-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G/SY7T9o+tuQ6jXn27pkIYz3fR2C3WMfzUd4yNB2eIqKwBmhCde6rkG8t20ARr9X Cyc/tqZ75JnTWJT+yIzYPw== 0000950135-97-003492.txt : 19970815 0000950135-97-003492.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950135-97-003492 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UST CORP /MA/ CENTRAL INDEX KEY: 0000316901 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042436093 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09623 FILM NUMBER: 97660757 BUSINESS ADDRESS: STREET 1: 40 COURT ST CITY: BOSTON STATE: MA ZIP: 02108 BUSINESS PHONE: 6177267000 MAIL ADDRESS: STREET 1: 40 COURT ST CITY: BOSTON STATE: MA ZIP: 02108 10-Q 1 UST CORP. FORM 10-Q (PERIOD ENDING 06/30/97) 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE #0-9623 ------------- UST CORP. (Exact Name of Registrant as Specified in its Charter) MASSACHUSETTS 04-2436093 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 40 COURT STREET BOSTON, MASSACHUSETTS 02108 (Address of principal executive offices) (Zip Code) (617) 726-7000 (Registrant's telephone number, including area code) NO CHANGE (Former name, former address and former fiscal year, if changed since last year.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No /_/ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. At July 31, 1997, there were 28,505,293 shares of common stock outstanding, par value $.625 per share. ================================================================================ 2 UST CORP. TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets -- June 30, 1997 and December 31, 1996............................................... 3 Consolidated Statements of Income -- Three and Six Months Ended June 30, 1997 and 1996........................... 4 Consolidated Statements of Changes in Stockholders' Investment -- Six Months Ended June 30, 1997.................................................................................................. 5 Consolidated Statements of Cash Flows -- Six Months Ended June 30, 1997 and 1996................................. 6 Notes to Consolidated Financial Statements....................................................................... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 10 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings.........................................................................................21 ITEM 4. Submission of Matters to a Vote of Security Holders.......................................................21 ITEM 6. Exhibits and Reports on Form 8-K..........................................................................22 SIGNATURES ........................................................................................................22
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UST CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 1997 1996 ------------ ------------ (DOLLARS IN THOUSANDS) ASSETS Cash, due from banks and interest-bearing deposits ............................ $ 136,204 $ 140,069 Federal funds sold and other short-term investments ........................... 105,142 142,901 Securities: Securities available-for-sale: Mortgage-backed securities ................................................ 393,867 267,726 U.S. Treasury and federal agencies and other securities ................... 306,564 414,077 ------------ ------------ Total securities available-for-sale ................................ 700,431 681,803 Securities held-to-maturity (Note 5) ........................................ 145,564 ------------ ------------ Total securities ................................................... 700,431 827,367 Loans: Loans -- net of unearned discount of $16,001,000 in 1997 and $18,721,000 in 1996 (Note 2) .............................................. 2,562,601 2,452,813 Reserve for possible loan losses (Note 2) ................................... (50,155) (50,204) ------------ ------------ Total loans, net ................................................... 2,512,446 2,402,609 Premises, furniture and equipment, net ........................................ 61,573 53,439 Intangible assets, net ........................................................ 58,916 66,826 Other real estate owned, net .................................................. 692 1,792 Loans held-for-sale ........................................................... 12,446 Other assets .................................................................. 44,650 50,793 ------------ ------------ Total assets ....................................................... $ 3,620,054 $ 3,698,242 ============ ============ LIABILITIES AND STOCKHOLDERS' INVESTMENT Deposits: Noninterest-bearing ........................................................ $ 589,587 $ 599,927 Interest-bearing: NOW ..................................................................... 49,644 381,782 Money market ............................................................ 614,086 313,548 Regular savings ......................................................... 649,188 649,974 Time: Certificates of deposit over $100 thousand .............................. 165,498 168,081 Other ................................................................... 747,307 742,500 ------------ ------------ Total deposits ..................................................... 2,815,310 2,855,812 Short-term borrowings ......................................................... 438,130 412,331 Other borrowings .............................................................. 28,504 66,091 Other liabilities ............................................................. 35,332 68,419 ------------ ------------ Total liabilities .................................................. 3,317,276 3,402,653 Commitments and contingencies (Note 3) Stockholders' investment (Note 4): Preferred stock $1 par value; Authorized -- 4,000,000 shares; Outstanding -- none Common stock $.625 par value; Authorized -- 45,000,000 shares; Issued -- 28,469,820 and 28,020,645 shares in 1997 and 1996, respectively . 17,794 17,590 Additional paid-in capital .................................................. 115,610 110,644 Retained earnings ........................................................... 172,382 169,465 Unrealized loss on securities available-for-sale, net of tax ................ (3,253) (2,576) Deferred compensation and other ............................................. 245 466 ------------ ------------ Total stockholders' investment ..................................... 302,778 295,589 ------------ ------------ Total liabilities and stockholders' investment ..................... $ 3,620,054 $ 3,698,242 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 4 UST CORP. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Interest income: Interest and fees on loans ................................. $ 54,647 $ 42,470 $ 107,126 $ 85,234 Interest and dividends on securities: Taxable .................................................. 11,131 13,234 23,018 26,310 Nontaxable ............................................... 271 144 388 289 Interest on federal funds sold and other short-term investments .............................................. 1,065 376 2,071 656 ------------ ------------ ------------ ------------ Total interest income ........................ 67,114 56,224 132,603 112,489 ------------ ------------ ------------ ------------ Interest expense: Interest on deposits ....................................... 20,284 17,484 40,421 35,270 Interest on borrowings ..................................... 5,736 6,213 11,426 11,742 ------------ ------------ ------------ ------------ Total interest expense ....................... 26,020 23,697 51,847 47,012 ------------ ------------ ------------ ------------ Net interest income ........................................ 41,094 32,527 80,756 65,477 Provision for possible loan losses (Note 2) .................. 300 (5,248) 300 (3,375) ------------ ------------ ------------ ------------ Net interest income after provision for possible loan losses ................................................... 40,794 37,775 80,456 68,852 ------------ ------------ ------------ ------------ Noninterest income: Asset management fees ..................................... 3,188 3,282 6,345 6,552 Service charges on deposit accounts ....................... 2,172 1,528 4,421 3,094 Corporate services income, net ............................ 1,384 1,160 2,759 2,251 Securities losses, net .................................... (584) (122) (573) (73) Gain on sale of loans held-for-sale ....................... 12 1,804 15 Other ..................................................... 1,888 1,541 3,950 2,971 ------------ ------------ ------------ ------------ Total noninterest income .................... 8,048 7,401 18,706 14,810 ------------ ------------ ------------ ------------ Noninterest expense: Salary and employee benefits .............................. 18,096 14,323 35,798 29,022 Occupancy and equipment expense ........................... 4,567 3,692 9,615 7,705 Deposit insurance assessment .............................. 255 311 321 1,036 Foreclosed asset and workout expense ...................... 179 408 502 623 Restructuring charges ..................................... 11,752 Acquisition and merger-related expense .................... 2,850 Other ..................................................... 11,899 7,233 22,386 14,222 ------------ ------------ ------------ ------------ Total noninterest expense .................... 34,996 25,967 83,224 52,608 ------------ ------------ ------------ ------------ Income before income taxes .................................. 13,846 19,209 15,938 31,054 Income tax provision ...................................... 5,602 7,417 7,332 11,876 ------------ ------------ ------------ ------------ Net income .................................. $ 8,244 $ 11,792 $ 8,606 $ 19,178 ============ ============ ============ ============ Per share data: Net income (Note 4) ....................................... $ 0.29 $ 0.41 $ 0.30 $ 0.67 Cash dividends declared ................................... $ 0.10 $ 0.08 $ 0.20 $ 0.14 Weighted average number of common shares (Note 4) ......... 28,873,654 28,422,465 28,785,672 28,472,957
The accompanying notes are an integral part of these consolidated financial statements. 4 5 UST CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (UNAUDITED)
ADDITIONAL UNREALIZED DEFERRED COMMON PAID-IN RETAINED GAIN/(LOSS) COMPENSATION STOCK CAPITAL EARNINGS ON SECURITIES AND OTHER TOTAL --------- ---------- --------- ------------- ------------ --------- (DOLLARS IN THOUSANDS) Balance December 31, 1996, as previously reported ..................... $ 11,262 $ 75,710 $ 112,975 $ (2,453) $ 466 $ 197,960 Adjustments for the Walden Bancorp, Inc. .. pooling of interests .................... 6,328 34,934 56,490 (123) 97,629 --------- ---------- --------- --------- ------ --------- Balance December 31, 1996, as restated .... 17,590 110,644 169,465 (2,576) 466 295,589 Net income ................................ 8,606 8,606 Cash dividends declared ................... (5,689) (5,689) Stock issued under stock option, restricted stock and stock purchase plans .......... 204 4,966 5,170 Change in unrealized loss on securities available-for-sale, net of tax .......... (677) (677) Activity in Directors Deferred Compensation Program and other, net .................. (221) (221) --------- ---------- --------- --------- ------ --------- Balance June 30, 1997 ..................... $ 17,794 $ 115,610 $ 172,382 $ (3,253) $ 245 $ 302,778 ========= ========== ========= ========= ====== =========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 UST CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1997 1996 ---- ---- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income .......................................................... $ 8,606 $ 19,178 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses ................................ 300 (3,375) Depreciation and amortization ..................................... 6,605 3,096 (Accretion) amortization of securities discount or premium, net ... (124) 134 Securities losses, net ............................................ 573 73 Gain on sale of other real estate owned, net ...................... (99) (283) Gain on sale of loans held-for-sale ............................... (1,804) (15) Writedowns of other real estate owned ............................. 47 245 Writedowns of fixed assets ........................................ 1,255 Deferred income tax expense ....................................... (7,342) Net change in other assets and other liabilities .................. (19,830) (22,366) --------- --------- Net cash used by operating activities ....................... (4,471) (10,655) Cash flows from investing activities: Proceeds from sales of securities available-for-sale ................ 175,177 62,086 Proceeds from maturities of securities available-for-sale ........... 99,298 69,137 Proceeds from maturities of securities held-to-maturity ............. 23,972 Purchases of securities available-for-sale .......................... (148,949) (151,658) Purchases of securities held-to-maturity ............................ (65,930) Net decrease (increase) in federal funds sold and other short-term investments ............................................ 37,759 (642) Net increase in loans ............................................... (111,965) (47,080) Proceeds from other real estate owned ............................... 2,980 2,828 Proceeds from loans held-for-sale ................................... 14,250 12,861 Purchases of premises and equipment ................................. (12,721) (2,631) --------- --------- Net cash provided (used) by investing activities ............ 55,829 (97,057) Cash flows from financing activities: Net decrease in nontime deposits .................................... (42,726) (34,362) Net increase in certificates of deposit ............................. 2,224 36,667 Net (decrease) increase in borrowings ............................... (11,788) 93,222 Cash dividends paid ................................................. (5,135) (2,669) Treasury stock acquired ............................................. (3,363) Issuance of common stock for cash, net .............................. 2,202 2,445 --------- --------- Net cash (used) provided by financing activities ............ (55,223) 91,940 --------- --------- Decrease in cash and cash equivalents ............................... (3,865) (15,772) Cash and cash equivalents at beginning of year ...................... 140,069 126,115 --------- --------- Cash and cash equivalents at end of period .......................... $ 136,204 $ 110,343 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest .......................................................... $ 51,509 $ 47,004 ========= ========= Income taxes ...................................................... $ 6,680 $ 16,179 ========= ========= Noncash transactions: Transfers from other assets to securities available-for-sale ........ $ 4,180 ========= Transfers from securities held-to-maturity to available-for-sale .... $ 145,564 $ 4,312 ========= ========= Transfers from loans to other real estate owned, net ................ $ 2,922 $ 550 ========= ========= Common stock issuance ............................................... $ 1,048 $ 93 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 6 7 UST CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The consolidated financial statements of UST Corp. and its subsidiaries ("the Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company, however, believes that the disclosures are adequate to make the information presented not misleading. All prior period amounts included in this Form 10-Q have been restated to reflect the January 3, 1997 acquisition of Walden Bancorp, Inc. as a pooling of interests. Refer to Note 5 for a further discussion of acquisitions. The amounts shown reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial statements for the periods reported. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. Certain prior period amounts have been reclassified to reflect current reporting classifications. The results of operations for three and six months ended June 30, 1997 and 1996 are not necessarily indicative of the results of operations for the full year or any other interim period. (2) RESERVE FOR POSSIBLE LOAN LOSSES Analysis of the reserve for possible loan losses for the six months ended June 30, 1997 and 1996 is as follows:
1997 1996 ---- ---- (DOLLARS IN THOUSANDS) Balance at beginning of period ...................... $ 50,204 $ 68,120 Chargeoffs/transfers ................................ 2,836 4,660 Recoveries on loans previously charged-off .......... 2,487 7,042 -------- -------- Net chargeoffs (recoveries) ......................... 349 (2,382) Provision (credit) for possible loan losses ......... 300 (3,375) -------- -------- Balance at end of period ............................ $ 50,155 $ 67,127 ======== ========
The reserve for possible loan losses is determined based on a consistent, systematic method which analyzes the size and risk of the loan portfolio on a monthly basis. See "Credit Quality and Reserve for Possible Loan Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operations herein. 7 8 UST CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) COMMITMENTS AND CONTINGENCIES At June 30, 1997, the Company had the following off-balance sheet financial instruments whose contract amounts represent credit risk:
CONTRACT OR NOTIONAL AMOUNT --------------------------- (DOLLARS IN THOUSANDS) Commitments to extend credit ............. $678,000 Standby letters of credit and financial guarantees written ........... 59,000 Commercial letters of credit ............. 5,000 Foreign exchange contracts ............... 4,000
(4) NET INCOME PER SHARE CALCULATION Net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents consist primarily of dilutive stock options computed under the treasury stock method. Average dilutive common stock equivalents totaled 441,512 and 437,695 for the three- and six-month periods ended June 30, 1997, respectively, and 518,932 and 558,487 for the three- and six-month periods ended June 30, 1996. On March 3, 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." This Statement supersedes APB Opinion No. 15 regarding the presentation of earnings per share ("EPS") on the face of the income statement. SFAS No. 128 replaces the presentation of Primary EPS with a Basic EPS calculation that excludes the dilutive effect of common stock equivalents. The Statement requires a dual presentation of Basic and Diluted EPS, which is computed similarly to Fully Diluted EPS pursuant to APB Opinion No. 15, for all entities with complex capital structures. This Statement is effective for fiscal years ending after December 15, 1997 and requires restatement of all prior-period EPS data presented. The net income per share for the three and six months ended June 30, 1997 would not change under SFAS No. 128. 8 9 UST CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) ACQUISITIONS On January 3, 1997, the Company completed its acquisition of Walden Bancorp, Inc. ("Walden"), a $1.0 billion multi-bank holding company headquartered in Acton, Massachusetts. The transaction was accounted for as a pooling of interests and was structured as a tax-free exchange of 1.9 shares of the Company's common stock for each share of Walden common stock. The Company's outstanding stock increased by 10,125,540 shares to a total of 28,144,163 shares on the date of acquisition. Based on the closing price of the Company's stock as of January 3, 1997, the market value of the shares exchanged totaled $207 million. Walden's two subsidiary banks, The Braintree Savings Bank and The Co-operative Bank of Concord operated a total of seventeen branches located in the Massachusetts counties of Middlesex, Norfolk and Plymouth. On April 18, 1997, The Co-operative Bank of Concord was merged into USTrust, the Company's principal banking subsidiary. The Braintree Savings Bank was merged into USTrust on May 16, 1997. The following presentation reflects key line items on a historical basis for Walden and UST Corp. and on a pro forma combined basis assuming the merger was in effect for the periods presented.
UST CORP. AS WALDEN AS UST CORP. ORIGINALLY REPORTED ORIGINALLY REPORTED RESTATED ------------------- ------------------- ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) YEAR ENDED DECEMBER 31, 1996 Net interest income .......... $ 96,126 $ 39,129 $ 135,255 Net income ................... 32,662 10,519 43,181 Net income per share ......... 1.79 1.97 1.52 Total assets ................. 2,706,614 995,628 3,702,242 Total deposits ............... 2,105,866 749,946 2,855,812 Total shareholders' investment ................. 197,960 97,629 295,589 THREE MONTHS ENDED JUNE 30, 1996 Net interest income .......... $ 22,660 $ 9,867 $ 32,527 Net income ................... 8,824 2,968 11,792 Net income per share ......... 0.49 0.55 0.41 SIX MONTHS ENDED JUNE 30, 1996 Net interest income .......... $ 46,035 $ 19,442 $ 65,477 Net income ................... 13,361 5,817 19,178 Net income per share ......... 0.74 1.07 0.67 Total assets ................. 2,027,016 1,051,743 3,078,759 Total deposits ............... 1,516,377 768,229 2,284,606 Total shareholders' investment ................. 177,145 97,255 274,400
Upon the completion of the Walden acquisition, the Company redesignated $146 million of former Walden securities from held-to-maturity to securities available-for-sale. On August 12, 1997, the Company announced the execution of a definitive agreement to acquire Firestone Financial Corp. ("Firestone"), a $87 million small business equipment finance company headquartered in Newton, Massachusetts. The transaction, which will be accounted for as a pooling of interests, is expected to close during the fourth quarter of 1997, and is structured as a tax-free exchange of 0.63 shares of the Company's common stock for each share of Firestone common stock. There are 2.0 million outstanding shares of Firestone common stock which is closely held. The Company's common stock to be exchanged for Firestone common stock will not have been registered prior to the effectiveness of the transaction and may not be offered or resold absent registration or an applicable exemption from registration requirements. At the Company's closing common stock price of $21.75 on August 8, 1997, the transaction would be valued at approximately $27.4 million. The agreement is subject to the approval of federal and state bank regulation authorities. The Company expects an estimated one-time, pre-tax charge of $900 thousand for acquisition-related costs in connection with the transaction. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements, notes, and tables included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. The discussion contains certain forward-looking statements regarding the future performance of the Company. All forward-looking information is inherently uncertain and actual results may differ materially from the assumptions, estimates or expectations reflected or contained in the forward-looking information. Please refer to "Cautionary Statement Regarding Forward-looking Information" of this Form 10-Q for a further discussion. All 1996 financial data included in this discussion has been restated to reflect the January 3, 1997 acquisition of Walden Bancorp, Inc. as a pooling of interests. HIGHLIGHTS Net income for the quarter ended June 30, 1997, was $8.2 million, or $0.29 per share, compared with $11.8 million, or $0.41 per share, for the same period in 1996. The second quarter results in 1996 reflected a $5.2 million net pre-tax earnings credit that was recorded through the provision for possible loan losses and added significantly to last year's results. For the six months ended June 30, 1997, net income was $8.6 million, or $0.30 per share, compared with $19.2 million, or $0.67 per share, reported for the first half of 1996. Results for the 1997 period included a nonrecurring charge of $2.8 million for certain nondeductible merger-related expenses and a pre-tax charge of $11.8 million for restructuring expenses associated with the acquisition of Walden accounted for as a pooling of interests and completed in January 1997. Also during the first six months of this year the Company realized a $1.8 million gain on the loans held-for-sale portfolio. Both the second quarter and first six months of this year were positively affected by the fourth quarter 1996 acquisition of 20 banking branches resulting in the assumption of $508 million in loans and $744 million in deposit and other liabilities from two banking subsidiaries of BankBoston Corp. ("the Branch Purchase"). Return on average equity and average assets were 10.96 percent and .93 percent, respectively, comparatively lower than the 17.32 percent and 1.57 percent earned in the same quarter last year which included the aforementioned $5.2 million pre-tax credit recorded through the provision for possible loan losses. NET INTEREST INCOME ANALYSIS Net interest income on a fully taxable equivalent basis was $41.3 million in the second quarter 1997, compared with $32.7 million in the same quarter last year. For the first six months of 1997, net interest income on a fully taxable equivalent basis was $81.2 million compared with $65.9 million last year. The increase in net interest income for both periods was due largely to the additional volume of interest-earning assets and interest-bearing liabilities acquired in the Branch Purchase. Average loan volume increased $596 million and $570 million over the same quarter and first six months of 1996, respectively, reflecting the loans acquired in the Branch Purchase and loan growth over the past year. This quarter's average loan growth over the first quarter of this year was 4 percent, or $87 million. Average securities decreased $154 million and $109 million for the three- and six-month periods, respectively, as a part of a portfolio restructuring program to sell off lower-yielding securities. As shown in the table below, the increase in loans and an increase in federal funds sold, partially reduced by lower average securities resulted in a $11.3 million and $22.8 million volume-related increase in interest income for the three- and six-month comparisons, respectively. Average interest-bearing liabilities increased $417 million for the quarter and $429 million for the first six months due mostly to 10 11 the deposits acquired in the Branch Purchase. This increase in liabilities added $2.7 million and $5.9 million in volume-related interest expense in the three- and six-month periods, respectively. The net effect on net interest income from changes in volume of interest-earning assets and interest-bearing liabilities was an increase of $8.6 million and $16.0 million for the three and six months ended June 30, 1997. Yield on loans decreased 20 basis points and 31 basis points to 8.73 percent and 8.75 percent for the three and six months ended June 30, 1997, reflecting the effect of a lower interest rate environment and some external pressure on loan pricing. Securities yield increased 20 basis points to 6.20 percent this quarter reflecting the benefit of a portfolio restructuring initiative to increase yield. The net effect on interest income from rate changes on earning assets was a decrease of $406 thousand and $2.7 million for the three- and six-month comparisons. Yield on total deposits decreased 28 basis points and 31 basis points for the three- and six-month periods, respectively. The effect on total interest expense from rate changes in deposits and other interest-bearing liabilities was a decrease of $378 thousand and $1.0 million for the three- and six-month periods. The net effect of rate changes on net interest income for the three and six months ending June 30, 1997, compared to the same periods last year, was a decrease of $28 thousand and $1.6 million, respectively. The yield on total average-earning assets increased slightly to 8.09 percent and 8.07 percent from 7.97 percent and 8.05 percent from the three- and six-month periods last year, respectively. The earning asset yield increase reflects the effect of a favorable change in mix of earning assets which was only partially offset by the aforementioned loan yield decline. As a percentage of interest-earning assets, higher-yielding loans increased to 75 percent and 74 percent for the three- and six-month periods, respectively, from 67 percent for both periods last year. Yield on interest-bearing liabilities decreased reflecting lower deposit costs, from 4.09 percent and 4.12 percent last year to 3.81 percent and 3.83 percent for the three- and six-month periods this year, respectively. As a result of these favorable changes, interest rate margin and spread for the quarter improved from 4.62 percent and 3.87 percent last year to 4.96 percent and 4.28 percent this year. For the six-month period, margin and spread increased from 4.70 percent and 3.94 percent last year to 4.92 percent and 4.24 percent this year. The following table attributes changes in interest income and interest expense to changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities for the three and six months ended June 30, 1997 when compared with the three and six months ended June 30, 1996. Changes attributable to both rate and volume are allocated on a weighted basis.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH 1996 1997 COMPARED WITH 1996 INCREASE (DECREASE) DUE TO CHANGE IN: INCREASE (DECREASE) DUE TO CHANGE IN: ------------------------------------- ------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE VOLUME RATE TOTAL VOLUME RATE TOTAL ------- ------- ----- ------- ------- ----- (DOLLARS IN THOUSANDS) Interest income: Interest and fees on loans* ............ $ 13,006 $ (856) $ 12,150 $ 24,825 $ (2,984) $ 21,841 Interest and dividends on securities: Taxable ............................ (2,268) 166 (2,102) (2,882) (410) (3,292) Nontaxable* ........................ (75) 270 195 (265) 422 157 Interest on federal funds sold and other ................................. 675 14 689 1,113 302 1,415 -------- -------- -------- -------- -------- -------- Total interest income* ............. 11,338 (406) 10,932 22,791 (2,670) 20,121 -------- -------- -------- -------- -------- -------- Interest expense: Interest on regular savings, NOW and money market deposits ................ 2,362 (327) 2,035 4,527 315 4,842 Interest on time deposits .............. 910 (145) 765 1,840 (1,531) 309 Interest on borrowings ................. (571) 94 (477) (489) 173 (316) -------- -------- -------- -------- -------- -------- Total interest expense ............. 2,701 (378) 2,323 5,878 (1,043) 4,835 -------- -------- -------- -------- -------- -------- Net interest income ...................... $ 8,637 $ (28) $ 8,609 $ 16,913 $ (1,627) $ 15,286 ======== ======== ======== ======== ======== ========
11 12 * Fully taxable equivalent at the federal income tax rate of 35 percent, and includes applicable state taxes, net of federal benefit. The tax equivalent adjustments were $97 thousand and $200 thousand on loans and $136 thousand and $195 thousand on nontaxable securities for the three and six months ended June 30, 1997, respectively. NONINTEREST INCOME Noninterest income increased $647 thousand and $3.9 million for the three and six months ended June 30, 1997, respectively. The combination of the favorable effect of the Branch Purchase and fee income growth was reflected in the increases in service charges on deposit accounts and corporate services income for the three and six months ended June 30, 1997. Deposit fees increased $644 thousand and $1.3 million, respectively. Corporate services income, which includes merchant credit card income net of card processing expense, increased $224 thousand and $508 thousand, respectively. Realized losses on securities increased $462 thousand for the quarter and $500 thousand from the same six-month period last year reflecting the sale of low-yielding securities as part of the portfolio restructuring. Other noninterest income reflects increases in both comparisons due mostly to fee income from debit cards, a new product introduced in the fourth quarter of 1996 and higher ATM fee income charged to ATM users from nonaffiliated banks. The six-month comparison also reflects realized gains on the loans held-for-sale portfolio of $1.8 million compared to a nominal gain last year. NONINTEREST EXPENSE Total noninterest expense increased $9.0 million from the same quarter last year to $35.0 million. Salary and employee benefits expense increased $3.8 million while occupancy and equipment expense increased $875 thousand reflecting the addition of the twenty banking branches acquired in the Branch Purchase. Other noninterest expense, which is detailed below, increased $4.7 million. Partially offsetting these expense increases was a decrease of $229 thousand in foreclosed asset and workout expense reflecting the reduced level of problem assets. For the six-month comparison, noninterest expense increased $30.6 million to $83.2 million. In the first quarter of this year nonrecurring acquisition and merger-related expense and restructuring charges of $14.6 million were recorded. Merger-related expense of $2.8 million was primarily for professional services paid in connection with the Walden acquisition transaction. Restructuring charges of $11.8 million included expenses paid and provisions for severance payments to former Walden executives and staff, writeoffs of certain Walden assets and contract buyouts, system conversion costs, and certain other expenses associated with the integration of the Walden banking subsidiaries. The increases in salary and employee benefits, occupancy and equipment reflect the operation of twenty additional branches. Other noninterest expense, which is described below, increased $8.2 million. As displayed in the table below, other noninterest expense increased $4.7 million and $8.2 million for the three and six months ended June 30, 1997, respectively. In both comparisons the increased service bureau expense reflects the result of higher use of nonaffiliated banks ATM's by the acquired customers in the Branch Purchase, a $230 thousand nonrecurring system conversion cost not included in the first quarter restructuring charge, and higher processing costs due to the branch additions. The increases in advertising and promotion expense are consistent with the Company's' growth in assets and reflect the continuation of the fourth quarter 1996 product promotion and this year's advertising campaign, "THE other BIG BANK." The amortization of intangibles increase reflects the amortization of premium incurred in the Branch Purchase. Litigation expense reflects a large settlement of a certain litigation matter during the current quarter. Increases in legal and consulting fees include the legal expenses associated with this year's litigation settlement and a $140 thousand one-time restructuring-related consulting expense. All other noninterest expense increased $1.9 million and $3.4 million for the three- and six-month periods. The largest increases for both periods were in checkbook expense due to free replacements offered to deposit customers acquired in the Branch Purchase, replacement stationery and supplies with the Company's new logo, and other miscellaneous categories due to the operation of twenty additional banking branches. 12 13
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Service bureau and other data processing 1,500 717 2,716 1,396 Advertising and promotion .............. 1,163 887 2,354 1,685 Amortization intangibles ............... 1,162 571 3,273 1,140 Legal and consulting ................... 1,082 795 1,783 1,433 Litigation provisions .................. 1,150 300 1,150 770 All other .............................. 5,842 3,963 11,110 7,798 ------- ------- ------- ------- Total other noninterest expense ... $11,899 $ 7,233 $22,386 $14,222 ======= ======= ======= =======
The Company recently initiated a study of the impact of the so-called Year 2000 problem on its information systems. The Year 2000 problem, which is common to most corporations, concerns the inability of information systems, primarily computer software programs, to properly recognize and process date-sensitive information as the year 2000 approaches. Once an assessment of the Company's systems is complete, a specific work plan will be developed and implemented. The Company currently believes it will be able to modify or replace any affected systems in time to minimize any detrimental effects on operations. The cost of the plan development and implementation, however, may materially effect the future operating results of the Company in the period(s) in which such expense is incurred. INCOME TAXES The Company recorded income taxes of $5.6 million compared with $7.4 million for the same quarter last year. The effective tax rate for the quarter was 40.5 percent compared with 38.6 percent a year ago. Included in other assets as of June 30, 1997 was a deferred tax asset of approximately $10 million. The Company believes that it is more likely than not that the benefit of this deferred asset will be realized. ASSETS Total assets at June 30, 1997 were $3.620 billion, a decrease of $78 million from $3.698 billion at December 31, 1996. This decrease in asset size was largely attributed to the restructuring of the securities portfolio principally at the acquired Walden banks. Total securities decreased $127 million to $700 million at June 30, 1997. Also, during the year, the securities held-to-maturity portfolio existing at December 31, 1996 was redesignated as securities available-for-sale. Federal funds sold decreased approximately $38 million and the entire $12 million loans held-for-sale portfolio at year-end 1996 was sold during the first quarter. Intangible assets decreased $8 million as a result of amortization during the year and a reallocation of the Branch Purchase price based upon receipt of appraisals of certain assets acquired. Total loans increased $110 million to $2.563 billion. 13 14 The following table presents the composition of the loan portfolio:
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30, 1997 1997 1996 1996 ---------- ---------- ------------ ---------- (DOLLARS IN THOUSANDS) Commercial and financial .......... $ 855,846 $ 811,454 $ 820,540 $ 707,031 Commercial real estate: Construction .................... 47,392 30,895 29,624 17,359 Developer, investor and land .... 283,481 317,050 305,056 338,222 Consumer: Residential mortgage ............ 772,157 779,464 804,109 476,367 Home equity ..................... 111,692 108,820 107,310 100,166 Indirect automobile installment . 401,154 336,672 301,072 250,535 Other consumer .................. 40,051 41,280 41,433 38,090 Lease financing ................... 50,828 47,193 43,669 39,141 ---------- ---------- ---------- ---------- Total loans ............... $2,562,601 $2,472,828 $2,452,813 $1,966,911 ========== ========== ========== ==========
The Company's commercial loan portfolios listed above totaled $1.187 billion at June 30, 1997, reflecting a net increase of $31 million since year-end 1996 and $124 million from a year ago. Commercial loans acquired in the 1996 Branch Purchase totaled $111 million while commercial loans sold in the fourth quarter 1996 sale of UST Bank/ Connecticut, a former banking subsidiary, were approximately $19 million. Excluding these events, the commercial loan portfolios grew $32 million over the past year. The June 30, 1997 commercial balances listed reflect some reclassifications among commercial loan categories of former Walden bank loans as compared to prior periods. Residential loans decreased $32 million during the year to $772 million due to normal amortization. Since the Company does not originate residential mortgage loans, growth in this portfolio is not expected unless through acquisition. The increase in residential loans from a year ago reflects loans acquired in the Branch Purchase. The indirect automobile loan portfolio continues to experience strong growth as planned. This portfolio grew 33 percent or $100 million in the first six months of this year to $401 million. In comparison to a year ago, the portfolio has grown 60 percent, or $151 million. These loans are subjected to the Company's credit quality standards and are not what is referred to in the industry as "subprime" or high risk automobile loans. LIQUIDITY AND FUNDING Liquidity involves the Company's ability to raise or gain access to funds in order to fulfill its existing and anticipated financial obligations. It may be provided through amortization, maturity or sale of assets such as loans and securities, liability sources such as increased deposits, utilization of the Federal Home Loan Bank credit facility, purchased or other borrowed funds, and access to the capital markets. The Company's securities portfolio is classified entirely as available-for-sale, which provides the flexibility to sell certain securities based upon changes in economic or market conditions, interest rate risk and the Company's financial position and liquidity. At June 30, 1997, liquidity, which includes excess cash, funds sold and unpledged securities, totaled approximately $493 million, or 14 percent of total assets. 14 15 The funds needed to support the Company's loan and securities portfolios are provided through a combination of commercial and retail deposits and short-term and other borrowings. Total deposits decreased $41 million since year-end 1996 to $2.815 billion. Noninterest-bearing deposits decreased $10 million to $590 million from the seasonal high at the beginning of the year. Interest-bearing savings deposits, including NOW, money market and regular savings, decreased $32 million to $1.313 billion. The savings deposit balances also reflect a shift from NOW to money market deposits of over $300 million since the beginning of the year. This was a result of an overnight deposit sweep process implemented earlier this year by the Company's subsidiary bank, USTrust. This process transfers certain NOW account balances to money market accounts on a nightly basis then returns the balances to a NOW account status the following morning. The effect of this process, which has no impact on an individual customer's account status, is a reduction of the cash reserve balances required to be maintained at the Federal Reserve Bank. This process has become a customary procedure for most large institutions and has Federal Reserve Board approval. Time certificates of deposit increased slightly from $911 million at December 31, 1996 to $913 million at June 30, 1997. Short-term and other borrowings, which consist principally of securities sold under agreement to repurchase and borrowings from the Federal Home Loan Bank, decreased $12 million to $467 million, reflective of the reduction in federal funds sold and lower securities balance. As shown in the Consolidated Statements of Cash Flows, cash and cash equivalents decreased $3.9 million during the six-month period ended June 30, 1997. Cash used by operations resulted largely from the net change in other assets and other liabilities partially offset by the aggregate of operating income items. Cash provided by investing activities was due to an excess of maturities and sales of securities over cash used for securities purchases and increased loan volume. Net cash used by financing activities was primarily due to decreases in nontime deposits and borrowings. At June 30, 1997, the parent Company had $1.1 million in cash and $4 million in short-term securities purchased under agreement to resell compared with $.8 million and $14 million, respectively, at year end. The decrease in excess funds was primarily due to the net of a $20 million capital contribution to USTrust, dividends paid to shareholders, and the receipt of $14.5 million in dividends from subsidiaries during the first half of 1997. INTEREST RATE RISK Volatility in interest rates requires the Company to manage interest rate risk which arises from differences in the timing of repricing of assets and liabilities. Management monitors and adjusts the difference between interest-sensitive assets and interest-sensitive liabilities ("GAP" position) within various time frames. Within GAP limits established by the Board of Directors, the Company seeks to balance the objective of insulating the net interest margin from rate exposure with that of taking advantage of anticipated changes in rates in order to enhance income. The Company's policy is to limit its one-year cumulative GAP position to 2.5 times equity, presently equal to approximately 21 percent of total assets. The Company manages its interest rate GAP primarily by lengthening or shortening the maturity structure of its securities portfolio. The Company's GAP presentation may not reflect the degrees to which interest-earning assets and core deposit costs respond to changes in market interest rates. The Company's rate-sensitive assets consist primarily of loans tied to the prime rate or the London Interbank Offered Rate ("LIBOR"). The following table summarizes the Company's GAP position at June 30, 1997. The majority of loans are included in 0-30 days as they reprice in response to changes in the interest rate environment. Interest-bearing deposits are classified according to their expected interest rate sensitivity. Actual sensitivity of these deposits is reviewed periodically and adjustments are made in the Company's GAP analysis that management deems appropriate. Securities and noninterest-bearing deposits are categorized according to their expected lives based on published industry prepayment estimates in the case of securities and current management estimates for noninterest-bearing deposits. Securities are evaluated in conjunction with the 15 16 Company's asset/liability management strategy and may be purchased or sold in response to expected or actual changes in interest rates, credit risk, prepayment risk, loan growth and similar factors. The reserve for possible loan losses is included in the "Over 1 Year" category of loans. At June 30, 1997, the one-year cumulative GAP position was positive at $103 million, or approximately 3 percent of total assets.
INTEREST SENSITIVE PERIODS ------------------------------------------------------------------ 0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL --------- ---------- ----------- ----------- ----- (DOLLARS IN MILLIONS) Loans, net of reserve ............. $ 938 $ 139 $ 334 $ 1,101 $ 2,512 Federal funds sold and other ...... 105 105 Securities ........................ 35 54 81 530 700 Other assets ...................... 122 3 178 303 ------- ------- ------- ------- ------- Total assets ............... $ 1,200 $ 193 $ 418 $ 1,809 $ 3,620 ------- ------- ------- ------- ======= Interest-bearing deposits ......... $ 513 $ 122 $ 476 $ 1,115 $ 2,226 Borrowed funds .................... 379 59 28 466 Noninterest-bearing deposits ...... 159 430 589 Other liabilities and stockholders' equity ........................... 339 339 ------- ------- ------- ------- ------- Total liabilities and equity ................... $ 1,051 $ 122 $ 535 $ 1,912 $ 3,620 ------- ------- ------- ------- ======= GAP for period .................... $ 149 $ 71 $ (117) $ (103) ======= ------- ------- ------- Cumulative GAP .................... $ 220 $ 103 $ 0 ======= ======= ======= As a percent of total assets ...... 4.12% 6.08% 2.85%
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES At June 30, 1997, substandard loans were $34.8 million compared with $37.7 million at December 31, 1996. Loans reported as substandard include loans classified as Substandard or Doubtful as determined by the Company in its internal credit risk rating profile. Under the Company's definition, Substandard loans, which include nonaccruals, are characterized by the distinct possibility that some loss will be sustained if the credit deficiencies are not corrected. The Substandard classification, however, does not necessarily imply ultimate loss for each individual loan so classified. Loans classified as Doubtful have all the weaknesses inherent in Substandard loans with the added characteristic that the weaknesses make collection of 100 percent of the assets questionable and improbable. 16 17 The following table displays the Company's total nonperforming assets and measures performance regarding certain key indicators of asset quality:
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30, 1997 1997 1996 1996 -------- --------- ------------ -------- (DOLLARS IN THOUSANDS) Nonperforming assets: Nonaccrual loans ........................ $ 26,275 $ 25,755 $ 33,710 $ 29,925 Accruing loans 90 days or more past due . 826 524 997 731 Other real estate owned ("OREO"), net ... 692 1,638 1,792 4,204 Restructured loans ...................... 754 1,264 584 -------- -------- -------- -------- Total nonperforming assets ................. $ 27,793 $ 28,671 $ 37,763 $ 35,444 ======== ======== ======== ======== Reserve for possible loan losses ........... $ 50,155 $ 50,155 $ 50,204 $ 67,127 Net chargeoffs (recoveries) for the quarter ................................... 300 49 809 (4,406) OREO reserve ............................... 367 320 320 813 Ratios: Reserve to nonaccrual loans ............. 190.9% 194.7% 148.9% 224.3% Reserve to total of nonaccrual loans, accruing loans 90 days or more past due, and restructured loans ........... 185.1% 185.5% 139.6% 214.9% Reserve to period-end loans ............. 2.0% 2.0% 2.0% 3.4% Nonaccrual loans and accruing loans over 90 days past due to period-end loans and OREO .............................. 1.1% 1.1% 1.4% 1.6% Annualized net chargeoffs to average loans ......................... nil nil .1% (.9)% OREO reserve to OREO .................... 34.7% 16.3% 15.2% 19.3%
As shown in the table above, total nonperforming assets were $27.8 million at June 30, 1997, which reflects a slight decrease in nonaccrual loans during the quarter, while total nonperformers were down $10 million from the end of 1996. The level of nonperforming assets at quarter end continues to be within the range of industry norms relative to the Company's size and total volume of loans. A nominal provision for possible loan losses of $300 thousand was recorded during the quarter as asset quality remained relatively stable. Losses of $2.0 million were charged against the reserve during the quarter and recoveries on loans previously charged off totaled $1.7 million. At June 30, 1997, the reserve balance was $50.2 million and equaled 191 percent of nonaccrual loans and 2.0 percent of total loans. At June 30, 1997, total impaired loans were $18.3 million, comprised of $.5 million that required a reserve for possible loan losses of $.3 million and $17.8 million that did not require a related reserve. Impaired loans, as defined in Statement of Financial Accounting Standards No. 114 ("SFAS No. 114") are commercial and commercial real estate loans recognized by the Company as nonaccrual and restructured. The Company maintains a reserve for possible loan losses to absorb future chargeoffs of loans and leases in the existing portfolio. The reserve is increased when a loan loss provision is recorded in the income statement. When a loan, or portion thereof, is considered uncollectible, it is charged against the reserve. Recoveries on amounts previously charged off are added to the reserve when collected. Adequacy of the reserve for possible loan losses is evaluated on a monthly basis using a consistent, systematic methodology which analyzes the size and risk of the loan and lease portfolio. Factors in this analysis include historical loss experience and asset quality, as reflected by 17 18 delinquency trends, nonaccrual and restructured loans and the Company's credit risk rating profile. Consideration is also given to the current and expected economic conditions and, in particular, how such conditions affect the types of credits in the portfolio and the market area in general. This analysis is documented using a combination of numerical and qualitative analysis and includes sensitivity testing and a written conclusion. No portion of the reserve is restricted to any loan or group of loans, and the entire reserve is available to absorb future realized losses. The amount and timing of realized losses and future reserve allocations may vary from current estimates. An allocation of the reserve for possible loan losses to each category of loans is presented below:
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30, 1997 1997 1996 1996 -------- --------- ------------ -------- Reserve for possible loan losses allocation to loans outstanding: Commercial and financial ................. $17,315 $17,501 $16,473 $19,836 Commercial real estate: Construction .......................... 897 622 556 463 Developer, investor and land .......... 4,241 5,215 4,638 7,095 Consumer* ................................ 18,626 15,737 15,836 10,896 Lease financing .......................... 635 590 589 489 Unallocated .............................. 8,441 10,490 12,112 28,348 ------- ------- ------- ------- Total loan loss reserve ............... $50,155 $50,155 $50,204 $67,127 ======= ======= ======= =======
- ---------- * Consumer loans include indirect automobile installment loans, residential mortgages, home equity lines of credit, credit cards, check credit and other consumer loans. The reserve for possible loan losses was $50.2 million at June 30, 1997, consistent with the March 1997 and December 1996 year-end balances. The reserve was $18 million lower than June 30, 1996 balance as a result of earnings credits recorded through the provision for possible loan losses in the second and third quarters of 1996. The unallocated portion of the reserve was 17 percent at June 30, 1997 compared with 24 percent at year end. The decrease of 7 percentage points, or $3.7 million, reflects a reallocation of the reserve to commercial loan categories at the Walden banks during the quarter and an increase in reserve allocated to the consumer category consistent with loan growth. CAPITAL AND DIVIDENDS The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its banking subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 1997, that the Company and its subsidiary banks meet all of their respective capital adequacy requirements. 18 19 As a condition to Federal Deposit Insurance Corporation approval of USTrust's fourth quarter 1996 Branch Purchase, USTrust was required to have a Tier I leverage capital ratio of not less than: (i) 4.8 percent, no later than ten days after consummation of the acquisition of sixteen BayBank branches; and (ii) 5 percent, no later than three months after consummation of the acquisition of the BayBank branches and for a period of six months thereafter. As of June 30, 1997, USTrust continued to be in compliance with the foregoing provisions and the Company expects that these conditions will not have a material adverse impact on the future operations of USTrust. During a period from the consummation of the Branch Purchase in December 1996 until March 5, 1997, USTrust's Total capital to total risk-based assets ratio temporarily fell below the requirement of an adequately capitalized bank. The parent Company effected a $20 million capital contribution to USTrust on March 5, 1997 in order to meet this requirement. The actual capital amounts and ratios of the Company and its banking subsidiaries as of June 30, 1997 are presented in the following summary:
AMOUNT PERCENT ---------------------------------- ------------------------------------- ADEQUATELY WELL ADEQUATELY WELL CAPITALIZED CAPITALIZED CAPITALIZED CAPITALIZED ACTUAL MINIMUMS MINIMUMS ACTUAL MINIMUMS MINIMUMS ------ ----------- ----------- ------ ----------- ----------- (DOLLARS IN MILLIONS) UST Corp. Consolidated: Tier 1 leverage capital ............ $249.1 $139.8 N/A 7.13% 4.00% N/A Tier 1 capital ..................... 249.1 111.2 N/A 8.96% 4.00% N/A Total (Tier 1 and Tier 2) capital .. 283.8 220.3 N/A 10.31% 8.00% N/A USTrust: Tier 1 leverage capital ............ 228.5 171.0 $171.0 6.68% 5.00% 5.00% Tier 1 capital ..................... 228.5 111.8 167.7 8.18% 4.00% 6.00% Total (Tier 1 and Tier 2) capital .. 263.4 222.5 278.1 9.47% 8.00% 10.00% United States Trust Company: Tier 1 leverage capital ............ 3.2 .5 .7 23.79% 4.00% 5.00% Tier 1 capital ..................... 3.2 .3 .5 37.32% 4.00% 6.00% Total (Tier 1 and Tier 2) capital .. 3.2 .7 .8 37.37% 8.00% 10.00%
The Company paid cash dividends to stockholders in the first half of the year in the amount of $5.1 million. On June 17, 1997, a regular quarterly dividend to stockholders was declared of $0.10 per share for a total of $2.8 million payable on July 25, 1997. The Company received cash dividends from subsidiaries during the first half of 1997 of $14.5 million. RECENT ACCOUNTING DEVELOPMENTS On June 30, 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS No. 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The standards are based on consistent application of a financial components approach that focuses on control. After a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement is effective for transactions occurring after December 31, 1996, and is to be applied prospectively. This Statement was adopted on January 1, 1997 and did not have a material impact on the Company's financial condition or results of operations. 19 20 On March 3, 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This Statement supersedes APB Opinion No. 15 regarding the presentation of earnings per share ("EPS") on the face of the income statement. Refer to Note 4 to the Notes to Consolidated Financial Statements for a further discussion. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The preceding Management's discussion contains certain forward-looking statements, including without limitation statements regarding the Year 2000 problem. Moreover, the Company may from time to time, in both written reports and oral statements by Company management, express its expectations regarding future performance of the Company. These forward-looking statements are inherently uncertain, and actual results may differ from Company expectations. The Company disclaims any obligation to announce publicly future events or developments which affect forward-looking statements. Risk factors that could impact current and future performance include but are not limited to: (i) changes in asset quality and resulting credit risk-related losses and expense; (ii) adverse changes in the economy of the New England region, the Company's primary market, which could accentuate credit-related losses and expenses; (iii) adverse changes in the local real estate market can also negatively affect credit risk since most of the Company's loans are concentrated in Eastern Massachusetts and a substantial portion of these loans have real estate as primary and secondary collateral; (iv) an increasingly competitive New England financial services marketplace, where a large number of bank acquisitions and mergers has resulted in fewer but much larger and financially stronger competitors which could alter Company expectations; (v) fluctuations in market rates and prices can negatively affect net interest margin, asset valuations and expense expectations; and (vi) changing regulatory requirements of federal and state agencies could materially impact future operations of the Company. 20 21 PART II. OTHER INFORMATION For the quarter ended June 30, 1997, Items 2, 3, and 5 of Part II are either inapplicable or would elicit a response of "None" and, therefore, no reference thereto has been made herein. ITEM 1. LEGAL PROCEEDINGS In the ordinary course of operations, the Company and its subsidiaries become defendants in a variety of judicial and administrative proceedings. In the opinion of management, however, there is no proceeding pending, or to the knowledge of management threatened, which, in the event of an adverse decision, would be likely to result in a material adverse change in the financial condition or results of operations of the Company and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Stockholders of the Company was held on May 20, 1997. (b) The election of each of the following eight Directors of the Company, each of whom will serve for a three-year term, was submitted to a vote of the Stockholders of the Company: David E. Bradbury Donald C. Dolben Robert M. Coard Francis X. Messina Domenic Colasacco James V. Sidell Alan K. DerKazarian G. Robert Tod The following votes were cast with respect to the election of Directors:
FOR WITHHOLD AUTHORITY ABSTAIN NONVOTING --- ------------------ ------- --------- David E. Bradbury 21,846,372 57,583 0 0 Robert M. Coard 20,070,633 1,833,321 0 0 Domenic Colasacco 21,845,557 58,398 0 0 Alan K. DerKazarian 21,831,690 72,265 0 0 Donald C. Dolben 21,845,902 58,053 0 0 Francis X. Messina 21,818,133 85,822 0 0 James V. Sidell 21,703,718 200,237 0 0 G. Robert Tod 21,592,250 311,704 0 0
The following is a list of the fifteen (15) additional Directors of the Company whose terms of office as Directors continued after the meeting: Chester G. Atkins Gerald M. Ridge Robert L. Culver William Schwartz Neal F. Finnegan Barbara C. Sidell Edward Guzovsky Paul D. Slater Wallace M. Haselton Edward J. Sullivan Brian W. Hotarek Michael J. Verrochi, Jr. Sydney L. Miller Gordon M. Weiner Vikki L. Pryor 21 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The Notice of Annual Meeting of Stockholders dated April 15, 1997 and related proxy card for the Annual Meeting of the Board of Directors of the Company to be held on May 20, 1997 was previously filed with the Securities and Exchange Commission on April 15, 1997 in hard copy and EDGAR electronic formats. (b) Reports on Form 8-K or 8-K/A None. In accordance with the requirements of the Securities Exchange Act of 1934, the Company has caused this report to be signed on its behalf by the undersigned duly authorized officers of the Company. Date: August 14, 1997 By: /s/ Neal F. Finnegan ------------------------------------ Neal F. Finnegan, President and Chief Executive Officer Date: August 14, 1997 By: /s/ James K. Hunt ------------------------------------ James K. Hunt, Executive Vice President, Treasurer, and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 22 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF UST CORP. AT OR FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF FORM 10-Q. 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1.00 136,146 58 105,142 0 700,431 0 0 2,562,601 50,155 3,620,054 2,815,310 438,130 35,332 28,504 0 0 17,794 284,984 3,620,054 107,126 23,406 2,071 132,603 40,421 51,847 80,756 0 (573) 83,224 15,938 15,938 0 0 8,606 .30 .30 8.07 26,275 826 0 37,100 50,204 2,836 2,487 50,155 50,155 0 8,441
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