<PAGE> 1
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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 JUNE 30, 1995 COMMISSION FILE #0-9623
------------------------
UST CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
(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 July 31, 1995,
there were issued and outstanding 17,695,478 shares of common stock, par value
.625 per share.
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<PAGE> 2
UST CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets -- June 30, 1995 and December 31, 1994............... 3
Consolidated Statements of Income -- Three and Six Months Ended June 30, 1995
and 1994....................................................................... 4
Consolidated Statements of Changes in Stockholders' Investment -- Six Months
Ended
June 30, 1995 and 1994......................................................... 5
Consolidated Statements of Cash Flows -- Six Months Ended June 30, 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........................................................... 21
ITEM 4. Submission of Matters to a Vote of Security Holders......................... 21
ITEM 6. Exhibits and Reports on Form 8-K............................................ 22
SIGNATURES.......................................................................... 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UST CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
----------- ------------
(UNAUDITED)
<S> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Cash, due from banks and interest-bearing deposits.......................... $ 74,632 $ 93,079
Excess funds sold to banks.................................................. 95,000 10,000
Securities:
Securities available-for-sale:
Mortgage-backed securities.............................................. 186,022 195,009
U.S. Treasury, corporate notes, and other............................... 186,336 206,631
----------- ------------
Total securities available-for-sale................................ 370,358 401,640
Securities held-to-maturity............................................... 100 100
----------- ------------
Total securities................................................... 370,458 401,740
Loans:
Loans -- net of unearned discount of $28,321,000 in 1995 and $18,619,000
in 1994 (Note 2)........................................................ 1,288,873 1,276,683
Reserve for possible loan losses (Notes 2 and 3).......................... (61,439 ) (64,088)
----------- ------------
Total loans, net................................................... 1,227,434 1,212,595
Premises, furniture and equipment, net...................................... 31,736 32,403
Intangible assets, net...................................................... 5,403 6,445
Other real estate owned, net (Note 2)....................................... 8,822 9,958
Other assets................................................................ 33,073 37,012
----------- ------------
Total assets....................................................... $1,846,558 $1,803,232
=========== ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Demand:
Noninterest-bearing..................................................... $ 346,515 $ 371,716
Interest-bearing........................................................ 156,409 168,434
Savings:
Money market............................................................ 224,822 271,898
Other................................................................... 250,280 285,350
Time:
Certificates of deposit over $100,000................................... 102,094 79,373
Other................................................................... 415,500 314,035
----------- ------------
Total deposits..................................................... 1,495,620 1,490,806
Short-term borrowings....................................................... 164,530 158,989
Other borrowings............................................................ 8,464 9,964
Other liabilities........................................................... 17,783 10,839
----------- ------------
Total liabilities.................................................. 1,686,397 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 -- 17,689,927 and 17,614,792 shares in 1995 and 1994,
respectively............................................................ 11,056 11,009
Additional paid-in capital................................................ 72,624 72,129
Retained earnings......................................................... 79,497 73,183
Unrealized loss on securities available-for-sale, net of tax.............. (3,126 ) (23,601)
Deferred compensation and other........................................... 110 (86)
----------- ------------
Total stockholders' investment............................................ 160,161 132,634
----------- ------------
Total liabilities and stockholders' investment..................... $1,846,558 $1,803,232
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
UST CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1995 1994 1995 1994
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.............................. $29,812 $25,212 $59,106 $49,730
Interest and dividends on securities:
Taxable............................................... 5,902 6,910 12,180 14,139
Non-taxable........................................... 54 53 108 105
Dividends............................................. 35 42 159 78
Interest on excess funds and other...................... 664 498 834 551
------- ------- ------- -------
Total interest income............................ 36,467 32,715 72,387 64,603
------- ------- ------- -------
Interest expense:
Interest on deposits.................................... 10,835 8,203 20,139 16,656
Interest on short-term borrowings....................... 1,842 1,511 3,773 2,819
Interest on other borrowings............................ 190 322 391 644
------- ------- ------- -------
Total interest expense........................... 12,867 10,036 24,303 20,119
------- ------- ------- -------
Net interest income..................................... 23,600 22,679 48,084 44,484
Provision for possible loan losses (Note 2)............... 3,670 6,545 8,500 12,258
------- ------- ------- -------
Net interest income after provision for possible loan
losses................................................ 19,930 16,134 39,584 32,226
------- ------- ------- -------
Noninterest income:
Asset management fees................................... 3,486 3,383 6,742 7,696
Corporate services income............................... 2,107 1,901 4,146 3,921
Service charges on deposit accounts..................... 1,188 1,232 2,440 2,466
Gain (loss) on sale of securities, net.................. (89) 496 1,446 518
Other................................................... 315 604 943 916
------- ------- ------- -------
Total noninterest income......................... 7,007 7,616 15,717 15,517
------- ------- ------- -------
Noninterest expense:
Salary and employee benefits............................ 10,759 10,289 21,904 20,429
Net occupancy expense................................... 1,826 1,914 3,734 3,990
Foreclosed asset and workout expense (Note 2)........... 1,153 1,582 3,470 3,912
Credit card processing expense.......................... 1,032 904 2,103 1,834
Deposit insurance assessment............................ 1,016 1,174 2,045 2,348
Other................................................... 5,425 6,188 12,025 11,875
------- ------- ------- -------
Total noninterest expense........................ 21,211 22,051 45,281 44,388
------- ------- ------- -------
Income before income taxes................................ 5,726 1,699 10,020 3,355
Income tax provision.................................... 2,182 376 3,706 1,029
------- ------- ------- -------
Net income....................................... $ 3,544 $ 1,323 $ 6,314 $ 2,326
======= ======= ======= =======
Per share data:
Net income (Note 5)..................................... $ .20 $ .07 $ .35 $ .13
Cash dividends declared................................. -- -- -- --
Weighted average number of common shares (Note 5)......... 18,029,518 17,864,532 17,933,378 17,820,022
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
UST CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED DEFERRED
---------------- PAID-IN RETAINED GAIN/(LOSS) COMPENSATION
SHARES AMOUNT CAPITAL EARNINGS ON SECURITIES AND OTHER
------ ------- ---------- -------- ------------- ------------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993........... 17,305 $10,815 $ 69,694 $ 68,437 $ 3,335 $538
Net income.......................... 2,326
Stock option exercises and stock
issued under restricted stock
plans............................. 74 47 422
Change from unrealized gain to loss
on securities available-for-sale,
net of tax........................ (17,707)
Activity in Directors Deferred
Compensation Program, net......... 42
------ ------- -------- -------- --------- ----
Balance June 30, 1994............... 17,379 $10,862 $ 70,116 $ 70,763 $ (14,372) $580
====== ======= ======== ======== ========= ====
Balance December 31, 1994........... 17,615 $11,009 $ 72,129 $ 73,183 $ (23,601) $(86)
Net income.......................... 6,314
Stock option exercises and stock
issued under restricted stock
plans............................. 75 47 495
Decrease in unrealized loss on
securities available-for-sale, net
of tax............................ 20,475
Activity in Directors Deferred
Compensation Program, net......... 196
------ ------- -------- -------- --------- ----
Balance June 30, 1995............... 17,690 $11,056 $ 72,624 $ 79,497 $ (3,126) $110
====== ======= ======== ======== ========= ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
UST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------
1995 1994
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 6,314 $ 2,326
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses.............................. 8,500 12,258
Depreciation and amortization................................... 2,722 2,688
Amortization of gain on sale/leaseback.......................... (192) (192)
Amortization of security premiums, net.......................... 320 296
Gain on sale of securities, net................................. (1,446) (518)
Gain on sale of other real estate owned, net.................... (252) (277)
Writedowns of other real estate owned........................... 1,030 1,523
Deferred income tax benefit..................................... 604 3,421
Increase in accruals and other, net............................. 7,462 9,274
-------- --------
Net cash provided by operating activities.................. 25,062 30,799
Cash flows provided by investing activities:
Proceeds from sales of securities available-for-sale............... 47,047 50,585
Proceeds from maturities of securities available-for-sale.......... 11,308 105,205
Purchases of securities available-for-sale......................... (2,171) (125,690)
Net (increase) decrease in short-term investments.................. (85,000) 46,485
Net (increase) decrease in loans................................... (26,345) 43,539
Proceeds from other real estate owned.............................. 3,364 3,309
Purchases of premises and equipment................................ (1,012) (1,143)
-------- --------
Net cash (used) provided by investing activities........... (52,809) 122,290
Cash flows used by financing activities:
Net decrease in nontime deposits................................... (119,372) (87,287)
Net increase (decrease) in certificates of deposit................. 124,186 (37,415)
Net increase (decrease) proceeds on short-term borrowings.......... 5,541 (44,834)
Net payments on other borrowings................................... (1,500)
Issuance of common stock for cash, net............................. 445 422
-------- --------
Net cash provided (used) by financing activities........... 9,300 (169,114)
-------- --------
Decrease in cash and cash equivalents.............................. (18,447) (16,025)
Cash and cash equivalents at beginning of year..................... 93,079 90,198
-------- --------
Cash and cash equivalents at end of period......................... $ 74,632 $ 74,173
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................................ $ 23,969 $ 20,103
======== ========
Income taxes.................................................... $ 2,192 $ 1,902
======== ========
Noncash transactions:
Transfers from other assets to securities available-for-sale....... $ 250
========
Transfers from loans to other real estate owned, net............... $ 3,571 $ 1,393
======== ========
Financed other real estate owned sales............................. $ 565 $ 4,337
======== ========
Common stock issuance.............................................. $ 97 $ 46
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 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- and six-month periods ended June 30,
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 Statement. 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 six months ended
June 30, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance at beginning of period..................... $ 64,088 $ 64,465
Chargeoffs/transfers............................... (15,873) (16,289)
Recoveries on loans previously charged-off......... 4,724 2,100
------- -------
Net chargeoffs/transfers........................... (11,149) (14,189)
Provided from operations........................... 8,500 12,258
------- -------
Balance at end of period........................... $ 61,439 $ 62,534
======= =======
</TABLE>
The reserve for possible loan losses is determined based on a consistent,
systematic method which analyzes the size and risk of the loan portfolio on a
monthly basis. See "Credit Quality and Reserve for Possible Loan Losses" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations herein.
7
<PAGE> 8
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: At June 30, 1995, the Company had the following off-balance sheet
financial instruments whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
---------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Commitments to extend credit......................... $ 277,000
Standby letters of credit and financial guarantees
written............................................ 54,000
Commercial letters of credit......................... 5,000
Foreign exchange contracts........................... 1,000
</TABLE>
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 344,608 and 275,424 for the three- and
six-month periods ended June 30, 1995, respectively, and 505,258 and
479,498 for the three-and six-month periods ended June 30, 1994,
respectively.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AT JUNE 30, 1995
INTRODUCTION
The operating results for the quarter ended June 30, 1995, reflect the
Company's continued progress in the resolution of problem assets and increased
level of operating profits. Substandard loans, as determined by the Company's
internal rating system, peaked at $265 million at December 31, 1993, following a
recessionary period in the local economy. Such loans have been reduced to $94
million at June 30, 1995. This reflects a reduction of 65%, or $171 million,
since December 1993 and 12%, or $13 million, during the quarter. Nonperforming
assets, consisting of substandard nonaccrual 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 $7.5 million this quarter to $56.8
million. Throughout the remainder of this year, the present Company strategy to
reduce aggressively the level of problem assets will continue and may include
bulk sales to further accelerate the process. See "Credit Quality and Reserve
for Possible Loan Losses" for a further discussion.
The reduced level of problem assets has directly contributed to the much
improved earnings results for the quarter by facilitating a lower loan loss
provision and reduction in foreclosed asset and workout expense. These credit
cost reductions when combined with the Company's initiatives to reduce
noninterest expense and improve efficiency, and a stronger net interest margin,
resulted in net income for the quarter ended June 30, 1995 of $3.5 million, or
$.20 per share, an increase of 168% over net income of $1.3 million, or $.07 per
share, for the corresponding period a year ago.
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.
ASSETS
Total assets at June 30, 1995 were $1.85 billion, an increase of $43
million from December 31, 1994. Excess funds sold to other banks increased $85
million since year end reflecting the proceeds from net securities sales and
maturities of $56 million, a decrease in cash and due from banks of $18 million
and smaller increases in deposits and short-term borrowings. Total loans, before
reserve for possible loan losses, were $1.29 billion, an increase of $12.2
million for the first half of the year. Total loans at June 30, 1995, include
however, $10.5 million of short-term commercial paper. Total loans, excluding
commercial paper activity, increased $12 million during the quarter compared
with a decrease of $10.3 million during the first quarter and a decrease of
$72.2 million for the twelve months ended December 31, 1994.
The following table presents the composition of the loan portfolio:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, DECEMBER 31,
1995 1995 1994 1993
---------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and financial................. $ 685,525 $ 677,042 $ 705,075 $ 760,446
Commercial real estate:
Construction........................... 14,164 14,556 13,109 35,295
Developer, investor and land........... 242,587 253,963 265,624 321,965
Consumer:
Residential mortgage................... 89,677 91,146 90,643 85,889
Home equity............................ 70,509 68,227 64,068 63,188
Indirect automobile installment........ 139,165 114,332 90,255 31,848
Other consumer......................... 20,787 20,887 21,964 23,944
Lease financing.......................... 26,459 26,249 25,945 26,348
---------- ---------- ---------- ----------
Total loans.................... $1,288,873 $1,266,402 $1,276,683 $1,348,923
========== ========== ========== ==========
</TABLE>
9
<PAGE> 10
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 automobile loans increased 22%, or $24.9
million, for the quarter ended June 30, 1995 and 54%, or $48.9 million, for the
six-month period. This year's increase in indirect automobile loans follows
growth of 183%, or $58.4 million, during the year ended December 31, 1994.
Securities decreased $31.2 million from $401.7 million at year end to
$370.5 million at June 30, 1995. The decrease reflects the sale of $58.4 million
of mostly U.S. Treasury securities and corporate notes which was partially
offset by a reduction in the unrealized loss on securities available-for-sale.
At June 30, 1995, the Company's securities portfolio consisted of $370.4
million of securities available-for-sale reported at fair value and $.1 million
of securities held-to-maturity reported at amortized cost consistent with
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"). Securities
available-for-sale are reported net of gross unrealized losses of $5.5 million
at June 30, 1995 compared with $29.0 million at December 31, 1994. The reduction
in gross unrealized loss on securities available-for-sale of $23.5 million
reflects the improvement in bond prices which began earlier this year and has
continued into the second quarter. The current upward trend compares with the
sharp decline in bond prices in 1994 due to the rapid rise in interest rates.
The decrease in the unrealized loss on securities available-for-sale also
had a positive effect of increasing stockholders' investment by $20.5 million
since the beginning of the year. The unrealized loss recorded as part of
stockholders' investment decreased from $23.6 million, net of a $5.4 million
deferred tax benefit at December 31, 1994, to $3.1 million, net of a $2.4
million deferred tax benefit at June 30, 1995.
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 June 30, 1995, liquidity, which includes excess cash, excess funds sold
and unpledged securities, totaled approximately $290 million, or 16% of total
assets, a $31 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 increased $4.8 million to $1.5 billion
since December 31, 1994. Savings deposits decreased $82.2 million while time
deposits increased $124.2 million as investors were attracted to the Company's
more aggressive certificate of deposit pricing. Demand deposits decreased $37.2
million since the beginning of the year.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased $18.4 million during the six-month period ended June 30,
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 used by investing activities was due principally to the
net increases in short-term investments and net increases in loans partially
offset by an excess of proceeds from sales and maturities of securities over
securities purchases. Cash provided by financing activities was primarily the
result of increases in certificates of deposit and short-term borrowings,
partially offset by decreases in nontime deposits.
10
<PAGE> 11
At June 30, 1995, the parent company had $1.3 million in cash and due from
banks and $10.5 million in commercial paper compared with $2.3 million in cash
and due from banks and $16 million in U.S. Treasury securities at December 31,
1994. For the six months ended June 30, 1995, the Company received $1.0 million
in dividends from United States Trust Company ("USTC"), a Massachusetts-based
subsidiary. During the same period the Company contributed as capital $1.0
million to UST Bank/Connecticut ("UST/Conn"), a Connecticut-based banking
subsidiary and $6.5 million to JSA Financial Corp. ("JSA"), a nonbanking
subsidiary of the Company specializing in the liquidation of problem assets.
This capital contribution to JSA facilitated the purchase of $5.1 million in
problem assets from UST/Conn and provided JSA with additional operating capital.
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% 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 rose during the first quarter of 1995
before leveling off in the second quarter, the prime rate and, therefore, the
Company's yield on earning assets increased faster than the rate paid on
interest-bearing liabilities.
11
<PAGE> 12
<TABLE>
The following table summarizes the Company's GAP position at June 30, 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 June 30, 1995, the
one-year cumulative GAP position was positive at $156 million, or approximately
8% of total assets.
<CAPTION>
INTEREST SENSITIVE PERIODS
-----------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Loans, net of reserve........................ $ 772 $ 18 $ 84 $ 354 $1,228
Excess funds sold............................ 95 95
Securities................................... 2 25 344 371
Other assets................................. 1 2 150 153
----- ------ ----- ------ ------
Total assets....................... $ 867 $ 21 $ 111 $ 848 $1,847
----- ------ ----- ------ ======
Interest-bearing deposits.................... $ 427 $ 55 $ 188 $ 478 $1,148
Borrowed funds............................... 165 4 4 173
Noninterest-bearing demand deposits.......... 348 348
Other liabilities and stockholders' equity... 4 174 178
----- ------ ----- ------ ------
Total liabilities & equity......... $ 596 $ 59 $ 188 $1,004 $1,847
----- ------ ----- ------ ======
GAP for period............................... $ 271 $ (38) $ (77) $ (156)
----- ------ ----- ------
Cumulative GAP............................... $ 233 $ 156 $ 0
====== ===== ======
As a percent of total assets................. 14.67% 12.62% 8.45%
</TABLE>
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 June 30, 1995 substandard loans were $94 million compared with $107
million at the beginning of the quarter and $126 million at December 31, 1994.
Loans reported as substandard for the purpose of this disclosure 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
12
<PAGE> 13
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 June 30, 1995, approximately 65 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.
<TABLE>
The following table displays the Company's total nonperforming assets and
measures performance regarding key indicators of asset quality:
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30,
1995 1995 1994 1994
-------- --------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans(1)........................ $38,170 $44,595 $ 59,944 $69,639
Accruing loans 90 days or more past due.... 1,576 478 1,409 950
Other real estate owned (OREO), net(1)..... 8,822 9,990 9,958 5,168
Restructured loans......................... 8,265 9,251 15,757 18,417
------- ------- ------- -------
Total nonperforming assets......... $56,833 $64,314 $ 87,068 $94,174
======= ======= ======= =======
Reserve for possible loan losses(1).......... $61,439 $61,842 $ 64,088 $62,534
Net chargeoffs for the quarter(1)............ $ 4,073 $ 7,076 $ 24,658(3) $ 6,673
OREO reserve(1).............................. $ 1,257 $ 1,473 $ 1,044 $ 1,596
Ratios:(1)
Reserve to nonaccrual loans................ 161.0% 138.7% 106.9% 89.8%
Reserve to total of nonaccrual loans,
accruing loans 90 days or more past due,
and restructured loans.................. 128.0% 113.8% 83.1% 70.3%
Reserve to period-end loans................ 4.8% 4.9% 5.0% 4.8%
Nonaccrual loans and accruing loans over 90
days past due to period-end loans....... 3.1% 3.6% 4.8% 5.5%
Nonperforming assets to period-end loans
and OREO................................ 4.4% 5.0% 6.8% 7.2%
Net chargeoffs to average loans............ 1.3%(2) 2.2%(2) 1.9% 2.1%(2)
OREO reserve to OREO....................... 12.5% 12.9% 9.5% 23.6%
<FN>
- ---------------
(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
</TABLE>
Total nonperforming assets, led by declines in nonaccrual loans, decreased
$7.5 million during the quarter ended June 30, 1995 and $30.3 million since the
beginning of the year to $56.8 million. The decreased level of nonperforming
assets contributed to a decline in chargeoff activity and lower loan loss
provisions. In order to further accelerate the reduction of nonperforming assets
the Company continues to consider such alternatives as bulk sales of portions of
these assets.
Included in net chargeoffs for the quarter ended June 30, 1995 was a charge
of $3.2 million in connection with the sale of $8.9 million in substandard
banking assets from UST/Conn to JSA Financial Corp., a nonbanking subsidiary of
the Company specializing in the liquidation of problem assets. The reserve for
possible loan losses has remained relatively level at $61.4 million at June 30,
1995 compared with $62.5 million a year ago. The ratio of reserve coverage to
nonaccrual loans has steadily strengthened over the
13
<PAGE> 14
past four quarters from 90% a year ago to 107% at year end, 139% at March 31,
1995 to 161% at June 30, 1995.
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 OREO writedowns
that 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 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, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
For purposes of this Statement, 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. SFAS No. 114
as amended, allows creditors to use their existing methods of recognizing
interest income on impaired loans.
Loans recognized by the Company as nonaccrual and restructured represent
"impaired loans" as defined in SFAS No. 114. At June 30, 1995, total impaired
loans were $46.4 million, comprised of $1.5 million that required reserves of
$0.3 million and $44.9 million that did not require a related reserve since
there was no impairment as measured by the provisions of SFAS No. 114. The
reserve for possible loan losses has not required an additional loan loss
provision as a result of the adoption of this Statement. The methodology used in
the required reserve calculation utilized the fair value of collateral. The
Company's methods for recognition of interest income on impaired loans has
remained unchanged by the adoption of SFAS No. 114 as amended.
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,
OREO, reserve for possible loan losses, 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 net income of
the Company as a result of the adoption of this Statement.
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%. The Company has not
been notified of a specific requirement above the minimum. See discussion below
for Tier 1 leverage capital requirements for the Company's subsidiary banks.
14
<PAGE> 15
At June 30, 1995 and December 31, 1994, the Company's consolidated
risk-based assets were $1.53 billion and $1.52 billion, respectively. The
capital ratios and regulatory minimum requirements applicable to the Company
were:
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Tier 1 capital:
Actual............................................... $157.8 10.32% $149.7 9.82%
Minimum required..................................... $ 61.4 4.00% $ 61.0 4.00%
Total (Tier 1 and Tier 2) capital:
Actual............................................... $177.7 11.95% $169.5 11.45%
Minimum required..................................... $119.3 8.00% $118.5 8.00%
Tier 1 leverage capital:............................... $157.8 8.78% $149.7 8.27%
</TABLE>
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.
Subsequent to the quarter ended June 30, 1995, on July 21, 1995, the
Company was released from the terms of its Written Agreement originally entered
into on August 3, 1992, by the Federal Reserve Bank of Boston ("FRB-Boston") and
the Office of the Massachusetts Commissioner of Banks ("Massachusetts
Commissioner"). In conjunction with the Agreement termination, the Company has
agreed to provide the FRB-Boston with written notification fifteen business days
prior to the declaration of dividends to stockholders. For a discussion of the
Agreement which is no longer in effect, refer to the Company's Report on Form
10-K for the fiscal year ended December 31, 1994.
The Company's Massachusetts-based and largest subsidiary bank, USTrust, was
released recently by the Federal Deposit Insurance Corporation ("FDIC") and the
Massachusetts Commissioner from the terms of its Cease and Desist Order,
originally issued in January 1992. In conjunction with the release of the Order,
USTrust's Board of Directors adopted a resolution pursuant to which USTrust
agreed, among other matters: (i) to continue to maintain a Tier 1 leverage
capital ratio of at least 6%; (ii) not to pay a dividend which would cause the
Bank's Tier 1 leverage capital ratio to fall below 6%; (iii) to continue to
implement plans to reduce nonperforming assets and the aggregate level of
insider loans; and (iv) to provide a quarterly progress report to the FDIC and
the Massachusetts Commissioner. For a discussion of the Order which is no longer
in effect, refer to the Company's Report on Form 10-K for the fiscal year ended
December 31, 1994. The Company's second Massachusetts-based banking subsidiary,
USTC, was released from a similar Order over a year ago, and has also agreed not
to declare or pay dividends should the effect of the payment of such dividends
cause USTC's Tier 1 leverage capital ratio to fall below 6%. Since June 1991,
UST/Conn has been operating under a Stipulation and Agreement with the
Commissioner of Banks for the State of Connecticut which was joined in by the
FDIC. This agreement was amended in August 1992, November 1993 and July 1994 and
requires, among other things, UST/Conn to maintain a 6% Tier 1 leverage capital
ratio. For a discussion of the Agreement which is still in effect, refer to the
Company's Report on Form 10-K for the fiscal year ended December 31, 1994. At
June 30, 1995 the Tier 1 leverage capital ratio for USTrust, USTC and UST/Conn
was 7.88%, 35.81% and 8.35%, respectively. This compared with 7.55%, 39.46% and
6.40%, respectively, at December 31, 1994.
For the six months ended June 30, 1995, the Company did not pay dividends
to stockholders; however, the Company did receive dividends of $1.0 million from
USTC. During the same period the Company contributed as capital $1.0 million to
UST/Conn and $6.5 million to JSA Financial Corp.
The Company and each of its subsidiary banks are currently in compliance
with their respective capital requirements.
15
<PAGE> 16
DEPOSIT INSURANCE
On August 8, 1995, the FDIC voted to reduce insurance premiums paid to the
Bank Insurance Fund ("BIF") by the best managed and capitalized banks to 4 cents
per $100 of deposits from the current rate of 23 cents per $100 of deposits.
Premiums for savings and loan associations ("thrifts") insured by the Savings
Association Insurance Fund ("SAIF") will remain unchanged, ranging from 23 cents
for the best managed and capitalized thrifts to 31 cents per $100 of deposits
for those institutions which present a higher risk to the insurance fund. In
1990, the Company purchased the deposits of a failed thrift institution.
Accordingly, the Company's deposit insurance premiums are expected to reflect a
combination of SAIF and BIF assessments at rates to be determined by the FDIC.
In addition, Federal banking regulators have proposed a one-time assessment on
thrift deposits that would supplement the weaker thrift deposit insurance fund
followed by a merger of SAIF and BIF. Such a one-time assessment could have a
material impact on the operating results of the Company. In the event of such
one-time assessment, it is expected that a lower premium rate would be assessed
on all deposits in subsequent periods.
16
<PAGE> 17
RESULTS OF OPERATIONS
COMPARISON OF 1995 WITH 1994
The Company reported net income of $3.5 million, or $.20 per share, for the
second quarter and $6.3 million, or $.35 per share, for the first six months of
1995. This compares with net income of $1.3 million, or $.07 per share, and $2.3
million, or $.13 per share, for the same periods in 1994. The significant
improvement in earnings for the second quarter and first six months of 1995 were
the result of large reductions in the provision for possible loan losses and
higher net interest margin. Also contributing to the earnings increase for the
quarter was a reduction in noninterest expense while for the six months
noninterest expenses were ahead of a year ago. Noninterest income led by lower
securities gains was lower this quarter compared to a year ago while the
six-month period reflects a nominal increase.
NET INTEREST INCOME ANALYSIS
The Company's net interest income on a fully taxable equivalent basis was
$23.8 million in the second quarter of 1995 compared with $24.7 million in the
first quarter of 1995 and $22.9 million for the second quarter of 1994. For the
first six months of 1995, net interest income on a fully taxable equivalent
basis was $48.6 million compared with $45.0 million for the same period in 1994.
The increase in net interest income compared to last year reflects the steady
rise in interest rate spread and margin during 1994 which continued into the
first quarter of 1995. Partially offsetting the effect of a stronger spread and
margin this year was a decline in the volume of earning assets and a shift by
deposit customers from savings and money market accounts to higher yielding
certificates of deposit. Interest rate spread and margin decreased in the second
quarter of 1995 which was reflected in the decline in net interest income from
the first quarter.
Interest rates leveled off in the second quarter after rising throughout
1994 and into the first quarter of this year. The result was an improvement in
yield on earnings assets, primarily loans, for the quarter of 148 basis points
from 7.94% last year to 9.42% this year and for the six-month period an
improvement of 169 basis points from 7.77% to 9.46%. The cost of
interest-bearing liabilities, principally deposits, was 3.79% this quarter and
3.58% for the first six months compared with 2.74% for both corresponding
periods in 1994. Deposit rates began to move upward towards the end of 1994 and
continued to increase in the first quarter of 1995 as the Company adopted more
aggressive deposit pricing. In the second quarter rates for new deposits leveled
off as the Company moved to a less competitive pricing policy. However, the cost
of deposits continued to rise and are expected to rise throughout the remainder
of the year as older certificates of deposit mature and reprice at the higher
current rates.
The increased yield on earnings assets, which outpaced movements in the
cost of interest-bearing liabilities, produced an improvement in the second
quarter's interest rate spread and margin from 4.47% and 5.11% last year to
4.63% and 5.60%, respectively, this year. The first six-month comparison also
reflected an improvement from 4.37% and 4.98% last year to 4.87% and 5.78%,
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
$1.4 million. The net effect for the six-month period was an increase of $5.4
million.
Current spreads and margins are at historically high levels which most
likely peaked in the first quarter. The cost of interest-bearing liabilities is
expected to increase while at least for the short term, pressure on interest
rates will force loan yields downward. The combined result is an expected
narrowing of spread and margin during the remainder of 1995.
Average earnings assets for the quarter were $1.71 billion, $90 million
lower than the same period in 1994. For the six-month period average earnings
assets were $1.70 billion, or $125 million, lower than the same period a year
ago. Interest-bearing liabilities also decreased $99 million and $140 million
for the three-and six-month periods, respectively, to $1.30 billion and $1.29
billion, respectively, this year. In addition, average deposits experienced a
shift of approximately $70 million for the three-month period and $25 million
for the six-month period from savings deposits to higher cost certificates of
deposit. The effect from changes in volume of loans, deposits and other
interest-bearing balances was a decrease in net interest income of $0.5 million
and $1.8 million for the quarter and six months ended June 30, 1995,
respectively.
17
<PAGE> 18
The following tables attribute 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 and six
months ended June 30, 1995 when compared with the quarter and six months ended
June 30, 1994. Changes attributable to both rate and volume are allocated on a
weighted basis.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM
QUARTER ENDED JUNE 30, 1994
--------------------------------
AMOUNT DUE TO
CHANGES IN
QUARTER ENDED TOTAL -------------------
JUNE 30, 1995 CHANGE VOLUME RATE
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans*................. $29,990 $ 4,578 $ (133) $4,711
Interest and dividends on securities........
Taxable.................................. 5,902 (1,020) (1,204) 184
Non-taxable*............................. 131 8 (62) 70
Interest on excess funds and other.......... 664 166 (15) 181
---------- ------- ------- ------
Total interest income*.............. 36,687 3,732 (1,414) 5,146
---------- ------- ------- ------
Interest expense:
Interest on deposits........................ 10,835 2,632 (391) 3,023
Interest on short-term borrowings........... 1,842 331 (375) 706
Interest on other borrowings................ 190 (132) (131) (1)
---------- ------- ------- ------
Total interest expense.............. 12,867 2,831 (897) 3,728
---------- ------- ------- ------
Net interest income........................... $23,820 $ 901 $ (517) $1,418
========== ======= ======= ======
</TABLE>
- ---------------
* 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 $178 thousand and on non-taxable securities
was $42 thousand for the quarter ended June 30, 1995.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM
SIX MONTHS ENDED JUNE 30, 1994
----------------------------------
AMOUNT DUE TO
CHANGES IN
SIX MONTHS ENDED TOTAL ---------------------
JUNE 30, 1995 CHANGE VOLUME RATE
---------------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans*............ $ 59,466 $ 9,332 $ (1,291) $10,623
Interest and dividends on securities:
Taxable............................. 12,180 (1,982) (2,768) 786
Non-taxable*........................ 392 157 (125) 282
Interest on excess funds and other..... 834 283 60 223
------------ ------- -------- -------
Total interest income*.............. 72,872 7,790 (4,124) 11,914
------------ ------- -------- -------
Interest expense:
Interest on deposits................... 20,139 3,483 (1,309) 4,792
Interest on short-term borrowings...... 3,773 954 (751) 1,705
Interest on other borrowings........... 391 (253) (248) (5)
------------ ------- -------- -------
Total interest expense.............. 24,303 4,184 (2,308) 6,492
------------ ------- -------- -------
Net interest income...................... $ 48,569 $ 3,606 $ (1,816) $ 5,422
============ ======= ======== =======
</TABLE>
- ---------------
* 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 $360 thousand and on non-taxable securities
was $125 thousand for the six months ended June 30, 1995.
18
<PAGE> 19
NONINTEREST INCOME
Noninterest income for the quarter declined $609 thousand from the same
period last year to $7.0 million. The decline was principally due to a decrease
in gain on sale of securities of $585 thousand. Increases in asset management
fees and corporate services income of $103 thousand and $206 thousand,
respectively, were offset by a decrease in other noninterest income due to a
lower level of residual income from maturing equipment leases.
For the six-month comparison noninterest income increased $200 thousand to
$15.7 million compared with the corresponding period in 1994. Results for 1995
include a $1.5 million realized gain from the sale of equity investments held by
a venture capital subsidiary while 1994 gain on sale of securities totaled $518
thousand. Asset management fees were lower in the first six months of 1995
compared with the same period last year due to timing differences in the
recognition of fee income in 1994.
NONINTEREST EXPENSE
Total noninterest expense was reduced 4%, or $840 thousand, from the second
quarter of 1994 to $21.2 million due to declines in occupancy, foreclosed asset
and workout expense, FDIC deposit insurance assessment, and other noninterest
expense. The decrease in foreclosed asset and workout expense of $429 thousand
reflects the lower level of problem assets compared with 1994. Partially
offsetting these decreases were higher salary and employee benefits of $470
thousand due to an increase in the asset management division revenue-sharing
provision and higher payroll taxes as compared with the second quarter of 1994
(See below for a further discussion of the revenue-sharing provision). Absent
any unforeseen events, further declines in noninterest expense are expected as
Company's initiatives to improve operating efficiencies are realized.
For the six-month comparison, noninterest expense increased $893 thousand
to $45.3 million. Salary and employee benefits increased $1.5 million due to a
$457 thousand provision for obligations payable to former officers and
directors, an increase in the asset management division revenue-sharing
provisions and payroll taxes compared with the same period a year ago. Partially
offsetting these increases were declines in occupancy, foreclosed asset and
workout expense, and FDIC deposit insurance assessment.
In 1995, the Company and senior executives of USTC's Asset Management
Division entered into employment agreements designed to maximize the
profitability and grow the assets under management of the asset management
business. The agreements 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. Certain provisions of the
agreements became effective July 1, 1994, and contain revenue-sharing provisions
which permit the asset management division to use a specified percentage of its
base revenues for the payment of expenses of the operation, including incentive
compensation. The revenue-sharing provisions contained in this agreement are
reflected in the three- and six-month periods ended June 30, 1995.
The major components of other noninterest expense were:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -------------------
1995 1994 1995 1994
------ ------ ------- -------
<S> <C> <C> <C> <C>
Furniture and equipment....................... $ 895 $ 847 $ 1,735 $ 1,677
Advertising and promotion..................... 527 758 1,248 1,063
Legal and consulting.......................... 522 864 1,119 1,652
Amortization of intangibles................... 462 387 1,044 714
Service bureau and other data processing...... 374 309 665 595
Facility consolidation provisions............. 874 300
All other..................................... 2,645 3,023 5,340 5,874
------ ------ ------- -------
Total other noninterest expense..... $5,425 $6,188 $12,025 $11,875
====== ====== ======= =======
</TABLE>
19
<PAGE> 20
Other noninterest expense decreased $763 thousand in the second quarter
compared with the same period a year ago primarily due to lower advertising,
legal and consulting and all other expense. For the six months ended June 30,
1995, other noninterest expense increased $150 thousand. Provisions recorded in
connection with space consolidation, including the writedown to market value of
former Company facilities offered for sale and the writeoff of abandoned leases,
lease subsidies and leasehold improvements increased to $874 thousand from $300
thousand last year. Amortization of intangibles increased $330 thousand as the
Company accelerated the amortization of certain core deposit intangible assets
after conducting a review of the expected future economic benefits derived from
these assets and their current carrying amount. Advertising and promotion was
also higher in the first six months compared with a year ago, reflecting an
increase of $185 thousand. These increases were partially offset by lower legal
and consulting of $533 thousand and lower all other expenses, principally
appraisal fees of $534 thousand.
INCOME TAXES
The Company recorded income taxes of $2.2 million and $3.7 million for the
three- and six-month periods ended June 30, 1995, respectively. This compares
with $376 thousand and $1.0 million for the three-and six-month periods ended
June 30, 1994. The statutory Federal income tax rate was 35% in 1995 and 34% in
1994. The effective tax rates for the second quarter and first half of this year
were 38.1% and 37.0%, respectively, compared with 22.1% and 30.7%, respectively,
for the same periods last year. The increase in effective tax rates was
attributable to the significantly higher level of income this year which reduced
the marginal effect on taxable income of tax-exempt and tax preference items.
As of June 30, 1995, the Company had a deferred tax asset of approximately
$8.4 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 this asset.
RECENT ACCOUNTING DEVELOPMENTS
In May 1993, 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 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 Statement on January 1,
1995. See "Credit Quality and Reserve for Possible Loan Losses" herein for a
further discussion.
The FASB issued in March 1995, SFAS No. 122, "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 loss would be recognized 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. The amount by which the
carrying amount of the asset exceeds the asset's fair value is the total
impairment loss to be recognized. The Statement also requires that for certain
long-lived assets to be disposed of, the amount by which the carrying amount of
the asset exceeds the fair value less costs to sell, is an impairment loss to be
recognized. This Statement does not apply to financial instruments, core deposit
intangibles, mortgages and other servicing rights, or deferred tax assets. This
Statement would apply for fiscal years beginning after December 15, 1995. The
effect on the Company's results of operations has not yet been determined.
As an amendment to SFAS No. 65, "Accounting for Mortgage Banking
Activities," the FASB issued in May 1995, SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This Statement amends certain SFAS No. 65 provisions
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, FASB No.
122 requires all capitalized mortgage loan service rights be evaluated for
impairment based on their fair values. This Statement would apply prospectively
for fiscal years beginning after December 15, 1995. The adoption of this
Statement is not expected to have a material impact on the Company's results of
operations.
20
<PAGE> 21
PART II -- OTHER INFORMATION
For the quarter ended June 30, 1995, Items 2, 3 and 5 of Part II are either
inapplicable or would elicit a response of "NONE" and therefore no reference
thereto has been made herein.
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of operations, the Company and its subsidiaries
become defendants in a variety of judicial and administrative proceedings. In
the opinion of management, however, there is no proceeding pending, or to the
knowledge of management threatened, which in the event of an adverse decision
would be likely to result in a material adverse change in the financial
condition or results of operations of the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) the Annual Meeting of Stockholders of the Company was held on May 16,
1995.
(b) the following matters were submitted to a vote of the Stockholders of
the Company: (1) the election of each of the following five Directors
of the Company, each of whom will serve for a three-year term:
Robert L. Culver
Neal F. Finnegan
Walter A. Guleserian
Wallace M. Haselton
Paul D. Slater
(2) the ratification and approval of amendments to the Company's Stock
Compensation Plan, to increase the number of shares of the Company's
Common Stock that may be granted under the Plan as well as to effect
certain other changes; and (3) the ratification and approval of a new
Stock Option Plan for certain Directors.
<TABLE>
The following votes were cast with respect to the election of Directors:
<CAPTION>
WITHHOLD
FOR AUTHORITY
----------- --------
<S> <C> <C>
Robert L. Culver...................................... 12,429,854 52,709
Neal F. Finnegan...................................... 12,424,672 52,709
Walter A. Guleserian.................................. 12,384,221 52,709
Wallace M. Haselton................................... 12,386,725 52,709
Paul D. Slater........................................ 12,380,866 52,709
</TABLE>
<TABLE>
The following is a list of the nine (9) additional Directors of the Company
whose term of office as a Director continued after the meeting:
<S> <C>
Domenic Colasacco William Schwartz
Brian W. Hotarek Samuel B. Sheldon
Francis X. Messina James V. Sidell
Vikki L. Pryor Michael J. Verrochi, Jr.
Gerald M. Ridge
</TABLE>
As reported in the Current Report on Form 8-K filed by the Company on July
24, 1995, subsequent to the meeting, the Company increased the size of its Board
of Directors to twenty-four (24) members and added eight USTrust Directors to
the Company's Board. As a result of the election of these eight individuals to
the Company's Board, all of the outside Directors of USTrust now also serve as
outside Directors of the Company. The eight additional Directors of the Company
are:
Robert Coard, Executive Director, Action for Boston Community Development,
Inc., Boston, MA
Alan K. DerKazarian, D.M.D., Periodontist, Cambridge, MA
21
<PAGE> 22
Donald C. Dolben, President, The Dolben Company, Inc., Boston, MA
Edward Guzovsky, Chairman, JWP New England, Milton, MA
Sydney L. Miller, President, Harry Miller Co., Inc., Boston, MA
Barbara C. Sidell, Esquire, of Newton, MA
Edward J. Sullivan, Clerk of Courts, Middlesex Superior Court, Cambridge,
MA
Gordon M. Weiner, Esquire, of Gloucester, MA
Accordingly, as of the date of this Report, the Company has twenty-two (22)
Directors and two vacancies remain on the Board of Directors.
<TABLE>
The following votes were cast at the Annual Meeting of the Stockholders in
connection with the amending of the Company's Stock Compensation Plan, to
increase the number of shares of the Company's Common Stock that may be granted
under the Plan as well as to effect certain other changes:
<S> <C>
IN FAVOR......................................................... 9,938,720
AGAINST.......................................................... 1,187,807
ABSTAIN.......................................................... 374,355
DELIVERED, NOT VOTED............................................. 1,171,273
</TABLE>
<TABLE>
The following votes were cast in connection with the approval of a new
Stock Option Plan for certain Directors:
<S> <C>
IN FAVOR......................................................... 10,057,719
AGAINST.......................................................... 1,008,232
ABSTAIN.......................................................... 434,930
DELIVERED, NOT VOTED............................................. 1,171,273
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Summary Financial Information.
28. UST Corp.'s Press Release dated June 30, 1995.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Commission on July
24, 1995 regarding (i) the release of the Company and its largest banking
subsidiary, USTrust, from their respective regulatory agreements and orders and
(ii) the election of eight individuals to the Board of Directors of the Company.
In accordance with the requirements of the Securities Exchange Act of 1934,
the Company has caused this report to be signed on its behalf by the undersigned
duly authorized officers of the Company.
Date: August 11, 1995 By: /s/ NEAL F. FINNEGAN
------------------------------------
Neal F. Finnegan, President and
Chief Executive Officer
Date: August 11, 1995 By: /s/ JAMES K. HUNT
------------------------------------
James K. Hunt, Executive Vice
President, Treasurer, and
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF UST CORP. AT OR FOR THE SIX MONTH ENDED JUNE 30, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1.00
<CASH> 74,580
<INT-BEARING-DEPOSITS> 52
<FED-FUNDS-SOLD> 95,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 370,358
<INVESTMENTS-CARRYING> 100
<INVESTMENTS-MARKET> 102
<LOANS> 1,288,873
<ALLOWANCE> 61,439
<TOTAL-ASSETS> 1,846,558
<DEPOSITS> 1,495,620
<SHORT-TERM> 164,530
<LIABILITIES-OTHER> 17,783
<LONG-TERM> 8,464
<COMMON> 11,056
0
0
<OTHER-SE> 149,105
<TOTAL-LIABILITIES-AND-EQUITY> 1,846,558
<INTEREST-LOAN> 59,106
<INTEREST-INVEST> 12,447
<INTEREST-OTHER> 834
<INTEREST-TOTAL> 72,387
<INTEREST-DEPOSIT> 20,139
<INTEREST-EXPENSE> 24,303
<INTEREST-INCOME-NET> 48,084
<LOAN-LOSSES> 8,500
<SECURITIES-GAINS> 1,446
<EXPENSE-OTHER> 45,281
<INCOME-PRETAX> 10,020
<INCOME-PRE-EXTRAORDINARY> 10,020
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,314
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<YIELD-ACTUAL> 8.67
<LOANS-NON> 38,170
<LOANS-PAST> 1,576
<LOANS-TROUBLED> 8,265
<LOANS-PROBLEM> 66,800
<ALLOWANCE-OPEN> 64,088
<CHARGE-OFFS> 15,873
<RECOVERIES> 4,724
<ALLOWANCE-CLOSE> 61,439
<ALLOWANCE-DOMESTIC> 61,439
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 27,139
</TABLE>
<PAGE> 1
[LOGO] N E W S R E L E A S E
For: Immediate Release
Contact: Sheila Celata (617) 726-7120
Exhibit 28
UST CORP. ADDS EIGHT INDIVIDUALS TO BOARD OF DIRECTORS
BOSTON, MASS ... June 30, 1995 ... UST Corp. (NASD: USTB), parent company of
USTrust and United States Trust Company in Massachusetts and UST
Bank/Connecticut, today announced that it has elected eight individuals to its
Board of Directors. All currently serve as Directors of USTrust, the Company's
lead banking subsidiary. As a result of the election, all of the outside
Directors of USTrust also serve as outside directors of UST Corp. The new UST
Corp. Directors are:
Robert Coard, Executive Director, Action for Boston Community
Development, Inc., Boston, Mass.
Alan K. DerKazarian, D.M.D., Periodontist, Cambridge, Mass.
Donald C. Dolben, President, The Dolben Company, Inc., Boston, Mass.
Edward Guzovsky, Chairman, JWP New England, Milton, Mass.
Sydney L. Miller, President, Harry Miller Co., Inc., Boston, Mass.
Barbara C. Sidell, Esquire, of Newton, Mass.
Edward J. Sullivan, Clerk of Courts, Middlesex Superior Court,
Cambridge, Mass.
Gordon M. Weiner, Esquire, of Newton, Mass.
"We are pleased to have all the USTrust Directors on the Board of the
holding company," said Neal F. Finnegan, UST Corp. President and CEO. "USTrust
represents over 90% of UST Corp.'s assets, and all our entities will benefit
from the uniformity of policy and consistency of approach that will result
from the combination of board membership."
UST Corp. is a Boston based bank holding company. Through its
subsidiaries, the Company provides a broad range of financial services,
principally to individuals and privately-held, owner-managed companies in New
England. These services include commercial banking, consumer financial
services, trust and money management and equipment leasing.
#####
