<PAGE> 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 JUNE 30, 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
BOSTON, MASSACHUSETTS 02108
(Address of principal executive offices) (Zip Code)
(617) 726-7000
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
year.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. At July 31, 1996,
there were 17,901,990 shares of common stock outstanding, par value $.625 per
share.
===============================================================================
<PAGE> 2
UST CORP.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets -- June 30, 1996 and
December 31, 1995 .......................................... 3
Consolidated Statements of Income -- Three and
Six Months Ended June 30, 1996 and 1995 .................... 4
Consolidated Statements of Changes in Stockholders'
Investment -- Six Months Ended June 30, 1996 and 1995 ...... 5
Consolidated Statements of Cash Flows -- Six Months Ended
June 30, 1996 and 1995 ..................................... 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
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UST CORP.
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash, due from banks and interest-bearing deposits ...... $ 82,403 $ 89,799
Federal funds sold ...................................... 15,000
Securities available-for-sale:
Mortgage-backed securities ............................ 245,437 246,521
U.S. Treasury and Government agencies, asset backed
and other securities ................................ 324,469 329,152
---------- ----------
Total securities available-for-sale .......... 569,906 575,673
Loans:
Loans -- net of unearned discount of $27,065,000 in
1996 and $33,419,000 in 1995 (Note 2) ............... 1,332,175 1,272,077
Reserve for possible loan losses (Note 2) ............. (55,427) (56,029)
---------- ----------
Total loans, net ............................. 1,276,748 1,216,048
Premises, furniture and equipment, net .................. 32,313 31,840
Loans held-for-sale ..................................... 237 13,098
Intangible assets, net .................................. 4,067 4,650
Other real estate owned, net ............................ 2,454 3,015
Other assets ............................................ 43,888 34,965
---------- ----------
Total assets ................................. $2,027,016 $1,969,088
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Demand ............................................... $ 345,147 $ 372,917
Interest-bearing demand (NOW accounts) ............... 157,529 166,011
Money market ......................................... 204,041 210,924
Regular savings ...................................... 252,452 244,680
Time:
Certificates of deposit over $100 thousand ........ 139,983 112,426
Other ............................................. 417,225 405,779
---------- ----------
Total deposits ............................... 1,516,377 1,512,737
Short-term and other borrowings ......................... 310,006 243,105
Other liabilities ....................................... 23,488 39,578
---------- ----------
Total liabilities ............................ 1,849,871 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 -- 17,920,307 and
17,843,582 shares in 1996 and 1995, respectively .... 11,200 11,152
Additional paid-in capital ............................ 74,668 74,158
Retained earnings ..................................... 96,701 87,253
Unrealized (loss) gain on securities
available-for-sale, net of tax ...................... (5,245) 961
Treasury stock, at cost, 36,707 shares ................ (480)
Deferred compensation and other ....................... 301 144
---------- ----------
Total stockholders' investment ............... 177,145 173,668
---------- ----------
Total liabilities and stockholders'
investment ................................. $2,027,016 $1,969,088
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
UST CORP.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans .............. $ 28,823 $ 29,812 $ 57,894 $ 59,106
Interest and dividends on securities:
Taxable ............................... 8,713 5,902 17,658 12,180
Non-taxable ........................... 79 89 158 267
Interest on federal funds sold and
other ................................. 63 664 85 834
----------- ----------- ----------- -----------
Total interest income .............. 37,678 36,467 75,795 72,387
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits .................... 10,912 10,835 21,983 20,139
Interest on borrowings .................. 4,106 2,032 7,777 4,164
----------- ----------- ----------- -----------
Total interest expense ............. 15,018 12,867 29,760 24,303
----------- ----------- ----------- -----------
Net interest income ..................... 22,660 23,600 46,035 48,084
Provision for possible loan losses
(Note 2) ................................ (5,500) 3,670 (4,000) 8,500
----------- ----------- ----------- -----------
Net interest income after provision for
possible loan losses .................. 28,160 19,930 50,035 39,584
----------- ----------- ----------- -----------
Noninterest income:
Asset management fees ................... 3,167 3,486 6,355 6,742
Corporate services income ............... 2,407 2,107 4,713 4,146
Service charges on deposit accounts ..... 1,038 1,188 2,148 2,440
Securities (losses) gains, net .......... (122) (89) (113) 1,446
Other ................................... 484 315 893 943
----------- ----------- ----------- -----------
Total noninterest income ........... 6,974 7,007 13,996 15,717
----------- ----------- ----------- -----------
Noninterest expense:
Salary and employee benefits ............ 10,914 10,759 22,324 21,904
Net occupancy expense ................... 1,808 1,826 3,683 3,734
Credit card processing expense .......... 1,247 1,032 2,462 2,103
Foreclosed asset and workout expense .... 391 1,153 997 3,470
Deposit insurance assessment ............ 310 1,016 622 2,045
Other ................................... 6,040 5,425 12,194 12,025
----------- ----------- ----------- -----------
Total noninterest expense .......... 20,710 21,211 42,282 45,281
----------- ----------- ----------- -----------
Income before income taxes ................ 14,424 5,726 21,749 10,020
Income tax provision .................... 5,600 2,182 8,388 3,706
----------- ----------- ----------- -----------
Net income ......................... $ 8,824 $ 3,544 $ 13,361 $ 6,314
=========== =========== =========== ===========
Per share data:
Net income (Note 4) ..................... $ 0.49 $ 0.20 $ 0.74 $ 0.35
Cash dividends declared ................. $ 0.07 -- $ 0.13 --
Weighted average number of common
shares (Note 4) ....................... 18,078,633 18,029,518 18,160,639 17,933,378
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
<TABLE>
UST CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(UNAUDITED)
<CAPTION>
ADDITIONAL UNREALIZED DEFERRED
COMMON PAID-IN RETAINED GAIN/(LOSS) TREASURY COMPENSATION
STOCK CAPITAL EARNINGS ON SECURITIES STOCK AND OTHER TOTAL
------- ------- -------- ------------- -------- ------------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 .................... $11,009 $72,129 $73,183 $(23,601) $(86) $132,634
Net income ................................... 6,314 6,314
Stock option exercises and stock issued
under restricted stock plan ................ 43 453 496
Change in unrealized loss on securities
available-for-sale, net of tax ............. 20,475 20,475
Activity in Directors Deferred
Compensation Program and Other, net ........ 4 42 196 242
------- ------- ------- -------- ---- --------
Balance June 30, 1995 ........................ $11,056 $72,624 $79,497 $ (3,126) $110 $160,161
======= ======= ======= ======== ==== ========
Balance December 31, 1995 .................... $11,152 $74,158 $87,253 $ 961 $144 $173,668
Net income ................................... 13,361 13,361
Cash dividends declared ...................... (2,326) (2,326)
Stock option exercises and stock
issued under restricted stock plan ........ 48 510 (1,587) $ 2,883 1,854
Change from unrealized gain to loss on
securities available-for-sale, net of tax .. (6,206) (6,206)
Treasury stock acquired ...................... (3,363) (3,363)
Activity in Directors Deferred
Compensation Program and Other, net ........ 157 157
------- ------- ------- -------- ------- ---- --------
Balance June 30, 1996 ........................ $11,200 $74,668 $96,701 $ (5,245) $ (480) $301 $177,145
======= ======= ======= ======== ======= ==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
<TABLE>
UST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 13,361 $ 6,314
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses ........................... (4,000) 8,500
Depreciation and amortization ................................ 2,330 2,722
Amortization of gain on sale/leaseback ....................... (192)
(Accretion) amortization of securities (discount) premium,
net ........................................................ (25) 320
Securities losses (gains), net ............................... 113 (1,446)
Gain on sale of other real estate owned, net ................. (268) (252)
Writedowns of other real estate owned ........................ 245 1,030
Deferred income tax (benefit) expense ........................ (6,446) 604
(Increase) decrease in other assets and other liabilities,
net ........................................................ (19,160) 7,462
--------- ---------
Net cash (used) provided by operating activities .......... (13,850) 25,062
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale ........... 59,086 47,047
Proceeds from maturities of securities available-for-sale ...... 49,238 11,308
Purchases of securities available-for-sale ..................... (109,259) (2,171)
Net increase in federal funds sold ............................. (15,000) (85,000)
Net increase in loans .......................................... (58,389) (26,345)
Proceeds from sales of other real estate owned ................. 2,273 3,364
Proceeds from loans held-for-sale .............................. 12,861
Purchases of premises and equipment ............................ (2,219) (1,012)
--------- ---------
Net cash used by investing activities ..................... (61,409) (52,809)
Cash flows from financing activities:
Net decrease in nontime deposits ............................... (35,363) (119,372)
Net increase in certificates of deposit ........................ 39,003 124,186
Net increase in borrowings ..................................... 66,901 4,041
Cash dividends paid ............................................ (1,076)
Treasury stock acquired ........................................ (3,363)
Issuance of common stock for cash, net ......................... 1,761 445
--------- ---------
Net cash provided by financing activities ................. 67,863 9,300
--------- ---------
Decrease in cash and cash equivalents .......................... (7,396) (18,447)
Cash and cash equivalents at beginning of year ................. 89,799 93,079
--------- ---------
Cash and cash equivalents at end of period ..................... $ 82,403 $ 74,632
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................................... $ 29,953 $ 23,969
========= =========
Income taxes.................................................. $ 12,617 $ 2,192
========= =========
Noncash transactions:
Transfers from other assets to securities
available-for-sale ........................................... $ 4,180 $ 250
========= =========
Transfers from loans to other real estate owned, net............ $ 2,701 $ 3,571
========= =========
Financed other real estate owned sales.......................... $ 550 $ 565
========= =========
Common stock issuance........................................... $ 93 $ 97
========= =========
</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
included in this Form 10-Q 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- and six-month periods ended
June 30, 1996 are not necessarily indicative of the results of
operations for the full year or any other interim period.
<TABLE>
NOTE 2: Analysis of the reserve for possible loan losses for the six months
ended June 30, 1996 and 1995 is as follows:
<CAPTION>
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period ........... $56,029 $ 64,088
Chargeoffs/transfers ..................... (3,575) (15,873)
Recoveries on loans previously
charged-off ............................ 6,973 4,724
------- --------
Net recoveries (chargeoffs/transfers) .... 3,398 (11,149)
Provided from operations ................. (4,000) 8,500
------- --------
Balance at end of period ................. $55,427 $ 61,439
======= ========
</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.
<TABLE>
NOTE 3: At June 30, 1996, the Company had the following off-balance sheet
financial instruments whose contract amounts represent credit risk:
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
---------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Commitments to extend credit ........... $456,000
Standby letters of credit and
financial guarantees written .......... 51,000
Commercial letters of credit ........... 4,000
Foreign exchange contracts ............. 2,000
</TABLE>
7
<PAGE> 8
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 281,700 and 321,329 for the three- and six-month
periods ended June 30, 1996, respectively, and 344,608 and 275,424 for
the three- and six-month periods ended June 30, 1995.
NOTE 5: On June 18, 1996 the Company announced that its principal banking
subsidiary, USTrust, had entered into a definitive agreement with The
First National Bank of Boston ("FNBB") and its parent company, Bank of
Boston Corporation, under which USTrust would purchase certain assets
and assume the deposit liabilities of twenty branches located in the
greater Boston area. The transaction includes the transfer of
approximately $860 million of deposits and USTrust will purchase
approximately $510 million in commercial, residential real estate and
other loans with businesses and consumers located in the communities
served by the branches. Sixteen of the branches to be acquired are
currently operated as BayBank branches and four of the branches are
currently operated by FNBB. Upon completion of the transaction, USTrust
will pay a premium equal to 7 percent of the deposit liabilities assumed
or approximately $60 million. The transaction is expected to be
completed in the fourth quarter of this year, or early 1997, and remains
subject to Federal Deposit Insurance Corporation approval. The Company
expects to fund this transaction with existing resources and does not
expect to issue any additional shares of stock.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HIGHLIGHTS
Net income for the quarter ended June 30, 1996, was $8.8 million, or $0.49
per share, over 145 percent above the $3.5 million, or $0.20 per share, reported
for the same period in 1995. The earnings results for the first six months of
1996 of $13.4 million, or $0.74 per share, were also significantly above the
prior year results of $6.3 million, or $0.35 per share. The predominant factor
contributing to the increased net income was an earnings credit of $5.5 million
recorded through the provision for possible loan losses. The recognition of a
credit provision in this quarter was supported by several factors, the most
significant of which was $5.1 million in net recoveries realized this quarter on
loans previously charged-off, and the Company's successful efforts in the
restoration of asset quality of the loan portfolio. See "Credit Quality and
Reserve for Possible Loan Losses" for a further discussion. Also contributing to
the earnings improvement was the continued reduction in noninterest expenses,
particularly in the areas of foreclosed asset and loan workout expense and
deposit insurance assessment.
The continued improvement in key profitability measures was further
accelerated by the jump in this quarter's net income. Return on average equity
and return on average assets were 19.99 percent and 1.79 percent this quarter,
respectively, compared to 8.82 percent and .79 percent, respectively, for the
same quarter a year ago. The year-to-date results reflect a similar increase in
return on average equity and assets of 15.23 percent and 1.37 percent in 1996,
respectively, compared with 7.98 percent and .71 percent, respectively, in 1995.
The following discussion should be read in conjunction with the financial
statements, notes, and tables included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995. The discussion contains
certain forward-looking statements, including without limitation the statements
under "Credit Quality and Reserve for Possible Loan Losses" below in this Item 2
regarding the possibility of additional credit provisions in the third quarter.
Moreover, the Company may from time to time, in both written reports and oral
statements by Company management, express its expectations regarding future
performance of the Company. These forward-looking statements are inherently
uncertain, and actual results may differ from Company expectations. Risk factors
that could impact current and future performance include but are not limited to:
(i) changes in asset quality and resulting credit risk-related losses and
expenses; (ii) adverse changes in the economy of the New England region, the
Company's primary market, which could further accentuate credit-related losses
and expenses and affect expectations of future loan balances; (iii) since most
of the Company's loans are concentrated in Eastern Massachusetts and a
substantial portion of these loans have real estate as primary and secondary
collateral, adverse changes in the local real estate market can also negatively
affect credit risk; (iv) the Company operates in an increasingly competitive New
England financial services marketplace, where a large number of bank
acquisitions and mergers has resulted in fewer but much larger and financially
stronger competitors which could alter Company expectations; (v) fluctuations in
market rates and prices can negatively affect net interest margin and asset
valuations; and (vi) as a bank-holding company, the Company and its subsidiary
banks are subject to changing regulatory requirements of federal and state
agencies that could materially impact future operations of the Company.
NET INTEREST INCOME ANALYSIS
Net interest income on a fully taxable equivalent basis was $22.8 million
in the second quarter 1996, compared with $23.8 million in the same quarter of
1995. For the first six months of 1996, net interest income on a fully taxable
equivalent basis was $46.4 million compared with $48.6 million in the same
period last year. The decrease in net interest income for the three-month and
six-month periods was largely attributable to the decline in market interest
rates over the previous quarters. Yield on loans, which was directly affected by
the decline in market rates, decreased 33 basis points to 9.09 percent for the
three-month period and 20 basis points to 9.26 percent for the six-month period
ended June 30, 1996. The positive benefit of the reduction in the level of
nonaccrual loans, which are included in the loan yield calculation, of $33
million and $39 million for the three- and six-month periods, only softened the
effect of the decrease caused by market rate changes. As shown in the table
below, the lower yield on loans caused a rate change decrease in
9
<PAGE> 10
interest income of $1.1 million for both the three- and six-month periods. Yield
on securities followed a similar track and declined approximately 30 basis
points to 5.95 percent and 6.01 percent for the three- and six-month periods. As
a result of the yield declines in loans and securities, yield on earning assets
decreased from 8.62 percent and 8.67 percent for the three- and six-month
periods last year, respectively, to 8.08 percent and 8.21 percent, respectively,
this year. The total effect on interest income was a decline due to changes in
rates of $1.5 million and $1.8 million for the three- and six-month periods,
respectively.
The cost of interest-bearing liabilities was 4.14 percent this quarter
compared with 3.98 percent a year ago, a 16 basis point increase. For the
six-month period liability costs increased from 3.80 percent last year to 4.14
percent this year. The increase was principally due to a rise in deposit rates
which occurred during the first three quarters of 1995. Since that time, deposit
rates have remained relatively flat. The resulting level cost of liabilities was
aided to a smaller degree by the effect of lower market rates on repurchase
agreements and federal funds purchased. The effect on total interest expense
from changes in rates from a year ago was a decrease of $99 thousand for the
current quarter and an increase of $836 thousand for the current six-month
period.
The second quarter's interest rate margin and spread of 4.88 percent and
3.94 percent, respectively, were below the 5.60 percent and 4.63 percent earned
in the same quarter last year. The six-month interest rate margin and spread
reflect similar decreases from 5.78 percent and 4.87 percent last year to 5.06
percent and 4.07 percent this year. Both interest rate margin and spread have
been on a decline since a historical peak in early 1995. The driver behind the
decline was the decrease in market rates and effect on earning asset yields. If
the more recent trend of level market interest rates continues, the narrowing of
interest rate margin and spread should subside with future changes limited to
fluctuations in deposit rates. Any future increase in market interest rates
would have a favorable, immediate impact on margin and spread. The net effect on
net interest income from changes in rates this quarter as compared with the same
quarter a year ago was a decrease of $1.4 million. The net effect for the
six-month period was a decrease of $2.6 million.
Average earning assets for the quarter were $1.88 billion, $175 million
higher than the same period a year ago. Average earning assets for the six-month
period were up $168 million from 1995. The growth in earning assets was
primarily from the build-up in the lower yielding securities portfolio. As shown
in the tables below, increased securities volume added $3.1 million to interest
income for the quarter and $5.9 million for the six months ended June 30, 1996.
When combined with lower interest income on federal funds sold due to reduced
volume and the change in volume-related loan interest, total interest income
increased $2.6 million this quarter from a year ago and $5.0 million for the six
months ended June 30, 1996. Funding for the additional securities volume was
reflected in an increase in average short-term borrowings of $186 million and
$159 million for the three- and six-month periods, respectively, which added
$2.2 million and $3.7 million, respectively, to interest expense. Also
contributing to higher interest expense in both periods was an increase in
average time deposits of $27 million and $59 million for the three- and
six-month periods, respectively, while lower-cost savings, NOW and money market
deposits decreased $49 million and $63 million, respectively. The net effect on
net interest income from changes in volume of interest-earning assets and
interest-bearing liabilities was an increase of $393 thousand and $411 thousand
for the three- and six-month periods, respectively.
10
<PAGE> 11
<TABLE>
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, 1996 when compared with the quarter and six months ended
June 30, 1995. Changes attributable to both rate and volume are allocated on a
weighted basis.
<CAPTION>
INCREASE (DECREASE) FROM
QUARTER ENDED JUNE 30, 1995
---------------------------
AMOUNT DUE TO
CHANGES IN
QUARTER ENDED TOTAL -----------------
JUNE 30, 1996 CHANGE VOLUME RATE
------------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans* ............ $28,947 $(1,043) $ 97 $(1,140)
Interest and dividends on securities:
Taxable .......................... 8,713 2,811 3,090 (279)
Non-taxable* ..................... 115 (16) (11) (5)
Interest on federal funds sold and
other................................ 63 (601) (533) (68)
------- ------- ------ -------
Total interest income* ........... 37,838 1,151 2,643 (1,492)
------- ------- ------ -------
Interest expense:
Interest on regular savings, NOW
and money market deposits .......... 3,527 (446) (298) (148)
Interest on time deposits ............ 7,385 523 366 157
Interest on borrowings ............... 4,106 2,074 2,182 (108)
------- ------- ------ -------
Total interest expense ........... 15,018 2,151 2,250 (99)
------- ------- ------ -------
Net interest income ...................... $22,820 $(1,000) $ 393 $(1,393)
======= ======= ====== =======
- ----------
<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 $124 thousand and on non-taxable securities was $36
thousand for the quarter ended June 30, 1996.
</TABLE>
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM
SIX MONTHS ENDED JUNE 30, 1995
------------------------------
AMOUNT DUE TO
CHANGES IN
SIX MONTHS ENDED TOTAL -----------------
JUNE 30, 1996 CHANGE VOLUME RATE
---------------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans* ............ $58,146 $(1,320) $ (216) $(1,104)
Interest and dividends on securities:
Taxable ............................ 17,658 5,478 5,964 (486)
Non-taxable* ....................... 231 (161) (30) (131)
Interest on federal funds sold and
other................................. 85 (749) (686) (63)
------- ------- ------ -------
Total interest income* ............. 76,120 3,248 5,032 (1,784)
------- ------- ------ -------
Interest expense:
Interest on regular savings, NOW
and money market deposits ............. 7,224 (958) (739) (219)
Interest on time deposits .............. 14,759 2,802 1,624 1,178
Interest on borrowings ................. 7,777 3,613 3,736 (123)
------- ------- ------ -------
Total interest expense ............. 29,760 5,457 4,621 836
------- ------- ------ -------
Net interest income ...................... $46,360 $(2,209) $ 411 $(2,620)
======= ======= ====== =======
- ----------
<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 $252 thousand and on non-taxable securities was $73
thousand for the six months ended June 30, 1996.
</TABLE>
11
<PAGE> 12
NONINTEREST INCOME
Noninterest income for the quarter was level with the same period a year
ago at $7.0 million. Corporate services income, which includes merchant credit
card fees, rose 14 percent, or $300 thousand, this quarter while other
noninterest income increased approximately $200 thousand due to a higher level
of residual income on maturing equipment leases and an increase in income
realized on home equity loans purchased at a substantial discount from the
Resolution Trust Corporation in 1991. These increases were offset by a decline
in asset management fees due to a slightly lower level of assets under
management, and a decline in deposit service fees resulting from a reduction
during the past year in the average number of deposit accounts and the effect of
price changes associated with new deposit product offerings. For the six-month
comparison noninterest income was $1.7 million lower than the six-month period
in 1995 which included a $1.5 million realized gain from the sale of equity
investments held by a venture capital subsidiary. Also lower were asset
management fees and deposit service fees of approximately $387 thousand and $292
thousand, respectively. Corporate services income year to date through June was
up 14 percent, or $567 thousand.
NONINTEREST EXPENSE
Total noninterest expense decreased this quarter $501 thousand to $20.7
million. The largest declines were $762 thousand in foreclosed asset and workout
expense commensurate with the decline in nonperforming and substandard assets,
and $706 thousand in deposit insurance assessment due to lower premium rates
(Refer to "Deposit Insurance Assessment" below for a further discussion).
Partially offsetting these decreases was an increase in salary and employee
benefits expense of $155 thousand which includes $80 thousand in
severance-related costs, higher credit card processing expense of $215 thousand
consistent with the increase in merchant credit card income described above, and
higher other noninterest expense. For the six-month comparison, noninterest
expense was $42.3 million, $3.0 million lower than the same period last year.
The largest declines were in foreclosed asset and workout expense of $2.5
million and deposit insurance assessment of $1.4 million.
<TABLE>
As shown in the table below, other noninterest expense increased $615
thousand in the second quarter compared with the same quarter a year ago, due
primarily to higher legal and consulting, litigation provisions, and all other
expense. In the six-month comparison other noninterest expense increased $169
thousand to $12.2 million reflecting higher furniture and equipment, legal and
consulting, litigation provisions and higher all other expense. The 1996
litigation provisions are the result of a settlement of certain litigation in
the first quarter and certain other litigation matters requiring current
accounting recognition. Amortization of intangibles decreased in both the
three-month and six-month periods in comparison to 1995 which included
accelerated amortization of certain core deposit intangible assets. Also
significantly lower in the first six months of 1996 compared to last year were
provisions recorded in connection with space consolidation, including the
write-off of leases and leasehold improvements on abandoned facilities.
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Furniture and equipment...... $ 903 $ 895 $ 1,946 $ 1,735
Legal and consulting......... 724 522 1,319 1,119
Advertising and promotion.... 603 527 1,217 1,248
Service bureau and other
data processing............ 346 374 701 665
Litigation provisions........ 300 770
Amortization of intangibles.. 292 462 584 1,044
Facility consolidation
provisions................. 31 49 874
All other.................... 2,841 2,645 5,608 5,340
------ ------ ------- -------
Total other noninterest
expense................... $6,040 $5,425 $12,194 $12,025
====== ====== ======= =======
</TABLE>
12
<PAGE> 13
For the remainder of the year many of the operating expenses of the Company
are expected to continue to be favorably below 1995 levels. At such time that
the pending acquisition of 20 banking branches is completed, noninterest
expenses would increase appropriately (Refer to Note 5 to the Notes to
Consolidated Financial Statements for a further discussion of the branch
acquisition). In addition, the Company expects to record a one-time
restructuring charge associated with the branch acquisition that would have a
material impact on the operating results of the Company in the period that it is
recognized.
DEPOSIT INSURANCE ASSESSMENT
The Company holds certain deposits insured by the Savings Association
Insurance Fund assumed by the Company in connection with its 1990 acquisition of
Home Owners Savings Bank, F.S.B., a failed savings association. Various forms of
proposed legislation have been introduced which may result in a one-time
assessment on such deposits. 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. In the event of such assessment, the insurance premium charged on the
former thrift deposits would be reduced in subsequent periods.
INCOME TAXES
The Company recorded income taxes of $5.6 million compared with $2.2
million for the same quarter last year. The effective tax rate for the quarter
was 38.8 percent compared with 38.1 percent a year ago.
As of June 30, 1996, included in other assets was a deferred tax asset of
approximately $15.9 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 from the December 31, 1995 balance of $7.0 million reflects the
recognition for tax purposes earlier this year 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 increased $58 million since year-end 1995 to $2.027 billion.
The increase in asset size was largely the result of net loan growth of $60
million during the first six months of this year to $1.332 billion. Sales of
loans in the loans held-for-sale portfolio reduced the $13 million balance at
year end to a nominal amount at June 30, 1996.
The balance of total securities was $570 million at June 30, $6 million
lower than six months ago. A decrease in the portfolio balance was due to a
change from an unrealized gain on securities available-for-sale of $1.7 million
at December 31, 1995 to an unrealized loss of $9.1 million at June 30, 1996. The
decline in market value of the portfolio is directly related to the upward
movement in market bond prices experienced during the period. Partially
offsetting the decrease was the purchase of $5 million in Federal Home Loan Bank
("FHLB") stock by a Company banking subsidiary, USTrust. The bank became a
member of the FHLB in the second quarter and is required to invest in the FHLB
in an amount equal to the greater of 1 percent of residential mortgage loans,
including certain mortgage-backed securities, or three tenths of 1 percent of
total assets.
The change in unrealized valuation to market value on securities
available-for-sale also had the negative effect of decreasing stockholders'
investment by $6.2 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 $5.2
million, net of a $3.9 million deferred tax benefit.
13
<PAGE> 14
<TABLE>
The following table presents the composition of the loan portfolio:
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30,
1996 1996 1995 1995
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and financial ................ $ 634,095 $ 593,249 $ 642,940 $ 685,525
Commercial real estate:
Construction .......................... 16,237 15,383 16,937 14,164
Developer, investor and land........... 199,904 202,066 207,710 242,587
Consumer:
Residential mortgage .................. 82,062 81,823 85,806 89,677
Home equity ........................... 85,676 78,083 70,066 70,509
Indirect automobile installment........ 250,535 218,080 197,148 139,165
Other consumer ........................ 29,158 24,162 23,015 20,787
Lease financing ......................... 34,508 28,880 28,455 26,459
---------- ---------- ---------- ----------
Total loans ..................... $1,332,175 $1,241,726 $1,272,077 $1,288,873
========== ========== ========== ==========
</TABLE>
The commercial loan portfolios listed above totaled $850 million at June
30, 1996, reflecting net growth of 5 percent, or $40 million, during the second
quarter. This period's growth follows several consecutive quarters of decline in
the commercial loan portfolio due to the outflow of problem loans through
aggressive collection, chargeoffs or third-party refinancings.
The strong growth in the indirect automobile loan portfolio experienced
over the last two years continued this quarter. This portfolio totaled $251
million at June 30 which represents growth of 27 percent, or $53 million, since
year end. The "Prime Always" home equity loan product and promotional campaign
has produced strong growth in this portfolio of 22 percent, or $16 million,
during the first six months of the year. This spring's consumer marketing
campaign also resulted in growth in the other consumer loan category of 27
percent, or $6 million. The lease financing portfolio also reflects successful
growth in equipment leases of 21 percent, or $6 million.
There was a small decrease in the balance of residential mortgage loans in
the first half of this year. With the exception of residential loans obtained
through possible acquisitions, future growth in this portfolio is not expected.
The residential mortgage industry has become increasingly the purview of large
scale providers which prompted the Company's subsidiary banks, after careful
consideration, to discontinue the origination of residential mortgages effective
in the quarter ended June 30, 1996.
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. In the second quarter the Company's largest subsidiary bank, USTrust,
became a member of the FHLB. The membership provides USTrust, among other
things, the privilege to borrow from the FHLB with a current limit of
approximately $40 million.
At June 30, 1996, liquidity, which includes excess cash, funds sold and
unpledged securities, totaled approximately $287 million, or 14 percent of total
assets.
14
<PAGE> 15
The funds needed to support the Company's loan and securities portfolios
are provided through a combination of commercial and retail deposits and
short-term borrowings. Total deposits increased only slightly to $1.516 billion
from $1.513 billion at year-end 1995. Demand deposits decreased $28 million from
the seasonal high at the beginning of the year. NOW, money market and regular
savings deposits decreased $8 million while time certificates of deposit
continue to build and increased $39 million in the first half of the year.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased $7.4 million during the six-month period ended June 30,
1996. Cash used by operations resulted largely from the net increase in other
assets and other liabilities partially offset by the aggregate of operating
income items. Cash used by investing activities was due to an excess of
purchases of securities and increased loan volume over the proceeds from both
the sales and maturities of securities. Net cash provided by financing
activities was primarily due to the increases in short-term borrowings and
certificates of deposit partially offset by the net decrease in nontime
deposits.
There was little change since the beginning of the year in the level of
liquid assets of the parent company which totaled $1.9 million in cash and due
from banks and $4 million in securities purchased under repurchase agreements
at June 30, 1996.
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 before leveling off in the second quarter, the prime rate and, therefore,
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 June 30, 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 June
30, 1996, the one-year cumulative GAP position was negative at $111 million, or
approximately 5 percent of total assets.
15
<PAGE> 16
<TABLE>
<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 ............................. $ 716 $ 58 $ 106 $ 397 $1,277
Federal funds sold ................................ 15 15
Securities ........................................ 6 22 75 467 570
Other assets ...................................... 20 145 165
----- ----- ----- ------ ------
Total assets ................................. $ 737 $ 100 $ 181 $1,009 $2,027
----- ----- ----- ------ ======
Interest-bearing deposits ......................... $ 364 $ 133 $ 217 $ 457 $1,171
Borrowed funds .................................... 300 10 310
Noninterest-bearing demand deposits ............... 105 240 345
Other liabilities and stockholders' equity ........ 201 201
----- ----- ----- ------ ------
Total liabilities and equity ................. $ 769 $ 143 $ 217 $ 898 $2,027
----- ----- ----- ------ ======
GAP for period .................................... $ (32) $ (43) $ (36) $ 111
===== ----- ----- ------
Cumulative GAP .................................... $ (75) $(111) $ 0
===== ===== ======
As a percent of total assets....................... (1.58%) (3.70%) (5.48%)
</TABLE>
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES
In the period ended June 30, 1996 substandard loans reflect another quarter
of the Company's aggressive effort to reduce the level of problem credits. Such
loans totaled $30.7 million at quarter end representing a 34 percent, or $15.5
million, reduction in the quarter. The June 30, 1996 balance compares with the
year-end balance of $43.8 million and $93.5 million a year ago. Loans reported
as substandard include loans classified as Substandard or Doubtful as determined
by the Company in its internal credit risk rating profile. Under the Company's
definition, Substandard loans, which include nonaccruals, are characterized by
the distinct possibility that some loss will be sustained if the credit
deficiencies are not corrected. The Substandard classification, however, does
not necessarily imply ultimate loss for each individual loan so classified.
Loans classified as Doubtful have all the weaknesses inherent in Substandard
loans with the added characteristic that the weaknesses make collection of 100
percent of the assets questionable and improbable.
As of June 30, 1996, approximately 50 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.
16
<PAGE> 17
<TABLE>
The following table displays the Company's total nonperforming assets and
measures performance regarding certain key indicators of asset quality:
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30,
1996 1996 1995 1995
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans ......................... $ 22,661 $19,204 $19,930 $38,170
Accruing loans 90 days or more past due .. 387 471 257 1,576
Other real estate owned ("OREO"), net .... 2,454 3,159 3,015 8,822
Restructured loans ....................... 61 67 5,783 8,265
-------- ------- ------- -------
Total nonperforming assets .................. $ 25,563 $22,901 $28,985 $56,833
======== ======= ======= =======
Reserve for possible loan losses ............ $ 55,427 $55,798 $56,029 $61,439
Net (recoveries) chargeoffs for the quarter . (5,129) 1,731 7,617 4,073
OREO reserve ................................ 813 682 568 1,257
Ratios:
Reserve to nonaccrual loans .............. 244.6% 290.6% 281.1% 161.0%
Reserve to total of nonaccrual loans,
accruing loans 90 days or more past due,
and restructured loans ................. 239.9% 282.6% 215.7% 128.0%
Reserve to period-end loans .............. 4.2% 4.5% 4.4% 4.8%
Nonaccrual loans and accruing loans over
90 days past due to period-end loans ... 1.7% 1.6% 1.6% 3.1%
Nonperforming assets to period-end loans
and OREO ................................ 1.9% 1.8% 2.3% 4.4%
Annualized net chargeoffs to average loans (1.6%) .6% 2.4% 1.3%
OREO reserve to OREO ..................... 24.9% 17.8% 15.9% 12.5%
</TABLE>
As shown in the table above, total nonperforming assets were $25.6 million
at June 30, 1996, which reflects a slight increase in nonaccrual loans during
the quarter, while total nonperformers were down $3.4 million for the year. The
level of nonperforming assets at quarter end was within the range of industry
norms relative to the Company's size and total volume of loans, so that periodic
fluctuations can be expected. In comparison with a year ago, nonperforming
assets have declined $31.3 million. With the exception of further accelerated
disposition programs such as bulk sales of troubled assets which the Company
continues to consider, the large quarterly declines experienced over the last
two to three years are not expected to continue.
At June 30, 1996, total impaired loans were $22.7 million, comprised of $.3
million that required a reserve for possible loan losses of $.3 million and
$22.4 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.
17
<PAGE> 18
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.
<TABLE>
No portion of the reserve is restricted to any loan or group of loans, and
the entire reserve is available to absorb future realized losses. The amount and
timing of realized losses and future reserve allocations may vary from current
estimates. An allocation of the reserve for possible loan losses to each
category of loans is presented below:
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30,
1996 1996 1995 1995
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Reserve for possible loan losses
allocation to loans outstanding:
Commercial and financial ....... $18,345 $18,816 $20,055 $20,721
Commercial real estate:
Construction ................. 440 457 495 401
Developer, investor and land . 4,267 4,796 4,802 5,528
Consumer* ...................... 6,601 5,898 8,515 7,319
Lease financing ................ 431 361 356 331
Unallocated .................... 25,343 25,470 21,806 27,139
------- ------- ------- -------
Total loan loss reserve...... $55,427 $55,798 $56,029 $61,439
======= ======= ======= =======
- ----------
<FN>
* Consumer loans include indirect automobile installment loans, residential
mortgages and home equity lines of credit, credit cards, and check credit
loans.
</TABLE>
The balance of the reserve for possible loan losses of $55.4 million at
June 30, 1996 has remained relatively unchanged since year-end 1995. Net
chargeoffs of $1.7 million in the first quarter were offset with a similar
amount of provision for possible loan losses. In the second quarter the Company
realized $5.1 million in net recoveries on loans previously charged off. This,
along with the Company's risk rating and reserve adequacy indicators and overall
improvement in asset quality, provided a basis to record a $5.5 million credit
provision for possible loan losses. As shown in the table above, the asset
quality improvement of the commercial loan portfolios has reduced the reserve
allocation requirement to these loans over the past few quarters. The
unallocated portion has grown to $25 million, or 46 percent, of the total
reserve balance as of June 30, 1996. The Company's subsidiary banks are
currently under an annual examination performed by the federal and state
regulatory agencies. Based on the final examination results, and the Company's
continued monitoring and analysis of trends in asset quality and reserve
adequacy, additional credit provisions may be recorded in the third quarter
which could align reserve ratios more closely with those of comparable
institutions. Such credit provisions could have a material positive impact on
the quarter and year-to-date operating results. As of June 30, 1996, the reserve
was 244.6 percent of nonaccrual loans, 216.8 percent of total nonperforming
assets, 180.5 percent of loans reported as substandard, which includes
nonaccrual loans, and 4.2 percent of total loans.
18
<PAGE> 19
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 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. All three capital ratios are calculated excluding
the effect of SFAS No. 115 and unrealized gain/loss on securities
available-for-sale.
<TABLE>
At June 30, 1996, and December 31, 1995, the Company's consolidated
risk-based assets totaled $1.66 billion and $1.63 billion, respectively. The
capital ratios and regulatory minimum requirements applicable to the Company
were:
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
----------------------------------- -----------------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------------- ----------------- ---------------- ------------------
MINIMUM MINIMUM MINIMUM MINIMUM
ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 leverage capital ......... $175.0 $ 79.1 8.87% 4.00% $167.4 $ 75.8 8.83% 4.00%
Tier 1 capital .................. 175.0 66.3 10.34% 4.00% 167.4 65.3 10.24% 4.00%
Total (Tier 1 and Tier 2) capital 196.1 129.9 11.83% 8.00% 187.8 127.7 11.75% 8.00%
</TABLE>
<TABLE>
The Tier 1 leverage capital ratios and regulatory minimum requirements for
the Company's subsidiary banks at June 30, 1996 and December 31, 1995 were:
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
----------------------------------- -----------------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------------- ----------------- ---------------- ------------------
MINIMUM MINIMUM MINIMUM MINIMUM
ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
USTrust ......................... $148.3 $117.7 7.97% 6.00% $141.7 $107.3 7.92% 6.00%
United States Trust Company...... 5.1 .9 35.04% 6.00% 5.0 .9 32.99% 6.00%
UST Bank/Connecticut ............ 6.6 4.4 5.99% 4.00% 9.1 4.4 8.31% 4.00%
</TABLE>
The Company and each of its subsidiary banks are in compliance with their
respective capital requirements.
The Company paid a cash dividend to stockholders in the second quarter of
$0.06 per share for a total of $1.1 million. On June 18, 1996, a quarterly
dividend to stockholders was declared of $0.07 per share for a total of $1.3
million payable July 25, 1996. The Company received cash dividends from
subsidiaries during the second quarter of $1 million from USTrust, $.5 million
from United States Trust Company ("USTC"), an asset management and trust
subsidiary, and $.5 million from JSA Financial Corporation ("JSA"), a nonbanking
subsidiary specializing in the liquidation of problem assets. The Company
recorded dividends receivable from subsidiaries of $2.5 million from USTrust,
$.5 million from USTC, $.5 million from JSA and $3 million from UST
Bank/Connecticut, a Connecticut-based banking subsidiary. These subsidiary
dividends are payable in July 1996.
In late 1995, the Company's Board of Directors approved a common stock
repurchase program, authorizing the repurchase of up to 500,000 shares subject
to market conditions and other factors. The repurchased shares are 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 June 30, 1996, a total of 250,000 shares had been
repurchased under this program, of which 213,293 shares have been reissued in
connection with stock option exercises.
19
<PAGE> 20
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 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.
20
<PAGE> 21
PART II. OTHER INFORMATION
For the quarter ended June 30, 1996, 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 is 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 21, 1996.
(b) the following matters were submitted to a vote of the Stockholders of
the Company: (1) the election of each of the following eight Directors
of the Company, each of whom will serve for a three-year term:
Edward Guzovsky William Schwartz
Brian W. Hotarek Edward J. Sullivan
Vikki L. Pryor Michael J. Verrochi, Jr.
Gerald M. Ridge Gordon M. Weiner
(2) the ratification and approval of the 1996 Directors' Stock Option Plan.
<TABLE>
The following votes were cast with respect to the election of Directors:
<CAPTION>
WITHHOLD
FOR AUTHORITY
--- ---------
<S> <C> <C>
Edward Guzovsky..................... 11,917,921 988,627
Brian W. Hotarek.................... 11,960,606 945,942
Vikki L. Pryor...................... 11,960,606 945,942
Gerald M. Ridge..................... 11,816,883 1,089,665
William Schwartz.................... 11,907,617 998,931
Edward J. Sullivan.................. 11,918,347 988,200
Michael J. Verrochi, Jr............. 11,910,228 996,320
Gordon M. Weiner.................... 11,957,191 949,356
</TABLE>
The following is a list of the thirteen (13) additional Directors of the
Company whose term of office as a Director continued after the meeting:
Robert M. Coard Francis X. Messina
Domenic Colasacco Sydney L. Miller
Robert L. Culver Samuel B. Sheldon*
Alan K. DerKazarian Barbara C. Sidell
Donald C. Dolben James V. Sidell
Neal F. Finnegan Paul D. Slater
Wallace M. Haselton
* Subsequently resigned on June 30, 1996
21
<PAGE> 22
<TABLE>
The following votes were cast in connection with the approval of the 1996
Directors' Stock Option Plan:
<S> <C>
IN FAVOR.............9,947,586
AGAINST................586,203
ABSTAIN................149,800
DELIVERED, NOT VOTED.2,222,958
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Summary Financial Information.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Commission on July
2, 1996 regarding the execution by USTrust, the Company's principal subsidiary,
of a Purchase and Assumption Agreement with The First National Bank of Boston
("FNBB") and joined in for certain purposes by Bank of Boston Corporation
pursuant to which USTrust will purchase certain assets and assume deposit
liabilities booked at and allocated to twenty branches located in the greater
Boston, Massachusetts area. The purchase remains conditioned on USTrust's
receipt of the regulatory approval from the Federal Deposit Insurance
Corporation. Sixteen of the branches to be acquired are currently operated as
BayBank branches and four of the branches are currently operated by FNBB. Ten of
the branches are located in Middlesex County, with the remaining ten divided
equally between Norfolk and Suffolk Counties.
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 12, 1996 By: /s/ Neal F. Finnegan
-------------------------------
Neal F. Finnegan, President and
Chief Executive Officer
Date: August 12, 1996 By: /s/ James K. Hunt
---------------------------
James K. Hunt, Executive Vice
President, Treasurer, and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF UST CORP. AT OR FOR THE SIX MONTHS ENDED JUNE 30,
1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 82,348
<INT-BEARING-DEPOSITS> 55
<FED-FUNDS-SOLD> 15,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 569,906
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,332,175
<ALLOWANCE> 55,427
<TOTAL-ASSETS> 2,027,016
<DEPOSITS> 1,516,377
<SHORT-TERM> 310,006
<LIABILITIES-OTHER> 23,488
<LONG-TERM> 0
<COMMON> 11,200
0
0
<OTHER-SE> 165,945
<TOTAL-LIABILITIES-AND-EQUITY> 2,027,016
<INTEREST-LOAN> 57,894
<INTEREST-INVEST> 17,816
<INTEREST-OTHER> 85
<INTEREST-TOTAL> 75,795
<INTEREST-DEPOSIT> 21,983
<INTEREST-EXPENSE> 29,760
<INTEREST-INCOME-NET> 46,035
<LOAN-LOSSES> (4,000)
<SECURITIES-GAINS> (113)
<EXPENSE-OTHER> 42,282
<INCOME-PRETAX> 21,749
<INCOME-PRE-EXTRAORDINARY> 21,749
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,361
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
<YIELD-ACTUAL> 8.21
<LOANS-NON> 22,661
<LOANS-PAST> 387
<LOANS-TROUBLED> 61
<LOANS-PROBLEM> 11,900
<ALLOWANCE-OPEN> 56,029
<CHARGE-OFFS> 3,575
<RECOVERIES> 6,973
<ALLOWANCE-CLOSE> 55,427
<ALLOWANCE-DOMESTIC> 55,427
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,343
</TABLE>
