1
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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 MARCH 31, 1996
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, 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 outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. At April 30, 1996,
there were outstanding 17,790,786 shares of common stock, par value $.625 per
share.
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2
UST CORP.
TABLE OF CONTENTS
PAGE
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -- March 31, 1996 and December 31, 1995............. 2
Consolidated Statements of Income -- Three Months Ended March 31, 1996 and
1995........................................................................... 3
Consolidated Statements of Changes in Stockholders' Investment -- Three Months
Ended March 31, 1996 and 1995.................................................. 4
Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1996 and
1995........................................................................... 5
Notes to Consolidated Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................................... 16
SIGNATURES......................................................................... 16
1
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UST CORP.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1996 1995
----------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
Cash, due from banks and interest-bearing deposits.......................... $ 65,235 $ 89,799
Securities:
Securities available-for-sale:
Mortgage-backed securities.............................................. 258,623 246,521
U.S. Treasury, corporate notes, and other............................... 365,371 329,152
---------- ----------
Total securities available-for-sale................................... 623,994 575,673
Loans:
Loans -- net of unearned discount of $29,880,000 in 1996 and $33,419,000
in 1995 (Note 2)........................................................ 1,241,726 1,272,077
Reserve for possible loan losses (Note 2)................................. (55,798) (56,029)
---------- ----------
Total loans, net...................................................... 1,185,928 1,216,048
Premises, furniture and equipment, net...................................... 32,131 31,840
Loans held-for-sale......................................................... 4,048 13,098
Intangible assets, net...................................................... 4,357 4,650
Other real estate owned, net................................................ 3,159 3,015
Other assets................................................................ 44,995 34,965
---------- ----------
Total assets.......................................................... $1,963,847 $1,969,088
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Demand.................................................................... $ 311,288 $ 372,917
Interest-bearing demand (NOW accounts).................................... 165,200 166,011
Money market.............................................................. 203,609 210,924
Regular savings........................................................... 246,469 244,680
Time:
Certificates of deposit over $100 thousand.............................. 113,567 112,426
Other................................................................... 405,700 405,779
---------- ----------
Total deposits........................................................ 1,445,833 1,512,737
Short-term and other borrowings............................................. 322,955 243,105
Other liabilities........................................................... 22,610 39,578
---------- ----------
Total liabilities..................................................... 1,791,398 1,795,420
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 -- 30,000,000 shares;
Issued -- 17,927,813 and 17,843,582 shares in 1996 and 1995,
respectively............................................................ 11,205 11,152
Additional paid-in capital................................................ 74,769 74,158
Retained earnings......................................................... 90,714 87,253
Unrealized (loss) gain on securities available-for-sale, net of tax....... (3,307) 961
Treasury stock, at cost, 75,000 shares.................................... (1,018)
Deferred compensation and other........................................... 86 144
---------- ----------
Total stockholders' investment........................................ 172,449 173,668
---------- ----------
Total liabilities and stockholders' investment........................ $1,963,847 $1,969,088
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
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UST CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
Interest income:
Interest and fees on loans....................................... $29,071 $29,294
Interest and dividends on securities:
Taxable....................................................... 8,945 6,278
Non-taxable................................................... 79 178
Interest on excess funds and other............................... 22 170
------- -------
Total interest income.................................... 38,117 35,920
------- -------
Interest expense:
Interest on deposits............................................. 11,071 9,304
Interest on borrowings........................................... 3,671 2,132
------- -------
Total interest expense................................... 14,742 11,436
------- -------
Net interest income.............................................. 23,375 24,484
Provision for possible loan losses (Note 2)........................ 1,500 4,830
------- -------
Net interest income after provision for possible loan losses..... 21,875 19,654
------- -------
Noninterest income:
Asset management fees............................................ 3,188 3,256
Corporate services income........................................ 2,306 2,039
Service charges on deposit accounts.............................. 1,110 1,252
Securities gains, net............................................ 9 1,535
Other............................................................ 409 628
------- -------
Total noninterest income................................. 7,022 8,710
------- -------
Noninterest expense:
Salary and employee benefits..................................... 11,410 11,138
Net occupancy expense............................................ 1,875 1,908
Credit card processing expense................................... 1,215 1,071
Foreclosed asset and workout expense............................. 606 2,317
Deposit insurance assessment..................................... 311 1,029
Other............................................................ 6,155 6,607
------- -------
Total noninterest expense................................ 21,572 24,070
------- -------
Income before income taxes......................................... 7,325 4,294
Income tax provision............................................. 2,788 1,524
------- -------
Net income............................................... $ 4,537 $ 2,770
======= =======
Per share data:
Net income (Note 4).............................................. $ .25 $ .16
Cash dividends declared.......................................... .06 --
Weighted average number of common shares (Note 4)................ 18,241,792 17,847,483
The accompanying notes are an integral part of these consolidated financial
statements.
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5
UST CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(UNAUDITED)
COMMON STOCK ADDITIONAL UNREALIZED DEFERRED
---------------- PAID-IN RETAINED GAIN/(LOSS) TREASURY COMPENSATION
SHARES AMOUNT CAPITAL EARNINGS ON SECURITIES STOCK AND OTHER
------ ------- ---------- -------- ------------- -------- ------------
(DOLLARS AND SHARES IN THOUSANDS)
Balance December 31, 1994... 17,615 $11,009 $72,129 $73,183 $(23,601) $(86)
Stock option exercises and
stock issued under
restricted stock plans.... 59 37 334
Net income.................. 2,770
Change in unrealized loss on
securities available-for-
sale, net of tax.......... 11,946
Activity in Directors
Deferred Compensation
Program and Other, net.... 6 4 42 12
------ ------- ------- ------- -------- ----
Balance March 31,1995....... 17,680 $11,050 $72,505 $75,953 $(11,655) $(74)
====== ======= ======= ======= ======== ====
Balance December 31, 1995... 17,844 $11,152 $74,158 $87,253 $ 961 $144
Stock option exercises and
stock issued under
restricted stock plans.... 84 53 611
Net income.................. 4,537
Cash dividend declared...... (1,076)
Change from unrealized gain
to loss on securities
available-for-sale, net of
tax....................... (4,268)
Treasury stock acquired..... $(1,018)
Activity in Directors
Deferred Compensation
Program and Other, net.... (58)
------ ------- ------- ------- -------- ------- ----
Balance March 31, 1996...... 17,928 $11,205 $74,769 $90,714 $ (3,307) $(1,018) $ 86
====== ======= ======= ======= ======== ======= ====
The accompanying notes are an integral part of these consolidated financial
statements.
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6
UST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------------
1996 1995
------- --------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income.......................................................... $ 4,537 $ 2,770
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses............................. 1,500 4,830
Depreciation and amortization.................................. 1,153 1,385
Amortization of gain on sale/leaseback......................... (96)
Amortization of security premiums, net......................... 3 188
Securities gains, net.......................................... (9) (1,535)
Gain on sale of other real estate owned, net................... (52) (147)
Writedowns of other real estate owned.......................... 115 466
Deferred income tax expense.................................... 313 282
(Increase) decrease in other assets and other liabilities,
net........................................................... (29,249) 3,404
------- --------
Net cash (used) provided by operating activities.......... (21,689) 11,547
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale................ 30,014 17,815
Proceeds from maturities of securities available-for-sale........... 17,711 5,634
Purchases of securities available-for-sale.......................... (99,305) (1,087)
Net decrease in short-term investments.............................. 10,000
Net decrease in loans............................................... 27,468 980
Proceeds from sales of other real estate owned...................... 945 1,481
Proceeds from loans held-for-sale................................... 9,050
Purchases of premises and equipment................................. (1,151) (20)
------- --------
Net cash (used) provided by investing activities.......... (15,268) 34,803
Cash flows from financing activities:
Net decrease in nontime deposits.................................... (67,966) (87,381)
Net increase in certificates of deposit............................. 1,062 73,026
Net increase (decrease) in borrowings............................... 79,850 (17,665)
Treasury stock acquired............................................. (1,018)
Issuance of common stock for cash, net.............................. 465 341
------- --------
Net cash provided (used) by financing activities.......... 12,393 (31,679)
------- --------
(Decrease) increase in cash and cash equivalents.................... (24,564) 14,671
Cash and cash equivalents at beginning of year...................... 89,799 93,079
------- --------
Cash and cash equivalents at end of period.......................... $65,235 $107,750
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................................... $14,410 $ 11,083
======= ========
Income taxes..................................................... $12,442 $ 1,032
======= ========
Noncash transactions:
Transfers from other assets to securities available-for-sale........ $ 4,180 $ 250
======= ========
Transfers from loans to other real estate owned, net................ $ 1,383 $ 2,790
======= ========
Financed other real estate owned sales.............................. $ 565
========
Common stock issuance............................................... $ 199 $ 76
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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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.
Any 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 Annual Report on Form 10-K for the fiscal
year ended December 31, 1995. The results of operations for the
three-month period ended March 31, 1996 are not necessarily
indicative of the results of operations for the full year or any
other interim period.
NOTE 2: Analysis of the reserve for possible loan losses for the three
months ended March 31, 1996 and 1995 is as follows:
1996 1995
------- --------
(DOLLARS IN
THOUSANDS)
Balance at beginning of period.................... $56,029 $ 64,088
Chargeoffs/transfers.............................. (2,637) (10,162)
Recoveries on loans previously charged-off........ 906 3,086
------- --------
Net chargeoffs/transfers.......................... (1,731) (7,076)
Provided from operations.......................... 1,500 4,830
------- --------
Balance at end of period.......................... $55,798 $ 61,842
======= ========
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.
NOTE 3: At March 31, 1996, 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..................... $410,000
Standby letters of credit and financial
guarantees written............................. 53,000
Commercial letters of credit..................... 3,000
Foreign exchange contracts....................... 800
NOTE 4: Net income per share is computed using the weighted average number
of shares of common stock and common stock equivalents outstanding.
Common stock equivalents consist primarily of dilutive stock
options computed under the treasury stock method. Average dilutive
common stock equivalents totaled 360,105 and 217,791 for the
three-month periods ended March 31, 1996 and 1995, respectively.
6
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net income for the quarter ended March 31, 1996, was $4.5 million, or $0.25
per share, compared with $2.8 million, or $0.16 per share, for the same period
of 1995, a per share increase of 56 percent. The Company's earnings continued to
be strengthened by large reductions in provision for possible loan losses and
expenses associated with foreclosed assets and troubled loan workout. The $3.3
million decline in the provision for possible loan losses and the $1.7 million
drop in foreclosed asset and workout expense were directly attributable to the
Company's successful efforts in the reduction of substandard and nonperforming
assets and improvement in overall credit quality of the loan portfolio. This
quarter's earnings growth over the same period last year was further aided by
lower operating expenses. The earnings results also resulted in a substantial
improvement in return on average equity to 10.41 percent from 7.00 percent for
the same quarter a year ago, while return on average assets improved to .94
percent from .62 percent a year ago.
This 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, 1995. Certain amounts reported for
prior periods have been reclassified to conform with the 1996 presentation.
NET INTEREST INCOME ANALYSIS
Net interest income on a fully taxable equivalent basis totaled $23.5
million for the three-month period ended March 31, 1996, compared with $24.7
million for the same period of 1995. The $1.2 million decrease was principally
caused by a decline in interest rate margin and spread fueled by higher rates
paid on time certificates of deposit and lower yields on securities this quarter
compared with a year ago. A decline in market interest rates, which began in
mid-1995, continued into the first quarter of this year. As a result, yield on
interest-earning assets decreased from 8.66 percent in the first quarter of 1995
to 8.34 percent this quarter. This decrease in yield on interest-earning assets
was largely due to a 34 basis point yield decline on securities from 6.42
percent last year to 6.08 percent this year. Yield on loans was up slightly to
9.44 percent from 9.42 percent a year ago. The Company's loan yield this quarter
reflects the benefit of a $35 million decrease in average nonaccrual loans,
which are included in the loan yield calculation, and the benefit of a higher
level of interest income recoveries on former nonaccrual loans.
The cost of interest-bearing liabilities, which consists principally of
deposits, was 4.15 percent this quarter compared with 3.61 percent a year ago, a
54 basis point increase. The higher cost this year of interest-bearing
liabilities was the result of increases in rates paid on deposits by the Company
in 1995 in response to competition for deposits and to satisfy funding needs.
Over the past two quarters deposit rates have remained constant and cost of
interest-bearing liabilities stabilized at 4.15 percent. This spring the Company
launched a new consumer marketing strategy which includes, among other features,
very competitive deposit products. The expected effect of these competitive
products is deposit growth accompanied by a reduction of service charge fee
income with little change to deposit rates.
The first quarter's interest rate margin and spread of 5.13 percent and
4.19 percent, respectively, were below the peak period results of 5.92 percent
and 5.05 percent, respectively, achieved in the first quarter of 1995. The
decreased margin and spread from a year ago reflects the lower yield on earning
assets and higher cost of deposits this year. Interest rate margin and spread
have continued to narrow since the historical highs of the first quarter of 1995
at a decreasing rate. In comparison with the fourth quarter of 1995, interest
rate margin declined a more modest 10 basis points and spread declined a minimal
4 basis points. Further pressure on margin and spread is expected as yields on
earning assets change with market conditions and balance sheet mix. The net
effect on net interest income from changes in rates this quarter as compared
with the same period a year ago was a decrease of $1.3 million.
Average earning assets for the quarter were $1.85 billion, or $152 million
higher than the same period last year. Lower average loan and excess fund sold
balances of $25 million and $10 million, respectively, were more than offset by
an increase in average securities of $187 million. The higher average securities
were principally funded by an increase in short-term repurchase agreement
borrowings at a modest 110 basis point approximate average spread. Average
interest-bearing liabilities increased $144 million to $1.43 billion this
quarter reflecting increases in average borrowings of $132 million and average
time deposits of $91 million
7
9
while lower-cost regular savings, NOW and money market balances decreased $78
million. The net effect on net interest income from changes in volume of loans,
securities, deposits and other interest-bearing balances this quarter compared
with the same period a year ago was an increase of $70 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
March 31, 1996, when compared with the quarter ended March 31, 1995. Changes
attributable to both rate and volume are allocated on a weighted basis.
INCREASE (DECREASE) FROM
QUARTER ENDED MARCH 31, 1995
-------------------------------
AMOUNT DUE TO
CHANGES IN
QUARTER ENDED TOTAL -------------------
MARCH 31, 1996 CHANGE VOLUME RATE
-------------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Interest income:
Interest and fees on loans*.............. $29,208 $ (268) $ (361) $ 93
Interest and dividends on securities:
Taxable............................. 8,945 2,669 2,840 (171)
Non-taxable*........................ 117 (142) 95 (237)
Interest on excess funds and other....... 22 (149) (153) 4
------- ------- ------ -------
Total interest income*.............. 38,292 2,110 2,421 (311)
------- ------- ------ -------
Interest expense:
Interest on regular savings, NOW and
money market deposits.................. 3,698 (511) (440) (71)
Interest on time deposits................ 7,373 2,278 1,221 1,057
Interest on borrowings................... 3,671 1,540 1,570 (30)
------- ------- ------ -------
Total interest expense.............. 14,742 3,307 2,351 956
------- ------- ------ -------
Net interest income........................... $23,550 $(1,197) $ 70 $(1,267)
======= ======= ====== =======
<FN>
- ---------------
* Fully taxable equivalent at the federal income tax rate of 35 percent, and
includes applicable state taxes, net of federal benefit. The tax equivalent
adjustment on loans was $137 thousand and on non-taxable securities was $38
thousand for the quarter ended March 31, 1996.
NONINTEREST INCOME
Noninterest income decreased $1.7 million compared with the same quarter
last year which included $1.5 million in unrealized gains from the sale of
equity investments held by a venture capital subsidiary. Fee-based revenues,
including deposit service charges and asset management fees, were down slightly
from a year ago while corporate services income was up 13 percent, or $267
thousand. Other noninterest income decreased $219 thousand from a year ago due
mostly to a decline in residual income on maturing equipment leases which
customarily fluctuates from period to period.
NONINTEREST EXPENSE
Total noninterest expense was reduced over 10 percent, or $2.5 million, to
$21.6 million this quarter. The largest decreases were in foreclosed asset and
loan workout expense of $1.7 million commensurate with the decline in troubled
assets, deposit insurance assessment of $718 thousand due to lower premium rates
(Refer to "Deposit Insurance Assessment" below for a further discussion), and
other noninterest expense of $452 thousand. Partially offsetting these decreases
was higher salary and employee benefit expense, which includes $198 thousand in
severance-related costs in 1996 compared with $457 thousand a year ago.
Other noninterest expense decreased $452 thousand from the same quarter a
year ago to $6.2 million. Last year included provisions recorded in connection
with space consolidation, including the write-off of leases on abandoned
facilities, lease subsidies and leasehold improvements of $874 thousand. Also
lower was amortization of intangible assets of $290 thousand from last year
which included accelerated amortization of
8
10
certain core deposit intangible assets. Partially offsetting these expense
reductions were increases in equipment maintenance and depreciation expense of
$203 thousand associated with the Company's investment in computer hardware and
software, and higher all other noninterest expense of $536 thousand. The
increase in all other was almost entirely due to the settlement of certain
litigation in the first quarter of this year. The major components of other
noninterest expense were:
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
------ ------
(DOLLARS IN
THOUSANDS)
Furniture and equipment............................ $1,043 $ 840
Advertising and promotion.......................... 614 720
Legal and consulting............................... 596 598
Service bureau and other data processing........... 354 291
Amortization of intangibles........................ 292 582
Facility consolidation provisions.................. 18 874
All other.......................................... 3,238 2,702
------ ------
Total other noninterest expense............... $6,155 $6,607
====== ======
Deposit Insurance Assessment
Federal legislation was proposed in 1995 to recapitalize the Savings
Association Insurance Fund which may result in a one-time assessment on certain
deposits assumed by the Company in connection with its 1990 acquisition of Home
Owners Savings Bank, F.S.B., a failed savings association. The amount of such
potential assessment cannot be determined at this time, but could have a
material impact on the operating results of the Company in the period in which
the enabling legislation is enacted. Under the proposed legislation, subsequent
to the one-time charge, the insurance premium charged on the former thrift
deposits would be reduced.
INCOME TAXES
The Company recorded income taxes of $2.8 million compared with $1.5
million for the same period last year. The effective tax rate for the quarter
was 38.1 percent compared with 35.5 percent a year ago. The increase in
effective tax rate was attributable to the higher level of income this year
which reduced the marginal effect on taxable income of tax-exempt and tax
preference items.
As of March 31, 1996, included in other assets was a deferred tax asset of
approximately $16.9 million which is expected to be realized against future
taxable income. The Company believes that it is more likely than not that the
benefit of this deferred asset will be realized. The increase in the deferred
tax asset this quarter reflects the recognition for tax purposes of the
significant increase in the market valuation of the loan portfolio as taxable
income. The increase in market valuation reflects the reduction in substandard
loans and improvement in credit quality of the loan portfolio.
ASSETS
Total assets at March 31, 1996 were $1.96 billion, just under the $1.97
billion at December 31, 1995. Cash and due from banks and loans declined $25
million and $30 million, respectively, while securities increased $48 million
due to purchases during the quarter. Sales of loans held-for-sale resulted in a
$9.1 million decrease in this portfolio to $4.0 million.
9
11
The following table presents the composition of the loan portfolio:
MARCH 31, DECEMBER 31, MARCH 31,
1996 1995 1995
---------- ------------ ----------
(DOLLARS IN THOUSANDS)
Commercial and financial..................... $ 593,249 $ 642,940 $ 677,042
Commercial real estate:
Construction............................ 15,383 16,937 14,556
Developer, investor and land............ 202,066 207,710 253,963
Consumer:
Residential mortgage.................... 81,823 85,806 91,146
Home equity............................. 78,083 70,066 68,227
Indirect automobile installment......... 218,080 197,148 114,332
Other consumer.......................... 24,162 23,015 20,887
Lease financing.............................. 28,880 28,455 26,249
---------- ---------- ----------
Total loans........................ $1,241,726 $1,272,077 $1,266,402
========== ========== ==========
The commercial loan portfolios listed above totaled $811 million at March
31, 1996 reflecting a $135 million decrease from a year ago. These commercial
portfolios have been experiencing a net decline due to the combination of normal
amortization and the aggressive outflow of problem loans through collection,
chargeoff or third-party refinancings. This quarter the net outflow from the
commercial portfolios totaled $57 million and included a $13 million reduction
in overdrafts which were unusually high at December 31, 1995.
The indirect auto loan portfolio continues to experience strong growth as
planned. This quarter the portfolio increased 11 percent , or $21 million to
$218 million. Since March 31, 1995, the portfolio has grown a total of 91
percent, or $104 million. The home equity loan portfolio also experienced 11
percent growth this quarter and totaled $78 million following recent consumer
market promotions.
Securities increased $48 million during the quarter to $624 million at
March 31, 1996. The continued growth in the portfolio reflects net purchases of
$52 million of mostly U.S. Treasury and government agency securities and
automobile asset-backed securities. Partially offsetting the increase in
securities due to purchases was a change from an unrealized gain on securities
available-for-sale of $1.7 million at December 31, 1995 to an unrealized loss of
$5.7 million at March 31, 1996, a $7.4 million reduction. The decrease in the
value of the portfolio was attributed to a sharp decrease in bond prices late in
the quarter.
The change in unrealized valuation to market value on securities
available-for-sale also had the negative effect of decreasing stockholders'
investment by $4.3 million since year-end 1995. The unrealized gain reported as
part of stockholders' investment of $1.0 million, net of a $.7 million deferred
tax provision at December 31, 1995 changed to an unrealized loss of $3.3
million, net of a $2.4 million deferred tax benefit.
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 and purchased or
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. A nominal volume of fixed and variable rate residential mortgage
loans are sold to investors as they are originated.
At March 31, 1996, liquidity, which includes excess cash, funds sold and
unpledged securities, totaled approximately $299 million, or 15 percent of total
assets.
The funds needed to support the Company's loan and securities portfolios
are provided through a combination of commercial and retail deposits and
short-term borrowings. Total deposits decreased $66.9 million to $1.45 billion
since December 31, 1995. Demand deposits decreased $61.6 million since the
beginning of the year mainly due to seasonal fluctuations which have normally
occurred during the first quarter of the year.
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As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased $24.6 million during the three-month period ended March
31, 1996. Cash used by operations resulted largely from the net increase in
other assets and other liabilities partially offset by net interest income from
loans and securities, less the net difference of noninterest expense over
noninterest income. Cash used by investing activities was due to an excess of
purchases of securities over the proceeds from both the sales and maturities of
securities and the net decrease in loan volume. Net cash provided by financing
activities was primarily due to the increase in short-term borrowings partially
offset by the net decrease in nontime deposits.
At March 31, 1996, the parent company had $1.2 million in cash and due from
banks and $5 million in short-term securities purchased under agreements to
resell compared with $1.0 million in cash and due from banks and $5 million in
securities purchased under agreements to resell at December 31, 1995.
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. An institution with more assets repricing than
liabilities within a given time frame is considered asset sensitive ("positive
GAP") and in time frames with more liabilities repricing than assets it is
liability sensitive ("negative GAP"). Within GAP limits established by the Board
of Directors, the Company seeks to balance the objective of insulating the net
interest margin from rate exposure with that of taking advantage of anticipated
changes in rates in order to enhance income. The Company's policy is to limit
its one-year cumulative GAP position to 2.5 times equity, presently equal to
approximately 22 percent of total assets. The Company manages its interest rate
GAP primarily by lengthening or shortening the maturity structure of its
securities portfolio.
The Company's GAP presentation may not reflect the degrees to which
interest-earning assets and core deposit costs respond to changes in market
interest rates. The Company's rate-sensitive assets consist primarily of loans
tied to the prime rate. As interest rates declined in the first three months of
1996, the prime rate and the Company's yield on earning assets decreased while
the rate paid on interest-bearing liabilities remained constant.
The following table summarizes the Company's GAP position at March 31,
1996. 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,
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
March 31, 1996, the one-year cumulative GAP position was negative at $121
million, or approximately 6 percent of total assets.
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INTEREST SENSITIVE PERIODS
-------------------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- ------
(DOLLARS IN MILLIONS)
Loans, net of reserve................. $683 $ 34 $ 88 $ 381 $1,186
Securities............................ 31 12 98 483 624
Other assets.......................... 15 139 154
---- ---- ----- ------ ------
Total assets..................... $714 $ 61 $ 186 $1,003 $1,964
---- ---- ----- ------ ======
Interest-bearing deposits............. $333 $ 97 $ 266 $ 439 $1,135
Borrowed funds........................ 323 323
Noninterest-bearing demand deposits... 63 248 311
Other liabilities and stockholders'
equity.............................. 195 195
---- ---- ----- ------ ------
Total liabilities and equity..... $719 $ 97 $ 266 $ 882 $1,964
---- ---- ----- ------ ======
GAP for period........................ $ (5) $(36) $ (80) $ 121
==== ---- ----- ------
Cumulative GAP........................ $(41) $(121) $ 0
==== ===== ======
As a percent of total assets.......... (0.25%) (2.09%) (6.16%)
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. 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.
At March 31, 1996, substandard loans were $46 million compared with $44
million at December 31, 1995 and $107 million a year ago. The decrease from last
year of 57 percent, or $61 million, was the direct result of the Company's
aggressive efforts to reduce the level of problem credits. This quarter the
level of substandard loans increased slightly; however, such nominal
fluctuations can be expected as the substandard balance approaches industry and
peer group norms. 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 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, 1996, approximately 55 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 45 percent
were collateralized by commercial real estate development, approximately 40
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 certain key indicators of asset quality:
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MARCH 31, DECEMBER 31, MARCH 31,
1996 1995 1995
--------- ------------ ---------
(DOLLARS IN THOUSANDS)
Nonperforming assets:
Nonaccrual loans..................................... $19,204 $19,930 $44,595
Accruing loans 90 days or more past due.............. 471 257 478
Other real estate owned (OREO), net.................. 3,159 3,015 9,990
Restructured loans................................... 67 5,783 9,251
------- ------- -------
Total nonperforming assets................................ $22,901 $28,985 $64,314
======= ======= =======
Reserve for possible loan losses.......................... $55,798 $56,029 $61,842
Net chargeoffs for the quarter............................ $ 1,731 $ 7,617 $ 7,076
OREO reserve.............................................. $ 682 $ 568 $ 1,473
Ratios:
Reserve to nonaccrual loans.......................... 290.6% 281.1% 138.7%
Reserve to total of nonaccrual loans, accruing loans
90 days or more past due, and restructured loans... 282.6% 215.7% 113.8%
Reserve to period-end loans.......................... 4.5% 4.4% 4.9%
Nonaccrual loans and accruing loans over 90 days past
due to period-end loans............................ 1.6% 1.6% 3.6%
Nonperforming assets to period-end loans and OREO.... 1.8% 2.3% 5.0%
Annualized net chargeoffs to average loans........... .6% 2.4% 2.2%
OREO reserve to OREO................................. 17.8% 15.9% 12.9%
As shown in the above table, nonperforming assets decreased $6.1 million
since December 31, 1995 and $41.4 million from a year ago to $22.9 million. The
twelve-month decline reflects the Company's successful efforts in reducing the
overall level of problem assets. This quarter's decline was due almost entirely
to a decrease in loans reported as restructured while the amount of nonaccrual
loans and other real estate owned remained relatively constant. The level of
nonperformers at March 31, 1996 is within the range of industry norms relative
to the Company's size and total volume of loans. Therefore, the large quarterly
declines in nonperforming assets that the Company experienced over the last
two-three years is not expected to continue. However, the Company is continuing
to consider further accelerated disposition programs such as bulk sales of
troubled assets.
At March 31, 1996, total impaired loans were $19.3 million, comprised of
$2.7 million that required a reserve for possible loan losses of $.3 million and
$16.6 million that did not require a related reserve. Impaired loans, as defined
in Statement of Financial Accounting Standards No. 114 ("SFAS No. 114") are
loans recognized by the Company as nonaccrual and restructured.
The position of the reserve for possible loan losses continues to
strengthen and is well in excess of nonaccruals and total nonperforming assets.
As of March 31, 1996, the reserve stood at $55.8 million, or 291 percent of
nonaccruals, compared with $56.0 million, or 281 percent at December 31, 1995
and $61.8 million and 139 percent a year ago. The favorable impact of the
reduced level of problem assets was evidenced in this quarter's loan loss
provision of $1.5 million and net chargeoffs of $1.7 million compared to a
provision of $4.8 million and net chargeoffs of $7.1 million for the same
quarter a year ago. Subject to adverse changes in economic conditions that could
result in a deterioration of the Company's loan portfolio, such reduced levels
of provisions and chargeoffs are likely to continue.
CAPITAL AND DIVIDENDS
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- and off-balance sheet items on a risk-weighted basis ("risk-based
assets"). Risk weightings are as determined by banking regulators for the
industry as a whole. Under these requirements, the Company must meet minimum
Tier 1 and Total risk-based capital ratios (capital, as defined in the
regulations, divided by risk-based assets) of 4 percent and 8 percent,
respectively. Tier 1 capital is essentially shareholders' investment, net of
intangible assets and Tier 2 capital is the allowable portion of the loan loss
reserve (as defined) and discounted subordinated debt. Total capital is
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the combination of Tier 1 and Tier 2. The third requirement is a leverage
capital ratio, defined as Tier 1 capital divided by total average assets, net of
intangibles. All but the most highly-rated banks are required to maintain a
minimum of 4 percent. The Company has not been notified of a specific
requirement above the minimum.
At March 31, 1996, and December 31, 1995, the Company's consolidated
risk-based assets totaled $1.62 billion and $1.63 billion, respectively. The
capital ratios and regulatory minimum requirements applicable to the Company
were:
MARCH 31, 1996 DECEMBER 31, 1995
-------------------------------------- --------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------------- ----------------- ----------------- -----------------
MINIMUM MINIMUM MINIMUM MINIMUM
ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
Tier 1 leverage capital............. $167.8 $ 77.5 8.68% 4.00% $167.4 $ 75.8 $ 8.83% 4.00%
Tier 1 capital...................... 167.8 65.0 10.32% 4.00% 167.4 65.3 10.24% 4.00%
Total (Tier 1 and Tier 2) capital... 188.1 127.2 11.83% 8.00% 187.8 127.7 11.75% 8.00%
The Tier 1 leverage capital ratios and regulatory minimum requirements for
the Company's subsidiary banks at March 31, 1996 and December 31, 1995 were:
MARCH 31, 1996 DECEMBER 31, 1995
-------------------------------------- --------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------------- ----------------- ----------------- -----------------
MINIMUM MINIMUM MINIMUM MINIMUM
ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
USTrust............................. $142.0 $109.7 7.77% 6.00% $141.7 $107.3 7.92% 6.00%
USTC................................ 5.1 1.0 29.33% 6.00% 5.0 .9 32.99% 6.00%
UST/Conn............................ 9.3 4.2 8.90% 4.00% 9.1 4.4 8.31% 4.00%
Capital ratios have been calculated consistent with regulatory policy which
excludes the impact of SFAS No. 115 and the recording of an unrealized gain/loss
on securities available-for-sale. The Company and each of its subsidiary banks
are in compliance with their respective capital requirements.
In the first quarter of this year, the Company recorded dividends
receivable from subsidiaries of $1 million from USTrust, the Company's
Massachusetts-based and largest subsidiary bank, $.5 million from United States
Trust Company, an asset management and trust subsidiary, and $.5 million from
JSA Financial Corporation, a nonbanking subsidiary specializing in the
liquidation of problem assets. These subsidiary dividends are payable in April,
1996. Also during the quarter, the Company declared a quarterly cash dividend of
$0.06 per share to stockholders for a total of $1.1 million payable April 25,
1996. This quarterly dividend reflects a 20 percent increase over the dividend
declared and paid in the fourth quarter of 1995 and reflects the restoration of
a regular quarterly shareholder dividend program.
In late 1995, the Board approved a stock repurchase program, authorizing
the Company to repurchase up to 500,000 shares, or approximately 2.8 percent of
the Company's common stock outstanding, subject to prevailing market conditions
and other factors. The repurchased shares will be held as treasury shares to be
used for general corporate purposes, including employee benefit plans. Purchases
may be made on the open market or in privately negotiated transactions. At March
31, 1996, a total of 75,000 shares had been repurchased under this program.
RECENT ACCOUNTING DEVELOPMENTS
As of January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." This Statement requires a review for impairment of long-lived assets and
certain identifiable intangibles to be held and used by an entity whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. An impairment would be estimated if the sum of the
expected future cash flows to result from the use and eventual disposition of
the asset is less than the carrying amount of the asset. This Statement does not
apply to financial instruments, core deposit intangibles, mortgage and other
servicing rights, or deferred tax assets. The
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adoption of this Statement did not have any impact on the Company's financial
position or results of operations.
Also on January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." This Statement amends certain provisions of SFAS No.
65, "Accounting for Certain Mortgage Banking Activities," prohibiting the
capitalization of mortgage loan servicing rights acquired through loan
origination activities, by requiring that both originated and purchase mortgage
loan servicing rights be capitalized. In addition, SFAS No. 122 requires all
capitalized mortgage loan servicing rights be evaluated for impairment based on
their fair values. The adoption of this Statement did not have any impact on the
Company's financial position or results of operations.
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PART II. OTHER INFORMATION
For the quarter ended March 31, 1996, Items 2, 3, 4 and 5 of Part II are
either inapplicable or would elicit a response of "None" and therefore no
reference thereto has been made herein.
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of operations, the Company and its subsidiaries
become defendants in a variety of judicial and administrative proceedings. In
the opinion of management, however, there is no proceeding pending, or to the
knowledge of management threatened, which is likely to result in a material
adverse change in the financial condition or results of operations of the
Company and its subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Summary Financial Information.
(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: May 14, 1996
By: /S/ NEAL F. FINNEGAN
------------------------------------------
Neal F. Finnegan, President and
Chief Executive Officer
Date: May 14, 1996
By: /S/ JAMES K. HUNT
-------------------------------------------
James K. Hunt, Executive Vice President,
Treasurer, and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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