1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1995 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, 02108
BOSTON, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(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 of outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. At April 30, 1995,
there were issued and outstanding 17,683,584 shares of common stock, par value
.625 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
UST CORP.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION....................................................... 3
Item 1. Financial Statements............................................... 3
Consolidated Balance Sheets -- March 31, 1995 and December 31, 1994......... 3
Consolidated Statements of Income -- Three Months Ended
March 31, 1995 and 1994..................................................... 4
Consolidated Statements of Changes in Stockholders' Investment -- Three
Months Ended March 31, 1995 and 1994........................................ 5
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 1995 and 1994..................................................... 6
Notes to Consolidated Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
SIGNATURES.................................................................. 18
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UST CORP.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1995 1994
----------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
Cash, due from banks and interest-bearing deposits................. $ 107,750 $ 93,079
Excess funds sold to banks......................................... 10,000
Securities:
Securities available-for-sale:
Mortgage-backed securities............................... 185,293 195,009
U.S. Treasury, corporate notes, and other................ 207,510 206,631
----------- ------------
Total securities available-for-sale................. 392,803 401,640
Securities held-to-maturity................................... 100 100
----------- ------------
Total securities.................................... 392,903 401,740
Loans:
Loans -- net of unearned discount of $23,316,000 in 1995 and
$18,619,000 in 1994 (Note 2)................................. 1,266,402 1,276,683
Reserve for possible loan losses (Notes 2 and 3).............. (61,842) (64,088)
----------- ------------
Total loans, net.................................... 1,204,560 1,212,595
Premises, furniture and equipment, net............................. 31,620 32,403
Intangible assets, net............................................. 5,866 6,445
Other real estate owned, net (Note 2).............................. 9,990 9,958
Other assets....................................................... 40,378 37,012
----------- ------------
Total assets........................................ $ 1,793,067 $1,803,232
=========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Demand:
Noninterest-bearing...................................... $ 331,994 $ 371,716
Interest-bearing......................................... 161,849 168,434
Savings:
Money market............................................. 253,203 271,898
Other.................................................... 262,971 285,350
Time:
Certificates of deposit over $100,000.................... 86,147 79,373
Other.................................................... 380,287 314,035
----------- ------------
Total deposits...................................... 1,476,451 1,490,806
Short-term borrowings.............................................. 142,824 158,989
Other borrowings................................................... 8,464 9,964
Other liabilities.................................................. 17,549 10,839
----------- ------------
Total liabilities................................... 1,645,288 1,670,598
Commitments and contingencies (Note 4)
Stockholders' investment (Note 5):
Preferred stock $1 par value; Authorized -- 4,000,000 shares;
Outstanding -- None
Common stock $.625 par value; Authorized -- 30,000,000 shares;
Outstanding -- 17,679,804 and 17,614,792 shares in 1995 and
1994, respectively............................................ 11,050 11,009
Additional paid-in capital....................................... 72,505 72,129
Retained earnings................................................ 75,953 73,183
Unrealized loss on securities available-for-sale, net of tax..... (11,655) (23,601)
Deferred compensation and other.................................. (74) (86)
----------- ------------
Total stockholders' investment...................... 147,779 132,634
----------- ------------
Total liabilities and stockholders' investment...... $ 1,793,067 $1,803,232
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
4
UST CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31,
---------------------
1995 1994
------- -------
(DOLLARS IN
THOUSANDS, EXCEPT
SHARE AMOUNTS)
Interest income:
Interest and fees on loans...................................... $29,294 $24,517
Interest and dividends on securities:
Taxable.................................................... 6,278 6,721
Non-taxable................................................ 54 51
Dividends.................................................. 124 36
Interest on excess funds and other.............................. 170 562
------- -------
Total interest income................................. 35,920 31,887
------- -------
Interest expense:
Interest on deposits............................................ 9,304 8,453
Interest on short-term borrowings............................... 1,931 1,327
Interest on other borrowings.................................... 201 302
------- -------
Total interest expense................................ 11,436 10,082
------- -------
Net interest income............................................. 24,484 21,805
Provision for possible loan losses (Note 2).......................... 4,830 5,713
------- -------
Net interest income after provision for possible loan losses.... 19,654 16,092
------- -------
Noninterest income:
Asset management fees........................................... 3,256 4,312
Corporate services income....................................... 2,039 2,043
Gain on sale of securities, net................................. 1,535 23
Service charges on deposit accounts............................. 1,252 1,234
Other........................................................... 628 288
------- -------
Total noninterest income.............................. 8,710 7,900
------- -------
Noninterest expense:
Salary and employee benefits.................................... 11,138 10,202
Foreclosed asset and workout expense (Note 2)................... 2,317 2,329
Net occupancy expense........................................... 1,908 2,076
Credit card processing expense.................................. 1,071 930
Deposit insurance assessment.................................... 1,029 1,174
Other........................................................... 6,607 5,625
------- -------
Total noninterest expense............................. 24,070 22,336
------- -------
Income before income taxes........................................... 4,294 1,656
Income tax provision............................................ 1,524 653
------- -------
Net income............................................ $ 2,770 $ 1,003
======= =======
Per share data:
Net income (Note 5)............................................. $ .16 $ .06
Cash dividends declared......................................... -- --
Weighted average number of common shares (Note 5).................... 17,847,483 17,774,092
The accompanying notes are an integral part of these
consolidated financial statements.
4
5
UST CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(UNAUDITED)
COMMON STOCK ADDITIONAL UNREALIZED DEFERRED
---------------- PAID-IN RETAINED GAIN/(LOSS) COMPENSATION
SHARES AMOUNT CAPITAL EARNINGS ON SECURITIES AND OTHER
------ ------- ---------- -------- ------------- ------------
(DOLLARS AND SHARES IN THOUSANDS)
Balance December 31, 1993.......... 17,305 $10,815 $ 69,694 $ 68,437 $ 3,335 $538
Net income......................... 1,003
Stock option exercises and stock
issued under restricted stock
plans............................ 29 19 178
Change from unrealized gain to
loss on securities
available-for-sale,
net of tax....................... (8,091)
------ ------- -------- -------- --------- ----
Balance March 31, 1994............. 17,334 $10,834 $ 69,872 $ 69,440 $ (4,756) $538
====== ======= ======== ======== ========= ====
Balance December 31, 1994.......... 17,615 $11,009 $ 72,129 $ 73,183 $ (23,601) $(86)
Net income......................... 2,770
Stock option exercises and stock
issued under restricted stock
plans............................ 65 41 376
Change in unrealized loss on
securities available-for-sale,
net of tax....................... 11,946
Activity in Directors Deferred
Compensation Program, net........ 12
------ ------- -------- -------- --------- ----
Balance March 31, 1995............. 17,680 $11,050 $ 72,505 $ 75,953 $ (11,655) $(74)
====== ======= ======== ======== ========= ====
The accompanying notes are an integral part of these consolidated financial
statements.
5
6
UST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
----------------------
1995 1994
-------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income....................................................... $ 2,770 $ 1,003
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses.......................... 4,830 5,713
Depreciation and amortization............................... 1,385 1,514
Amortization of gain on sale/leaseback...................... (96) (96)
Amortization of security premiums, net...................... 188 126
Gain on sale of securities, net............................. (1,535) (23)
Gain on sale of other real estate owned, net................ (147) (194)
Writedowns of other real estate owned....................... 466 1,050
Deferred income tax benefit................................. 282 308
Increase in accruals and other, net......................... 3,404 74,700
-------- ---------
Net cash provided by operating activities.............. 11,547 84,101
Cash flows provided by investing activities:
Proceeds from sales of securities available-for-sale............. 17,815 22
Proceeds from maturities of securities available-for-sale........ 5,634 38,276
Purchases of securities available-for-sale....................... (1,087) (106,265)
Net decrease in short-term investments........................... 10,000 65,492
Net loans paid................................................... 980 44,867
Proceeds from other real estate owned............................ 1,481 1,056
Purchases of premises and equipment.............................. (20) (362)
-------- ---------
Net cash provided by investing activities.............. 34,803 43,086
Cash flows used by financing activities:
Net decrease in nontime deposits................................. (87,381) (76,050)
Net increase (decrease) in certificates of deposit............... 73,026 (15,876)
Net payments on short-term borrowings............................ (16,165) (14,094)
Net payments on other borrowings................................. (1,500)
Issuance of common stock for cash, net........................... 341 151
-------- ---------
Net cash used by financing activities.................. (31,679) (105,869)
-------- ---------
Increase in cash and cash equivalents............................ 14,671 21,318
Cash and cash equivalents at beginning of year................... 93,079 90,198
-------- ---------
Cash and cash equivalents at end of period....................... $107,750 $ 111,516
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................... $ 11,083 $ 9,710
======== =========
Income taxes................................................ $ 1,032 $ 1,374
======== =========
Noncash transactions:
Transfers from other assets to securities available-for-sale..... $ 250
========
Transfers from loans to other real estate owned.................. $ 2,790 $ 882
======== =========
Financed other real estate owned sales........................... $ 565 $ 893
======== =========
Common stock issuance............................................ $ 76 $ 46
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
7
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: 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. Certain prior period amounts have been reclassified to
conform to current classifications. The amounts shown reflect, in the
opinion of management, all adjustments necessary for a fair
presentation of the financial statements for the periods reported. All
such adjustments were of a normal recurring nature, except as disclosed
herein. These financial statements should be read in conjunction with
the financial statements and the notes thereto included in the
Company's Report on Form 10-K for the fiscal year ended December 31,
1994. The results of operations for the three-month period ended March
31, 1995 are not necessarily indicative of the results of operations
for the full year or any other interim period.
NOTE 2: The Company adopted Statement of Financial Accounting Standards No. 114
("SFAS No. 114") as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan," on January 1, 1995. As a result, loans
previously characterized as in-substance foreclosures are now reported
with loans instead of other real estate owned. Furthermore, the
valuation reserve associated with such in-substance foreclosures is now
included as part of the reserve for possible loan losses. Prior period
balances have been reclassified to reflect the loans, other real estate
owned, loan loss provision and in-substance foreclosure writedown
expense on a basis comparable to the classification that would have
been used under SFAS No. 114. There was no effect on current or
previously reported net income of the Company as a result of the
adoption of this Standard. See "Credit Quality and Reserve for Possible
Loan Losses" in Management's Discussion and Analysis of Financial
Condition and Results of Operations herein for further information.
NOTE 3: Analysis of the reserve for possible loan losses for the three months
ended March 31, 1995, and 1994 is as follows:
1995 1994
-------- -------
(DOLLARS IN
THOUSANDS)
Balance at beginning of period...................... $ 64,088 $64,465
Chargeoffs/transfers................................ (10,162) (8,462)
Recoveries on loans previously charged-off.......... 3,086 946
-------- -------
Net chargeoffs/transfers............................ (7,076) (7,516)
Provided from operations............................ 4,830 5,713
-------- -------
Balance at end of period............................ $ 61,842 $62,662
======== =======
The reserve for possible loan loss is 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 -- (CONTINUED)
NOTE 4: At March 31, 1995, 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................. $ 318,000
Standby letters of credit and financial
guarantees written......................... 54,000
Commercial letters of credit................. 3,000
Foreign exchange contracts................... 1,000
NOTE 5: Earnings 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 outstanding stock
options computed under the treasury stock method. Average dilutive
common stock equivalents totaled 217,791 at March 31, 1995 and 452,527
at March 31, 1994.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
For the quarter ended March 31, 1995, the Company continued with operating
strategies adopted during 1993 and 1994 to enhance both asset quality and
operating profits. As a result, the level of substandard loans was reduced for
the fifth consecutive quarter from a peak of $265 million at December 31, 1993
to $107 million at March 31, 1995, a reduction of 60%, or $158 million.
Nonperforming assets, consisting of substandard loans, restructured loans,
accruing loans greater than 90 days past due and other real estate owned, have
followed a similar downward trend and were reduced $22.7 million this quarter to
$64.3 million. The Company's strategy to enhance operating profits is evidenced
this quarter by an increase in net income of 176% over the same period last year
to $2.8 million, or $.16 per share.
The successful resolution of problem assets has been aided by an improving
local economy in 1994 and first quarter of 1995. This follows a recessionary
period from 1990 to 1993 in the Company's primary loan market, the New England
region. The earlier economic climate contributed to a decline in real estate
values and adversely affected the net worth and operations of certain borrowing
customers of the Company's subsidiary banks. The result was a large increase in
the flow of problem assets and related carrying costs. Consequently, the Company
adopted a strategy in 1993 to aggressively reduce the level of nonperforming
assets and substandard loans. This strategy has resulted in high levels of
provisions for possible loan losses and expenses associated with foreclosed
assets and loan workout which continue to influence the Company's financial
results for the quarter ended March 31, 1995.
This discussion should be read in conjunction with the financial
statements, notes, and tables included in the Company's Report on Form 10-K for
the fiscal year ended December 31, 1994. Certain amounts reported for prior
periods have been reclassified to conform with the 1995 presentation.
FINANCIAL CONDITION AT MARCH 31, 1995
ASSETS
Total assets at March 31, 1995 were $1.79 billion, a decrease of $10.1
million from December 31, 1994. Total loans declined $10.3 million during the
first quarter to $1.27 billion. This quarter's decline follows a decrease in
loans during the twelve months ended December 31, 1994 of $72.2 million. The
Company's commercial and real estate loan portfolios have been experiencing a
decline due to the combination of normal amortization and the outflow of problem
loans through collection, chargeoff or third-party refinancing. In addition,
increased competition for the small-to-middle market credits has affected new
loan growth. The Company, however, has experienced a significant growth in its
indirect automobile loan portfolio as a result of increased marketing efforts.
Indirect auto loans increased 27%, or $24.1 million, during the three months
ended March 31, 1995 to $114.3 million, which followed growth of 183%, or $58.4
million, during the year ended December 31, 1994.
Securities decreased $8.8 million during the quarter from $402 million at
year end to $393 million at March 31, 1995. The decrease reflects the sale of
short-term U. S. Treasury securities which was partially offset by a reduction
in the unrealized loss on securities available-for-sale. See below for a further
discussion.
On December 31, 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt
and Equity Securities," issued by the Financial Accounting Standards Board. The
Statement addresses the accounting and reporting for debt and equity securities
that have readily determinable market values. According to SFAS No. 115, these
securities must be classified as either held to maturity, available-for-sale, or
trading and are reported at either amortized cost or fair value, depending upon
the classification.
At March 31, 1995, the Company's securities portfolio consisted of $392.8
million of securities available-for-sale and $.1 million of securities
held-to-maturity. Securities available-for-sale are reported net of gross
unrealized losses of $17.1 million at March 31, 1995 compared with $29.0 million
at December 31, 1994. The reduction in the gross unrealized loss on securities
available-for-sale of $11.9 million reflects improving bond
9
10
prices during the first quarter. The current upward trend compares with the
severe decline in bond prices in 1994 due to the rapid rise in interest rates.
Stockholders' investment increased during the quarter as the unrealized
loss on securities available-for-sale, net of a $5.4 million deferred tax
benefit, decreased from $23.6 million at December 31, 1994 to $11.7 million at
March 31, 1995. In light of the size of the unrealized loss and the current
level of taxable income, the Company concluded that full recognition of the
deferred tax amount was not appropriate and, as such, limited the amount of the
recorded benefit to $5.4 million at March 31, 1995 and December 31, 1994.
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 the maturity or sale of an entity's assets, such as loans
and securities, liability sources such as increased deposits and purchased or
borrowed funds, and access to the capital markets. The Company's security
portfolio is currently classified almost entirely as available-for-sale, and the
Company may sell certain securities based upon changes in economic or market
conditions, interest rate risk and the Company's financial position and
liquidity. A nominal volume of fixed-rate residential mortgage loans are sold to
investors as they are originated.
At March 31, 1995, liquidity, which includes excess cash, excess funds sold
and unpledged securities, totaled approximately $263 million, or 15% of total
assets, a $4 million increase from December 31, 1994.
The funds needed to support the Company's loan and securities portfolios
are provided through a combination of commercial and retail deposits and
short-term borrowings. Total deposits decreased $14.4 million to $1.48 billion
since December 31, 1994. Demand deposits decreased $46.3 million due primarily
to seasonal fluctuations. Savings deposits decreased $41.1 million while time
deposits increased $73.0 million as investors were attracted to the Company's
subsidiary banks more aggressive certificate of deposit pricing.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents increased $14.7 million during the three-month period ended March
31, 1995. Cash provided by operations resulted largely from net interest income
from loans and securities, less the net difference of noninterest expense over
noninterest income. Cash provided by investing activities was due principally to
the net decreases in short-term investments, net decreases in loans through
repayment, and to an excess of proceeds from sales and maturities of securities
over securities purchases. Cash used for financing activities was primarily the
result of decreases in nontime deposits and short-term borrowings, partially
offset by increases in certificates of deposit.
At March 31, 1995, the parent company had $2.3 million in cash and due from
banks and $16 million in certificates of deposit compared with the same level of
cash and due from banks and $16 million in U.S. Treasury securities at December
31, 1994. During the first quarter the U.S. Treasury securities were sold and
$16 million in proceeds were reinvested in certificates of deposit.
INTEREST RATE RISK
Volatility in interest rates requires the Company to manage interest rate
risk which arises from differences in the timing of repricing of assets and the
liabilities. Management monitors and adjusts the difference between
interest-sensitive assets and interest-sensitive liabilities ("GAP" position)
within various time frames. An institution with more assets repricing than
liabilities within a given time frame is considered asset sensitive ("positive
GAP") and in time frames with more liabilities repricing than assets it is
liability sensitive ("negative GAP"). Within GAP limits established by the Board
of Directors, the Company seeks to balance the objective of insulating the net
interest margin from rate exposure with that of taking advantage of anticipated
changes in rates in order to enhance income. The Company's policy is to limit
its one-year cumulative GAP position to 2.5 times equity, presently equal to
approximately 21% of total assets. The Company manages its interest rate GAP
primarily by lengthening or shortening the maturity structure of the Company's
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
10
11
primarily of loans tied to the prime rate. As interest rates rose during the
first three months of 1995, the prime rate and, therefore, the Company's yield
on earning assets increased faster than the rate paid on interest-bearing
liabilities.
The following table summarizes the Company's GAP position at March 31,
1995. 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 demand deposits are categorized according to their expected
lives based on published industry prepayment estimates in the case of securities
and current management estimates for demand 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,
prepayment risk, loan growth and similar factors. The reserve for possible loan
losses is included in the "Over 1 Year" category of loans. At March 31, 1995,
the one-year cumulative GAP position was positive at $75 million, or
approximately 4% of total assets.
INTEREST SENSITIVITY PERIODS
----------------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- ------
(DOLLARS IN MILLIONS)
Loans, net of reserve................... $ 753 $ 32 $ 77 $ 342 $1,204
Securities.............................. 3 23 367 393
Other assets............................ 6 1 3 186 196
----- ---- ----- ----- ------
Total assets....................... $ 759 $ 36 $ 103 $ 895 $1,793
======
----- ---- ----- -----
Interest-bearing deposits............... $ 470 $ 71 $ 134 $ 469 $1,144
Borrowed funds.......................... 135 4 4 143
Noninterest-bearing demand deposits..... 332 332
Other liabilities and Stockholders'
equity................................ 9 165 174
----- ---- ----- ----- ------
Total liabilities and equity....... $ 614 $ 71 $ 138 $ 970 $1,793
======
----- ---- ----- -----
GAP for period.......................... $ 145 $(35) $ (35) $ (75)
=======
---- ----- -----
Cumulative GAP.......................... $110 $ 75 $ 0
==== ===== =====
As a percent of total assets............ 8.09% 6.13% 4.18%
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES
The Company maintains a reserve for possible loan losses to absorb future
chargeoffs of loans and leases in the existing portfolio. The reserve is
increased when a loan loss provision is recorded in the income statement. When a
loan, or portion thereof, is considered uncollectible, it is charged against the
reserve. Recoveries on amounts previously charged-off are added to the reserve
when collected. Adequacy of the reserve for possible loan losses is determined
using a consistent, systematic methodology which analyzes the size and risk of
the loan and lease portfolio on a monthly basis. 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. The Company's credit risk rating profile uses categories of
risk based on those currently utilized by its primary regulators. Accuracy of
assigned ratings is monitored by an ongoing evaluation by the Company's Loan
Review Department. 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 monthly using a combination of numerical, statistical and qualitative
analysis (including sensitivity tests) and a written conclusion discussing the
rationale supporting the monthly adequacy of the loan loss reserve.
At March 31, 1995 substandard loans were $107 million compared with $126
million at the beginning of the quarter, a decrease of $19 million. Loans
reported as substandard for the purposes of this disclosure include loans
classified as Substandard or Doubtful, as determined by the Company in its
internal credit risk
11
12
rating profile. Under the Company's definition, Substandard Loans 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.
As of March 31, 1995, approximately 70 percent of loans classified as
Substandard or Doubtful were collateralized with real estate, and the remainder
were collateralized with accounts receivable, inventory, equipment and other
business assets. Of the loans secured by real estate, approximately 60 percent
were collateralized by commercial real estate development, approximately 25
percent by owner-occupied commercial properties and approximately 10 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 key indicators of asset quality:
MARCH 31, DECEMBER 31, MARCH 31,
1995 1994 1994
--------- ------------ ---------
(DOLLARS IN THOUSANDS)
Nonperforming assets:
Nonaccrual loans(1)..................................... $44,595 $ 59,944 $56,198
Accruing loans 90 days or more past due................. 478 1,409 1,305
Other real estate owned (OREO), net(1).................. 9,990 9,958 10,388
Restructured loans...................................... 9,251 15,757 25,767
--------- ------------ ---------
Total nonperforming assets...................... $64,314 $ 87,068 $93,658
======= ========== =======
Reserve for possible loan losses(1)....................... $61,842 $ 64,088 $62,662
Net chargeoffs for the quarter(1)......................... $ 7,076 $ 24,658(3) $ 7,516
OREO reserve(1)........................................... $ 1,473 $ 1,044 $ 4,859
Ratios:(1)
Reserve to nonaccrual loans............................. 138.7% 106.9% 111.5%
Reserve to total of nonaccrual loans,
accruing loans 90 days or more
past due, and restructured loans..................... 113.8% 83.1% 75.3%
Reserve to period-end loans............................. 4.9% 5.0% 4.8%
Nonaccrual loans and accruing loans over 90 days
past due to period-end loans......................... 3.6% 4.8% 4.4%
Nonperforming assets to period-end
loans and OREO....................................... 5.0% 6.8% 7.2%
Net chargeoffs to average loans......................... 2.2%(2) 1.9% 2.3%(2)
OREO reserve to OREO.................................... 14.7% 10.5% 31.9%
- ---------------
(1) Balances and ratios for 1994 reflect the reclassification of in-substance
foreclosure related amounts consistent with SFAS No. 114. See below for a
further discussion.
(2) Annualized
(3) Full year 1994
Total nonperforming assets, led by declines in nonaccrual loans and
restructured loans, decreased $22.8 million during the quarter ended March 31,
1995 and $29.3 million since March 31, 1994 to $64.3 million. The reserve for
possible loan losses at March 31, 1995 totals $61.8 million, or 139% of
nonaccruals compared with 107% and 112% at December 31, and March 31, 1994,
respectively. Net chargeoffs for the first three months of 1995 decreased $440
thousand to $7.1 million compared with the same period a year ago.
12
13
Adverse economic conditions in the future could result in a deterioration
of the Company's loan portfolio and the value of its other real estate owned
portfolio. Such conditions would also likely result in increases in
delinquencies, nonperforming assets, restructured loans, and other real estate
owned writedowns which individually or collectively could have a material
negative effect on future earnings through reduced interest income, increased
provisions for possible loan losses, and higher costs to collect loans and
maintain repossessed collateral.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 114 ("SFAS No. 114"), "Accounting by
Creditors for Impairment of a Loan," which the Company adopted on January 1,
1995. SFAS No. 114 requires, among other things, that creditors measure impaired
loans at the present value of expected future cash flows, discounted at the
loan's effective interest rate or, the fair value of the collateral if the loan
is collateral dependent. For purposes of this Standard, a loan is considered
impaired when it is probable that a creditor will be unable to collect all
amounts due, including interest, according to the contractual terms of the loan
agreement. The FASB also issued SFAS No. 118, which amended SFAS No. 114, by
allowing creditors to use their existing methods of recognizing interest income
on impaired loans.
The Company has determined after review of its Credit Quality policies,
that loans recognized as nonaccrual, in-substance foreclosure and restructured
represent "impaired loans" as defined in SFAS No. 114. At March 31, 1995
impaired loans with SFAS No. 114 required reserves totaled $3.8 million and the
reserve for possible loan losses allocated to such loans was in the amount of
$1.5 million. Also at March 31, 1995 the Company had additional impaired loans
of $50.0 million that did not require reserves. The methodology used in the
required reserve calculation, utilized the fair value of collateral. The Company
also determined that the reserve for possible loan losses at March 31, 1995 did
not require an additional loan loss provision as a result of the adoption of
this Standard. The existing methods for the recognition of interest income on
impaired loans has remained unchanged by the adoption of SFAS No. 114 as amended
by SFAS No. 118.
SFAS No. 114 also requires that in-substance foreclosures be reported as
part of loans and the in-substance foreclosure valuation reserve be included in
the reserve for possible loan losses. The effect at January 1, 1995, the date of
adoption of SFAS No. 114, on the Company's balance sheet was an increase to
loans of $10.6 million, an increase to the reserve for possible loan losses of
$2.1 million and a decrease in other real estate owned of $8.5 million. In
addition, prior period balances have been reclassified to reflect the loans,
other real estate owned, reserve for possible loan losses, loan loss provision
and other real estate owned writedown expense on a basis comparable to the
classification that would have been used under SFAS No. 114. There was no effect
on net income of the Company as a result of the adoption of this Standard.
CAPITAL AND REGULATORY AGREEMENTS
There are three capital requirements which banks and bank holding companies
must meet. Two requirements take into consideration risks inherent in assets for
both on-balance and off-balance sheet items on a risk weighted basis
("risk-based assets"). Risk weightings are as determined by banking regulators
for the industry as a whole. Under these requirements, the Company must meet
minimum Tier 1 and Total risk-based capital ratios (capital, as defined in the
regulations, divided by risk-based assets) of 4% and 8%, respectively. Tier 1
capital is essentially shareholders' investment, net of intangible assets and
Tier 2 capital is the allowable portion of the loan loss reserve (as defined)
and discounted subordinated debt. Total capital is the combination of Tier 1 and
Tier 2. The third requirement is a leverage capital ratio, defined as Tier 1
capital divided by total average assets, net of intangibles. All but the most
highly-rated banks are required to maintain a minimum of 4%. While the Company
has not been notified of a specific requirement above the minimum, two of the
Company's banking subsidiaries are required under regulatory agreements to
maintain, and in fact have, over 6% Tier 1 leverage capital. Those two banking
subsidiaries comprise almost all of the consolidated assets of the Company. See
discussion below concerning capital requirements for the Company and its banking
subsidiaries resulting from regulatory agreements.
13
14
At March 31, 1995 and December 31, 1994, the Company's consolidated
risk-based assets were $1.51 billion and $1.52 billion, respectively. The
capital ratios and regulatory minimum requirements applicable to the Company
were:
MARCH 31, 1995 DECEMBER 31, 1994
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN MILLIONS)
Tier 1 capital:
Actual......................................... $153.6 10.21% $149.7 9.82%
Minimum required............................... $ 60.4 4.00% $ 61.0 4.00%
Total (Tier 1 and Tier 2) capital:
Actual......................................... $173.3 11.85% $169.5 11.45%
Minimum required............................... $117.5 8.00% $118.5 8.00%
Tier 1 leverage capital:............................ $153.6 8.60% $149.7 8.27%
Capital ratios have been calculated consistent with regulatory policy which
excludes the impact of unrealized gain/loss on securities available-for-sale.
However, as required, any net unrealized loss on marketable equity securities
has been deducted from Tier 1 capital.
Effective August 3, 1992, UST Corp. entered into a written agreement with
the Federal Reserve Bank of Boston ("FRB-Boston") and the Banking Commissioner
of the Commonwealth of Massachusetts ("Massachusetts Commissioner") which
requires the Company to maintain Tier 1, Total risk-based and Tier 1 leverage
capital ratios which conform to the Capital Adequacy Guidelines of the Board of
Governors of the Federal Reserve System, and which take into account the current
and future capital requirements of the subsidiary banks, without specifying a
numeric minimum for the Tier 1 leverage capital ratio. The Company believes its
consolidated ratios meet the required minimums. Additionally, per this
agreement, the Company has agreed not to pay any dividends to stockholders, nor
take any dividends from its banking subsidiaries, without prior regulatory
approval. For the three months ended March 31, 1995, no dividends were
transferred to the Company from its banking subsidiaries, nor did the Company
pay dividends to stockholders.
In February 1992, USTrust, a Massachusetts-based banking subsidiary of the
Company, entered into a Consent Agreement and Order with the Federal Deposit
Insurance Corporation ("FDIC") and the Massachusetts Commissioner. In accordance
with this agreement, the bank agreed to, among other things, maintain a Tier 1
leverage capital ratio at or in excess of 6% by February 1993. In addition, the
bank agreed to refrain from transferring funds in the form of dividends to the
Company without prior regulatory approval. The Company's second
Massachusetts-based banking subsidiary, United States Trust Company ("USTC")
entered into a similar agreement with the FDIC and Massachusetts Commissioner in
February 1992. Subsequently, both regulators terminated and lifted the Consent
Agreement and Order in February 1994. USTC, however, has agreed to continue to
request regulatory consent prior to the payment of dividends. Since June 1991,
the Company's Connecticut-based banking subsidiary, UST/Conn, has been operating
under a Stipulation and Agreement with the Commissioner of Banks for the State
of Connecticut. This agreement was amended in August 1992, November 1993 and
July 1994 and requires UST/Conn to maintain a 6% Tier 1 leverage capital ratio.
At March 31, 1995 the Tier 1 leverage capital ratio for USTrust, USTC and
UST/Conn were 7.75%, 39.11% and 6.95%, respectively. This compares with 7.55%,
39.46% and 6.40%, respectively, at December 31, 1994.
Recent amendments to risk-based capital guidelines will affect the amount
of deferred tax assets that may be included in Tier 1 capital for risk-based and
leverage capital purposes. Under the new rule, which becomes effective April 1,
1995, deferred tax assets would be limited to the amount that an institution
expects to realize within one year, or 10% of Tier 1 capital, whichever is less.
The Company's consolidated Tier 1, Total risk-based capital and leverage capital
ratios at March 31, 1995 would be unaffected by this new regulation. The revised
regulation would have an insignificant effect on the Tier 1 leverage capital
ratios of USTrust and USTC. In 1994 UST/Conn's FDIC and state regulators
indicated that the bank should be using the more stringent calculation which the
March 31, 1995 and December 31, 1994 numbers above reflect.
The Company and each of its subsidiary banks are currently in compliance
with their respective capital requirements under these regulatory agreements.
14
15
RESULTS OF OPERATIONS
COMPARISON OF 1995 WITH 1994
The Company reported net income of $2.8 million, or $.16 per share, for the
quarter ended March 31, 1995, compared with net income of $1.0 million, or $.06
per share, for the same period in 1994. Results for the first quarter of 1995
reflect increases in net interest income and noninterest income, a lower
provision for possible loan losses, and increased noninterest expense.
The Company's net interest income on a fully taxable equivalent basis was
$24.7 million for the first quarter of 1995 compared with $22.0 million for the
same period last year. The interest rate spread and margin rose steadily
throughout 1994 and in the first quarter of 1995. The improved margin and spread
is a direct result of increased earning asset yields coupled with moderate
increases in interest-bearing liabilities (See "Net Interest Income Analysis"
below for a further discussion). The resultant increase in net interest income
was partially offset by a continued decline in the volume of earning assets.
NET INTEREST INCOME ANALYSIS
The rise in interest rates experienced throughout 1994 continued into the
first quarter of 1995. The result was an improvement in yield on earning assets,
primarily loans, for the quarter of 167 basis points from 6.99% for the same
period last year to 8.66% this year. The cost of interest-bearing liabilities,
principally deposits, was 3.61% compared to 2.75% a year ago. Deposit rates
remained relatively stable throughout much of 1994 until the fourth quarter when
the Company adopted more aggressive deposit pricing. The Company's more
competitive pricing policy, along with a general increase in deposit rates,
continued into the first quarter of 1995 and is expected to push deposit rates
upward throughout the remainder of 1995. The increased yield on earning assets,
which has to date outpaced increases in the cost of interest-bearing
liabilities, produced an improvement in interest rate spread and margin from
4.24% and 4.80% for the first three months of 1994 to 5.05% and 5.92%,
respectively, this year. The net effect from changes in rates this quarter as
compared to the same period a year ago, was an increase in net interest income
of $3.5 million.
Current spreads and margins are at historically high levels and are not
expected to continue to increase during the remainder of 1995. Rates on loans
and other interest-earning assets may continue to increase if interest rates
continue to rise, however, rates on deposits are expected to move upward at a
persistent pace and narrow the current levels of spread and margin.
Average earning assets were $1.69 billion, $144 million lower than the same
period in 1994 reflecting declines in loans, securities and excess funds of $49
million, $37 million and $58 million, respectively. Interest-bearing liabilities
decreased $180 million to $1.28 billion reflecting declines in interest-bearing
deposits and short-term borrowings. The effect from changes in volume of loans,
deposits and other interest-bearing balances was a decrease in net interest
income of $768 thousand.
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 quarter ended
15
16
March 31, 1995 when compared with the quarter ended March 31, 1994. Changes
attributable to both rate and volume are allocated on a weighted basis.
INCREASE (DECREASE) FROM
QUARTER ENDED MARCH 31, 1994
-----------------------------
AMOUNT DUE TO
CHANGES IN
QUARTER ENDED TOTAL ------------------
MARCH 31, 1995 CHANGE VOLUME RATE
-------------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Interest income:
Interest and fees on loans*................. $ 29,476 $4,755 $ (948) $5,703
Interest and dividends on securities:
Taxable................................ 6,278 (443) (518) 75
Non-taxable*........................... 259 135 (68) 203
Interest on excess funds and other.......... 170 (392) (646) 254
-------- ------ ------- ------
Total interest income*................. 36,183 4,055 (2,180) 6,235
-------- ------ ------- ------
Interest expense:
Interest on deposits........................ 9,304 851 (920) 1,771
Interest on short-term borrowings........... 1,931 604 (375) 979
Interest on other borrowings................ 201 (101) (117) 16
-------- ------ ------- ------
Total interest expense................. 11,436 1,354 (1,412) 2,766
-------- ------ ------- ------
Net interest income.............................. $ 24,747 $2,701 $ (768) $3,469
======== ====== ======= ======
- ---------------
* Fully taxable equivalent at the Federal income tax rate of 35% in 1995 and 34%
in 1994, and includes applicable State taxes net of Federal benefit. The tax
equivalent adjustment on loans was approximately $180 thousand and on
non-taxable securities was approximately $80 thousand for the quarter ended
March 31, 1995.
NONINTEREST INCOME
Noninterest income for the quarter increased $810 thousand over last year
to $8.7 million. First quarter 1995 results include a $1.5 million realized gain
from the sale of equity investments held by a venture capital subsidiary. Asset
management fees were lower in the first quarter of 1995 by $1.1 million compared
with the same period in 1994. Contributing to the decrease were timing
differences in the recognition of fee income in 1994, and, to a lesser extent,
fees derived from managed fund values decreased in 1995 due to the effect of
lower market values of fixed-income securities.
Other noninterest income increased $340 thousand due to a higher level of
residual income from maturing equipment leases and fees derived from sales of
mutual funds, a new product introduced in the second quarter of 1994.
NONINTEREST EXPENSE
Total noninterest expense increased $1.7 million from the first quarter of
1994 to $24.1 million. Salary and employee benefits increased $936 thousand to
$11.1 million principally due to a $457 thousand provision for obligations
payable to former officers and directors and an increase in the asset management
division revenue-sharing provision over last year. (See below for a further
discussion of the revenue-sharing provision.) Foreclosed asset and workout
expense for the quarter was $2.3 million, consistent with 1994's expenditures,
however, it remains high as the Company continues to aggressively reduce the
level of problem credits.
In 1994, the Company and senior executives of USTC's Asset Management
Division negotiated the terms of employment agreements designed to maximize the
profitability and grow the assets under management of the asset management
business. The agreements, which remain subject to regulatory approval, are
designed to increase the foregoing executives' participation in the value
created in the asset management business and, in a change-in-control situation,
increase the likelihood that a prospective purchaser will retain the services of
the executives. The agreements, which became effective July 1, 1994, contain
revenue-sharing provisions which will permit the asset management division to
use a specified percentage of its base revenues
16
17
for the payment of expenses of the operation, including incentive compensation.
The revenue-sharing provisions contained in this agreement are reflected in the
first quarter 1995 financial results.
The major components of other noninterest expense were:
THREE MONTHS
ENDED
MARCH 31,
-----------------
1995 1994
------ ------
Facility consolidation provisions.................................. $ 874 $ 300
Furniture and equipment............................................ 840 830
Advertising and promotion.......................................... 720 305
Legal and consulting............................................... 598 789
Amortization of intangibles........................................ 582 357
Service bureau and other data processing........................... 291 286
All other.......................................................... 2,702 2,758
------ ------
Total.................................................... $6,607 $5,625
====== ======
Other noninterest expense increased $982 thousand for the quarter to $6.6
million. Provisions recorded in connection with space consolidation, including
the writeoff of abandoned leases, lease subsidies and leasehold improvements,
totaled $874 thousand for the first quarter of 1995. For the same period in 1994
the Company recorded a $300 thousand writedown to market value on a former
Company branch building which was being offered for sale. The increase in
advertising and promotion of $415 thousand was a function of differences in the
level of activity between the first and second quarters of last year compared
with this year rather than an increase in total advertising expenditures.
Consulting fees for the quarter ended March 31, 1995 were $598 thousand and
included a $151 thousand provision for obligations payable to former officers
and directors.
INCOME TAXES
The Company recorded income taxes of $1.5 million for the quarter ended
March 31, 1995 compared with a $.7 million for the same period last year. The
statutory Federal income tax rate was 35% in 1995 compared with 34% in 1994.
Despite the statutory rate increase, the effective tax rate in the first quarter
of 1995 decreased to 35.5% from 39.4% for the first quarter of 1994. The
variations in income taxes are attributable to the level and composition of
pretax income among the subsidiaries of the Company.
As of March 31, 1995, the Company had a deferred tax asset of approximately
$11.4 million, net of a valuation allowance of $2.4 million, included in other
assets which is expected to be realized against future taxable income.
Management believes that it is more likely than not that the Company will
realize the benefit of these deferred assets.
RECENT ACCOUNTING DEVELOPMENTS
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which was effective for fiscal years beginning after
December 15, 1994. In October 1994, the FASB issued SFAS No. 118, which amended
SFAS No. 114, and was effective concurrent with the effective date of SFAS No.
114. The Company adopted this Standard on January 1, 1995. See "Credit Quality
and Reserve for Possible Loan Losses" herein for a further discussion.
PART II -- OTHER INFORMATION
For the quarter ended March 31, 1995, Items 2 through 5 of Part II are
either inapplicable or would elicit a response of "NONE" and therefore no
reference thereto has been made herein.
17
18
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 is likely to result in a material
adverse change in the financial condition or results of operations of the
Company and its subsidiaries.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused his Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit -- 27 Article 9 Summary Financial Information.
(b) Reports on Form 8-K -- None.
UST CORP.
Date: May 15, 1995 By: /s/ NEAL F. FINNEGAN
......................................
NEAL F. FINNEGAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: May 15, 1995 By: /s/ JAMES K. HUNT
......................................
JAMES K. HUNT, EXECUTIVE VICE
PRESIDENT, TREASURER AND
CHIEF FINANCIAL OFFICER
18