-----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, Ioz+KvPE1js5ENueujdelXK8U3IYvENg5tA5QdX0AmrQArrbWPiQ+rFFSNPGcSUM s3trSD+sPk5FXJzz62kFrg== 0000950135-98-004801.txt : 19980817 0000950135-98-004801.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950135-98-004801 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: SEC FILE NUMBER: 000-09623 FILM NUMBER: 98690306 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 FORM 10-Q 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE #0-9623 ------------- UST CORP. (Exact Name of Registrant as Specified in its Charter) MASSACHUSETTS 04-2436093 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 40 COURT STREET BOSTON, MASSACHUSETTS 02108 (Address of principal executive offices) (Zip Code) (617) 726-7000 (Registrant's telephone number, including area code) NO CHANGE (Former name, former address and former fiscal year, if changed since last year.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No /_/ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. At July 31, 1998, there were 33,102,451 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, 1998 and December 31, 1997....................................................... 3 Consolidated Statements of Income -- Three and Six Months Ended June 30, 1998 and 1997................................... 4 Consolidated Statements of Changes in Stockholders' Investment -- Six Months Ended June 30, 1998 and 1997..................... 5 Consolidated Statements of Cash Flows -- Six Months Ended June 30, 1998 and 1997............................................... 6 Notes to Consolidated Financial Statements....................... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 12 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...................................................... 23 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings......................................... 24 ITEM 4. Submission of Matters to a Vote of Security Holders....... 24 ITEM 6. Exhibits and Reports on Form 8-K.......................... 26 SIGNATURES ........................................................ 26 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UST CORP. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1998 1997 ----------- ----------- (UNAUDITED) ASSETS Cash, due from banks and interest-bearing deposits ............................... $ 89,545 $ 95,702 Federal funds sold and other short-term investments .............................. 60,248 67,851 Securities available-for-sale: Mortgage-backed securities ..................................................... 518,256 490,691 U.S. Treasury and federal agencies and other securities ........................ 168,154 231,741 ----------- ----------- Total securities available-for-sale ................................... 686,410 722,432 Loans: Loans -- net of unearned discount of $33,373 in 1998 and $29,053 in 1997 (Note 2) ..................................................... 2,957,280 2,835,982 Reserve for possible loan losses (Note 2) ...................................... (52,816) (52,230) ----------- ----------- Total loans, net ...................................................... 2,904,464 2,783,752 Premises, furniture and equipment, net ........................................... 66,251 64,407 Intangible assets, net ........................................................... 54,194 57,807 Other property owned, net ........................................................ 1,577 1,334 Other assets ..................................................................... 52,669 44,973 ----------- ----------- Total assets .......................................................... $ 3,915,358 $ 3,838,258 =========== =========== LIABILITIES AND STOCKHOLDERS' INVESTMENT Deposits: Noninterest-bearing ........................................................... $ 699,798 $ 708,399 Interest-bearing: NOW ........................................................................ 49,347 43,116 Money market ............................................................... 687,539 660,641 Regular savings ............................................................ 725,106 675,087 Time: Certificates of deposit over $100 thousand ............................... 155,017 159,644 Other .................................................................... 675,089 731,328 ----------- ----------- Total deposits ........................................................ 2,991,896 2,978,215 Short-term borrowings ............................................................ 483,744 421,313 Other borrowings ................................................................. 26,694 49,338 Other liabilities ................................................................ 50,925 49,266 ----------- ----------- Total liabilities ..................................................... 3,553,259 3,498,132 Commitments and contingencies (Note 3) Stockholders' investment (Note 4): Preferred stock $1 par value; Authorized - 4,000,000 shares; Outstanding -- none Common stock $.625 par value; Authorized - 75,000,000 and 45,000,000 shares in 1998 and 1997, respectively Issued -- 29,896,928 and 29,762,224 shares in 1998 and 1997, respectively .... 18,686 18,601 Additional paid-in capital ..................................................... 120,272 117,236 Retained earnings .............................................................. 218,981 201,355 Accumulated other comprehensive income ......................................... 3,565 2,245 Deferred compensation and other ................................................ 595 689 ----------- ----------- Total stockholders' investment ........................................ 362,099 340,126 ----------- ----------- Total liabilities and stockholders' investment ........................ $ 3,915,358 $ 3,838,258 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 UST CORP. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Interest income: Interest and fees on loans .................................... $63,919 $ 57,344 $ 126,340 $112,559 Interest and dividends on securities: Taxable .................................................... 10,476 11,131 21,062 23,018 Nontaxable ................................................. 156 271 296 388 Interest on federal funds sold and other short-term investments 591 1,065 1,557 2,071 ------- -------- --------- ------- Total interest income .............................. 75,142 69,811 149,255 138,036 ------- -------- --------- ------- Interest expense: Interest on deposits .......................................... 20,304 20,301 40,847 40,438 Interest on borrowings ........................................ 6,734 6,947 12,677 13,795 ------- -------- --------- ------- Total interest expense ............................. 27,038 27,248 53,524 54,233 ------- -------- --------- ------- Net interest income ........................................... 48,104 42,563 95,731 83,803 Provision for possible loan losses (Note 2) ..................... 690 300 1,665 300 ------- -------- --------- ------- Net interest income after provision for possible loan losses .. 47,414 42,263 94,066 83,503 ------- -------- --------- ------- Noninterest income: Asset management fees ......................................... 3,850 3,188 7,579 6,345 Deposit account service charges ............................... 2,651 2,172 5,125 4,421 Corporate services income, net ................................ 1,522 1,384 2,998 2,759 Securities gains (losses), net ................................ 30 (584) 1,471 (573) Gain on sale of loans ......................................... 1,804 Other ......................................................... 1,996 2,314 4,198 4,646 ------- -------- --------- ------- Total noninterest income ........................... 10,049 8,474 21,371 19,402 ------- -------- --------- ------- Noninterest expense: Salary and employee benefits .................................. 19,163 18,740 38,441 37,121 Occupancy, net ................................................ 3,309 2,930 6,730 6,300 Equipment depreciation and maintenance ........................ 2,372 1,655 4,633 3,409 Intangible asset amortization ................................. 1,747 1,162 3,521 3,275 Data processing services ...................................... 1,701 1,512 3,081 2,716 Professional and consulting fees .............................. 1,308 1,548 2,276 2,574 Advertising and promotion ..................................... 1,240 1,177 2,413 2,353 Year 2000 readiness expense ................................... 845 1,339 Foreclosed asset and workout expense .......................... 136 179 272 321 Acquisition and merger-related expense ........................ 11 25 2,850 Restructuring charges ......................................... 11,751 Other ......................................................... 5,587 7,143 11,844 12,586 ------- -------- --------- ------- Total noninterest expense .......................... 37,419 36,046 74,575 85,256 ------- -------- --------- ------- Income before income taxes ...................................... 20,044 14,691 40,862 17,649 Income tax provision .......................................... 7,511 5,922 15,472 7,976 ------- -------- --------- ------- Net income ......................................... $12,533 $ 8,769 $ 25,390 $ 9,673 ======= ======== ========= ======= Per share data (Note 4): Basic earnings per share .................................... $ 0.42 $ 0.30 $ 0.85 $ 0.33 Diluted earnings per share .................................. $ 0.41 $ 0.29 $ 0.83 $ 0.32 Cash dividends declared per share ........................... $ 0.14 $ 0.10 $ 0.26 $ 0.20
The accompanying notes are an integral part of these consolidated financial statements. 4 5 UST CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (DOLLARS IN THOUSANDS) (UNAUDITED)
ACCUMULATED ADDITIONAL OTHER DEFERRED COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE COMPENSATION INCOME (LOSS) STOCK CAPITAL EARNINGS INCOME (LOSS) AND OTHER TOTAL ------------- ----- ------- -------- ------------- --------- ----- Balance December 31, 1996 .................. $ 18,328 $ 111,158 $ 181,645 $(2,576) $466 $309,021 Comprehensive income (Note 6): Net income ............................... $ 9,673 9,673 9,673 -------- Other comprehensive income: Unrealized securities losses, net of $521 tax benefit .................... (1,012) Less: Reclassification of securities losses included in net income, net of $238 tax benefit ............. (335) -------- Total other comprehensive income (loss) .................. (677) (677) (677) -------- Total comprehensive income ........ $ 8,996 ======== Cash dividends declared .................... (5,689) (5,689) Activity related to stock option, restricted stock and stock purchase plans ........... 204 4,966 5,170 Activity in Directors Deferred Compensation Program and other, net ...... (221) (221) -------- --------- --------- ------- ---- -------- Balance June 30, 1997 ...................... $ 18,532 $ 116,124 $ 185,629 $(3,253) $245 $317,277 ======== ========= ========= ======= ==== ======== Balance December 31, 1997 .................. $ 18,601 $ 117,236 $ 201,355 $ 2,245 $689 $340,126 Comprehensive income (Note 6): Net income ............................... $ 25,390 25,390 25,390 -------- Other comprehensive income: Unrealized securities gains, net of $1,577 tax expense .................. 2,181 Less: Reclassification of securities gains included in net income, net of $610 tax expense ............. 861 -------- Total other comprehensive income .. 1,320 1,320 1,320 -------- Total comprehensive income ........ $ 26,710 ======== Cash dividends declared .................... (7,764) (7,764) Activity related to stock option, restricted stock and stock purchase plans ........... 85 3,036 3,121 Activity in Directors Deferred Compensation Program and other, net ...... (94) (94) -------- --------- --------- ------- ---- -------- Balance June 30, 1998 ...................... $ 18,686 $ 120,272 $ 218,981 $ 3,565 $595 $362,099 ======== ========= ========= ======= ==== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 UST CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1998 1997 ---- ---- Cash flows from operating activities: Net income ...................................................................... $ 25,390 $ 9,673 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses ............................................ 1,665 300 Depreciation and amortization ................................................. 7,788 6,640 Accretion of securities discount, net ......................................... (625) (124) Securities gains (losses), net ................................................ (1,471) 573 Gain on sale of other property owned, net ..................................... (11) (99) Gain on sale of loans held-for-sale ........................................... (1,804) Writedowns of other property owned ............................................ 47 Writedowns of fixed assets .................................................... 670 1,255 Deferred income tax benefit ................................................... (1,765) Net change in other assets and other liabilities .............................. (4,305) (18,275) --------- --------- Net cash provided (used) by operating activities ......................... 27,336 (1,814) Cash flows from investing activities: Proceeds from sales of securities available-for-sale ............................ 147,507 175,177 Proceeds from maturities of securities available-for-sale ....................... 80,640 99,298 Purchases of securities available-for-sale ...................................... (187,743) (148,949) Net decrease in federal funds sold and other .................................... 7,603 37,759 Net increase in loans ........................................................... (126,035) (116,209) Proceeds from other property owned .............................................. 3,430 2,980 Proceeds from loans held-for-sale ............................................... 14,250 Proceeds from sale of fixed assets .............................................. 40 Purchases of premises and equipment ............................................. (6,729) (12,751) --------- --------- Net cash (used) provided by investing activities ......................... (81,287) 51,555 Cash flows from financing activities: Net increase (decrease) in nontime deposits ..................................... 74,547 (42,726) Net (decrease) increase in certificates of deposit .............................. (60,866) 2,224 Net increase (decrease) in short-term and other borrowings ...................... 39,787 (10,354) Cash dividends paid ............................................................. (7,148) (5,135) Issuance of common stock for cash, net .......................................... 1,474 2,202 --------- --------- Net cash provided (used) by financing activities ......................... 47,794 (53,789) --------- --------- Decrease in cash and cash equivalents ........................................... (6,157) (4,048) Cash and cash equivalents at beginning of year .................................. 95,702 140,263 --------- --------- Cash and cash equivalents at end of period ...................................... $ 89,545 $ 136,215 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest ...................................................................... $ 52,990 $ 49,089 ========= ========= Income taxes .................................................................. $ 26,472 $ 6,214 ========= ========= Noncash transactions: Transfers from securities held-to-maturity to available-for-sale ................ $ 145,564 ========= Transfers from loans to other property owned .................................... $ 5,635 $ 2,922 ========= ========= Common stock issuance ........................................................... $ 1,647 $ 1,048 ========= =========
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 applicable prior period amounts included in this Form 10-Q have been restated to reflect the October 1997 acquisition of Firestone Financial Corp. as a pooling of interests. Refer to Note 5 for a further discussion of acquisitions. The amounts shown reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial statements for the periods reported. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. Certain prior period amounts have been reclassified to reflect current reporting classifications. The results of operations for the three and six months ended June 30, 1998 and 1997 are not necessarily indicative of the results of operations for the full year or any other interim period. (2) RESERVE FOR POSSIBLE LOAN LOSSES Analysis of the reserve for possible loan losses for the six months ended June 30, 1998 and 1997 is as follows:
1998 1997 ------- ------- (DOLLARS IN THOUSANDS) Balance at beginning of period ........... $52,230 $51,984 Chargeoffs ............................... 5,540 2,887 Recoveries on loans previously charged-off 4,461 2,487 ------- ------- Net chargeoffs ........................... 1,079 400 Provision for possible loan losses ....... 1,665 300 ------- ------- Balance at end of period ................. $52,816 $51,884 ======= =======
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, 1998, the Company had the following off-balance sheet financial instruments whose contract amounts represent credit risk:
CONTRACT OR NOTIONAL AMOUNT --------------------------- (DOLLARS IN THOUSANDS) Commitments to extend credit .......... $958,000 Standby letters of credit and financial guarantees written ................. 77,000 Loans sold with recourse .............. 11,000 Commercial letters of credit .......... 7,000 Foreign exchange contracts ............ 5,000
(4) EARNINGS PER SHARE CALCULATION The Company computes earnings per share in accordance with SFAS No. 128. This Statement supersedes APB No. 15 regarding the presentation of earnings per share ("EPS") on the face of the income statement. SFAS No. 128 replaced the presentation of Primary EPS with a Basic EPS calculation that excludes the dilutive effect of common stock equivalents. The Statement requires a dual presentation of Basic and Diluted EPS, which is computed similarly to Fully Diluted EPS pursuant to APB No. 15, for all entities with complex capital structures. This Statement was effective for fiscal years ending after December 15, 1997 and requires restatement of all prior period EPS data presented, including quarterly information. The Company's common stock equivalents consist primarily of dilutive outstanding stock options computed under the treasury stock method. Basic and Diluted EPS computations for the three and six months ended June 30, 1998 and 1997 are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Basic earnings per share computation: Numerator: Net income .................................... $ 12,533 $ 8,769 $ 25,390 $ 9,673 Denominator: Weighted average shares outstanding ........... 29,879 29,612 29,840 29,528 Basic earnings per share ............................ $ 0.42 $ 0.30 $ 0.85 $ 0.33 Diluted earnings per share computation: Numerator: Net income .................................... $ 12,533 $ 8,769 $ 25,390 $ 9,673 Denominator: Weighted average shares outstanding ........... 29,879 29,612 29,840 29,528 Dilutive stock options ........................ 604 442 587 438 ----------- ----------- ----------- ----------- Weighted average diluted shares outstanding . 30,483 30,054 30,427 29,966 =========== =========== =========== =========== Diluted earnings per share .......................... $ 0.41 $ 0.29 $ 0.83 $ 0.32
8 9 UST CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) ACQUISITIONS Walden Bancorp, Inc. On January 3, 1997, the Company completed its acquisition of Walden Bancorp, Inc. ("Walden"), a $1.0 billion multi-bank holding company headquartered in Acton, Massachusetts. The transaction was accounted for as a pooling of interests and was structured as a tax-free exchange of 1.9 shares of the Company's common stock for each share of Walden common stock. The Company's outstanding stock increased by 10,125,540 shares to a total of 28,144,163 shares on the date of acquisition. Based on the closing price of the Company's stock as of January 3, 1997, the market value of the shares exchanged totaled $207 million. Walden's two subsidiary banks, The Braintree Savings Bank and The Co-operative Bank of Concord operated a total of seventeen branches located in the Massachusetts counties of Middlesex, Norfolk and Plymouth. The Co-operative Bank of Concord and The Braintree Savings Bank were merged into USTrust during the second quarter of 1997. In the first quarter of 1997 the Company recognized a nondeductible charge of $2.8 million in nonrecurring acquisition and merger-related expense and a pre-tax $11.8 million restructuring charge associated with the transaction. Firestone Financial Corp. On October 15, 1997, the Company completed its acquisition of Firestone Financial Corp. ("Firestone"), an $85 million small business equipment finance company headquartered in Newton, Massachusetts. The transaction was accounted for as a pooling of interests and was structured as a tax-free exchange of 0.59 shares of the Company's common stock for each share of Firestone common stock. The Company's outstanding stock increased by 1,180,000 to a total of 29,716,593 shares on the date of acquisition. Based on the closing price of the Company's stock as of October 15, 1997, the market value of the shares exchanged totaled $31 million. Firestone operates as a wholly-owned subsidiary of USTrust. Somerset Savings Bank Subsequent to June 30, 1998, on July 20, 1998, the Company completed its acquisition of Somerset Savings Bank ("Somerset"), a Massachusetts savings bank headquartered in Somerville. The transaction was accounted for as a pooling of interests and was structured as a tax-free exchange of 0.19 shares of the Company's common stock for each share of Somerset common stock. The Company's outstanding stock increased by 3,203,373 shares to a total of 33,100,551 shares on the date of acquisition. Based on the closing price of the Company's stock as of July 20, 1998, the market value of the shares exchanged totaled $88.9 million. Somerset operated six branches in Middlesex County. At the date of acquisition, Somerset was merged with and into USTrust, a subsidiary bank of the Company. At June 30, 1998, Somerset had total net loans and total assets of $403 million and $524 million, respectively, and total deposits and total stockholders' investment of $444 million and $40 million, respectively. 9 10 UST CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) ACQUISITIONS (CONT'D.) Affiliated Community Bancorp, Inc. Subsequent to June 30, 1998, on August 7, 1998, the Company completed its acquisition of Affiliated Community Bancorp, Inc. ("Affiliated"), a multi-bank holding company headquartered in Waltham, Massachusetts. The transaction was accounted for as a pooling of interests and was structured as a tax-free exchange of 1.41 shares of the Company's common stock for each share of Affiliated common stock. The Company's outstanding stock increased by 9,439,735 shares to a total of 42,542,386 shares on the date of acquisition. Based on the closing price of the Company's stock as of August 7, 1998, the market value of the shares exchanged was $225 million. Affiliated's three subsidiary banks, The Federal Savings Bank ("Federal"), Lexington Savings Bank ("Lexington") and Middlesex Bank & Trust Company ("Middlesex"), operate a total of thirteen branch offices in Middlesex County. It is expected that Federal and Lexington will be merged with and into USTrust during the fourth quarter. As contemplated by the agreement to the terms of which the Affiliated acquisition was consummated, Middlesex Bank & Trust Company, a $28 million bank was sold for $8.24 million to a private investor unaffiliated with the Company following the consummation of the Affiliated acquisition. At June 30, 1998, Affiliated had total net loans and total assets of $684 million and $1.123 billion, respectively, and total deposits and total stockholders' investment of $734 million and $119 million, respectively. The following unaudited pro forma condensed consolidated financial information as of June 30, 1998 and for the three and six months ended June 30, 1998 and 1997, has been prepared to give effect to the Somerset and Affiliated acquisitions using the pooling of interests method of accounting. The unaudited pro forma consolidated statements of income data have been derived from the unaudited statements of income of the Company, Somerset and Affiliated for the three and six months ended June 30, 1998 and 1997 as if these transactions were effective as of January 1 of each year. The unaudited pro forma balance sheet data have been derived from the unaudited pro forma consolidated balance sheets of the Company, Somerset and Affiliated as of June 30, 1998. Such unaudited pro forma consolidated financial information is not necessarily indicative of the results of operations or financial condition which would have actually been reported had the mergers of the Company with Somerset and Affiliated occurred on the assumed dates, nor is it necessarily indicative of the future results of operations or financial condition of the Company. The unaudited pro forma June 30, 1998 balance sheet data reflects an after-tax charge for estimated merger and reorganization expenses related to both acquisitions as of the date of this filing of $14.0 million ($19.5 million pre-tax), net of an estimated 40 percent tax benefit (after excluding $5.8 million of nondeductible expense); however, since these expenses are nonrecurring, they have not been reflected in the unaudited pro forma statements of income data. The pro forma statements of income data also do not give effect to any anticipated cost savings in connection with the combination. 10 11 Unaudited Pro Forma Condensed Consolidated Statements of Income Data:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net interest income ....................... $ 62,083 $56,351 $124,851 $111,076 Provision (credit) for possible loan losses (880) 850 221 1,350 Noninterest income ........................ 11,106 9,215 23,584 20,852 Noninterest expense ....................... 47,210 44,221 92,836 98,440 Net income ................................ 17,450 13,419 36,184 18,248 Basic earnings per share .................. $ 0.41 $ 0.32 $ 0.86 $ 0.43 Diluted earnings per share ................ $ 0.40 $ 0.31 $ 0.84 $ 0.43
Unaudited Pro Forma Condensed Consolidated Balance Sheet Data:
JUNE 30, 1998 ------------- (DOLLARS IN THOUSANDS) Total loans, net of reserve for possible loan losses $3,991,728 Total assets ....................................... 5,562,487 Total deposits ..................................... 4,169,926 Total stockholders' investment ..................... 507,667
(6) COMPREHENSIVE INCOME On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which requires companies to report all changes in stockholders' investment during a period, except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. The Company has chosen, as allowed by SFAS No. 130, to disclose Comprehensive Income, which encompasses net income and unrealized gains or losses on securities available-for-sale, in the Consolidated Statements of Changes in Stockholders' Investment. Prior years have been restated to conform to SFAS No. 130 requirements. The impact of this Statement for the six months ended June 30, 1997 was to reduce reported net income of $9.7 million to a total comprehensive net income of $9.0 million. The impact for the six months ended June 30, 1998 was to increase reported income of $25.4 million to a total comprehensive net income of $26.7 million. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements, notes, and tables included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. The discussion contains certain forward-looking statements regarding the future performance of the Company. All forward-looking information is inherently uncertain and actual results may differ materially from the assumptions, estimates or expectations reflected or contained in the forward-looking information. Please refer to "Cautionary Statement Regarding Forward-looking Information" of this Form 10-Q for a further discussion. All applicable prior period financial data included in this discussion has been restated to reflect the 1997 acquisition of Firestone Financial Corp. ("Firestone") as a pooling of interests. HIGHLIGHTS Net income for the quarter ended June 30, 1998 was $12.5 million, or $0.41 per diluted share, compared with $8.8 million, or $0.29 per diluted share, for the same period last year. The earnings improvement was mainly the result of higher net interest income from earning asset growth and favorable changes in asset and liability mix. Noninterest income also reflected growth in fee-based services such as asset management, deposit account services and corporate services income. Excluding nonrecurring items, quarterly earnings results during the past two years of acquisition activity have continued to improve. This favorable earnings trend is reflective of the synergies and operating efficiencies of the acquisitions, improvement in net interest income and growth in fee-based noninterest income. For the six months ended June 30, 1998, net income was $25.4 million, or $0.83 per diluted share, compared with $9.7 million, or $0.32 per diluted share for the first half of 1997. Results for the 1997 period included a nonrecurring charge of $2.8 million for certain nondeductible, merger-related expenses and pre-tax charges of $11.8 million for restructuring expenses associated with the acquisition of Walden Bancorp Inc. ("Walden") in January of 1997. The increase in earnings this quarter was favorably reflected in return on average equity and return on average assets, which improved to 14.12 percent and 1.30 percent, respectively, from 11.24 percent and .97 percent, respectively, last year. NET INTEREST INCOME ANALYSIS Net interest income on a fully taxable equivalent basis was $48.2 million for the quarter ended June 30, 1998, compared with $42.8 million for the same period a year ago. For the first six months of 1998, net interest income was $96.0 million compared with $84.2 million last year. The increase in net interest income in both comparisons was due to the combination of, earning asset growth, favorable changes in earning asset and deposit mix, noninterest and low cost deposit growth and lower borrowing costs. Average loans increased over 12 percent in both the three- and six-month periods, or $327 million and $313 million, respectively, from the same periods last year to $2.927 billion and $2.868 billion, respectively. As exhibited in the table below, loan growth was the largest contributor to the improvement in net interest income, a $7.2 million volume-related interest income increase for the quarter and $13.8 million for the six months ended June 30. Lower-yielding assets, such as securities, decreased $63 million and $88 million for the three- and six-month periods, respectively, and Federal Funds sold decreased $44 million and $26 million for the same periods. Low-cost savings deposits, including regular savings, NOW and money market increased $35 million and $22 million from the three- and six-month periods last year while higher-cost certificates of deposit decreased $68 million and $47 million, respectively. Noninterest-bearing deposits increased $191 million and $169 million from the three- and six-month periods last year. The effect on net interest income from these favorable changes in volume of interest-earning assets and interest-bearing liabilities was an increase of $5.9 million and $11.5 million for the three and six months ended June 30, 1998 compared with the same periods last year. 12 13 Yield on earning assets increased 8 basis points to 8.30 percent for the three months ended June 30 and 16 basis points to 8.37 percent for the six-month period due to the improvement in yields on securities from a portfolio restructuring and sale of lower-yielding securities in the latter half of 1997, and reflects the effect of an increase in loans, which are higher yielding, in the asset mix. The cost of interest-bearing liabilities remained at last year's levels as the effect of increased savings deposit rates of 17 basis points and a smaller increase in certificates of deposit rates in both comparisons was offset with lower borrowing costs. Borrowing costs declined approximately 35 basis points from last year in both the three- and six-month periods ended June 30 due to the maturity and pay down of higher cost, longer-term borrowings replaced with lower cost, short-term maturity borrowings. Cost of interest-bearing liabilities was 3.88 percent for the three months and 3.91 percent for the six months ended June 30, 1998. The net effect of rate changes on net interest income for the three and six months ended June 30, 1998, compared with the same periods last year, was a decrease of $454 thousand and an increase of $274 thousand, respectively. As a result of the favorable changes in earning asset mix, yield on securities improvement and more favorable deposit mix, the interest rate margin and spread improved from 5.02 percent and 4.33 percent for the three-month period last year to 5.32 percent and 4.42 percent, respectively, this year and from 4.99 percent and 4.30 percent for the six-month period last year to 5.38 percent and 4.46 percent this year, respectively. 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-month periods ended June 30, 1998 when compared with the three and six months ended June 30, 1997. Changes attributable to both rate and volume are allocated on a weighted basis.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH 1997 1998 COMPARED WITH 1997 INCREASE (DECREASE) DUE TO CHANGE IN: INCREASE (DECREASE) DUE TO CHANGE IN: ------------------------------------- ------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE VOLUME RATE TOTAL VOLUME RATE TOTAL ------- ------- ------- ------- ------- -------- (DOLLARS IN THOUSANDS) Interest income: Interest and fees on loans* .............. $ 7,156 $(612) $ 6,544 $ 13,795 $ (79) $ 13,716 Interest and dividends on securities: Taxable ............................ (947) 292 (655) (2,792) 836 (1,956) Nontaxable* ........................ (50) (134) (184) 54 (214) (160) Interest on federal funds sold and other . (698) 224 (474) (777) 263 (514) ------- ----- ------- -------- ------- -------- Total interest income* ............. 5,461 (230) 5,231 10,280 806 11,086 ------- ----- ------- -------- ------- -------- Interest expense: Interest on regular savings, NOW and money market deposits .................. 214 599 813 263 1,174 1,437 Interest on time deposits ................ (898) 88 (810) (1,263) 235 (1,028) Interest on borrowings ................... 250 (463) (213) (241) (877) (1,118) ------- ----- ------- -------- ------- -------- Total interest expense ............. (434) 224 (210) (1,241) 532 (709) ------- ----- ------- -------- ------- -------- Net interest income ........................ $ 5,895 $(454) $ 5,441 $ 11,521 $ 274 $ 11,795 ======= ===== ======= ======== ======= ========
- ------------- * Fully taxable equivalent at the federal income tax rate of 35 percent, and includes applicable state taxes, net of federal benefit. The tax equivalent adjustments were $66 and $135 thousand on loans and $67 and $127 thousand on nontaxable and preferential rate taxable securities for the three and six months ended June 30, 1998, respectively. 13 14 NONINTEREST INCOME Total noninterest income increased $1.6 million and $2.0 million for the three- and six-month periods ended June 30, 1998, respectively. The improvement was led by increases of $662 thousand and $1.2 million in asset management fees, the largest component of noninterest income, for the three- and six-month periods, respectively. The increases in asset management fees were the result of growth of 16 percent or approximately $480 million in trust and money management balances from a year ago to $3.4 billion at June 30, 1998. Deposit account service charges increased $479 thousand and $704 thousand for the same periods, respectively, consistent with the growth in noninterest-bearing and savings deposit balances. The 1997 periods reflect realized securities losses of $584 thousand and $573 thousand, respectively, for the three- and six-month periods ended June 30 due to the portfolio restructuring. Realized securities gains this year were nominal in the second quarter, while year-to-date net realized gains totaled $1.5 million due to the sale of equity investments held by a venture capital subsidiary. The first six months of 1997 also reflects a $1.8 million gain on sale of loans. The decreases in other noninterest income in both comparisons reflects lower residual income on terminated equipment leases. NONINTEREST EXPENSE Total noninterest expense was $37.4 million, $1.4 million higher than the second quarter last year. The increase reflects $845 thousand of expenses related to the Company's Year 2000 readiness efforts, $717 thousand increase in equipment depreciation and maintenance reflective of the Company's investment in computer hardware and software, a $379 thousand increase in occupancy due mostly to the addition of new branches, and a $423 thousand increase in personnel costs. Amortization of intangible asset expense increased $585 thousand from last year due to a 1997 expense adjustment related to the re-allocation of purchase price of assets assumed in the late 1996 acquisition of twenty banking branches from Bank of Boston Corporation. Partially offsetting these increases was a $1.5 million decrease in other noninterest expense due mostly to a $1.2 million settlement of litigation expense in 1997 and lower checkbook charges in 1998 compared with last year which included charges for free replacements for acquired Bank of Boston customers. For the six months ended June 30, 1998, total noninterest expense was $74.6 million, $10.7 million lower than the same period last year. Included in 1997 were the Walden acquisition and merger-related expenses of $2.9 million and restructuring charges of $11.8 million. Other noninterest expense was lower than last year due to the aforementioned settlement of litigation expense in 1997 and lower checkbook charges this year. Partially offsetting these expense decreases was a $1.3 million increase in personnel cost, $1.2 million increase in equipment depreciation and maintenance related to investment in technology and $1.3 million in Year 2000 readiness expense. 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 systems and certain systems of its customers, vendors and other parties that service or otherwise interact with the Company. The Year 2000 problem, which is common to most corporations, concerns the inability of 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 information and noninformation systems and applications have been completed and all third-party vendors who provided applications to the Company have been contacted. Efforts to bring the major operating systems, and certain outsourced applications, into compliance with Year 2000 requirements have or will be accomplished primarily through the installation of updated or replacement programs developed by third parties. In addition, the status of all Company facilities and all significant third party providers of goods and services to the Company has been assessed. Starting in March 1998, the Company retained the services of Arthur Andersen LLP, Atlantic Data Services, Inc. and certain additional outside advisors and programmers to augment the Company's efforts in addressing its Year 2000 compliance. Arthur Andersen's efforts have been focused upon assisting the Company in project management and progress assessment. 14 15 Bank regulatory agencies have issued guidance as to the standards they will use when assessing Year 2000 readiness. The failure of a financial institution, such as the Company, to take appropriate steps to address deficiencies in their Year 2000 project management process may result in regulatory enforcement actions which could have a material adverse effect on 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's Year 2000 Readiness Program contains a number of discrete segments, including Awareness and Assessment, Project Planning, Remediation, Unit Test Plans, Unit Testing, Commercial (including evaluation and monitoring stages), Retail, Contingency Plans for Information Systems and Contingency Plans for Business Continuation. Awareness and Assessment, Project Planning for all aspects and Unit Test Plans for mission critical technology systems have been completed. Mission critical systems are defined by the Company as those vital to the successful continuance of core business activities. Test Plans for noncritical applications are in process of development and are expected to be completed during the second half of 1998. The Remediation phase, wherein software and hardware are either modified or replaced, is well underway and presently scheduled to be substantially completed by year-end 1998 for mission critical applications and early 1999 for nonmission critical applications. Mission critical systems testing is targeted to be substantially complete by December 31, 1998 and nonmission critical systems are expected to be completely tested by the end of the first quarter of 1999. To assure the completion of testing for nonmission critical applications, the Company has recently engaged the services of an additional third-party vendor. The Commercial phase, which includes the evaluation of credit risk stemming from problems borrowers may have in resolving their own Year 2000 issues, is in process and monitoring of the remediation efforts of high risk customers will be ongoing. During the monitoring stage the Company will implement a course of action and procedures designed to reduce any increased potential credit risk as a result of borrowers' Year 2000 issues. Also encompassed in this phase is the in-process evaluation, assessment and monitoring of the state of readiness of the Company's funds providers and the capital markets. The Retail phase is largely focused on customer communications as to the state of the Company's Year 2000 readiness. This effort has begun and is ongoing. Contingency Planning (other than business continuation planning) for all technology systems has been completed. The process of updating the Company's existing Business Continuation Plan to address Year 2000 issues began July 1 and will establish reasonably likely worst case scenerios. Utilizing the resources of the Company's existing Disaster Recovery consultant, all Business Continuation Plans will address Year 2000 issues. The Company believes that it will be able to modify or replace any affected systems in time to minimize any detrimental effects on the Company's operations. In a 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. At June 30, 1998 Year 2000 readiness expense totaled $1.3 million, all of which was recorded during the first half of 1998. Although total costs for the entire project have yet to be determined, the Company expects to incur, as current operating expense (including the above $1.3 million), costs in the range of $3 million to $4 million to assure Year 2000 readiness. Capital expenditures for new equipment and software purchases are expected to total an additional $1 million. This estimate does not include the cost of a number of system installations previously planned by the Company in the normal course of business. Costs of the Year 2000 project are based on current estimates and actual results could vary significantly from such estimates. If the Company's Year 2000 Readiness Program were unsuccessful, it would have a material adverse effect on its future operating results and the financial condition of the Company. Accordingly, the Company's Board of Directors is actively involved in monitoring management's efforts to address Year 2000 readiness and has instructed management to allocate appropriate resources to address these matters. Ultimately, an estimation of the efforts of the Company in addressing the Year 2000 issue in a successful and timely manner depends to a large extent not only on the corrective measures that the Company undertakes, but also on the efforts undertaken by businesses and other independent entities who provide data to, or receive data from, the Company as borrowers, vendors or customers. In particular, the Company's credit risk associated with its borrowers may increase as a result of problems such borrowers may have in resolving their own Year 2000 issues. Because the Company has not yet completed its evaluation, it is not possible to quantify the magnitude of any potential increased credit risk at this time. The impact of the Year 2000 problem on borrowers, however, could result in increases in problem loans and credit losses in future years. 15 16 INCOME TAXES The Company recorded income taxes of $7.5 million compared with $5.9 million for the same quarter last year, an increase of $1.6 million, consistent with the higher level of pre-tax income this year. The effective tax rate for the quarter was 37 percent compared with 40 percent last year. The decrease in effective rate was attributable to the formation of a wholly-owned real estate investment trust ("REIT") subsidiary earlier this year. The REIT holds a substantial portion of the Company's commercial real estate loan portfolio, which was originated by and transferred from USTrust. Income earned by a REIT is taxed at a lower state tax rate than a bank. Included in other assets as of June 30, 1998 was a deferred tax asset of approximately $15.9 million. The Company believes that it is more likely than not that the benefit of this deferred asset will be realized in future periods. ASSETS Total assets at June 30, 1998 were $3.915 billion, an increase of $77 million since the beginning of the year. Loan growth of $121 million to $2.957 billion was partially offset by a $36 million decrease in securities and a lower balance of cash and federal funds sold. The following table presents the composition of the loan portfolio:
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30, 1998 1998 1997 1997 ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Commercial and financial ............ $1,083,357 $1,077,033 $1,023,783 $ 939,217 Commercial real estate: Construction ...................... 41,726 39,773 41,834 47,392 Developer, investor and land ...... 244,796 226,057 236,263 283,481 Commercial lease financing .......... 65,366 58,965 56,260 54,007 Consumer: Residential mortgage .............. 571,588 632,780 697,874 772,157 Home equity ....................... 101,023 106,433 111,151 111,692 Indirect automobile installment ... 753,362 676,999 605,486 401,154 Other consumer .................... 33,943 34,327 37,048 40,051 Indirect automobile lease financing 62,119 40,822 26,283 275 ---------- ---------- ---------- ---------- Total loans ................. $2,957,280 $2,893,189 $2,835,982 $2,649,426 ========== ========== ========== ==========
The Company's commercial loan portfolios listed above totaled $1.370 billion at June 30, 1998, reflecting a net increase of $70 million since year end and $100 million from a year ago. The increase in commercial loans was the result of the purchase of an $80 million commercial loan portfolio during the first quarter and continued growth within the commercial loan portfolio. Residential loans decreased $126 million during the first six months to $572 million due to high levels of prepayment and normal amortization. The currently low interest rate environment has accelerated the prepayment rates in this portfolio and is expected to continue in the near term. The indirect automobile loan portfolio grew 24 percent, or $148 million, in the first six months of this year to $753 million. In comparison with a year ago, the portfolio grew 88 percent, or $352 million, due to the exiting of some larger competitors from the market during the latter half of 1997. Management expects growth in this portfolio to be at a more moderate pace as competition has recently intensified. These loans are subjected to the Company's credit quality standards and are not what is referred to in the industry as "subprime" automobile loans. 16 17 In 1997, the Company made available indirect automobile lease financing through existing client automobile dealers. This portfolio totaled $62 million at June 30, 1998, reflecting an increase of 136 percent, or $36 million, since year end. 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, 1998, liquidity, which includes excess cash, funds sold and unpledged securities, totaled approximately $363 million, or 9 percent of total assets. The funds needed to support the Company's loan and securities portfolios are provided through a combination of commercial and retail deposits and short-term and other borrowings. Total deposits increased $14 million since year-end 1997 to $2.992 billion. Noninterest-bearing deposits decreased $9 million. Savings deposits increased $83 million while certificates of deposit decreased $61 million. Short-term and other borrowings, which consist principally of securities sold under agreement to repurchase and borrowings from the Federal Home Loan Bank, increased $40 million to $510 million. As shown in the Consolidated Statements of Cash Flows, cash and cash equivalents decreased $6 million during the six-month period ended June 30, 1998. Cash provided by operations resulted largely from net income earned during the period. Cash used by investing activities was due to net new loan fundings partially offset with an excess of securities sales and maturities over securities purchases. Net cash provided by financing activities was primarily due to a shift in the deposit mix from certificates of deposit to nontime deposits and increased short-term and other borrowings. At June 30, 1998, the parent Company had $6 million in cash and $4 million in repurchase agreements consistent with year-end as cash dividends paid to stockholders approximated dividends received from subsidiaries during the year. INTEREST RATE RISK Volatility in interest rates requires the Company to manage interest rate risk which arises from differences in the timing of repricing of assets and liabilities. Management monitors and adjusts the difference between interest-sensitive assets and interest-sensitive liabilities ("GAP" position) within various time frames. Within GAP limits established by the Board of Directors, the Company seeks to balance the objective of insulating the net interest margin from rate exposure with that of taking advantage of anticipated changes in rates in order to enhance income. The Company's policy is to limit its one-year cumulative GAP position to 2.5 times equity, presently equal to approximately 23 percent of total assets. The Company manages its interest rate GAP primarily by lengthening or shortening the maturity structure of its securities portfolio. 17 18 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, 1998. The majority of loans are included in 0-30 days as they reprice in response to changes in the interest rate environment. Interest-bearing deposits are classified according to their expected interest rate sensitivity. Actual sensitivity of these deposits is reviewed periodically and adjustments are made in the Company's GAP analysis that management deems appropriate. Securities and noninterest-bearing deposits are categorized according to their expected lives based on published industry prepayment estimates in the case of securities and current management estimates for noninterest-bearing deposits. Securities are evaluated in conjunction with the Company's asset/liability management strategy and may be purchased or sold in response to expected or actual changes in interest rates, credit risk, prepayment risk, loan growth and similar factors. The reserve for possible loan losses is included in the "Over 1 Year" category of loans. At June 30, 1998, the one-year cumulative GAP position was positive at $21 million, or approximately 1 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 .................... $ 968 $ 163 $490 $ 1,283 $2,904 Federal funds sold and other ............. 60 60 Securities ............................... 27 53 108 498 686 Other assets ............................. 265 265 ------- ----- ---- ------- ------ Total assets ...................... $ 1,055 $ 216 $598 $ 2,046 $3,915 ------- ----- ---- ------- ====== Interest-bearing deposits ................ $ 581 $ 146 $443 $ 1,122 $2,292 Borrowed funds ........................... 494 8 8 510 Noninterest-bearing deposits ............. 160 540 700 Other liabilities and stockholders' equity 16 397 413 ------- ----- ---- ------- ------ Total liabilities and equity ...... $ 1,251 $ 146 $451 $ 2,067 $3,915 ------- ----- ---- ------- ====== GAP for period ........................... $ (196) $ 70 $147 $ (21) ======= ----- ---- ------- Cumulative GAP ........................... $(126) $ 21 $ 0 ===== ==== ======= As a percent of total assets ............. (5.01%) (3.22%) 0.54%
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES At June 30, 1998, substandard loans were $21.4 million compared with $36.0 million at December 31, 1997. Loans reported as substandard include loans classified as Substandard or Doubtful as determined by the Company in its internal credit risk rating profile. Under the Company's definition, Substandard loans, which include nonaccruals, are characterized by the distinct possibility that some loss will be sustained if the credit deficiencies are not corrected. The Substandard classification, however, does not necessarily imply ultimate loss for each individual loan so classified. Loans classified as Doubtful have all the weaknesses inherent in Substandard loans with the added characteristic that the weaknesses make collection of 100 percent of the assets questionable and improbable. 18 19 At June 30, 1998, approximately 58 percent of loans classified as Substandard or Doubtful were collateralized by real estate, and the remainder were collateralized by accounts receivable, inventory, equipment and other business assets. Of the loans secured by real estate, approximately 27 percent were collateralized by owner-occupied commercial properties, approximately 64 percent were collateralized by commercial real estate, and approximately 7 percent by residential real estate. The remaining loans were collateralized by real estate under construction and raw land. The following table displays the Company's total nonperforming assets and measures performance regarding certain key indicators of asset quality:
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30, 1998 1998 1997 1997 --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Nonperforming assets: Nonaccrual loans ............................. $ 19,857 $ 24,640 $ 25,518 $ 27,037 Accruing loans 90 days or more past due ...... 1,252 1,192 1,069 989 Other property owned (OPO), net* ............. 1,577 1,370 1,334 880 --------- --------- --------- --------- Total nonperforming assets ...................... $ 22,686 $ 27,202 $ 27,921 $ 28,906 ========= ========= ========= ========= Reserve for possible loan losses ................ $ 52,816 $ 54,060 $ 52,230 $ 51,884 Net chargeoffs (recoveries) for the quarter ..... 1,934 (855) 654 351 OPO reserve ..................................... 154 154 623 367 Ratios: Reserve to nonaccrual loans .................. 266.0% 219.4% 204.7% 191.9% Reserve to total of nonaccrual loans, accruing loans 90 days or more past due, and restructured loans ......................... 250.2% 209.3% 196.4% 185.1% Reserve to period-end loans .................. 1.8% 1.9% 1.8% 2.0% Nonaccrual loans and accruing loans over 90 days past due to period-end loans ....... 0.7% 0.9% 0.9% 1.1% Nonperforming assets to period-end loans and OPO .............................. 0.8% 0.9% 1.0% 1.1% Annualized net (recoveries) chargeoffs to average loans ........................... 0.3% (0.1%) 0.1% 0.1% OPO reserve to OPO ........................... 8.9% 10.1% 31.8% 29.4%
------------ * Included in other property owned ("OPO") are other real estate, automobiles and equipment acquired through foreclosure or in settlement of loans. As shown in the table above, total nonperforming assets were $22.7 million, a $5.2 million decrease from the $27.9 million at year end. Nonaccrual loans remain at a level appropriate to the size of the loan portfolio, while other nonperforming assets remain at low levels. The net chargeoffs of $1.1 million and provision for possible loan losses this year of $1.7 million resulted in a reserve which increased to $52.8 million. The reserve to nonaccrual loan ratio increased to 266 percent while reserve to total loans remained consistent with the year-end level. 19 20 The Company's consumer loan delinquency rates (greater than 30 days past due including nonaccruals) continue to remain at favorable levels. The delinquency rate for the indirect automobile loans, the largest component of the Company's consumer loan portfolio excluding residential mortgage loans, was 2.78 percent at June 30, 1998 favorably lower than the 3.20 percent at December 31, 1997. The Company anticipates that the current high growth rate experience in the indirect automobile loan portfolio will subside in future periods as well as experience seasonal fluctuations. This factor, combined with the eventual maturity of the existing portfolio, may result in an increase in the delinquency rate and subsequent level of chargeoffs in future periods. At June 30, 1998, total impaired loans were $10.9 million, comprised of $787 thousand that required a reserve for possible loan losses of $410 thousand and $10.1 million that did not require a related reserve. Impaired loans, as defined in Statement of Financial Accounting Standards No. 114 ("SFAS No. 114") are commercial and commercial real estate loans recognized by the Company as nonaccrual and restructured. The Company maintains a reserve for possible loan losses to absorb future chargeoffs of loans and leases in the existing portfolio. The reserve is increased when a loan loss provision is recorded in the income statement. When a loan, or portion thereof, is considered uncollectible, it is charged against the reserve. Recoveries on amounts previously charged off are added to the reserve when collected. Adequacy of the reserve for possible loan losses is evaluated on a monthly basis using a consistent, systematic methodology which analyzes the size and risk of the loan and lease portfolio. Factors in this analysis include historical loss experience and asset quality, as reflected by delinquency trends, nonaccrual and restructured loans and the Company's credit risk rating profile. Consideration is also given to the current and expected economic conditions and, in particular, how such conditions affect the types of credits in the portfolio and the market area in general. This analysis is documented using a combination of numerical and qualitative analysis and includes sensitivity testing and a written conclusion. No portion of the reserve is restricted to any loan or group of loans, and the entire reserve is available to absorb future realized losses. The amount and timing of realized losses and future reserve allocations may vary from current estimates. An allocation of the reserve for possible loan losses to each category of loans is presented below:
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30, 1998 1998 1997 1997 -------- --------- ------------ -------- Reserve for possible loan losses allocation to loans outstanding: Commercial and financial ............... $17,121 $19,652 $19,449 $18,666 Commercial real estate: Construction ........................ 582 614 747 897 Developer, investor and land ........ 3,417 2,452 3,057 4,241 Commercial lease financing ............. 1,202 1,138 974 690 Consumer* .............................. 21,089 20,949 20,745 18,626 Unallocated ............................ 9,405 9,255 7,258 8,764 ------- ------- ------- ------- Total loan loss reserve ............. $52,816 $54,060 $52,230 $51,884 ======= ======= ======= =======
- ------------- * Consumer loans include indirect automobile installment loans and leases, residential mortgages, home equity lines of credit, credit cards, check credit and other consumer loans. The reserve for possible loan losses was $52.8 million at June 30, 1998, an increase of $586 thousand since December 1997 and an increase of $932 thousand from June 1997. The unallocated portion of the reserve was 18 percent at June 30, 1998 compared with 14 percent at year end reflecting the reduction in reserve allocated to the commercial loan portfolios consistent with the improvement in asset quality. A 13 percent increase in reserve for consumer loans from a year ago was consistent with the strong growth in the consumer indirect automobile portfolio. 20 21 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, 1998, that the Company and its subsidiary banks meet all of their respective capital adequacy requirements. The actual capital amounts and ratios of the Company and its banking subsidiaries as of June 30, 1998 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 ......... $304.5 $151.8 * 8.02% 4.00% * Tier 1 capital .................. 304.5 133.5 * 9.12% 4.00% * Total (Tier 1 and Tier 2) capital 346.2 266.1 * 10.41% 8.00% * USTrust: Tier 1 leverage capital ......... 284.5 151.1 $188.9 7.53% 4.00% 5.00% Tier 1 capital .................. 284.5 132.9 199.4 8.56% 4.00% 6.00% Total (Tier 1 and Tier 2) capital 326.0 264.9 331.2 9.85% 8.00% 10.00% United States Trust Company: Tier 1 leverage capital ......... 4.8 0.9 1.1 21.75% 4.00% 5.00% Tier 1 capital .................. 4.8 0.5 0.7 40.51% 4.00% 6.00% Total (Tier 1 and Tier 2) capital 4.9 1.0 1.2 40.58% 8.00% 10.00%
- -------------- * Not applicable On June 16, 1998, a regular quarterly dividend to stockholders was declared of $0.14 per share for a total of $4.2 million payable on July 24, 1998. This quarter's dividend was an increase of 17 percent, or $0.02, over the first quarter of this year and $0.04 higher than the same quarter last year. For the first six months of this year dividends declared totaled $7.8 million, or $0.26 per share compared with $5.7 million, or $0.20 per share for the same period last year. 21 22 RECENT ACCOUNTING DEVELOPMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." Refer to Note 6 to the Notes to Consolidated Financial Statements for a further discussion. In June 1997, FASB also issued Statement of Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information." This Statement changes the way public companies report segment information in annual financial statements and requires public companies to report selected segment information in interim financial reports to shareholders. Under the Statement's "management approach," public companies are to report financial and descriptive information about their operating segments. Operating segments are components of an enterprise for which separate financial information is produced internally and are subject to evaluation by the chief operating decision maker in deciding how to allocate resources to segments and assess segment performance. This Statement is effective for fiscal years beginning after December 15, 1997; however, it is not required to be applied for interim reporting in the initial year of application. These disclosure requirements will have no material impact on the Company's financial position or results of operations. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement does not change the recognition or measurement associated with pension or postretirement plans. It standardizes certain disclosures, requires additional information about changes in the benefit obligations and about change in the fair value of plan assets to facilitate analysis, and it eliminates certain disclosures that were not deemed useful. This Statement is effective for financial statements issued for periods beginning after December 15, 1997. These disclosure requirements will have no material impact on the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments and hedging activities. The Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not expect that the adoption of this Statement will have a material impact on the Company's financial position or results of operations. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The preceding Management's discussion and Notes to Consolidated Financial Statements of this Form 10-Q contain certain forward-looking statements, including without limitation statements regarding (i) rates of loan growth and amortization; (ii) the rate of delinquencies and amounts of chargeoffs; (iii) the level of reserve for possible loan losses; (iv) the amount and timing of acquisition and restructuring charges related to the Somerset and Affiliated transactions; (v) the Company's ability to minimize any detrimental effects of the Year 2000 problem and associated expense; and (vi) utilization of deferred tax assets. Moreover, the Company may from time to time, in both written reports and oral statements by Company management, express its expectations regarding future performance of the Company and estimates of the effects of its acquisition activities. These forward-looking statements are inherently uncertain, and actual results may differ from Company expectations. Risk factors that could impact current and future performance include but are not limited to: (i) adverse changes in asset quality and resulting credit risk-related losses and expenses; (ii) adverse changes in the economy of the New England region, the Company's primary market, which could further accentuate credit-related losses and expenses; (iii) adverse changes in the local real estate market can also negatively affect credit risk as most of the Company's loans are concentrated in Eastern Massachusetts and a substantial portion of these loans have real estate as primary and secondary collateral; (iv) the consequences of continued bank acquisitions and mergers in the Company's market, resulting in fewer but much larger and financially stronger competitors which could increase competition for financial services to the Company's detriment; (v) fluctuations in market rates and prices can negatively affect net interest margin, asset valuations and expense expectations; and (vi) changes in the regulatory requirements of federal and state agencies applicable to bank holding companies and banks, such as the Company and its Subsidiary Banks, which could have a materially adverse effect on the Company's future operating results. 22 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There have been no material changes in market risk exposures that affect the quantitative or qualitative disclosures presented in the Company's annual report on Form 10-K for the year ended December 31, 1997. 23 24 PART II. OTHER INFORMATION For the quarter ended June 30, 1998, Items 2, 3 and 5 are either inapplicable or would elicit a response of "None" and, therefore, no reference thereto has been made herein. ITEM 1. LEGAL PROCEEDINGS. In the ordinary course of operations, the Company and its subsidiaries become defendants in a variety of judicial and administrative proceedings. In the opinion of management, however, there is no proceeding pending, or to the knowledge of management threatened, which, in the event of an adverse decision, would be likely to result in a material adverse change in the financial condition or results of operations of the Company and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Annual Meeting of Stockholders The Annual Meeting of Stockholders of the Company was held on May 19, 1998, at which time the election of each of the following six Directors of the Company, each of whom will serve for a three-year term with the exception of Sydney L. Miller (who, in accordance with the Company's mandatory retirement policy for Directors, will serve until December 8, 1999, the date of his 70th birthday) was submitted to a vote of the Stockholders of the Company: Chester G. Atkins Sydney L. Miller Robert L. Culver Barbara C. Sidell Neal F. Finnegan Paul D. Slater The following votes were cast with respect to the election of Directors:
Withhold For Authority Abstain Nonvoting --- --------- ------- --------- Chester G. Atkins 22,550,444 89,128 0 0 Robert L. Culver 22,559,055 80,517 0 0 Neal F. Finnegan 22,558,099 81,473 0 0 Sydney L. Miller 22,515,119 124,453 0 0 Barbara C. Sidell 22,454,774 184,797 0 0 Paul D. Slater 22,511,374 128,197 0 0
Two (2) vacancies were retained for this year's class of Directors which will serve until the 2001 Annual Meeting of Stockholders. 24 25 The following is a list of the fifteen (15) additional Directors of the Company whose terms of office as Directors continued after the meeting: David E. Bradbury Vikki L. Pryor Robert M. Coard Gerald M. Ridge Alan K. DerKazarian William Schwartz Donald C. Dolben James V. Sidell Edward Guzovsky Edward J. Sullivan Brian W. Hotarek G. Robert Tod Francis X. Messina Michael J. Verrochi, Jr. Gordon M. Weiner Subsequent to the Annual Meeting, on July 20, 1998, in connection with the Company's acquisition of Somerset Savings Bank, James F. Drew became a Director of the Company. On August 3, 1998, Edward Guzovsky resigned from his Directorship at the Company, but continues as a Director of the Company's principal banking subsidiary, USTrust. The approval and ratification of the proposed new Annual Incentive Plan for key executives of the Company was also submitted to a vote of the Stockholders of the Company at the Annual Meeting of Stockholders held on May 19, 1998. The new Annual Incentive Plan was designed to advance the Company's interest by enhancing its ability to attract and retain key executives of the Company through the grant of performance-based incentive awards. The Plan was designed so that awards under the Plan to Executive Officers will qualify for the performance-based compensation exemption under Section 162(m) of the Internal Revenue Code. The following votes were cast with respect to the approval and ratification of the proposed new Annual Incentive Plan:
In Favor Against Abstain Delivered Not Voted -------- ------- ------- ------------------- 21,380,103 907,698 285,112 66,659
Special Meeting of Stockholders At a Special Meeting of Stockholders held on June 10, 1998, the Stockholders were asked to consider and vote upon proposals (i) to ratify and approve an Affiliation Agreement and Plan of Reorganization dated as of December 15, 1997, by and among UST Corp., Affiliated Community Bancorp, Inc. ("AFCB") and a wholly-owned acquisition subsidiary of UST Corp. and each of the transactions contemplated thereby; and (ii) to amend the Company's Restated Articles of Organization to increase the number of authorized shares of the Company's common stock from 45,000,000 to 75,000,000. The following votes were cast with respect to the two proposals:
Delivered, In Favor Against Abstain Note Voted -------- ------- ------- ---------- AFCB Affiliation 17,066,110 36,792 64,782 3,397,885 Common Stock Increase 20,244,825 233,858 96,886 0
25 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The Notice of Annual Meeting of Stockholders dated April 15, 1998 and related proxy card for the Annual Meeting of Stockholders to be held on May 19, 1998 was previously filed with the Securities and Exchange Commission on April 15, 1998 in hard copy and EDGAR electronic formats. The Notice of Special Meeting of Stockholders dated May 11, 1998 and related proxy card for the Special Meeting of Stockholders to be held on June 10, 1998 was previously filed with the Securities and Exchange Commission on May 11, 1998 in hard copy and EDGAR electronic formats. 27.1 Article 9 Summary Financial Information for the six months ended June 30, 1998. 27.2 Article 9 Restated Summary Financial Information for the six months ended June 30, 1997. (b) Reports on Form 8-K. 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, 1998 By: /s/ Neal F. Finnegan ----------------------------------------- Neal F. Finnegan, President and Chief Executive Officer Date: August 14, 1998 By: /s/ James K. Hunt ----------------------------------------- James K. Hunt, Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 26 EX-27.1 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF UST CORP. FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF FORM 10-Q. 1,000 6-MOS DEC-31-1997 JAN-01-1998 JUN-30-1998 89,381 164 60,248 0 686,410 0 0 2,957,280 52,816 3,915,358 2,991,896 483,744 50,925 26,694 0 0 18,686 343,413 3,915,358 126,340 21,358 1,557 149,255 40,847 53,524 95,731 1,665 1,471 74,575 40,862 40,862 0 0 25,390 .85 .83 8.37 19,857 1,252 0 33,200 52,230 5,540 4,461 52,816 52,816 0 9,405
EX-27.2 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF UST CORP. FOR THE SIX MONTHS ENDED JUNE 30, 1997, WHICH HAS BEEN RESTATED TO REFLECT THE ACQUISITION OF FIRESTONE FINANCIAL CORP. AS A POOLING OF INTERESTS, AND THE ADOPTION OF SFAS NO. 128, "EARNINGS PER SHARE," AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF FORM 10-Q. 1,000 6-MOS DEC-31-1996 JAN-01-1997 JUN-30-1997 136,157 58 105,142 0 700,431 0 0 2,649,426 51,884 3,706,812 2,815,310 442,292 40,381 91,552 0 0 18,532 298,745 3,706,812 112,559 23,406 2,071 138,036 40,438 54,233 83,803 0 (573) 85,256 17,649 17,649 0 0 9,673 .33 .32 8.21 27,037 989 0 37,100 51,984 2,887 2,487 51,884 51,884 0 8,764
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