio of
loans in each category to total loans at December 31, 1993 through 1997 is
presented below:
DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- --------------------- --------------------- --------------------- --------------------
LOANS AS LOANS AS LOANS AS LOANS AS LOANS AS
A PERCENT A PERCENT A PERCENT A PERCENT A PERCENT
ALLOCATION OF TOTAL ALLOCATION OF TOTAL ALLOCATION OF TOTAL ALLOCATION OF TOTAL ALLOCATION OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Amount of loan loss
reserve:
Commercial and
financial.......... $19,449 36.1% $17,762 35.5% $22,345 38.5% $33,601 41.1% $39,879 43.7%
Commercial real
estate:
Construction..... 747 1.5% 556 1.2% 952 2.5% 891 1.8% 2,271 3.0%
Developer,
investor
and land....... 3,057 8.3% 4,638 12.0% 8,329 18.1% 13,927 20.4% 18,497 23.1%
Commercial lease
financing......... 974 2.0% 634 1.8% 408 1.6% 181 1.5% 199 1.5%
Consumer*........... 20,745 52.1% 15,837 49.5% 10,948 39.3% 7,728 35.2% 7,148 28.7%
Unallocated......... 7,258 12,557 27,000 20,415 8,523
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total........ $52,230 100.0% $51,984 100.0% $69,982 100.0% $76,743 100.0% $76,517 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
* Consumer loans include indirect automobile installment loans and leases,
residential mortgages and home equity lines of credit, credit cards, and check
credit loans.
23
24
The reserve for possible loan losses was $52.2 million at December 31,
1997, approximating the $52.0 million balance a year ago. Net chargeoffs of $654
thousand were offset by a $900 thousand provision for possible loan losses. The
unallocated portion of the reserve at year end was $7.3 million, or 14 percent
of the reserve, down from $12.6 million, or 24 percent, of the reserve a year
ago. The decrease in the unallocated portion was due mostly to additional
allocation to the consumer loan category consistent with the 1997 net consumer
loan growth of $225 million. The level reserve for possible loan losses follows
a net decrease of $18.0 million in 1996 which reflected the receipt of a
regulatory examination that confirmed the Company's risk ratings and reserve
adequacy analysis which allowed for a large reduction in reserve requirements.
The unallocated portion of the reserve is not expected to decline over
the next year as it has since 1995. The Company expects to maintain reserve
levels which are consistent with asset quality and the risk inherent within the
loan portfolios.
A summary of loan loss experience for the years ended December 31, 1993
through 1997 is presented below:
DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Reserve for loan losses at
beginning of period........... $ 51,984 $ 69,982 $ 76,743 $ 76,517 $ 61,735
--------- ---------- ---------- ---------- ----------
Chargeoffs:
Commercial and financial... 2,030 4,732 10,122 16,845 32,452
Commercial real estate:
Construction............. 531 206 1,760
Developer, investor and land 362 256 16,531 13,483 23,387
Consumer:
Residential mortgage..... 449 1,162 2,115 1,458 1,298
Home equity.............. 116 51 403 119 370
Indirect automobile
installment............ 2,793 1,736 844 806 1,981
Other consumer........... 996 212 178 281 319
---------- ---------- ---------- ---------- ----------
Total chargeoffs......... 6,746 8,149 30,724 33,198 61,567
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial and financial... 2,976 4,908 5,654 4,524 1,989
Commercial real estate:
Construction............. 35 192 94 97
Developer, investor and land 1,746 3,104 1,799 1,034 928
Consumer:
Residential mortgage..... 623 736 1,191 127 408
Home equity ............. 12 17 46 48 101
Indirect automobile
installment........... 685 707 642 820 1,046
Other consumer........... 50 48 44 88 23
---------- ---------- ---------- ---------- ----------
Total recoveries......... 6,092 9,555 9,568 6,735 4,592
---------- ---------- ---------- ---------- ----------
Net chargeoffs (recoveries)..... 654 (1,406) 21,156 26,463 56,975
Provision (credit) for possible
loan losses ................ 900 (17,300) 14,395 25,674 71,757
Reserve of (sold) acquired banks (2,104) 1,015
---------- ---------- ---------- ---------- ----------
Reserve for loan losses at
end of period............... $ 52,230 $ 51,984 $ 69,982 $ 76,743 $ 76,517
========== ========== ========== ========== ==========
Average loans................... $2,635,868 $2,077,325 $1,976,769 $1,894,734 $1,997,908
========== ========== ========== ========== ==========
Ratio of net chargeoffs
(recoveries) to average
loans......................... 0.0% (0.1)% 1.1% 1.4% 2.9%
24
25
RESULTS OF OPERATIONS
COMPARISON OF 1997 WITH 1996
For the year ended December 31, 1997, net income was $32.4 million, or
$1.08 diluted earnings per share, compared with $45.3 million, or $1.53 diluted
earnings per share, for the year ended December 31, 1996. The decrease in
reported earnings was the direct result of a number of one-time charges and
credits in both periods. Results for 1997 included a nonrecurring charge of $4.4
million for certain nondeductible merger-related expenses and a pre-tax charge
of $11.8 million for restructuring charges related to the acquisition of Walden.
1996 results included a $6.8 million gain from a sale of a Connecticut banking
subsidiary, an earnings credit of $18.6 million recorded through the provision
for possible loan losses, a $5.9 million one-time charge primarily from expenses
incurred in connection with the Branch Purchase, and a one-time charge against
earnings of $3.0 million to reflect an assessment on certain deposits insured by
the SAIF. Excluding these nonrecurring charges and credits in both years, 1997
net income was $43.6 million, or $1.45 diluted earnings per share, a 22 percent
increase over the $35.6 million, or $1.21 diluted earnings per share in 1996.
Net income for 1997, including the aforementioned nonrecurring items, produced a
return on average stockholders' investment of 10.37 percent compared with 15.60
percent in 1996, and a return on average assets of .88 percent compared with
1.43 percent last year. A comparative analysis for return on average assets and
return on average stockholders' investment is presented below:
RETURN ON AVERAGE
RETURN ON AVERAGE ASSETS STOCKHOLDERS' INVESTMENT
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ ------------------------
1997 1996 1997 1996
---------- -------- ---------- ---------
Net interest income.............................. 4.77% 4.44% 56.08% 48.62%
Provision (credit) for possible loan losses...... .02 (.54) .29 (5.96)
---- ---- ----- -----
Net interest income after provision for possible
loan losses.................................... 4.75 4.98 55.79 54.58
Noninterest income............................... 1.03 1.26 12.17 13.76
Noninterest expense.............................. 4.28 3.92 50.28 42.96
---- ---- ----- -----
Income before income tax......................... 1.50 2.32 17.68 25.38
Income tax provision............................. .62 .89 7.31 9.78
---- ---- ----- -----
Net income.................................. .88% 1.43% 10.37% 15.60%
==== ==== ===== =====
Net Interest Income Analysis
The Company's net interest income on a fully taxable equivalent basis
was $175.9 million in 1997, $34.0 million higher than the previous year. The
increase in net interest income was due to the additional volume of
interest-earning assets and interest-bearing liabilities acquired in the Branch
Purchase, and improvements in earning asset mix and volumes. Market rates were
relatively level during the year and not a major factor in the interest margin
growth.
25
26
The table below presents the following information: average earning
assets and average interest-bearing liabilities supporting earning assets; and
interest income and interest expense expressed as a percentage of the related
asset or liability. The average balances and the rates presented include the
effect of fair value adjustments under SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities."
DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- ---- --------- -------- ---- --------- ------- ----
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks......... $ 100,461 $ 110,862 $ 111,429
Federal funds sold and other.... 81,563 $ 4,775 5.85% 40,829 $ 2,223 5.44% 53,030 $ 3,939 7.43%
Securities:
Taxable....................... 718,274 44,803 6.24 875,356 52,600 6.01 685,284 41,875 6.11
Nontaxable(1)................. 14,712 981 6.67 10,969 872 7.95 8,058 868 10.77
--------- ------ --------- ------ --------- ------
Total securities.............. 732,986 45,784 6.25 886,325 53,472 6.03 693,342 42,743 6.16
Loans(1)(2)..................... 2,635,868 235,338 8.93 2,077,325 188,277 9.06 1,976,769 183,485 9.28
Reserve for possible loan losses (52,116) (66,952) (76,000)
---------- ---------- ----------
Net loans..................... 2,583,752 2,010,373 1,900,769
Other assets.................... 167,981 125,442 121,122
---------- -------- ---------- -------- ---------- --------
Total assets/interest income $3,666,743 $285,897 $3,173,831 $243,972 $2,879,692 $230,167
========== ======== ========== ======== ========== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Noninterest-bearing............. $ 544,098 $ 410,181 $ 381,238
NOW............................. 74,718 $ 894 1.20% 264,063 $ 3,299 1.25% 259,498 $ 3,304 1.27%
Money market.................... 612,242 13,381 2.19 299,259 9,551 3.19 309,034 8,823 2.86
Regular savings................. 670,182 19,500 2.91 465,685 11,636 2.50 491,484 13,204 2.69
Time............................ 906,842 48,891 5.39 853,114 47,198 5.53 805,351 44,072 5.47
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits................ 2,263,984 82,666 3.65 1,882,121 71,684 3.81 1,865,367 69,403 3.72
---------- ---------- ----------
Total deposits.............. 2,808,082 2,292,302 2,246,605
Short-term and other
borrowings.................... 504,180 27,342 5.42 557,092 30,443 5.46 354,553 21,230 5.99
Other liabilities............... 42,048 34,238 25,045
Stockholders' investment........ 312,433 290,199 253,489
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total liabilities and
stockholders'
investment/interest
expense.................. $3,666,743 $110,008 3.00% $3,173,831 $102,127 3.22% $2,879,692 $ 90,633 3.15%
========== ======== ========== ======== ========== ========
Earning assets -- interest income $3,450,417 $285,897 8.29% $3,004,479 $243,972 8.12% $2,723,141 $230,167 8.45%
Interest-bearing
liabilities -- interest expense $2,768,164 110,008 3.97% $2,439,213 102,127 4.19% $2,219,920 90,633 4.08%
-------- -------- --------
Net interest spread(3).......... 4.32% 3.93% 4.37%
Net interest margin(4).......... $175,889 5.10% $141,845 4.72% $139,534 5.12%
======== ======== ========
- - ----------
(1) Interest on loans to and obligations of states and political subdivisions is
not subject to federal income tax. In order to make pretax yields comparable
to taxable loans and investments, a tax equivalent adjustment is utilized.
The adjustment is based on a 35 percent federal income tax rate in 1997,
1996 and 1995 and includes applicable state taxes, net of federal tax
benefit.
(2) Average loan balance includes nonaccrual loans, such that the negative
income effect is included in the calculation of average rates.
(3) Net interest spread is the excess of the interest rate on average earning
assets over the interest rate on average interest-bearing liabilities.
(4) Net interest margin is the excess of the interest earned over interest
expense divided by average earning assets.
As reflected in the foregoing table, the yield on loans in 1997 was
8.93 percent, down slightly from 9.06 percent a year earlier, due mostly to
external pressure on loan pricing of new loans, particularly commercial credits.
Yield on securities improved from 6.03 percent to 6.25 percent reflecting the
positive impact of the aforementioned restructuring program. Yield on earning
assets increased 17 basis points from 8.12 percent last year to 8.29 percent in
1997 due to a shift in earning asset mix from securities to the higher yielding
loan assets, and from the securities yield improvement. The cost of
interest-bearing liabilities decreased 22 basis points to 3.97 percent. Deposit
costs, the principal component of interest-bearing liabilities, crept downward
during the year from 3.81 percent to 3.65 percent. The rollover of certificates
of deposit at the current lower rates was the largest contributor to the cost of
funds decrease. The combined effect of a higher yield on earning assets with a
lower liabilities cost resulted in improvement in interest margin and spread
from 4.72 percent and 3.93 percent, respectively, last year to 5.10 percent and
4.32 percent, respectively, this year.
26
27
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 year ended
December 31, 1997 when compared with the year ended December 31, 1996. Changes
attributable to both rate and volume are allocated on a weighted basis.
INCREASE (DECREASE) FROM YEAR ENDED
DECEMBER 31, 1996
--------------------------------------
AMOUNT DUE TO
YEAR ENDED CHANGES IN
DECEMBER 31, 1997 TOTAL CHANGE VOLUME RATE
----------------- ------------ ------ -------
(DOLLARS IN THOUSANDS)
Interest income:
Interest and fees on
loans*..................... $235,338 $47,061 $49,908 $(2,847)
Interest on securities:
Taxable................ 44,803 (7,797) (9,251) 1,454
Nontaxable*............ 981 109 265 (156)
Interest on federal funds
sold and other............ 4,775 2,552 2,373 179
-------- ------- ------- -------
Total interest
income*........... 285,897 41,925 43,295 (1,370)
-------- ------- ------- -------
Interest expense:
Interest on NOW, money
market and regular
savings deposits.......... 33,775 9,289 8,121 1,168
Interest on time deposits.... 48,891 1,693 2,919 (1,226)
Interest on borrowings....... 27,342 (3,101) (2,871) (230)
-------- ------- ------- -------
Total interest
expense.......... 110,008 7,881 8,169 (288)
-------- ------- ------- -------
Net interest income............. $175,889 $34,044 $35,126 $(1,082)
======== ======= ======= =======
- - ----------
* Fully taxable equivalent at the federal income tax rate of 35 percent and
includes applicable state taxes net of federal benefit. The tax equivalent
adjustment on loans was approximately $400 thousand and on nontaxable
securities was approximately $300 thousand.
Average earning assets for 1997 were $3.450 billion, $446 million higher
than 1996. Average securities volume decreased $153 million to $733 million due
to the aforementioned portfolio restructuring. Average loan volume increased 27
percent, or $559 million, to $2.636 billion in 1997. The increase in loan volume
reflects the full year average of the loans acquired in the late 1996 Branch
Purchase and loan growth during 1997. As noted in the table above, total
interest income increased $43.3 million due to changes in earning asset volume.
Average interest-bearing deposits increased $382 million to $2.264 billion due
to the full year average of deposits acquired in the Branch Purchase and deposit
growth during the year. When combined with a $53 million decrease in average
borrowings, changes in volume of interest-bearing liabilities resulted in a
$8.2 million increase in interest expense over 1996. The net positive
differential between average total earning assets and average total
interest-bearing liabilities increased $117 million in 1997. The increase in
noninterest-bearing deposits accounts for most of the differential improvement
and contributed to the favorable volume variance impact on net interest margin.
Noninterest Income
Total noninterest income was $38.0 million, $1.9 million lower than
1996. This year included $1.5 million in realized securities losses compared
with $1.2 million in realized securities gains in 1996. The 1997 securities
losses reflect the portfolio restructuring sale of lower-yielding securities.
Deposit account service charges increased 43 percent, or $2.8 million, from 1996
to $9.4 million. Corporate services income, which includes merchant credit card
income net of card processing expense, increased 27 percent, or $1.2 million, to
$5.7 million. The increase in both deposit and corporate fee income reflects the
additional volume of accounts obtained in the December 1996 Branch Purchase and
new account growth in 1997. This year's realized gain on the loans held-for-sale
portfolio was $1.8 million compared with a nominal gain in 1996. Other
noninterest income increased $1.6 million from 1996 due primarily to increased
Debit card income, a new product introduced in late 1996, and the benefit of the
larger branch network and resulting increase in ATM fee income from noncustomer
users. Asset management fees, the largest component of noninterest income,
remained consistent with last year at $13.0 million.
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28
Noninterest Expense
Total noninterest expense was $157.1 million, an increase of $32.4
million over 1996. The largest component of the increase resulted from
nonrecurring charges related to acquisitions. This year included an $11.8
million restructuring charge consisting of expenses for severance payments to
former Walden executives and staff, writeoffs of certain Walden assets and
contract buyouts, costs associated with the conversion of Walden's systems to
the Company's operating systems, and certain other expenses associated with the
integration of the Walden banking subsidiaries. This year also included $4.4
million in acquisition and merger-related expense primarily for professional
services paid in connection with the Walden and Firestone acquisitions and
pending acquisitions of Somerset and Affiliated. In 1996 acquisition expense and
merger-related expense was $5.9 million primarily related to the Branch
Purchase. During 1998, the Company expects to record a one-time charge totaling
$19.5 million in connection with the pending Somerset and Affiliated
acquisitions. Refer to Notes 2 and 12 of the Notes to Consolidated Financial
Statements for a further discussion of acquisitions.
Salary and employee benefits, occupancy, and equipment and furniture
increased a combined $13.4 million due mostly to the full year's operation and
support for the twenty banking branches acquired in the December 1996 Branch
Purchase. The $4.2 million increase in intangible asset amortization resulted
from the premiums paid in the Branch Purchase. Service bureau expense increased
$2.4 million as a result of a higher use of nonaffiliated banks' ATM's by new
customers, and increased processing costs associated with Debit cards. The
increase in advertising and promotion is consistent with the Company's growth in
assets and reflects this year's many product promotions and the advertising
campaign, "THE other BIG BANK." Deposit insurance premiums decreased from 1996,
which included the $3.0 million one-time SAIF assessment. Other noninterest
expense increased $5.3 million reflecting higher costs associated with operating
an expanded branch network. Communications expense, including telephone,
stationery and supplies, postage and delivery charges accounted for most of the
other noninterest expense increase.
Year 2000
In 1997 the Company assembled a project team of senior officers and
outside consultants to assess the impact of the so-called Year 2000 problem on
its information systems and information systems of its customers, vendors and
other parties that service or otherwise interact with the Company. The Year 2000
problem, which is common to most corporations, concerns the inability of
information systems, primarily, (but not exclusively) computer software
programs, to recognize properly and process date-sensitive information as the
year 2000 approaches. Data processing for the Company's major operating systems
(loans and deposits) is conducted in-house using programs developed primarily by
third-party vendors. Inventory and Year 2000 readiness assessment of all systems
and applications have been completed and all third party vendors who provided
applications to the Company have been contacted. Efforts to bring the major
operating systems, and certain outsourced applications, into compliance with
Year 2000 requirements will be accomplished through the installation of updated
or replacement programs developed by third parties.
Bank regulatory agencies have recently issued additional guidance under
which they are assessing and will assess Year 2000 readiness. The failure of a
financial institution, such as the Company, to take appropriate steps to address
deficiencies in their Year 2000 project management process may result in
regulatory enforcement actions which could have a material adverse effect on
such institution, result in the imposition of civil money penalties, or result
in the delay (or receipt of an unfavorable or critical evaluation of management
of a financial institution in connection with regulatory review) of applications
seeking to acquire other entities or otherwise expand the institution's
activities.
The Company concluded in early 1998 that sufficient progress against
planning objectives had not been achieved. Accordingly, the Board of Directors
of the Company has instructed management to accelerate the pace of achieving the
milestones listed in the project plan and to add such additional milestones,
assessments, documentation procedures and take such further steps and actions as
may be necessary to attain Year 2000 readiness. The Board specifically directed
management to modify the Company's Year 2000 compliance process to address the
following items: (i)include more specific milestones and target dates in the
project plan; (ii)complete an inventory and assessment of hardware at both the
Company's data processing center and its back-up location; (iii) complete the
project planning phase for resolution of Year 2000 problems; (iv) formulate
contingency plans covering both the hypothetical failure of a critical
information system and the hypothetical failure of a key outside servicer to
make its product Year 2000 compliant; (v) develop more detailed testing plans
for Year 2000 compliance; (vi) formulize documentation procedures for Year 2000
compliance; (vii) accelerate efforts to address credit risks associated with
Year 2000 issues of the Company's customers; (viii) develop procedures to
address customers' Year 2000 inquiries concerning the Company; and (ix) such
other
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29
matters as management of the Company deems appropriate. Moreover, the Board of
Directors has directed management of the Company to dedicate the human and
financial resources needed to address Year 2000 compliance and to take those
steps needed to assure that conversion issues involving pending acquisitions and
new applications installations will not be detrimental to (or in any way
diminish) the Company's Year 2000 readiness. In March, 1998, the Company
retained the services of Arthur Andersen LLP and certain additional outside
advisors and programmers to augment the Company's effort in addressing its Year
2000 compliance.
The Company currently believes that it will be able to modify or replace
any affected systems in time to minimize any detrimental effects on the
Company's operations. In a number of cases, Year 2000 compliant systems have
been installed or are already in the process of installation in the normal
course of upgrade and functionality improvement. The Company expects that it
will incur costs to replace existing hardware and software which will be
capitalized and amortized in accordance with the Company's existing accounting
policy while maintenance or modification costs will be expensed as incurred.
Although final costs have yet to be determined, the Company currently expects to
incur costs in the range of $4 million to $5 million to assure Year 2000
readiness. Costs of the Year 2000 project are based on current estimates and
actual results could vary significantly from such estimates once detailed test
plans are developed. If the Company's resolution plan were unsuccessful, it
would have a material adverse effect on its future operating results and the
financial condition of the Company.
Ultimately, an estimation of the efforts of the Company in addressing
the Year 2000 issue in a successful and timely manner depends to a large extent
not only on the corrective measures that the Company undertakes, but also on the
efforts undertaken by businesses and other independent entities who provide data
to, or receive data from, the Company as borrowers, vendors or customers. In
particular, the Company's credit risk associated with its borrowers may increase
as a result of problems such borrowers may have in resolving their own Year 2000
issues. Although it is not possible to evaluate the magnitude of any potential
increased credit risk at this time, the impact of the Year 2000 problem on
borrowers could result in increases in problem loans and credit losses in future
years. Over the course of the next two years, the Company will endeavor to
monitor the Year 2000 efforts of its borrowers and will implement a course of
action and procedures designed to reduce any increased potential risk as a
result of Year 2000 issues.
Income Taxes
The Company recorded income taxes of $22.9 million compared with $28.4
million in 1996, a decrease due to the lower level of pre-tax income. The
effective tax rate for 1997 was 41.4 percent compared with 38.5 percent in 1996.
The increase in the effective tax rate was primarily the result of incurring
$4.6 million in nondeductible acquisition-related expenses this year compared
with $793 thousand in 1996. Refer to Note 13 to the Notes to Consolidated
Financial Statements of this Form 10-K for a further discussion of income taxes.
As of December 31, 1997, included in other assets was a deferred tax
asset of approximately $8.9 million, which is expected to be realized against
future taxable income. Management believes that it is more likely than not that
the Company will realize the benefit of these deferred assets.
Fair Value of Financial Instruments
The methods and assumptions used by the Company to estimate the fair
value of each class of financial instruments as of December 31, 1997 and 1996,
in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," are discussed in Note 20 to the Notes to Consolidated Financial
Statements of this Form 10-K. Financial Instruments do not include all of the
assets and liabilities recorded on a company's balance sheet. Therefore, the
aggregate fair value amounts of the Financial Instruments do not represent the
underlying value of a company.
As a result of these assumptions and valuation methodologies, the
estimated fair value of Financial Instrument assets as of December 31, 1997 and
1996 was $3.63 billion and $3.59 billion, respectively, or $42.4 million and
$27.3 million, respectively, in excess of carrying value. The increase in excess
of fair value over the carrying value of Financial Instrument assets of $15.1
million is attributed, in the opinion of management, to the competitive local
environment for commercial credits and resulting lower commercial loan market
rates at year-end 1997, and an increase in value of the residential loan
portfolios due to lower residential loan market rates. The estimated fair value
of Financial Instrument liabilities as of December 31, 1997 and 1996 was $3.45
billion and $3.40 billion, respectively, or approximately $3.1 million lower
than carrying value for both periods.
COMPARISON OF 1996 WITH 1995
Net Interest Income Analysis
The Company's net interest income on a fully taxable equivalent basis
was $141.8 million in 1996, $2.3 million above 1995 of $139.5 million. The
improvement in net interest margin in 1996 over 1995 reflects the positive
29
30
effect of earning asset growth exceeding the negative effect of lower market
interest rates in 1996. The decline in market rates was for the most part
limited to the first quarter of 1996 as rates remained relatively level
throughout the rest of the year.
The yield on loans, which was directly affected by the market rate
decline and, to a lesser extent by external pressure on loan pricing, decreased
22 basis points from 9.28 percent in 1995 to 9.06 percent for the year ended
December 31, 1996. The yield on securities was also affected by market interest
rates and decreased 13 basis points from 6.16 percent to 6.03 percent in 1996.
The combination of yield declines in loans and securities and, to a lesser
degree, lower federal funds sold rates, resulted in a decline in yield on total
earning assets of 33 basis points from 8.45 percent to 8.12 percent. The cost of
interest-bearing liabilities increased 11 basis points from 1995 to 4.19 percent
in 1996. Deposit costs, the principal component of interest-bearing liabilities,
had remained relatively stable since the third quarter of 1995. The 1996
increase of 9 basis points to 3.81 percent in deposit costs reflects the
carryover effect in 1996 of rising deposit rates during the first three quarters
of 1995. Cost of borrowings, which are mostly short term, decreased during 1996
consistent with interest rates. As exhibited in the following table, the net
effect on net interest income from changes in rates on interest-earning assets
and interest-bearing liabilities was a decrease of $4.1 million.
Reflecting the decline in earning asset yield and a modest increase in
liability costs, the interest margin and spread decreased from 5.12 percent and
4.37 percent, respectively, in 1995 to 4.72 percent and 3.93 percent in 1996.
Since reaching a historical peak in the first quarter of 1995, both net interest
margin and rate spread had been on a decline in concert with market interest
rates and some pressure on loan pricing.
Average earning assets for the year 1996 were $3.004 billion, $281 million
higher than 1995. Average securities volume was up $193 million to $886 million
for the year while average loans outstanding increased $100 million to $2.077
billion. Funding for the higher loan and securities volume was provided through
an increase in average borrowings of $203 million to $557 million and deposit
growth of $46 million which was principally higher cost certificates of deposit.
In the aggregate, interest-bearing liabilities increased $219 million in 1996 to
$2.439 billion. The net effect on net interest income from changes in volume of
interest-earning assets and interest-bearing liabilities was an increase of $6.4
million.
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 year ended
December 31, 1996 when compared with the year ended December 31, 1995. Changes
attributable to both rate and volume are allocated on a weighted basis.
INCREASE (DECREASE) FROM YEAR ENDED
DECEMBER 31,1995
-----------------------------------
AMOUNT DUE TO
YEAR ENDED CHANGES IN
DECEMBER 31, 1996 TOTAL CHANGE VOLUME RATE
----------------- ------------ ------ -------------
(DOLLARS IN THOUSANDS)
Interest income:
Interest and fees on loans* ..................... $188,277 $ 4,791 $ 9,183 $ (4,392)
Interest on securities:
Taxable ................................... 52,600 10,725 10,903 (178)
Nontaxable* ............................... 872 4 266 (262)
Interest on federal funds sold
and other .................................... 2,223 (1,716) (794) (922)
-------- -------- -------- --------
Total interest income* ................ 243,972 13,804 19,558 (5,754)
-------- -------- -------- --------
Interest expense:
Interest on NOW, money market
and regular savings deposits ................... 24,486 (845) (738) (107)
Interest on time deposits ....................... 47,198 3,126 2,638 488
Interest on borrowings ......................... 30,443 9,214 11,209 (1,995)
-------- -------- -------- --------
Total interest expense .................. 102,127 11,495 13,109 (1,614)
-------- -------- -------- --------
Net interest income.................................. $141,845 $ 2,309 $ 6,449 $ (4,140)
======== ======== ======== ========
- - ----------
* Fully taxable equivalent at the federal income tax rate of 35 percent and
includes applicable state taxes net of federal benefit. The tax equivalent
adjustment on loans was approximately $500 thousand and on non-taxable
securities was approximately $300 thousand.
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31
Noninterest Income
Total noninterest income was $39.9 million, $3.4 million higher than 1995.
Included in 1996's noninterest income was a $6.8 million gain on the sale of a
banking subsidiary. Corporate services income, which includes merchant credit
card income net of expenses, increased 8 percent, or $350 thousand to $4.5
million. Asset management fees decreased $634 thousand due to a lower level of
assets under management. Net realized securities gains were $1.2 million lower
than 1995. Other noninterest income decreased $1.1 million from 1995, which
included a nonrecurring gain of $1.2 million from the sale of a branch office by
Walden.
Noninterest Expense
Total noninterest expense was $124.7 million in 1996, an increase of $6.6
million over 1995. Contributing to the increase were acquisition and
merger-related expenses of $5.1 million related to the Branch Purchase and $793
thousand related to the Walden acquisition for a total of $5.9 million. The 1996
acquisition expense compares with $2.4 million in 1995 for expenses related to
Walden's 1995 acquisition of The Braintree Savings Bank. Refer to Note 12 to the
Notes to Consolidated Financial Statements for a further discussion of
acquisition charges.
Salary and employee benefits increased $4.8 million reflecting additional
staffing in retail banking, computer operations and processing to support the
addition of 20 banking branches acquired in the Branch Purchase. Also included
in 1996 benefit expense was a one-time $830 thousand contractual pension
provision related to the sale of a banking subsidiary. The deposit insurance
assessment was $4.0 million in 1996 and includes a one-time $3.0 million Savings
Association Insurance Fund assessment on former savings and loan association
deposits held by a Company subsidiary bank, USTrust. Refer to Note 12 to the
Notes to Consolidated Financial Statements of this Form 10-K for a further
discussion of the deposit insurance assessment. The increase in professional and
consulting fees of $910 thousand was largely driven by the growth in home equity
and indirect automobile loans and associated legal costs for new loan closings
and collection activities. In addition, a $243 thousand nonrecurring charge for
severance-related consulting services of a former Company executive was recorded
during the year. Advertising and promotion increased $586 thousand as a result
of several successful promotional campaigns during 1996 for new loan products
and deposit services as well as to increase the presence and awareness of the
Company's subsidiary bank, USTrust among the constituents of its market area.
Amortization of intangible expense for 1996 includes one month, or $534 thousand
of amortization related to the premium paid with the Branch Purchase. Intangible
asset amortization in 1995 included an additional $1.3 million due to the
acceleration of amortization of certain core deposit intangible assets following
a review of the expected future economic benefits derived from these assets and
their current carrying amount, and due to a writedown of goodwill in connection
with the sale of a branch by a former Walden banking subsidiary.
Other noninterest expense increased $1.7 million to $17.1 million. Included
in 1996 was $870 thousand in litigation provisions recorded for certain
litigation matters that required accounting recognition, higher costs associated
with the increased volume of consumer loans, and other miscellaneous operating
costs. Partially offsetting the aforementioned increases in expense was a sharp
decrease from 1995 in foreclosed asset and workout expense of $6.0 million to
$1.7 million in 1996, a direct benefit of the Company's successful effort in the
reduction of problem assets over the past few years.
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32
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The preceding discussion and Notes to Consolidated Financial Statements of
this Form 10-K contain certain forward-looking statements, including without
limitation the statements regarding (i) rates of loan growth and amortization;
(ii) expectations regarding the level of securities held by the Company; (iii)
effects on net interest margin from changes in market interest rates; (iv) the
rate of delinquencies and amounts of chargeoffs; (v) the level of reserve for
possible loan losses; (vi) the amount and timing of acquisition and
restructuring charges related to the Somerset and Affiliated transactions; (vii)
the Company's ability to minimize any detrimental effects of the Year 2000
problem and associated expense; and (viii) 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 the 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 that 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.
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33
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations of this Form 10-K under "Interest Rate Risk" for a
discussion of market risk.
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34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE
Report of Independent Public Accountants.................................................... 35
Consolidated Balance Sheets -- December 31, 1997 and 1996................................... 36
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and
1995...................................................................................... 37
Consolidated Statements of Changes in Stockholders' Investment for the years ended
December 31, 1997, 1996 and 1995.......................................................... 38
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995...................................................................................... 39
Notes to Consolidated Financial Statements.................................................. 40
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35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of UST Corp.:
We have audited the accompanying consolidated balance sheets of UST Corp.
and subsidiaries (a Massachusetts corporation) as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in stockholders'
investment and cash flows for each of the three years in the period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of UST Corp.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 28, 1998
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36
UST CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Cash, due from banks and interest-bearing deposits (Note 3) ...................... $ 95,702 $ 140,263
Federal funds sold and other short-term investments .............................. 67,851 142,901
Securities (Notes 1 and 4):
Securities available-for-sale:
Mortgage-backed securities ................................................... 490,691 268,245
U.S. Treasury, federal agencies and other securities ......................... 231,741 413,558
----------- -----------
Total securities available-for-sale ................................... 722,432 681,803
Securities held-to-maturity (1996 market value $144,095,000) .................. 145,564
----------- -----------
Total securities ...................................................... 722,432 827,367
Loans (Notes 5, 16, and 18):
Loans -- net of unearned discount of $21,040,000 in 1997 and
$25,892,000 in 1996 .......................................................... 2,835,982 2,535,246
Reserve for possible loan losses ............................................... (52,230) (51,984)
----------- -----------
Total loans, net ...................................................... 2,783,752 2,483,262
Premises, furniture and equipment, net (Note 6) .................................. 64,407 60,670
Intangible assets, net (Note 1) .................................................. 57,807 66,826
Other property owned, net (Notes 1 and 7) ........................................ 1,334 1,988
Loans held-for-sale (Note 1) ..................................................... 12,446
Other assets (Notes 10 and 12) ................................................... 44,973 45,332
----------- -----------
Total Assets .......................................................... $ 3,838,258 $ 3,781,055
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Noninterest-bearing ........................................................... $ 708,399 $ 600,272
Interest-bearing:
NOW ........................................................................ 43,116 381,782
Money market ............................................................... 660,641 313,548
Regular savings ............................................................ 675,087 649,974
Time:
Certificates of deposit over $100 thousand ................................. 159,644 168,081
Other ...................................................................... 731,328 742,500
---------- ----------
Total deposits ........................................................ 2,978,215 2,856,157
Short-term borrowings (Note 8) ................................................... 421,313 441,607
Other borrowings (Note 9) ........................................................ 49,338 107,304
Other liabilities (Note 10) ...................................................... 49,266 66,966
---------- ----------
Total liabilities ..................................................... 3,498,132 3,472,034
Commitments and contingencies (Notes 17 and 18)
Stockholders' investment (Note 15):
Preferred stock $1 par value; Authorized -- 4,000,000 shares; Outstanding -- none
Common stock $.625 par value; Authorized -- 45,000,000 shares;
Issued -- 29,762,224 and 29,324,164 shares in 1997 and 1996, respectively .... 18,601 18,328
Additional paid-in capital ..................................................... 117,236 111,158
Retained earnings .............................................................. 201,355 181,645
Unrealized gain (loss) on securities available-for-sale, net of tax ............ 2,245 (2,576)
Deferred compensation and other ................................................ 689 466
----------- -----------
Total stockholders' investment ........................................ 340,126 309,021
----------- -----------
Total Liabilities and Stockholders' Investment ........................ $ 3,838,258 $ 3,781,055
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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37
UST CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Interest income:
Interest and fees on loans ................................... $ 234,972 $ 187,802 $ 182,775
Interest and dividends on securities:
Taxable .................................................... 44,803 52,600 41,875
Nontaxable ................................................. 663 588 628
Interest on federal funds sold and other short-term investments 4,775 2,223 3,939
------------ ------------ ------------
Total interest income .......................... 285,213 243,213 229,217
------------ ------------ ------------
Interest expense:
Interest on deposits ......................................... 82,666 71,684 69,402
Interest on borrowings ....................................... 27,342 30,443 21,230
------------ ------------ ------------
Total interest expense ......................... 110,008 102,127 90,632
------------ ------------ ------------
Net interest income .......................................... 175,205 141,086 138,585
Provision (credit) for possible loan losses (Note 5) ........... 900 (17,300) 14,395
------------ ------------ ------------
Net interest income after provision for possible loan losses . 174,305 158,386 124,190
------------ ------------ ------------
Noninterest income:
Asset management fees ........................................ 13,093 12,947 13,581
Deposit account service charges .............................. 9,366 6,549 7,157
Corporate services income, net ............................... 5,689 4,471 4,121
Gain on sale of loans ........................................ 1,804 2 157
Gain on sale of bank subsidiary .............................. 6,806
Securities (losses) gains, net ............................... (1,491) 1,179 2,395
Other ........................................................ 9,562 7,987 9,106
------------ ------------ ------------
Total noninterest income ...................... 38,023 39,941 36,517
------------ ------------ ------------
Noninterest expense:
Salary and employee benefits ................................. 73,579 64,579 59,820
Occupancy, net ............................................... 12,953 10,773 10,605
Restructuring charges (Notes 2 and 12) ....................... 11,751
Equipment and furniture depreciation and maintenance ......... 7,584 5,368 5,153
Intangible asset amortization ................................ 6,983 2,815 3,618
Data processing services ..................................... 5,536 3,121 3,208
Professional and consulting fees ............................. 5,385 5,497 4,587
Advertising and promotion .................................... 4,780 3,881 3,295
Acquisition and merger-related expense (Notes 2 and 12) ...... 4,418 5,933 2,409
Deposit insurance assessment ................................. 1,053 3,959 4,051
Foreclosed asset and workout expense ......................... 709 1,687 5,972
Other ........................................................ 22,351 17,056 15,403
------------ ------------ ------------
Total noninterest expense ...................... 157,082 124,669 118,121
------------ ------------ ------------
Income before income taxes ..................................... 55,246 73,658 42,586
Income tax provision (Note 13) ............................... 22,853 28,381 15,533
------------ ------------ ------------
Net income .................................... $ 32,393 $ 45,277 $ 27,053
============ ============ ============
Per share data (Note 14):
Basic earnings per share ..................................... $ 1.09 $ 1.56 $ 0.94
Diluted earnings per share ................................... $ 1.08 $ 1.53 $ 0.92
Cash dividends declared ...................................... $ 0.42 $ 0.32 $ 0.11
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
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED GAIN/(LOSS) TREASURY DEFERRED
STOCK CAPITAL EARNINGS ON SECURITIES STOCK COMPENSATION
----- ------- -------- ------------- ----- AND OTHER TOTAL
(DOLLARS IN THOUSANDS) --------- -----
Balance December 31, 1994,
as previously reported ................. $ 11,009 $ 72,129 $ 73,183 $ (23,601) $ (86) $ 132,634
Adjustments for the Walden Bancorp,
Inc. pooling of interests (Note 2) ..... 6,090 35,922 43,140 (3,622) 81,530
Adjustments for the Firestone Financial
Corp. pooling of interests (Note 2) .... 738 514 7,289 8,541
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1994,
as restated ............................ 17,837 108,565 123,612 (27,223) (86) 222,705
Net income ............................... 27,053 27,053
Cash dividends declared .................. (3,250) (3,250)
Stock option exercises and stock issued
under restricted stock plan (Notes 10
and 11) ................................ 297 3,022 (171) 3,148
Change from net unrealized loss to gain
on securities available-for-sale, net
of tax (Note 1) ........................ 28,290 28,290
Reduction in ESOP loan guarantee ......... 321 321
Activity in Directors Deferred Compen-
sation Program and other, net
(Note 11) ............................ 4 42 80 126
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 ............... 18,138 111,629 147,415 1,067 144 278,393
Net income ............................... 45,277 45,277
Cash dividends declared .................. (9,309) (9,309)
Treasury stock acquired (Note 15)......... $ (9,913) (9,913)
Stock option exercises and stock issued
under restricted stock plan (Notes 10
and 11) ................................ 174 (656) (1,738) 9,771 7,551
Change from net unrealized gain to loss
on securities available-for-sale, net
of tax (Note 1) ........................ (3,643) (3,643)
Reduction in ESOP loan guarantee ......... 143 143
Activity in Directors Deferred Compen-
sation Program and other, net
(Note 11) ............................ 16 185 142 179 522
--------- --------- --------- --------- -------- --------- ---------
Balance, December 31, 1996 ............... 18,328 111,158 181,645 (2,576) 466 309,021
Net income ............................... 32,393 32,393
Cash dividends declared .................. (12,683) (12,683)
Stock option exercises and stock issued
under restricted stock plan (Notes 10
and 11) ................................ 273 6,078 6,351
Change from net unrealized loss to gain
on securities available-for-sale, net
of tax (Note 1) ........................ 4,821 4,821
Activity in Directors Deferred Compen-
sation Program and other, net
(Note 11) ............................ 223 223
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 ............... $ 18,601 $ 117,236 $ 201,355 $ 2,245 $ -- $689 $340,126
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
38
39
UST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income ..................................................... $ 32,393 $ 45,277 $ 27,053
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision (credit) for possible loan losses..................... 900 (17,300) 14,395
Depreciation and amortization of fixed and intangible assets ... 14,208 8,421 8,450
Amortization of sale and leaseback gain ........................ (372)
Accretion of net securities discount ........................... (25) (234) (395)
Gain on sale of bank subsidiary ................................ (6,806)
Securities losses (gains), net ................................. 1,491 (1,179) (2,395)
Gain on sale of other property owned, net ...................... (148) (593) (479)
Gain on sale of loans held-for-sale ............................ (1,804) (2) (157)
Writedowns of other property owned ............................. 303 496 2,128
Writedowns of fixed assets ..................................... 1,158
Proceeds from loans held-for-sale............................... 14,250 12,996
Deferred income tax expense (benefit) .......................... 2,364 3,507 (2,841)
Net change in other assets and other liabilities ............... (19,421) 14,710 17,640
--------- --------- ---------
Net cash provided by operating activities .............. 45,669 59,293 63,027
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale ........... 267,949 53,942 101,173
Proceeds from maturities of securities available-for-sale ...... 198,236 185,608 52,850
Proceeds from maturities of securities held-to-maturity ........ 53,919 22,412
Purchases of securities available-for-sale ..................... (354,313) (231,292) (286,578)
Purchases of securities held-to-maturity ....................... (71,344) (15,530)
Net decrease (increase) in federal funds sold and other ........ 75,050 (118,828) (25,060)
Net increase in loans .......................................... (306,699) (111,665) (57,433)
Proceeds from sale of fixed assets ............................. 208
Proceeds from other property owned ............................. 5,773 7,062 12,870
Net cash proceeds from sale of bank subsidiary (Note 2) ....... 11,989
Net cash acquired from Branch Purchase (Note 2) ................ 176,862
Purchases of premises and equipment ............................ (12,328) (13,635) (4,531)
--------- --------- ---------
Net cash used by investing activities ................... (126,124) (57,382) (199,827)
Cash flows from financing activities:
Net increase (decrease) in nontime deposits .................... 141,667 42,560 (149,803)
Net (decrease) increase in certificates of deposit ............. (19,609) (40,479) 176,620
Net (decrease) increase in borrowings .......................... (78,260) 20,429 113,228
Cash dividends paid ............................................ (11,406) (7,866) (3,250)
Treasury stock acquired ........................................ (9,913)
Issuance of common stock for cash, net ......................... 3,502 7,403 2,581
--------- --------- ---------
Net cash provided by financing activities .............. 35,894 12,134 139,376
--------- --------- ---------
(Decrease) increase in cash and cash equivalents ............... (44,561) 14,045 2,576
Cash and cash equivalents at beginning of period ............... 140,263 126,218 123,642
--------- --------- ---------
Cash and cash equivalents at end of period ..................... $ 95,702 $ 140,263 $ 126,218
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ..................................................... $ 108,653 $ 101,522 $ 89,852
========= ========= =========
Income taxes ................................................. $ 15,080 $ 23,578 $ 14,439
========= ========= =========
Noncash transactions:
Transfers from other assets to securities available-for-sale ... $ 180 $ 4,180 $ 499
========= ========= =========
Transfers from securities available-for-sale to held-to-maturity $ 12,162
=========
Transfers from securities held-to-maturity to available-for-sale
(Note 1) .................................................. $ 145,564 $ 34,392
========= =========
Transfers from loans to other property owned ................... $ 7,766 $ 7,033 $ 7,980
========= ========= =========
Transfers from loans to loans held-for-sale, net .............. $ 12,344 $ 13,098
========= =========
Financed other property owned sales ............................ $ 550 $ 565
========= =========
Common stock issuance .......................................... $ 929 $ 492 $ 784
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
39
40
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UST Corp. is a bank holding company with two principal banking subsidiaries:
USTrust, the largest banking subsidiary, which represents 99 percent of the
Company's total assets, and United States Trust Company ("USTC"), each
headquartered in Boston, Massachusetts. UST Corp. and its banking and nonbanking
subsidiaries (the "Company") are engaged in a single line of business, that of
providing a broad range of financial services principally to individuals and
small- and medium-sized companies in the New England region. Included in these
services are commercial banking, consumer financial services, trust and money
management, equipment leasing and loan servicing. The Company through its
banking subsidiaries operates 66 banking branches and an automated teller
machine system in Eastern Massachusetts.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practice in the banking industry. The
preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reporting and disclosure of assets and liabilities, including
those that are of a contingent nature at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The significant accounting and
reporting policies of the Company are summarized below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of UST Corp. and
its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. The parent company only financial statements
contained in Note 19 reflect investments in subsidiaries using the equity method
of accounting.
Certain reclassifications have been made to prior year balances to conform
with the current year presentation. All prior period amounts included in these
financial statements have been restated to reflect the January 3, 1997
acquisition of Walden Bancorp, Inc. ("Walden") and the October 15, 1997
acquisition of Firestone Financial Corp. ("Firestone") as poolings of interests.
Refer to Note 2 for a further discussion of acquisitions. Assets owned by others
and held in a fiduciary or agency capacity are not included in the consolidated
balance sheets.
SECURITIES
The Company classifies investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115 ("SFAS No.
115"), "Accounting for Certain Investments in Debt and Equity Securities." This
Statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. Under this statement such securities are classified as
held-to-maturity, trading, or available-for-sale.
Securities Held-to-Maturity -- Debt securities which management has the positive
intent and ability to hold to maturity are classified as held-to-maturity, and
are carried at cost adjusted for the amortization of premium or the accretion of
discount. Securities classified by the Company as held-to-maturity were $146
million at December 31, 1996. All of the year-end 1996 held-to-maturity
securities were owned by Walden and were redesignated as available-for-sale upon
the closing of the Walden acquisition as allowed under SFAS No. 115.
Trading Securities -- Debt and equity securities with readily determinable
market values that are bought and held principally for the purpose of selling
them in the near term are classified as trading securities and are carried at
fair
40
41
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value, with unrealized gains and losses included in current earnings. At
December 31, 1997 and 1996, there were no securities classified by the Company
as trading.
Securities Available-for-Sale -- Debt and equity securities not classified as
either held-to-maturity or trading are classified as available-for-sale and
carried at fair value, with unrealized after-tax gains and losses reported as a
separate component of stockholders' investment. At December 31, 1997,
stockholders' investment was increased by an unrealized gain related to SFAS No.
115 of $2.2 million net of a deferred tax provision of $1.6 million.
For mortgage-backed securities, the Company recalculates the effective yield
on the investment to reflect the actual prepayment results and estimated future
prepayments. The net investment in these securities is adjusted to the amount
that would have existed had the new estimated average life and effective yield
been applied since the acquisition of the securities. Such adjustments are
charged or credited to interest income in the current period.
The Company determines the securities sold by the specific identification
method. The amount of taxes paid on gains is dependent upon the overall results
of operations of the subsidiary realizing the gain.
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment are stated at cost, less accumulated
depreciation and amortization. The Company provides for depreciation using the
straight-line method by charges to expense in amounts estimated to amortize the
cost over the estimated useful lives of the respective assets as follows:
Buildings and building improvements........... 10-40 years
Computer equipment............................ 5 years
All other furniture and equipment............. 3-10 years
Leasehold improvements are amortized over the life of the lease agreements
plus one renewal period.
LOANS AND LEASES
The Company adopted on January 1, 1995, SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118. Under this
Statement, commercial and commercial real estate loans that are recognized by
the Company as nonaccrual and restructured are classified as "impaired loans" by
the Company. Consumer loans and lease financings recognized as nonaccrual are
collectively evaluated for impairment, and are excluded from impaired loans in
accordance with SFAS No. 114. Loan impairment is measured based on the present
value of expected future cash flows, discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
Loans are stated at their principal amount net of unearned discount, if any.
Certain loans are made on a discounted basis. The unearned discount applicable
to such loans is recorded as income monthly by use of the actuarial method.
Interest income on nondiscounted loans is accrued based on the principal amount
of loans outstanding. Loans and leases are placed on nonaccrual, with the
reversal of all uncollected accrued interest, when there is doubt as to the
collectibility of interest or principal or if loans or leases are 90 days or
more past due unless they are both well secured and in the process of
collection. In every case, a loan or lease reaching 180 days past due is placed
on nonaccrual. Interest received on impaired loans, nonaccrual leases and
nonaccrual consumer loans is applied to principal if collection of principal is
doubtful; otherwise, it is reflected in interest income on a cash basis.
Restructured loans are those on which concessions in terms have been granted
as a result of deterioration of a borrower's financial condition. Interest on
these loans is accrued at the new terms.
41
42
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses is maintained at a level considered
adequate by management to provide for possible losses from loans and leases.
Adequacy of the reserve is determined by management using a consistent,
systematic methodology which analyzes the size and risk of the loan and lease
portfolio. Factors 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. The
analysis includes sensitivity testing and supports a written conclusion. The
reserve is based on estimates, and ultimate losses may vary from current
estimates. These estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the current period.
When a loan, classified as impaired or otherwise, or a lease, 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. Amounts are charged off once the probability of loss has been
established, after having given consideration to such factors as level of
collateral and guarantees, prospective economic conditions and financial
strength of the customer.
OTHER PROPERTY OWNED
Other property owned consists of equipment, vehicles and other real estate
owned ("OREO"). OREO includes properties which the Company acquired through
foreclosure or in settlement of loans. All OREO is held for sale and carried at
the lower of the loan value or fair value of the property acquired, less
estimated costs to sell ("net realizable value"). At the time of foreclosure,
the excess, if any, of the loan value over the net realizable value, is charged
to the reserve for possible loan losses. The carrying value of OREO is reviewed
periodically. Subsequent declines in the fair value of the property and net
operating results of the property are charged to foreclosed asset and workout
expense.
Other vehicles owned are acquired by the Company through repossession or in
settlement of loans or leases. Repossessed vehicles are carried at the lower of
the net investment in the loan, or the estimated proceeds from insurance and
sale at auction.
Other equipment owned is acquired by the Company through repossession or in
settlement of loans or leases. The equipment is carried at the lower of the net
investment in the loan or lease, or the estimated fair value of the equipment
less estimated selling costs.
STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-based Compensation," which establishes a fair value-based method of
accounting for stock options and similar equity instruments of employee stock
compensation plans. This Statement provides the option of adopting the new fair
value method or to continue to measure compensation cost for the those plans
using the current intrinsic value-based method as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB No. 25"). Under this Statement, the continued use of the intrinsic
value-based method, requires pro forma disclosure of net income and earnings per
share as if the fair value-based method had been applied. The Company continues
to use the intrinsic value-based method under the provisions of APB No. 25 and
has disclosed the required pro forma information in Note 11.
42
43
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
income tax provision.
INTANGIBLE ASSETS
Intangible assets include goodwill and core deposit intangibles which are
stated at cost less accumulated amortization. Cost of purchased businesses in
excess of net assets acquired ("goodwill") includes amounts being amortized
using lives ranging from twelve- to twenty-five-year periods with an
insignificant amount at forty years. Values assigned to deposits of purchased
businesses ("core deposit intangibles") are being amortized over seven- and
fifteen-year periods using an accelerated method.
On a periodic basis, the Company reviews its goodwill and core deposit
intangible assets for events or changes in circumstances that may indicate that
the carrying amount of the assets may not be recoverable, and, if appropriate,
reduces the carrying amount through a charge to income in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of."
Goodwill, net of accumulated amortization of $4.6 million, totaled $32.2
million and $15.4 million at December 31, 1997 and 1996, respectively. Core
deposit intangibles, net of accumulated amortization of $14.1 million, totaled
$24.9 million and $51.4 million at December 31, 1997 and 1996, respectively. The
change in goodwill and core deposit intangibles balances from year-end 1996
reflect scheduled amortization and a re-allocation of the purchase price for the
assets assumed in the fourth quarter 1996 acquisition of twenty banking branches
from Bank of Boston Corporation. Refer to Note 2 for a further discussion of
acquisitions. The re-allocation of the intangible asset categories was based on
the completion and receipt in 1997 of appraisals of certain assets acquired.
STATEMENTS OF CASH FLOWS
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and interest-bearing deposits.
RECENT ACCOUNTING DEVELOPMENTS
On June 30, 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125 as amended by SFAS No. 127, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This Statement, which
also superseded SFAS No. 122, provides accounting and reporting standards for
transfers and
43
44
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
servicing of financial assets and extinguishments of liabilities. The standard
is 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. SFAS No. 125 is effective for
transactions occurring after December 31, 1996 and did not have a material
impact on the Company's financial condition or results of operations.
(2) ACQUISITIONS AND DIVESTITURES
Branch Purchase
In the fourth quarter of 1996 the Company completed its acquisition of
twenty banking branches (the "Branch Purchase") from The First National Bank of
Boston ("FNBB"), BayBank, N.A. ("BayBank") and their parent company, Bank of
Boston Corporation. The transaction included the assumption of approximately
$149 million in noninterest-bearing deposits, $378 million in savings deposits,
$140 million of certificates of deposit, $77 million of repurchase agreements,
$8 million in premises and equipment, and $508 million in commercial,
residential real estate, and other loans with businesses and consumers. USTrust
paid a premium equal to 7 percent of average deposit liabilities assumed or
approximately $49 million.
UST Bank/Connecticut
In November 1996, the Company completed the sale of its Connecticut banking
subsidiary, UST Bank/Connecticut ("UST/Conn"), to Lafayette American Bank and
Trust Company, a subsidiary of HUBCO, Inc., a New Jersey-based bank holding
company. The Company received cash of $13 million representing UST/Conn's
capital plus a deposit premium of 7 percent and recorded a $6.8 million gain on
the sale in noninterest income. The positive effect on capital from the gain and
cash proceeds received in the sale transaction provided the Company with a
portion of the necessary funds to contribute capital to USTrust to facilitate
the aforementioned Branch Purchase. At the time of the sale, UST/Conn had total
assets of $107 million, including loans of $70 million, securities of $22
million and federal funds sold of $15 million. Liabilities totaled $101 million
and included noninterest-bearing deposits of $22 million, $41 million in savings
deposits, certificates of deposit of $32 million and $4 million in other
borrowings.
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-fee 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 Braintree
Savings Bank was merged into USTrust on May 16, 1997. In 1997 the Company
recognized a nondeductible charge of $2.9 million in nonrecurring acquisition
and merger-related expense and a pre-tax $11.8 million restructuring charge
associated with the transaction.
44
45
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The
Company recognized a nondeductible charge of $1.0 million in nonrecurring
acquisition and merger-related expenses associated with the transaction.
The following presentation reflects key line items on a historical basis for
Firestone and UST Corp. and on a pro forma combined basis assuming the merger
was in effect for the period:
UST CORP. AS FIRESTONE AS UST CORP.
ORIGINALLY REPORTED ORIGINALLY REPORTED RESTATED
------------------- ------------------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, 1997
Net interest income ............ $124,977 $ 4,562 $129,539
Net income ..................... 19,415 858 20,273
Diluted earnings per share ..... 0.67 0.43 0.68
The following presentation reflects key line items on a historical basis for
Walden, Firestone and UST Corp. and on a pro forma combined basis assuming the
mergers were in effect for the periods presented.
UST CORP. AS WALDEN AS FIRESTONE AS UST CORP.
ORIGINALLY REPORTED ORIGINALLY REPORTED ORIGINALLY REPORTED RESTATED
------------------- ------------------- ------------------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,1996
Net interest income ............ $ 96,126 $ 39,129 $ 5,831 $ 141,086
Net income ..................... 32,662 10,519 2,096 45,277
Diluted earnings per share ..... 1.79 1.97 1.05 1.53
Total assets ................... 2,706,614 995,628 82,813 3,781,055
Total deposits ................. 2,105,866 749,946 345 2,856,157
Total shareholders' investment . 197,960 97,629 13,432 309,021
YEAR ENDED DECEMBER 31, 1995
Net interest income ............. $ 95,434 $ 37,926 $ 5,225 $ 138,585
Net income ...................... 14,958 9,299 2,796 27,053
Diluted earnings per share ...... 0.83 1.74 1.40 0.92
Somerset Savings Bank - Pending
On December 10, 1997, the Company announced the execution of a definitive
agreement to acquire Somerset Savings Bank ("Somerset"), a $540 million bank
headquartered in Somerville, Massachusetts. The transaction is expected to close
during the second or third quarter of 1998, and is structured to qualify as a
tax-free exchange and as a pooling of interests for accounting purposes. The
agreement provides for the issuance of 0.19 shares of the Company's common stock
for each share of Somerset common stock. Based on the closing price of the
Company's stock as of December 9, 1997, the transaction would be valued at
approximately $94 million. The agreement is subject to the
45
46
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approval of Somerset shareholders as well as federal and state regulatory
authorities. In 1997 the Company recognized a nondeductible charge of $210
thousand in acquisition and merger-related expense associated with the
transaction. The Company expects an estimated additional one-time charge of $5.3
million ($7.5 million pre-tax) in 1998 for acquisition-related costs.
Affiliated Community Bancorp, Inc. - Pending
On December 15, 1997, the Company announced the execution of a definitive
agreement to acquire Affiliated Community Bancorp, Inc. ("Affiliated"), a $1.2
billion bank holding company headquartered in Waltham, Massachusetts. The
transaction is expected to close during the second or third quarter of 1998, and
is structured to qualify as a tax-free exchange and as a pooling of interests
for accounting purposes. The agreement provides for the issuance of 1.41 shares
of the Company's common stock for each share of Affiliated common stock. Based
on the closing price of the Company's stock as of December 12, 1997, the
transaction would be valued at approximately $259 million. The agreement is
subject to the approval of the shareholders of the Company and Affiliated as
well as federal and state bank regulatory authorities. In 1997 the Company
recognized a nondeductible charge of $563 thousand in acquisition and
merger-related expense associated with the transaction. The Company expects an
estimated additional one-time charge of $8.7 million ($12.0 million pre-tax) in
1998 for acquisition-related costs.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
At December 31, 1997 and 1996, cash and due from banks included $17.8
million and $41.9 million, respectively, to satisfy the reserve requirements
established by the Federal Reserve Bank.
(4) SECURITIES
A comparison of the amortized cost, fair value and gross unrealized gains
and losses as of December 31, 1997 and 1996 for securities available-for-sale
follows:
1997
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Mortgage-backed securities:
Pass-through securities ............. $248,482 $ 1,794 $ (587) $249,689
Collateralized mortgage
obligations......................... 241,495 526 (1,019) 241,002
-------- -------- -------- --------
Total mortgage-backed securities .. 489,977 2,320 (1,606) 490,691
U.S. Treasury and federal agencies ... 106,084 273 (405) 105,952
FHLB equity securities ............... 50,300 50,300
Asset-backed securities .............. 37,022 82 (5) 37,099
Corporate debt securities ............ 19,905 397 20,302
Marketable equity securities ......... 9,442 2,711 (2) 12,151
States and municipalities ............ 1,999 25 2,024
Foreign governments .................. 445 445
All other securities ................. 3,468 3,468
-------- -------- -------- --------
Total securities available-for-sale $718,642 $ 5,808 $ (2,018) $722,432
======== ======== ======== ========
46
47
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Mortgage-backed securities:
Pass-through securities ............. $ 90,192 $ 1,338 $ (727) $ 90,803
Collateralized mortgage obligations . 180,015 160 (2,733) 177,442
-------- -------- -------- --------
Total mortgage-backed securities ... 270,207 1,498 (3,460) 268,245
U.S. Treasury and federal agencies .... 236,336 230 (3,057) 233,509
FHLB equity securities ................ 50,300 50,300
Asset-backed securities ............... 61,640 75 (74) 61,641
Corporate debt securities ............. 51,011 67 (93) 50,985
Marketable equity securities .......... 8,238 389 (49) 8,578
States and municipalities ............. 2,233 42 2,275
Foreign governments ................... 365 365
All other securities .................. 5,905 5,905
-------- -------- -------- --------
Total securities available-for-sale $686,235 $ 2,301 $ (6,733) $681,803
======== ======== ======== ========
Equity securities of the Federal Home Loan Bank of Boston ("FHLB") and
certain other securities, which do not have readily determinable market values
are carried at cost. USTrust is a member of the FHLB and is required to invest
in FHLB equity securities, a restricted investment, in an amount equal to the
greater of 1 percent of residential mortgage loans, including certain
mortgage-backed securities, or three-tenths of 1 percent of total assets or a
specified percentage of outstanding advances.
The amortized cost and fair value of debt securities at December 31, 1997,
by contractual maturity, are shown in the table below. Actual maturities are
expected to differ from contractual maturities because some borrowers have the
right to prepay without penalty. Mortgage-backed securities are shown at their
final maturity but are expected to have shorter average lives. Equity
securities, which have no contractual maturity, are presented in the aggregate.
DECEMBER 31, 1997
-----------------
AMORTIZED FAIR
COST VALUE
---------- --------
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Mortgage-backed securities:
Due after 1 year through 5 years ... $ 17,896 $ 17,758
Due after 5 years through 10 years . 145,233 146,482
Due after 10 years ................. 326,848 326,451
-------- --------
Total mortgage-backed securities 489,977 490,691
All other debt securities:
Due in 1 year or less .............. 1,749 1,752
Due after 1 year through 5 years ... 120,524 121,128
Due after 5 years through 10 years . 42,740 42,496
Due after 10 years ................. 441 446
-------- --------
Total debt securities .......... 165,454 165,822
-------- --------
Equity securities and other .......... 63,211 65,919
-------- --------
Total ...................... $718,642 $722,432
======== ========
47
48
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no securities designated as held-to-maturity by the Company at
December 31, 1997. All of the year-end 1996 held-to-maturity securities were
owned by Walden and were redesignated as available-for-sale at the time of the
acquisition of Walden. The effect of the redesignation was to increase the gross
unrealized loss on securities available-for-sale by approximately $1.5 million.
The amortized cost, fair value and gross unrealized gains and losses as of
December 31, 1996 for securities held-to-maturity follows:
DECEMBER 31, 1996
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Securities held-to-maturity:
Mortgage-backed securities:
Pass-through securities .............. $ 45,723 $ 13 $ (1,093) $ 44,643
Collateralized mortgage obligations .. 68,073 239 (381) 67,931
-------- -------- -------- --------
Total mortgage-backed securities 113,796 252 (1,474) 112,574
U.S. Treasury and federal agencies .... 25,468 47 (315) 25,200
States and municipalities ............. 6,300 21 6,321
-------- -------- -------- --------
Total securities held-to-maturity .... $145,564 $ 320 $ (1,789) $144,095
======== ======== ======== ========
Total gross realized gains, gross realized losses, and proceeds from the
sale or other disposition of securities available-for-sale for the three years
ended December 31 were:
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Debt securities:
Gross realized gains ...... $ 307 $ 80 $ 736
Gross realized losses ..... (1,798) (333) (271)
Proceeds from sales* ...... 267,949 52,357 98,437
Equity securities:
Gross realized gains ....... $ 1,551 $ 2,179
Gross realized losses ...... (119) (249)
Proceeds from sales* ...... 1,585 2,736
* Excluded from 1996 proceeds from sales was a reduction in securities
available-for-sale of $21.4 million in debt securities and $.1 million
in equity securities resulting from the sale of a banking subsidiary.
At December 31, 1997, securities carried at $330.2 million were pledged to
secure public and trust deposits, securities sold under agreements to repurchase
and for other purposes as required by law.
48
49
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LOANS
The composition of the loan portfolio (net of unearned discount) at December
31, 1997 and 1996 was as follows:
1997 -- 1996
------------ ------------
(DOLLARS IN THOUSANDS)
Commercial and financial ........... $ 1,023,783 $ 900,162
Commercial real estate:
Construction ...................... 41,834 29,624
Developer, investor and land ...... 236,263 305,056
Commercial lease financing ......... 56,260 46,480
Consumer:
Residential mortgage .............. 697,874 804,109
Home equity ....................... 111,151 107,310
Indirect automobile installment ... 605,486 302,044
Other consumer .................... 37,048 40,461
Indirect automobile lease financing 26,283
----------- -----------
2,835,982 2,535,246
Reserve for possible loan losses .. (52,230) (51,984)
----------- -----------
$ 2,783,752 $ 2,483,262
=========== ===========
Most of the Company's lending activity is with customers located within
Massachusetts. At year-end 1997, the Company's exposure to credit risk
principally secured by commercial real estate, home equity and residential real
estate included approximately $1.1 billion of loans. Refer to Note 18 for
additional discussion of concentration of credit risk.
Reserve for Possible Loan Losses
An analysis of the reserve for possible loan losses for the three years
ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ............ $ 51,984 $ 69,982 $ 76,743
Chargeoffs/transfers ...................... 6,746 8,149 30,724
Recoveries on loans previously
charged-off............................... 6,092 9,555 9,568
-------- -------- --------
Net chargeoffs (recoveries) ............... 654 (1,406) 21,156
Provision (credit) for possible loan losses 900 (17,300) 14,395
Reserve of sold bank ...................... (2,104)
-------- -------- --------
Balance at end of period .................. $ 52,230 $ 51,984 $ 69,982
======== ======== ========
49
50
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The status of impaired loans for the years ended December 31, 1997, 1996 and
1995 is as follows:
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Impaired loans-reserve required .... $ 2,239 $ 605 $ 1,512
Impaired loans-reserve not
required*.......................... 14,126 27,622 26,110
------- ------- -------
Total impaired loans ............. $16,365 $28,227 $27,622
======= ======= =======
Required reserve for impaired loans* $ 1,130 $ 383 $ 412
Average balance of impaired loans
during the year ................... $19,245 $24,194 $47,997
--------------
* The methodology used in the required reserve calculation utilized the fair
value of collateral consistent with the provisions of SFAS No. 114. The required
reserve for impaired loans is included in the Company's total reserve for
possible loan losses.
For the years ended December 31, 1997, 1996 and 1995, the amount of interest
income on impaired loans that would have been recognized if the loans had been
paying in accordance with their original terms, was $3.2 million for all three
periods, while the amount recognized as interest income in the same periods was
$1.2 million, $0.8 million, and $1.1 million, respectively.
(6) PREMISES, FURNITURE AND EQUIPMENT
A summary of the accounts at December 31, 1997 and 1996 is as follows:
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
Land .................................... $ 4,457 $ 4,457
Buildings and leasehold improvements .... 58,476 56,712
Furniture and equipment ................. 44,646 35,340
-------- --------
107,579 96,509
Accumulated depreciation and
amortization ........................... (43,172) (35,839)
-------- --------
$ 64,407 $ 60,670
======== ========
Depreciation and amortization expenses reflected in the consolidated
statements of income were $7.3 million, $5.9 million and $4.4 million in 1997,
1996 and 1995, respectively.
(7) OTHER PROPERTY OWNED
Other property owned includes other real estate owned and repossessed
vehicles and equipment of $275 thousand and $1.1 million, respectively, at
December 31, 1997, and $1.6 million and $356 thousand, respectively, at
December 31, 1996.
Other property owned is stated net of a valuation allowance. Analysis of the
valuation allowance for the three years ended December 31, 1997 is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
Balance at beginning of
period ....................... $ 320 $ 568 $ 1,044
Chargeoffs .................... 744 2,604
Provision charged to
operations ................... 303 496 2,128
------- ------- -------
Balance at end of period ...... $ 623 $ 320 $ 568
======= ======= =======
50
51
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net cost of other real estate owned included in foreclosed asset and
workout expense in the income statement was approximately $207 thousand, $898
thousand and $3.8 million in 1997, 1996 and 1995, respectively. These costs
include provisions charged to operations to reflect reductions in net realizable
value, net gain or loss on sales and net cost of maintaining and operating the
properties.
(8) SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31, 1997 and
1996:
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
Federal funds purchased ............................. $ 79,027 $ 92,677
Securities sold under agreements to repurchase...... 272,460 237,317
Treasury tax and loan note account .................. 13,670 14,837
FHLB borrowings ..................................... 55,000 35,000
Notes payable ....................................... 1,156 61,776
-------- --------
$421,313 $441,607
======== ========
USTrust is a member of the Federal Home Loan Bank of Boston. As a member
institution, USTrust has a borrowing capacity of approximately $479 million for
short- and long-term FHLB advances.
Notes payable at December 31, 1996 consist of short-term revolving credit
loans between unaffiliated banks and Firestone. Following the acquisition,
Firestone moved most of its borrowing activities from unaffiliated banks to
USTrust.
The weighted average interest rates for short-term borrowings at December
31, 1997 and 1996 were 5.02 percent and 5.36 percent, respectively. The average
outstanding short-term borrowings were $447.8 million in 1997 and $443.4 million
in 1996. The approximate weighted average interest rates during the year were
5.13 percent in 1997 and 5.42 percent in 1996. The maximum amount of short-term
borrowings outstanding at any month end was $485.5 million in 1997 and $722.0
million in 1996.
51
52
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) OTHER BORROWINGS
Other borrowings consisted of the following at December 31, 1997 and 1996:
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
USTrust:
FHLB seventeen-year advance, 6.27%, due December 17, 1997 ..... $ 10,000
FHLB two-year advance, 5.78%, due November 17, 1997 ........... 5,500
FHLB two-year advance, 5.61%, due December 17, 1997 ........... 2,000
FHLB two-year advance, 5.50%, due December 30, 1997 ........... 15,000
FHLB two-year advance, 5.90%, due March 13, 1998 .............. $ 5,000 5,000
FHLB two-year advance, 6.09%, due April 29, 1998 .............. 1,000 1,000
FHLB two-year advance, 6.28%, due May 21, 1998 ................ 10,000 10,000
FHLB two-year amortizing, 5.93%, due May 28, 1998 ............. 5,226 15,221
FHLB two-year advance, 6.51%, due June 12,1998 ................ 500 500
FHLB two and one-half year advance, 5.26%, due July 20, 1998 .. 10,000 10,000
FHLB three-year amortizing advance, 5.85%, due
October 27, 1998............................................ 1,623 3,297
FHLB three-year advance, 5.76%, due November 23, 1998 ......... 7,000 7,000
FHLB three-year advance, 6.04%, due March 22, 1999 ............ 1,000 1,000
FHLB three-year advance, 6.77%, due June 14, 1999 ............. 1,000 1,000
FHLB three-year advance, 6.69%, due June 21, 1999 ............. 1,000 1,000
FHLB four-year advance, 6.27%, due March 27, 2000 ............. 1,000 1,000
FHLB four-year advance, 6.68%, due August 1, 2000 ............. 405 405
FHLB five-year advance, 6.61%, due May 23, 2001 ............... 500 500
FHLB five-year advance, 6.73%, due May 23, 2001 ............... 500 500
FHLB nine-year advance, 5.54%, due June 13, 2005 .............. 5,000
FHLB ten-year amortizing advance, 7.16%, due June 28, 2006 .... 3,384 3,468
FHLB twenty-year advance, 4.12%, due May 11, 2015 ............. 200 200
The Co-operative Bank of Concord(1):
Subordinated debenture, $5,000,000 par value, interest rate
determined by average cost of interest-bearing deposits, due
July 31, 1999................................................ 4,713
Firestone Financial Corp.(2):
Subordinated notes payable, prime rate plus 1.75%, principal
installments due quarterly through year 2000................. 4,000
------- --------
$49,338 $107,304
======= ========
(1) Subordinated debenture held by the former The Co-operative Bank of Concord,
a bank acquired in the January 3, 1997 acquisition of Walden. The debt was
paid in full during 1997 prior to the merger of The Co-operative Bank of
Concord with USTrust.
(2) Subordinated notes issued by Firestone were paid in full during 1997 prior
to the October 15, 1997 acquisition of Firestone by the Company.
52
53
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) EMPLOYEE BENEFIT PLANS
The Company has a noncontributory, defined benefit retirement plan covering
all employees who meet specified age and employment requirements. The Company
also has a nonqualified, unfunded supplemental retirement plan, which covers
certain senior officers of the Company. The plans provide pension benefits that
are based on the employee's compensation during the highest four consecutive
years before retirement. The following summary sets forth each plan's funded
status and amounts included in the Company's consolidated balance sheets as of
December 31, 1997 and 1996:
QUALIFIED PLAN SUPPLEMENTAL PLAN
1997 1996 1997 1996
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation ......................................... $ 19,097 $ 17,000 $ 1,592 $ 1,372
Nonvested benefit obligation ...................................... 1,308 1,198 120 91
-------- -------- -------- --------
Accumulated benefit obligation .................................... 20,405 18,198 1,712 1,463
Effect of projected future compensation levels .................... 5,887 4,928 902 423
-------- -------- -------- --------
Projected benefit obligation for service rendered to date.. 26,292 23,126 2,614 1,886
Plan assets, primarily listed stocks and U.S. bonds ................ 30,032 25,005
-------- -------- -------- --------
Excess (deficiency) of plan assets over projected
benefit obligation ................................................ 3,740 1,879 (2,614) (1,886)
Unrecognized (gain) loss ........................................... (4,034) (1,192) 190 (238)
Unrecognized prior service asset (obligation) ...................... 1,054 871 490 541
Unrecognized net transition asset .................................. (1,049) (1,083)
-------- -------- -------- --------
Prepaid (accrued) costs included in other assets (other $ (289) $ 475 $ (1,934) $ (1,583)
liabilities) ...................................................... ======== ======== ======== ========
The actuarial assumptions used were as follows:
1997 1996
-------- --------
Discount rate ................................ 7.0% 7.5%
Rate of increase of future compensation levels 4.5% 4.5%
Expected rate of return on plan assets ....... 8.0% 8.0%
Net pension cost for 1997, 1996 and 1995 included the following components:
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service cost benefit earned during the period $ 1,531 $ 1,473 $ 982
Interest cost on projected benefit obligation 1,781 1,607 1,538
Return on plan assets ........................ (6,629) (3,331) (4,564)
Net amortization and deferral ................ 4,496 1,282 2,977
------- ------- -------
Net pension cost ............................. $ 1,179 $ 1,031 $ 933
======= ======= =======
The Company has an Employee Savings Plan which qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
Plan, contributions made by eligible employees are matched by the Company at
rates ranging from 25 to 100 percent, based on a specified percentage of
employee contributions up to 6 percent of the employee's earnings. Beginning in
1998 the rate of matching was changed to a range of 50 to 100 percent.
For the years presented the Company had an employee stock ownership plan
("ESOP") which covered substantially all of its employees. The plan was
administered by a committee designated by the Board of Directors and was
maintained in a separate trust established for that purpose. Under the plan, the
Company contributed either a fixed amount or a percentage of compensation of all
participants. Effective December 31, 1997, the ESOP ceased
53
54
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to operate as an independent plan and was merged into a newly created Employer
Stock Fund of the Employee Savings Plan. All participants became vested in their
ESOP account balances, and these funds were transferred directly to their
respective Employee Savings Plan accounts.
Certain key employees are awarded shares of the Company's common stock
through the Company's Restricted Stock Ownership Plan adopted in 1989 and the
restricted stock program of the Stock Compensation Plan adopted in 1992 and
amended in 1994. Under these restricted stock plans 545,070 shares of common
stock have been granted, of which 32,100, 14,400 and 50,195 were granted in
1997, 1996 and 1995, respectively. The shares vest to the employee over varying
schedules. In 1997, 25,900 restricted shares vested under this plan. At December
31, 1997 there were 60,800 unvested restricted shares outstanding.
Expenses relating to the employee benefit plans were as follows:
EMPLOYEE
YEAR ENDED EMPLOYEE RESTRICTED SAVINGS PLAN
DECEMBER 31, PENSION STOCK OWNERSHIP STOCK 401(k)
------------- ------- --------------- --------- ------------
(DOLLARS IN THOUSANDS)
1997 ...... $1,179 $ 506 $ 629 $ 899
1996 ...... 1,031 425 531 1,298
1995 ...... 933 425 490 935
(11) STOCK OPTIONS
The Company has a Stock Compensation Plan for officers and key employees
under the terms of which the Company may issue incentive stock options,
nonqualified stock options and shares of restricted stock. At December 31, 1997,
105,442 shares of the Company's common stock remained available for future
grants. The Company's Stock Compensation Plan provides that the number of shares
of common stock reserved for future grants under the plan be increased by an
amount equal to 1.25 percent of the number of shares outstanding on the first
day of each fiscal year. As a result, as of January 1, 1998, 372,028 additional
common shares are to be reserved for future grants. The vesting periods for
options under this Plan range from immediate vesting at grant date to 5 years.
The expiration periods for options under this Plan range from between 5 and 10
years.
The Company has two stock option plans for Directors, the 1996 Director
Option Plan and the 1995 Director Option Plan. Eligible Directors received
option grants at fair value for 5,000 shares in 1996 and up to 7,500 shares in
1995. A total of 150,000 shares of the Company's common stock were reserved for
issuance under each Plan. The vesting periods for options under these Plans
range from immediate vesting at grant date to 3 years. The expiration periods
for options under these Plans range from 5 to 10 years.
The vesting periods for certain options under the aforementioned employee
and Director Plans can be accelerated in accordance with the Plans based on
prescribed movement in the market price of the Company's stock or other
conditions. Under all option Plans the option exercise price equaled the market
price of the Company's stock on date of grant.
54
55
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has opted to continue to measure stock compensation in
accordance with APB Opinion No. 25. Refer to Note 1 for a further discussion. If
the Company had determined stock compensation cost consistent with the fair
value alternative contained in SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts presented in
the table below.
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net income:
As reported ............. $32,393 $45,277 $27,053
Pro forma ............... 32,123 44,574 26,657
Diluted earnings per share:
As reported ............. $1.08 $1.53 $0.92
Pro forma ............... $1.07 $1.51 $0.91
The following table presents the activity for the employee stock option
program under the Stock Compensation Plan and the activity in the Stock Option
Plans for Directors for the years ended December 31, 1997, 1996, and 1995:
WEIGHTED
NUMBER OF SHARES EXERCISE PRICE AVERAGE
UNDER OPTION PER SHARE EXERCISE PRICE
---------------- -------------- --------------
Outstanding December 31,
1994 ....................... 1,423,574 $1.84-$12.00 $ 8.16
Granted in 1995 ............. 500,801 $7.24-$14.13 $10.61
Canceled in 1995 ............ (26,365) $6.07-$9.75 $ 8.68
Exercised in 1995 ........... (195,206) $5.00-$9.75 $ 6.74
---------
Outstanding December 31,
1995 ....................... 1,702,804 $1.84-$14.13 $ 9.03
---------
Granted in 1996 ............. 378,131 $8.68-$14.81 $13.27
Canceled in 1996 ............ (34,849) $6.07-$12.88 $10.16
Exercised in 1996 ........... (384,804) $6.07-$13.44 $ 7.04
---------
Outstanding December 31,
1996 ....................... 1,661,282 $1.84-$14.81 $10.43
---------
Granted in 1997 ............. 193,300 $18.56-$20.31 $20.22
Exercised in 1997 ........... (416,304) $1.84-$13.81 $ 7.79
---------
Outstanding December 31,
1997 ....................... 1,438,278 $3.16-$20.31 $12.51
=========
Options exercisable at:
December 31, 1995 .......... 1,178,525 $1.84-$14.13 $ 7.97
December 31, 1996 .......... 1,538,882 $1.84-$14.81 $10.23
December 31, 1997 .......... 1,378,745 $3.16-$20.31 $12.19
55
56
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information regarding options outstanding and
options exercisable at December 31, 1997 under the employee Stock Compensation
Plan and Stock Option Plans for Directors.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------- -----------------------------------------
WEIGHTED AVERAGE
NUMBER OUTSTANDING REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
AT DECEMBER 31, 1997 LIFE IN YEARS EXERCISE PRICE AT DECEMBER 31, 1997 EXERCISE PRICE
-------------------- --------------------- ---------------- -------------------- ----------------
$3.16-$9.00 259,578 3.53 $ 8.38 259,578 $ 8.38
$9.75-$12.00 407,244 3.17 $ 9.93 407,244 $ 9.93
$12.88-$13.81 498,656 6.75 $ 13.44 498,656 $ 13.44
$14.14-$20.31 272,800 8.74 $ 18.62 213,267 $ 18.20
--------- ---------
1,438,278 1,378,745
========= =========
The weighted average fair value of options granted during the years ended
December 31, 1997, 1996 and 1995 was $2.66, $1.43 and $1.49, respectively. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1997, 1996 and 1995:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
Risk-free interest rate ...... 5.70% 5.94% 5.15%
Expected dividend yield ...... 3.5% 3.5% 3.5%
Expected life in years ....... 2.0 2.3 2.0
Expected volatility ......... 24.00% 18.12% 18.25%
The Company has a Directors Deferred Compensation Program under which up to
250,000 shares of the Company's common stock may be granted to outside Directors
of the Company or its banking subsidiaries who choose to receive their
Director's fees or stipend in shares of the Company in lieu of cash. The shares
may not be sold until the individual holder's status as Director terminates.
(12) NONINTEREST EXPENSE
Restructuring Charges, Acquisition and Merger-related Expense
Restructuring charges for the year ended December 31, 1997 totaled $11.8
million. Such costs were incurred in connection with the Walden acquisition and
were the result of management's integration plan. These costs related to
activities that had no future economic benefit to the Company and were
incremental to other costs incurred in the conduct of the Company's business.
The nature of these expenses included charges for severance payments to former
Walden executives and staff, writeoffs of certain noncompatible Walden computer
equipment and signage no longer in use, service contract buyouts, costs
associated with the conversion of Walden's systems to the Company's operating
systems, and other expenses directly associated with the integration of the
Walden banking subsidiaries.
Acquisition and merger-related expense for the year ended December 31, 1997
totaled $4.4 million which included professional, legal, accounting and
investment banking services incurred in connection with Walden and Firestone and
the pending acquisitions of Somerset and Affiliated. The 1997 expense incurred
for the Somerset and Affiliated transactions were not contingent on the
completion of the acquisition transactions. The acquisition charges for the year
ended December 31, 1996 totaled $5.9 million and included $793 thousand for
professional services incurred in connection with the Walden acquisition and a
$5.1 million charge in connection with the Branch Purchase largely for
customer-related expenses such as direct mailings, replacement checks and ATM
and Debit
56
57
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cards, promotions, target advertising and various incentive programs directed
toward the new customers acquired in the purchase transaction. The acquisition
charges for the year ended December 31, 1995 totaled $2.4 million for expenses
related to Walden's acquisition of The Braintree Savings Bank.
Deposit Insurance Assessment
The Company's deposit insurance assessment reflects premiums paid to two
Federal Deposit Insurance Corporation ("FDIC") funds, the Bank Insurance Fund
("BIF") for banks, as well as the Savings Association Insurance Fund ("SAIF")
for savings and loan associations ("Thrifts") due, in part, to the Company's
1990 purchase of deposits of a failed Thrift institution. The deposit insurance
assessment for the years ended December 31, 1997 and 1996 reflect reductions in
expense due to reduced premium rates by the FDIC on BIF balances. The year ended
December 31, 1996, includes a one-time $3.0 million assessment by the SAIF on
the former Thrift deposits held by the Company.
(13) INCOME TAXES
The income tax provision (benefit) included in the consolidated statements
of income consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
Current tax expense*:
Federal ...................... $16,948 $17,910 $13,681
State ........................ 3,541 6,918 4,646
Foreign ...................... 46 47
------- ------- -------
20,489 24,874 18,374
------- ------- -------
Deferred tax expense (benefit):
Federal ...................... 1,751 4,571 (2,108)
State ........................ 613 (1,064) (130)
Change in valuation
allowance ................... (603)
------- ------- -------
2,364 3,507 (2,841)
------- ------- -------
Total ............ $22,853 $28,381 $15,533
======= ======= =======
-----------------
* The 1997 and 1996 current provisions do not reflect $245
thousand and $301 thousand, respectively, of tax benefits
related to stock options exercised that were credited directly
to additional paid-in capital.
As of December 31, 1997 and 1996, cumulative deferred tax assets, included
in the consolidated balance sheets as other assets, amounted to $9.3 million and
$12.6 million, respectively, while cumulative deferred tax liabilities of $0.4
million and $1.3 million, respectively, were included in other liabilities.
Additionally, at December 31, 1997 and 1996 there were tax refund receivables of
approximately $1.6 million and $3.0 million included in other assets while
current taxes payable were approximately $4.5 and $2.0 million, respectively,
and included in other liabilities.
In August 1996, Congress passed the Small Business Job Protection Act of
1996. Included in this bill was the repeal of Internal Revenue Code (IRC)
Section 593, which allowed thrift institutions special provisions in calculating
bad debt deductions for income tax purposes. Thrift institutions now will be
viewed as commercial banks for income tax purposes. The repeal is effective for
tax years beginning after December 31, 1995. One effect of this legislative
change is to suspend a thrift's bad debt reserve for income tax purposes as of
its base year (December 31, 1988). Any bad debt reserve in excess of the base
year amount is subject to recapture over a six-year time period. The suspended
(i.e., base year) amount is subject to recapture upon the occurrence of certain
57
58
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
events, such as a complete or partial redemption of a bank's stock or if the
bank ceases to qualify as a bank for income tax purposes.
Through the Company's acquisition of Walden and subsequent merger of the two
Walden banking subsidiaries with USTrust in 1997, USTrust's tax position is
effected by this legislative change. At December 31, 1997, USTrust's surplus
includes approximately $18.8 million of bad debt reserves, representing the base
year amount, for which income taxes have not been provided. Since USTrust does
not intend to use the suspended bad debt reserve for purposes other than to
absorb the losses for which it was established, deferred taxes in the amount of
$7.9 million have not been recorded with respect to such reserve.
The components of the net deferred tax asset were as follows:
DECEMBER 31,
---------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
Book provision for loan losses in excess of tax ........ $ 22,058 $ 21,162
Deferred compensation benefits not deducted for tax .... 2,323 2,235
Book writedowns on foreclosed real estate,
not deducted for tax .................................. 1,030 359
Pension expense deducted for tax not book .............. 167 (557)
Alternative minimum tax credit ......................... 3,243
Tax credit carryforward ................................ 1,102
Book basis in core deposit more than tax ............... (33) 71
Securities mark-to-market adjustment deferred for tax .. (1,545) 1,856
Cumulative tax depreciation in excess of book .......... (2,074) (2,024)
Tax basis in partnership investments less than book .... (3,320) (2,919)
Loan mark-to-market adjustment for tax ................. (4,961) (2,189)
Tax deductions on leveraged leases deferred for book ... (6,362) (11,409)
Other, net ............................................. 1,639 356
-------- --------
Total net deferred tax asset ................. $ 8,922 $ 11,286
======== ========
The provisions for income taxes differ from the amounts computed by applying
the U.S. statutory federal tax rate of 35 percent in 1997,1996 and 1995, to
income before income taxes principally due to:
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Tax at statutory rate ................................. $ 19,335 $ 25,565 $ 14,716
Increases (reductions) from:
Tax-exempt income ................................... (331) (457) (596)
State income taxes .................................. 3,071 3,817 2,952
Low income housing .................................. (1,194) (911) (724)
Nondeductible expenses .............................. 1,570 664 638
Tax credits utilized ................................ (191) (175)
Reversal of tax reserves in excess of tax liabilities (106) (253)
Change in valuation reserve ......................... (603)
Accretion of purchase discount ...................... (422)
Other, net .......................................... 402
-------- -------- --------
Tax expense recorded .......................... $ 22,853 $ 28,381 $ 15,533
======== ======== ========
58
59
(14) EARNINGS PER SHARE
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 is 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 for the three years ended December 31,
1997, 1996 and 1995 are as follows:
1997 1996 1995
---------------------------- ---------------------------- ------------------------------
NET PER-SHARE NET PER-SHARE NET PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ --------- ------ ------ ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Basic EPS:
Net income available to common
stockholders $32,393 29,615,584 $1.09 $45,277 29,015,101 $1.56 $27,053 28,733,634 $0.94
======= ===== ======= ===== ======= =====
Effect of dilutive stock options 488,867 560,904 583,538
---------- ---------- ----------
Diluted EPS:
Net Income available to common
stockholders $32,393 30,104,451 $1.08 $45,277 29,576,005 $1.53 $27,053 29,317,172 $0.92
======= ========== ===== ======= ========== ===== ======= ========== =====
(15) CAPITAL
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.
59
60
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, 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 are presented in the following summary.
DECEMBER 31, 1997
------------------------------------------------------------------------------
AMOUNT PERCENT
------------------------------------------------------------------------------
ADEQUATELY WELL ADEQUATELY WELL
CAPITALIZED CAPITALIZED CAPITALIZE CAPITALIZED
ACTUAL MINIMUMS MINIMUMS ACTUAL MINIMUMS MINIMUMS
------ -------- -------- ------ -------- --------
(DOLLARS IN MILLIONS)
UST Corp. Consolidated:
Tier 1 leverage capital ......... $ 280.7 $ 148.5 * 7.56% 4.00% *
Tier 1 capital .................. 280.7 124.8 * 9.00% 4.00% *
Total (Tier 1 and Tier 2)
capital ........................ 319.7 248.5 * 10.29% 8.00% *
USTrust:
Tier 1 leverage capital ......... 261.6 147.5 $ 184.4 7.09% 4.00% 5.00%
Tier 1 capital .................. 261.6 124.1 186.2 8.43% 4.00% 6.00%
Total (Tier 1 and Tier 2)
capital ........................ 300.4 247.2 309.0 9.72% 8.00% 10.00%
USTC:
Tier 1 leverage capital ......... 3.5 .8 .9 18.42% 4.00% 5.00%
Tier 1 capital .................. 3.5 .4 .6 32.26% 4.00% 6.00%
Total (Tier 1 and Tier 2)
capital ........................ 3.5 .9 1.1 32.34% 8.00% 10.00%
- - ----------------------------
DECEMBER 31, 1996
------------------------------------------------------------------------------
AMOUNT PERCENT
------------------------------------------------------------------------------
ADEQUATELY WELL ADEQUATELY WELL
CAPITALIZED CAPITALIZED CAPITALIZE CAPITALIZED
ACTUAL MINIMUMS MINIMUMS ACTUAL MINIMUMS MINIMUMS
------ -------- -------- ------ -------- --------
(DOLLARS IN MILLIONS)
UST Corp. Consolidated:
Tier 1 leverage capital ......... $ 245.0 $ 136.9 * 7.16% 4.00% *
Tier 1 capital .................. 245.0 110.9 * 8.84% 4.00% *
Total (Tier 1 and Tier 2)
capital ........................ 279.7 220.3 * 10.16% 8.00% *
USTrust:
Tier 1 leverage capital 217.3 166.6 $ 166.6 6.52% 5.00% 5.00%
Tier 1 capital 217.3 110.5 165.8 7.86% 4.00% 6.00%
Total (Tier 1 and Tier 2) 251.8 219.6 274.5 9.17% 8.00% 10.00%
capital ........................
USTC:
Tier 1 leverage capital ......... 2.1 .7 .8 12.43% 4.00% 5.00%
Tier 1 capital .................. 2.1 .3 .5 27.87% 4.00% 6.00%
Total (Tier 1 and Tier 2) capital 2.1 .6 .8 27.88% 8.00% 10.00%
- - ----------------------------
* Not applicable
60
61
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends
The Company and its banking subsidiaries' ability to pay dividends is
subject to certain limitations imposed by statutes of the Commonwealth of
Massachusetts and limitations imposed by bank and bank holding company
regulators. Massachusetts statutes restrict the amount of dividends payable by
banks to be the balance of their undivided profits, net of any amount
transferred to capital in excess of par value. An issuance of dividends which
would reduce the capital of the Company and/or its Subsidiary Banks below
minimum capital requirements would cause the appropriate regulatory agencies to
require the institution to submit an acceptable capital restoration plan. An
institution which fails to submit an acceptable plan may be subject to a bank
regulatory enforcement action, or ultimately placed into conservatorship or
receivership.
In 1997 the Company declared quarterly cash dividends totaling $12.7 million
or $0.42 per share to stockholders. During the year the Company's subsidiaries
declared dividends payable to the Company totaling $22.5 million; $1.0 million
from USTC, $2.0 million from JSA Financial Corporation, a nonbanking subsidiary,
and $19.5 million from USTrust. Early in 1997 the Company contributed as capital
$20 million to USTrust in connection with USTrust's capital requirements and the
Branch Purchase.
Shareholder Rights Plan
In 1995, the Company's Board of Directors approved a Shareholder Rights Plan
and distributed preferred share purchase rights to shareholders. The rights will
become exercisable only if a person or group (i) acquires 15 percent or more of
the Company's common stock, (ii) announces a tender offer that would result in
ownership of 15 percent or more of the common stock, or (iii) is declared to be
an "Adverse Person" by the Company's Board of Directors. "Adverse Person"
includes any person or group who owns at least 10 percent of the Company's
common stock and attempts an action that would adversely impact the Company.
Each right would entitle a stockholder to purchase 1/100th of a share of a new
series of junior participating preferred stock.
Once a person or group has acquired 15 percent or more of the outstanding
common stock of the Company or is declared an "Adverse Person" by the Company's
Board of Directors, each right may entitle its holder (other than the acquiring
person or Adverse Person) to purchase, at an exercise price of $40, shares of
common stock of the Company (or any organization that acquires the Company) at
an amount equal to 50 percent of their current market price. Under certain
circumstances, the Continuing Directors (as defined in the rights plan) may
exchange the rights for common stock (or equivalent securities) on a one-for-one
basis excluding rights held by the acquiring person or Adverse Person. The
rights may be redeemed by action of the Board of Directors for $.001 per right.
Stock Repurchase Program
In 1995, the Company's Board of Directors approved a common stock repurchase
program authorizing the repurchase of up to 500,000 shares subject to market
conditions and other factors. The repurchased shares were held as treasury
shares to be used for general corporate purposes, including employee benefit
plans. In the third quarter of 1996 the program was terminated with a total of
250,000 shares repurchased, all of which were reissued in connection with the
exercise of stock options and deferred compensation distributions.
61
62
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company's banking subsidiaries have
granted loans to certain of the Company's directors and executive officers. All
such transactions are made on substantially the same terms as those prevailing
at the same time for individuals not affiliated with the Company and its
subsidiaries and at the time they were granted did not involve more than the
normal risk of collectibility. At December 31, 1997, none of these transactions
were on nonaccrual status, nor did they involve delinquent, substandard or
restructured loans. Over 90 percent of the balance outstanding at December 31,
1997 and over 80 percent in 1996 was due from one director.
An analysis of loans outstanding in excess of $60 thousand to directors and
officers related to the foregoing entities at December 31, 1997 is as follows:
DOLLARS IN THOUSANDS
--------------------
Balance, December 31,
1995 .................... $ 21,174
Additions ................ 250
Repayments ............... (3,795)
Other reductions* ........ (359)
--------
Balance, December 31,
1996 .................... 17,270
Additions ................ 1,203
Repayments ............... (309)
Other reductions* ....... (2,241)
--------
Balance, December 31,
1997 .................... $ 15,923
========
------------
* Other reductions are loans outstanding to directors and
officers who ceased to be directors or officers of the Company
or its subsidiary banks during the year or their balance
decreased below $60 thousand.
(17) COMMITMENTS AND CONTINGENCIES
Commitments for leased premises expire at various dates through 2010. At
December 31, 1997, minimum rental commitments for noncancelable leases are as
follows:
DOLLARS IN THOUSANDS
--------------------
1998 ........ $ 6,009
1999 ........ 5,843
2000 ........ 5,072
2001 ........ 3,438
2002 ........ 3,198
thereafter .. 3,361
-------
Total ....... $26,921
=======
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $5.4
million, $4.4 million, and $5.0 million, respectively.
In the ordinary course of business, the Company and its subsidiaries become
defendants in a variety of judicial and administrative proceedings. In the
opinion of management there is no proceeding pending, or to the knowledge of
management threatened, which in the event of an adverse decision, would result
in a material adverse change in the financial condition or results of operations
of the Company.
62
63
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) FINANCIAL INSTRUMENTS WITH ON- AND OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees, foreign exchange contracts, and
recourse arrangements on sold loans. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount contained in the
balance sheet. The contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument or commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
The Company generally requires collateral or other security to support
financial instruments with credit risk.
CONTRACT OR NOTIONAL AMOUNT
---------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
Financial instruments whose contract amount represents credit risk:
Commitments to extend credit .................................... $1,003,000 $750,000
Standby letters of credit and financial guarantees written ...... 70,000 60,000
Commercial letters of credit .................................... 4,000 4,000
Foreign exchange contracts ...................................... 5,000 2,000
Loans sold with recourse ........................................ 14,000 15,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract during its
term. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being fully drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. Of the total
commitments to extend credit, approximately $195 million and $198 million were
secured by real estate at December 31, 1997 and December 31, 1996, respectively.
The amount of collateral obtained is based on management's evaluation of the
credit risk. Collateral held on commitments and loans varies but may include
cash, accounts receivable, inventory, property, plant and equipment. Standby and
commercial letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of, or payment
by, a customer to a third party. Those guarantees are primarily issued to
support private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Company holds various collateral to support these
commitments including (but not limited to) cash, account receivables, inventory,
property, plant and equipment. The extent of collateral held for those
commitments varies from zero to one hundred percent. Of the total standby and
commercial letters of credit, approximately $17 million was secured by real
estate at December 31, 1997.
The Company's primary loan market is the New England region. Most of the
loans outstanding are from eastern Massachusetts and a substantial portion of
these loans are various types of real estate loans; still others have real
estate as additional collateral. Approximately 90 percent of the Company's
outstanding commercial and commercial real estate loans are collateralized.
63
64
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company enters into foreign currency exchange contracts to purchase or
sell foreign currencies at a future date at a predetermined exchange rate.
Except as noted below, contracts are purchased on the open market to assist
customers with international transactions denominated in foreign currencies. The
Company is exposed to credit risk in the event the customer fails to deliver or
take delivery of the agreed upon currency whereby the Company would execute the
transaction with another counterparty at the prevailing currency valuation. The
positive fair value, which represents the credit exposure of contracts
outstanding, was insignificant at December 31, 1997 and 1996.
The Company enters into nominal amounts of foreign exchange contracts for
the purposes of hedging certain financial commitments related to the collection
of loans of Canadian borrowers. The fair value of such contracts was
insignificant at December 31, 1997 and 1996.
During 1996 and part of 1997 the Company, through its small equipment
finance company, Firestone, was party to an interest rate swap agreement with a
nominal notional amount. The swap agreement effectively converted a portion of
Firestone's interest rate obligation on certain long-term borrowings from a
floating to a fixed rate. The arrangement was paid in full and terminated in
August 1997. The fair value of such agreement was insignificant at December 31,
1996.
The Company's securities portfolio includes a significant investment in
mortgage-backed securities. These securities carry prepayment risk due to the
fact that prevailing interest rates could decline. Under such circumstances an
unusually high percentage of homeowners may choose to refinance their first
mortgages to take advantage of these lower rates with the result that, under the
Company's accounting policy, adjustments reducing gross unamortized premiums
would be required. Refer to Note 1 for a discussion of accounting policies.
(19) PARENT COMPANY FINANCIAL INFORMATION
Summarized information relative to the balance sheets at December 31, 1997
and 1996 and statements of income and cash flows for the three years in the
period ended December 31, 1997 of UST Corp. (parent company only) are presented
as follows:
BALANCE SHEETS -- PARENT COMPANY ONLY
DECEMBER 31,
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
Assets:
Cash, due from banks and interest-bearing
deposits ......................................... $ 6,077 $ 837
Securities purchased under agreements to resell ... 4,000 14,000
Securities available-for-sale ..................... 3,284 2,208
Investment in banking subsidiaries ................ 330,626 277,400
Investment in nonbanking subsidiaries ............. 2,582 17,341
Premises, furniture and equipment, net ............ 287 393
Other assets ...................................... 6,278 5,351
-------- --------
Total assets ................................. $353,134 $317,530
======== ========
Liabilities and Stockholders' Investment:
Other liabilities ................................. $ 13,008 $ 8,509
Stockholders' investment .......................... 340,126 309,021
-------- --------
Total liabilities and stockholders'
investment .................................. $353,134 $317,530
======== ========
64
65
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------ -------- --------
(DOLLARS IN THOUSANDS)
Dividend income ................................. $22,500 $15,658 $ 5,000
Undistributed equity in net income
of subsidiaries ................................ 12,422 26,392 22,613
Gain on sale of bank subsidiary ................. 6,806
Other income .................................... 4,962 4,685 4,216
------- ------- -------
39,884 53,541 31,829
Expenses ....................................... 7,491 8,264 4,776
Net income..................................... ------- ------- -------
$32,393 $45,277 $27,053
======= ======= =======
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income .................................................. $ 32,393 $ 45,277 $ 27,053
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................. 217 220 125
Undistributed income of subsidiaries ....................... (12,422) (26,392) (22,613)
Noncash dividend from subsidiary ........................... (2,158)
Gain on sale of bank subsidiary ............................ (6,806)
Loss on sale of securities ................................. 2
Increase in other assets ................................... (1,330) (1,756) (558)
Increase (decrease) in other liabilities ................... 3,766 4,808 (1,262)
-------- -------- --------
Net cash provided by operating activities ............. 22,624 13,193 2,747
Cash flows from investing activities:
Proceeds from securities .................................... 15,957
Purchase of securities ...................................... (60)
Purchases of premises and equipment ......................... (415) (10)
Proceeds from sale of bank subsidiary ....................... 13,435
Net decrease (increase) in short-term investments ........... 10,000 (9,000) (5,000)
Equity contributed to subsidiaries .......................... (20,000) (13,000) (7,500)
-------- -------- --------
Net cash (used) provided investing activities ......... (10,060) (8,980) 3,447
Cash flows from financing activities:
Repayment of other borrowings ............................... (8,000)
Proceeds from issuance of common stock, net ................. 3,230 2,795 1,388
Treasury stock acquired ..................................... (3,363)
Cash dividends paid ......................................... (10,554) (3,760) (888)
-------- -------- --------
Net cash used by financing activities ................. (7,324) (4,328) (7,500)
-------- -------- --------
Increase (decrease) in cash and cash equivalents ............ 5,240 (115) (1,306)
Cash and cash equivalents beginning of year ................. 837 952 2,258
-------- -------- --------
Cash and cash equivalents end of year ....................... $ 6,077 $ 837 $ 952
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ................................................... $ 56 $ 56 $ 607
======== ======== ========
Income taxes ............................................... $ 11,375 $ 12,160 $ 4,970
======== ======== ========
Noncash transactions:
Transfers from other assets to securities available-for-
sale ...................................................... $ 50
========
Dividend of equity securities received from subsidiary ..... $ 2,158
========
Cash dividends paid to the Company in 1997 by consolidated bank
subsidiaries totaled $17.5 million, $14.7 million in 1996 and $4.0 million in
1995. Cash dividends paid to the Company by nonbank subsidiaries totaled $2.0
million in 1997, and $1.0 million in both 1996 and 1995.
65
66
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(20) FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair market value of Financial Instruments (as
defined), whether assets, liabilities or off-balance sheet commitments, if
practicable. The following methods and assumptions were used to estimate the
fair value of each class of Financial Instruments. Fair value estimates which
were derived from discounted cash flows or broker quotes cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument.
Cash and due from banks, federal funds sold and other short-term investments
- - -- For these short-term instruments the carrying amount is a reasonable estimate
of fair value.
Securities available-for-sale and securities held-to-maturity -- For
marketable securities fair values are based on quoted market prices or dealer
quotes.
Loans -- For certain homogeneous categories of loans, such as residential
mortgages and home equity loans, fair value is estimated based on broker quotes
on sales of similar loans. The fair value of fixed rate loans was estimated by
discounting anticipated future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of performing variable rate loans is the
same as the book value at the reporting date because the loans reprice when the
market changes.
Deposit liabilities -- The fair value of noncertificate deposit accounts is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting the
anticipated future cash payments using the rates currently offered for deposits
of similar remaining maturities.
Short-term borrowings -- For these short-term instruments the carrying
amount is a reasonable estimate of fair value.
Other borrowings -- The fair value for Federal Home Loan Bank borrowings
with an original maturity of greater than one year was determined by discounting
the expected cash flows using a discount rate equal to the current rate offered
by the Federal Home Loan Bank of Boston for debt of the same remaining maturity.
While the current FHLB debt outstanding has a prepayment option at the
borrower's discretion, the fair value was estimated assuming the Company will
hold the full amount until maturity. The fair value of the debenture was
determined by discounting the expected cash outflows by rates which are
estimated for their current similar offerings with similar maturity. The fair
value of the notes payable was the same as the book value at the reporting date
because the debt reprices when the market changes.
Off-balance sheet financial instruments -- For commitments to extend credit,
standby and commercial letters of credit and foreign exchange contracts, the
carrying amount which represents accruals of deferred income (fees) arising from
these instruments, and the fair value of such deferred income is not material.
Refer to Note 18 for notional or contract amounts and a further discussion of
off-balance sheet financial instruments.
Values not determined -- SFAS No. 107 excludes certain assets from its
disclosure requirements including real estate included in banking premises and
equipment, lease financings, and the intangible value inherent in the Company's
deposit relationships (i.e., core deposits). Accordingly, the aggregate fair
value amounts presented below do not represent the underlying value of the
Company.
66
67
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount and estimated fair values of the Company's Financial
Instruments at December 31, 1997 and 1996 are as follows:
1997 1996
-----------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
Financial Instrument assets:
Cash and due from banks ........ $ 95,702 $ 95,702 $ 140,263 $ 140,263
Securities ..................... 722,432 722,432 827,367 825,898
Federal funds sold and other
short-term investments ........ 67,851 67,851 142,901 142,901
Loans receivable, net .......... 2,702,436 2,744,874 2,440,483 2,469,244
Loans held-for-sale ............ 12,446 12,446
Financial Instrument liabilities:
Deposits
Noninterest-bearing .......... $ 708,399 $ 708,399 $ 600,272 $ 600,272
NOW .......................... 43,116 43,116 381,782 381,782
Money market ................. 660,641 660,641 313,548 313,548
Regular savings .............. 675,087 675,087 649,974 649,974
Time ......................... 890,972 887,835 910,581 907,077
Short-term borrowings .......... 421,313 421,313 441,607 441,607
Other borrowings ............... 49,338 49,234 107,304 107,694
(21) CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR YEAR ENDED DECEMBER 31, 1997 FOR YEAR ENDED DECEMBER 31, 1996
---------------------------------------- ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income .................... $ 73,576 $ 73,602 $ 69,811 $ 68,225 $ 64,715 $ 60,459 $58,987 $ 59,001
Interest expense ................... 27,911 27,865 27,248 26,986 27,026 25,549 24,960 24,580
Net interest income ................ 45,665 45,737 42,563 41,239 37,689 34,910 34,027 34,421
Provision (credit) for possible loan
losses ........................... 300 300 300 230 (14,253) (5,200) 1,924
Net interest income after provision
for possible loan losses ......... 45,365 45,437 42,263 41,239 37,459 49,163 39,227 32,497
Noninterest income ................. 10,163 8,453 8,474 12,703 14,840 9,880 8,896 8,836
Noninterest expense ................ 36,363 35,459 36,046 50,984 38,530 31,739 28,137 28,734
Income tax expense ................. 7,045 7,831 5,922 2,054 5,005 10,884 7,727 4,765
Net income ......................... $12,120 $10,600 $ 8,769 $ 904 $ 8,764 $16,420 $12,259 $7,834
Basic earnings per share ........... $ 0.41 $ 0.36 $ 0.30 $ 0.03 $ 0.30 $ 0.57 $ 0.42 $ 0.27
Diluted earnings per share ......... $ 0.40 $ 0.35 $ 0.29 $ 0.03 $ 0.30 $ 0.56 $ 0.41 $ 0.26
Quarterly net income, while affected by large nonrecurring items, grew
throughout the two-year period. The positive impact of the late 1996 Branch
Purchase was the largest contribution to earnings growth followed by net
interest margin improvements, fee income growth, and operating expense
efficiencies. The large nonrecurring items included net credit provisions for
possible loan losses of $5.2 million and $14.3 million in the second and third
quarters of 1996, acquisition and restructuring charges (pre-tax) of $5.9
million, $14.6 million, $946 thousand, and $622 thousand in the fourth quarter
of 1996, first quarter 1997, third quarter 1997, and fourth quarter 1997,
respectively.
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UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net interest income was relatively level throughout the first three quarters
of 1996. Fourth quarter reflects the positive impact on margin from the late
quarter Branch Purchase. Net interest income increased steadily throughout 1997
due to a full quarter's positive impact of the additional assets and liabilities
from the Branch Purchase and favorable changes in earning asset mix and growth.
Noninterest income fluctuated from quarter to quarter due to realized
securities gains or losses, a $6.8 million gain on the sale of a banking
subsidiary in fourth quarter 1996, and a $1.8 million gain on the sale of the
loans held-for-sale portfolio in first quarter 1997. Fee-based income increased
throughout the two-year period. Account growth and the additional fee
income-based accounts acquired in the Branch Purchase are attributed to the fee
income increase.
Noninterest expense was relatively constant for the first two quarters of
1996. The third quarter and fourth quarter expense increased due to the one-time
$3.0 million SAIF assessment and the $5.9 million acquisition charge,
respectively. Acquisition and restructuring charges of $14.6 million relating to
the Walden acquisition caused the substantial increase in the first quarter
1997. Beginning in the fourth quarter of 1996 and subsequent quarters,
noninterest expense reflects additional personnel costs, occupancy, and
equipment and furniture expense to support the operation of the twenty
additional banking branches acquired in the Branch Purchase.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
This item has been omitted since the Company will have filed a Definitive
Proxy Statement within 120 days after December 31, 1997, the close of its fiscal
year. The information required by this item is incorporated by reference to such
Proxy Statement.
ITEM 11. Executive Compensation
This item has been omitted since the Company will have filed a Definitive
Proxy Statement within 120 days after December 31, 1997, the close of its fiscal
year. The information required by this item is incorporated by reference to such
Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
This item has been omitted since the Company will have filed a Definitive
Proxy Statement within 120 days after December 31, 1997, the close of its fiscal
year. The information required by this item is incorporated by reference to such
Proxy Statement.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Executive Officers and
Directors are required by the SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that, during 1997, all such filing requirements applicable to
its executive officers and directors were complied with by such individuals.
ITEM 13. Certain Relationships and Related Transactions
This item has been omitted since the Company will have filed a Definitive
Proxy Statement within 120 days after December 31, 1997, the close of its fiscal
year. The information required by this item is incorporated by reference to such
Proxy Statement.
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70
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List the following documents filed as part of this report:
1. All financial statements
UST Corp. and subsidiaries
See Index to Financial Statements.
2. Financial statement schedules required to be filed by Item 8
of Form 10-K and by Item 14(d)
None (Information included in Financial Statements).
3. Exhibits required to be filed by Item 501 of Regulation S-K
and by Item 13(c)
(3) Articles: By-Laws
3(a) Articles of Organization of the Company as
amended to date. (Exhibit to Form 10-K for
year ended December 31, 1996)**
3(b) By-laws of the Company as amended to date.
(Exhibit to Form 10-K for year ended
December 31, 1994)**
(4) Instruments defining the rights of security holders,
including indentures:
4(a) Specimen of the Company's Common Stock
Certificate. (Exhibit 4.1 to Registrant's
Registration Statement No. 2-67787 on Form
S-l.)**
4(b) Description of rights of the holders of the
Company's Common Stock (Appearing on Page 64
of Registrant's Registration Statement No.
333-45809 on Form S-4).**
4(c) Rights Agreement, dated September 19, 1995,
between UST Corp. and United States Trust
Company, as Rights Agent. (Exhibit to
Registrant's Form 8-A filed September 26,
1995)**
4(c)(i) Certificate of Vote Establishing a
Series of a Class of Stock.
(Exhibit A to Rights Agreement
between the Company and United
States Trust Company, dated
September 19, 1995 and filed as an
Exhibit to Registrant's Form 8-A
filed September 26, 1995.)**
4(c)(ii) Form of Rights Certificate.
(Exhibit B to Rights Agreement
between the Company and United
States Trust Company, dated
September 19, 1995 and filed as an
Exhibit to Registrant's Form 8-A
filed September 26, 1995.)**
4(c)(iii) Summary of Rights to Purchase
Preferred Shares. (Exhibit C to
Rights Agreement between the
Company and United States Trust
Company, dated September 19, 1995
and filed as an Exhibit to
Registrant's Form 8-A filed
September 26, 1995.)**
(10) Material Contracts
10(a) Affiliation Agreement and Plan of
Reorganization, dated as of August 12, 1997,
between UST Corp. and Firestone Financial
Corp. (Exhibit to Form 8-K filed on August
30, 1997)**
10(b) Affiliation Agreement and Plan of
Reorganization, dated as of December 9,
1997, between UST Corp. and Somerset Savings
Bank (Exhibit to Form 8-K filed on December
16, 1997)**
10(c) Affiliation Agreement and Plan of
Reorganization, dated as of December 15,
1997, among UST Corp., Mosaic Corp. and
Affiliated Community Bancorp, Inc. (Exhibit
to Form 8-K filed on December 16, 1997)**
10(d) Deferred Compensation Program, as amended to
June 16, 1992. (Exhibit to Form 10-K for
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71
year ended December 31, 1992)**
10(e) Incentive Stock Option Plan, as amended to
May 15, 1990. (Exhibit to Form 10-K for year
ended December 31, 1992)**
10(f) Pension Plan, as amended to January 1, 1990.
(Exhibit to Form 10-K for year ended
December 31, 1991)**
10(f)(i) Amendment dated December 20, 1994
to the Pension Plan as previously
amended on January 1, 1990.
(Exhibit to Form 10-K for year
ended December 31, 1994)**
10(f)(ii) Amendment dated February 18, 1997
to the Pension Plan. (Exhibit to
Form 10-K for year ended December
31, 1996)**
10(f)(iii) Amendment dated December 31,
1997 to the Pension Plan.*
10(g) Executive Policy Committee Deferred Benefits
Plan dated February 18, 1997. (Exhibit to
Form 10-K for year ended December 31,
1996)**
10(h) Employee Stock Ownership Plan, as amended to
January 1, 1991. (Exhibit to Form 10-K for
year ended December 31, 1991)**
10(h)(i) December 20, 1994 Amendment to
Employee Stock Ownership Plan.
(Exhibit to Form 10-K for year
ended December 31, 1994)**
10(i) Employee Savings Plan (formerly known as
Profit-Sharing Plan), as amended to January
1, 1991. (Exhibit to Form 10-K for year
ended December 31, 1991)**
10(i)(i) Amendment, as of January 1, 1994,
to Employee Savings Plan. (Exhibit
to Form 10-K for year ended
December 31, 1994)**
10(i)(ii) Amendment dated December 31, 1996
and effective as of January 1, 1997
to Employee Savings Plan. (Exhibit
to Form 10-K for year ended
December 31, 1996)**
10(i)(iii) Amendment dated June 30, 1997 to
Employee Savings Plan.*
10(j) 1992 Stock Compensation Plan. (Registration
Statement Nos. 33-54390 and 2-77803)**
10(j)(i) 1992 Stock Compensation Plan as
amended and restated on November
15, 1994. (Exhibit to Form 10-K for
year ended December 31, 1994)**
10(k) Dividend Reinvestment Plan, as amended.
(Exhibit to Registration Statement No.
33-38836 on Form S-3.)**
10(l) 1989 Directors Stock Option Plan (Exhibit to
Form 10-K for year ended December 31,
1989)**
10(m) 1995 Stock Option Plan for Non-Employee
Directors. (Exhibit to Proxy
Statement for Annual Meeting of Stockholders
dated April 20, 1995)**
10(m)(i) 1996 Stock Option Plan for
Non-Employee Directors. (Exhibit to
Proxy
71
72
Statement for Annual Meeting of Stockholders
dated April 19, 1996)**
10(n) Restated and amended Employment Agreement,
dated as of November 21, 1995, between the
Company and Neal F. Finnegan, President and
Chief Executive Officer of the Company.
(Exhibit to Form 10-K for year ended
December 31, 1995)**
10(n)(i) Amendment effective as of January
1, 1997 to the Employment
Agreement between the Company and
Neal F. Finnegan, President and
Chief Executive Officer of the
Company. (Exhibit to Form 10-K for
year ended December 31, 1996)**
10(o) Executive Employment Agreements with certain
members of the Company's Executive Policy
Committee, dated as of February 1, 1996:
10(o)(i) Restated Employment Agreement
between UST Corp. and Walter E.
Huskins, Executive Vice
President/Administration of the
Company (Exhibit to Form 10-K for
year ended December 31, 1995)**
10(o)(ii) Restated Employment Agreement
between UST Corp. and James K.
Hunt, Executive Vice President,
Chief Financial Officer and
Treasurer of the Company (Exhibit
to Form 10-K for year ended
December 31, 1995)**
10(o)(iii) Restated Employment Agreement
between UST Corp. and Eric R.
Fischer, Executive Vice President,
General Counsel and Clerk of the
Company (Exhibit to Form 10-K for
year ended December 31, 1995)**
10(o)(iv) Restated Employment Agreement
between UST Corp. and Linda J.
Lerner, Senior Vice President/Human
Resources of the Company (Exhibit
to Form 10-K for year ended
December 31, 1995)**
10(o)(v) Restated Employment Agreement
between UST Corp. and Kenneth L.
Sullivan, Senior Vice
President/Operations of the
Company. (Exhibit to Form 10-K for
year ended December 31, 1995)**
10(o)(vi) Restated Employment Agreement
between UST Corp. and Katharine C.
Armstrong, Executive Vice
President/Commercial Lending of the
Company. (Exhibit to Form 10-K for
year ended December 31, 1995)**
10(o)(vii) Employment Agreement between UST
Corp. and Robert T. McAlear,
Executive Vice President/ Banking
Operations and Acquisition
Integration of the Company.
(Exhibit to Form 10-K for year
ended December 31, 1995)**
10(o)(viii) Employment Agreement between UST
Corp. and Kathie S. Stevens,
Executive Vice President, Senior
Lending Officer of the Company.
(Exhibit to Form 10-K for year
ended December 31, 1995)**
10(o)(ix) Amendments to Employment
Agreements 10(o)(i) through
10(o)(viii) dated as of December
17, 1996. (Exhibit to Form 10-K for
year ended December 31, 1996)**
10(p) Severance Pay Plan, effective January 1,
1995. (Exhibit to Form 10-K for year ended
December 31, 1995)**
10(q) Senior Officer Severance Pay Plan, effective
January 1, 1995. (Exhibit to Form 10-K for
year ended December 31, 1995)**
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73
10(r) Asset Management Employment Agreement by and
among Employee/Principals of the Asset
Management Division of the United States
Trust Company and United States Trust
Company and UST Corp., effective as of
January 1, 1995:
10(r)(i) Employment Agreement among UST
Corp, USTC and Domenic Colasacco,
President of USTC, a wholly-owned
subsidiary of the Company. (Exhibit
to Form 10-K for year ended
December 31, 1995)**
10(r)(ii) Employment Agreement among UST
Corp., USTC and Robert A. Lincoln,
Senior Vice President, Senior
Portfolio Manager of USTC. (Exhibit
to Form 10-K for year ended
December 31, 1995)**
10(r)(iii) Employment Agreement among UST
Corp., USTC and Stephen K. Moody,
Senior Vice President, Senior
Portfolio Manager of USTC. (Exhibit
to Form 10-K for year ended
December 31, 1995)**
10(r)(iv) Employment Agreement among UST
Corp., USTC and Lucia B. Santini,
Senior Vice President/Administrator
of USTC. (Exhibit to Form 10-K for
year ended December 31, 1995)**
10(s) Asset Management Unifying Agreement by and
among Employee/Principals of the Asset
Management Division of the United States
Trust Company and United States Trust
Company and UST Corp., effective as of
January 1, 1995. (Exhibit to Form 10-K for
year ended December 31, 1995)**
10(s)(i) Amendment dated December 31, 1996
to the Asset Management Unifying
Agreement by and among
Employee/Principals of the Asset
Management Division of the United
States Trust Company and United
States Trust Company and UST Corp.,
effective as of January 1, 1995.
(Exhibit to Form 10-K for year
ended December 31, 1996)**
(11) Statement re: computation of per share earnings (See
Note 14 to the Notes to Consolidated Financial
Statements.)*
(21) Subsidiaries of the Registrant*
(23) Consent of Arthur Andersen LLP*
(27.1) Article 9 Summary Financial Information for 12 months
ended December 31, 1997*
(27.2) Article 9 Restated Summary Financial Information for
12 months ended December 31, 1996*
(27.3) Article 9 Restated Summary Financial Information for
12 months ended December 31, 1995*
* Filed herewith
** Filed as part of a previous Commission filing and incorporated
herein by reference.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the Company on December
16, 1997 related to the Affiliation Agreement and Plan of
Reorganization, dated as of December 9, 1997, between UST Corp. and
Somerset Savings Bank and the Affiliation Agreement and Plan of
Reorganization, dated as of December 15, 1997, among UST Corp., Mosaic
Corp. and Affiliated Community Bancorp, Inc.**
(d) Exhibits being filed
See Exhibit Index
73
74
(e) Financial Statement Schedules included in Financial Statements.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UST Corp.
By /s/ NEAL F. FINNEGAN By /s/ JAMES K. HUNT
Neal F. Finnegan James K. Hunt
President and Chief Executive Officer Executive Vice President and Treasurer
(Principal Executive Officer) (Principal Financial Officer and Principal
Date: March 17, 1998 Accounting Officer)
Date: March 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By /s/ CHESTER G. ATKINS By /s/ MICHAEL A. MILLER
Chester G. Atkins, Director Michael A. Miller, Director
Date: March 17, 1998 Date: March 17, 1998
By /s/ DAVID E. BRADBURY By /s/ SYDNEY L. MILLER
David E. Bradbury, Director Sydney L. Miller, Director
Date: March 17, 1998 Date: March 17, 1998
By /s/ ROBERT M. COARD By /s/ VIKKI L. PRYOR
Robert M. Coard, Director Vikki L. Pryor, Director
Date: March 17, 1998 Date: March , 1998
By /s/ ROBERT L. CULVER By /s/ GERALD M. RIDGE
Robert L. Culver, Director Gerald M. Ridge, Director
Date: March 17, 1998 Date: March 17, 1998
By /s/ ALAN K. DERKAZARIAN By /s/ WILLIAM SCHWARTZ
Alan K. Derkazarian, Director William Schwartz, Director
Date: March 17, 1998 Date: March 17, 1998
By /s/ DONALD C. DOLBEN By /s/ BARBARA C. SIDELL
Donald C. Dolben, Director Barbara C. Sidell, Director
Date: March , 1998 Date: March 17, 1998
By /s/ NEAL F. FINNEGAN By /s/ JAMES V. SIDELL
Neal F. Finnegan, Director James V. Sidell, Director
President and Chief Executive Date: March 17, 1998
Officer
Date: March 17, 1998
By /s/ EDWARD GUZOVSKY By /s/ PAUL D. SLATER
Edward Guzovsky, Director Paul D. Slater, Director
Date: March 17, 1998 Date: March 17, 1998
By /s/ EDWARD J. SULLIVAN
Edward J. Sullivan, Director
Date: March 17, 1998
74
75
By /s/ WALLACE M. HASELTON By /s/ G. ROBERT TOD
Wallace M. Haselton, Director G. Robert Tod, Director
Date: March , 1998 Date: March 17, 1998
By /s/ BRIAN W. HOTAREK By /s/ MICHAEL J. VERROCHI
Brian W. Hotarek, Director Michael J. Verrochi, Director
Date: March 17, 1998 Date: March 17, 1998
By /s/ FRANCIS X. MESSINA By /s/ GORDON M. WEINER
Francis X. Messina, Director Gordon M. Weiner, Director
Date: March 17, 1998 Date: March 17, 1998
75