<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 September 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE #0-9623
_____________
UST CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2436093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
40 COURT STREET, 02108
BOSTON, MASSACHUSETTS
(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 October 31, 1995, there
were issued and outstanding 17,704,464 shares of common stock, par value $.625
per share.
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<PAGE> 2
UST Corp.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1995 and December 31, 1994.................................. 3
Consolidated Statements of Income -- Three and Nine Months Ended September 30, 1995 and 1994 ........... 4
Consolidated Statements of Changes in Stockholders' Investment -- Nine Months Ended
September 30, 1995 and 1994.............................................................................. 5
Consolidated Statements of Cash Flows -- Nine Months Ended September 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.................................................................................. 23
Item 5. Other Matters...................................................................................... 23
Item 6. Exhibits and Reports on Form 8-K................................................................... 23
SIGNATURES ................................................................................................. 24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UST CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
(UNAUDITED)
------------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash, due from banks and interest-bearing deposits ................................... $ 90,182 $ 93,079
Excess funds sold to banks ........................................................... 90,000 10,000
Securities:
Securities available-for-sale:
Mortgage-backed securities ...................................................... 193,688 195,009
U.S. Treasury, corporate notes, and other ....................................... 230,432 206,631
----------- -----------
Total securities available-for-sale ....................................... 424,120 401,640
Securities held-to-maturity ........................................................ 100 100
----------- -----------
Total securities .......................................................... 424,220 401,740
Loans:
Loans -- net of unearned discount of $34,411,000 in 1995 and
$18,619,000 in 1994 (Note 2) ....................................................... 1,264,488 1,276,683
Reserve for possible loan losses (Notes 2 and 3) ................................... (61,846) (64,088)
----------- -----------
Total loans, net .......................................................... 1,202,642 1,212,595
Premises, furniture and equipment, net ............................................... 31,725 32,403
Intangible assets, net ............................................................... 4,941 6,445
Other real estate owned, net (Note 2) ................................................ 4,861 9,958
Other assets ......................................................................... 39,927 37,012
----------- -----------
Total assets .............................................................. $ 1,888,498 $ 1,803,232
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Demand:
Noninterest-bearing .............................................................. $ 340,115 $ 371,716
Interest-bearing ................................................................. 164,595 168,434
Savings:
Money market ..................................................................... 227,824 271,898
Other ............................................................................ 247,228 285,350
Time:
Certificates of deposit over $100,000 ............................................ 97,637 79,373
Other ............................................................................ 414,423 314,035
----------- ----------
Total deposits ............................................................ 1,491,822 1,490,806
Short-term borrowings ................................................................ 203,635 158,989
Other borrowings ..................................................................... 4,321 9,964
Other liabilities .................................................................... 23,414 10,839
----------- ----------
Total liabilities ......................................................... 1,723,192 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 -- 17,701,839 and 17,614,792 shares in 1995 and 1994, respectively.... 11,064 11,009
Additional paid-in capital ......................................................... 72,679 72,129
Retained earnings .................................................................. 83,642 73,183
Unrealized loss on securities available-for-sale, net of tax ....................... (2,451) (23,601)
Deferred compensation and other .................................................... 372 (86)
----------- -----------
Total stockholders' investment ............................................ 165,306 132,634
----------- -----------
Total liabilities and stockholders' investment ............................ $ 1,888,498 $ 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans .................................. $ 29,871 $ 26,369 $ 88,979 $ 76,098
Interest and dividends on securities:
Taxable ................................................... 6,010 6,642 18,191 20,780
Non-taxable ............................................... 48 54 156 159
Dividends ................................................. 115 41 274 120
Interest on excess funds and other .......................... 1,582 365 2,415 917
----------- ----------- ----------- -----------
Total interest income ............................... 37,626 33,471 110,015 98,074
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits ........................................ 11,251 7,926 31,390 24,582
Interest on short-term borrowings ........................... 2,554 1,635 6,356 4,494
Interest on other borrowings ................................ 116 245 478 849
----------- ----------- ----------- -----------
Total interest expense .............................. 13,921 9,806 38,224 29,925
----------- ----------- ----------- -----------
Net interest income ......................................... 23,705 23,665 71,791 68,149
Provision for possible loan losses (Note 2) ................... 2,790 7,223 11,290 19,480
----------- ----------- ----------- -----------
Net interest income after provision for possible loan losses 20,915 16,442 60,501 48,669
----------- ----------- ----------- -----------
Noninterest income:
Asset management fees ....................................... 3,306 3,383 10,048 11,079
Corporate services income ................................... 2,046 2,017 6,192 5,936
Service charges on deposit accounts ......................... 1,096 1,235 3,536 3,702
Gain on sale of securities, net ............................. 340 504 1,786 1,022
Other ....................................................... 295 439 1,238 1,355
----------- ----------- ----------- -----------
Total noninterest income ............................ 7,083 7,578 22,800 23,094
----------- ----------- ----------- -----------
Noninterest expense:
Salary and employee benefits ................................ 11,237 11,468 33,141 31,910
Net occupancy expense ....................................... 1,937 1,985 5,671 5,925
Foreclosed asset and workout expense (Note 2) ............... 1,183 1,804 4,653 5,717
Credit card processing expense .............................. 1,069 981 3,172 2,815
Deposit insurance assessment ................................ 401 1,174 2,446 3,522
Other ....................................................... 5,460 5,105 17,485 17,017
----------- ----------- ----------- -----------
Total noninterest expense ........................... 21,287 22,517 66,568 66,906
----------- ----------- ----------- -----------
Income before income taxes .................................... 6,711 1,503 16,733 4,857
Income tax provision ........................................ 2,566 447 6,274 1,475
----------- ----------- ----------- -----------
Net income .......................................... $ 4,145 $ 1,056 $ 10,459 $ 3,382
=========== =========== =========== ===========
Per share data:
Net income (Note 5) ......................................... $ .23 $ .06 $ .58 $ .19
Cash dividends declared ..................................... -- -- -- --
Weighted average number of common shares (Note 5) ............. 18,155,828 17,805,079 18,029,892 17,814,670
</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>
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........................................ 3,382
Stock option exercises and stock issued under
restricted stock plans........................... 177 111 1,119
Change from unrealized gain to loss on
securities available-for-sale, net of tax........ (21,024)
Activity in Directors Deferred
Compensation Program and Other, net............. (67)
------ ------- ------- ------- -------- ----
Balance September 30, 1994........................ 17,482 $10,926 $70,813 $71,819 $(17,689) $471
====== ======= ======= ======= ======== ====
Balance December 31, 1994......................... 17,615 $11,009 $72,129 $73,183 $(23,601) $(86)
Net income........................................ 10,459
Stock option exercises and stock issued under
restricted stock plans............................ 87 55 550
Decrease in unrealized loss on securities
available-for-sale, net of tax.................... 21,150
Activity in Directors Deferred
Compensation Program and Other, net............... 458
------ ------- ------- ------- -------- ----
Balance September 30, 1995........................ 17,702 $11,064 $72,679 $83,642 $ (2,451) $372
====== ======= ======= ======= ======== ====
</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>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................................... $ 10,459 $ 3,382
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses ................................................ 11,290 19,480
Depreciation and amortization ..................................................... 4,025 3,485
Amortization of gain on sale/leaseback ............................................ (288) (288)
Amortization of security premiums, net ............................................ 416 551
Gain on sale of securities, net ................................................... (1,786) (1,022)
Gain on sale of other real estate owned, net ...................................... (320) (483)
Writedowns of other real estate owned ............................................. 1,350 2,014
Deferred income tax (expense) benefit ............................................. (669) 3,785
Increase in accruals and other, net ............................................... 7,269 13,524
--------- ---------
Net cash provided by operating activities ................................... 31,746 44,428
Cash flows (used) provided by investing activities:
Proceeds from sales of securities available-for-sale ................................ 49,179 51,390
Proceeds from maturities of securities available-for-sale ........................... 17,947 114,581
Purchases of securities available-for-sale .......................................... (63,202) (127,272)
Purchases of securities held-to-maturity ............................................ (100)
Net (increase) decrease in short-term investments ................................... (80,000) 80,483
Net (increase) decrease in loans .................................................... (5,364) 64,325
Proceeds from sales of other real estate owned ...................................... 8,094 5,109
Purchases of premises and equipment ................................................. (1,841) (2,113)
--------- ---------
Net cash (used) provided by investing activities ............................ (75,187) 186,403
Cash flows provided (used) by financing activities:
Net decrease in nontime deposits .................................................... (117,636) (106,369)
Net increase (decrease) in certificates of deposit .................................. 118,652 (66,660)
Net increase (decrease) in proceeds on short-term borrowings ........................ 44,646 (56,965)
Net payments on other borrowings .................................................... (5,643) (4,143)
Issuance of common stock for cash, net .............................................. 525 680
--------- ---------
Net cash provided (used) by financing activities ............................ 40,544 (233,457)
--------- ---------
Decrease in cash and cash equivalents ............................................... (2,897) (2,626)
Cash and cash equivalents at beginning of year ...................................... 93,079 90,198
--------- ---------
Cash and cash equivalents at end of period .......................................... $ 90,182 $ 87,572
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .......................................................................... $ 37,566 $ 29,899
--------- ---------
Income taxes ...................................................................... $ 6,643 $ 2,144
Noncash transactions: --------- ---------
Transfers from other assets to securities available-for-sale ........................ $ 301 $ 300
--------- ---------
Transfers from loans to other real estate owned, net ................................ $ 4,592 $ 5,130
--------- ---------
Financed other real estate owned sales .............................................. $ 565 $ 4,887
--------- ---------
Common stock issuance ............................................................... $ 80 $ 550
--------- ---------
</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 Annual
Report on Form 10-K for the fiscal year ended December 31, 1994. The
results of operations for the three- and nine-month periods ended
September 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, "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--Impaired Loans" 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 nine months
ended September 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 ........................ (20,254) (22,886)
Recoveries on loans previously charged-off 6,722 3,184
-------- --------
Net chargeoffs/transfers .................... (13,532) (19,702)
Provided from operations .................... 11,290 19,480
-------- --------
Balance at end of period .................... $ 61,846 $ 64,243
======== ========
</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 September 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....................... $303,000
Standby letters of credit and
financial guarantees written...................... 57,000
Commercial letters of credit....................... 4,000
Foreign exchange contracts......................... 400
</TABLE>
NOTE 5: 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 457,643 and 358,712 for the three- and nine-month
periods ended September 30, 1995, respectively, and 387,253 and 448,096
for the three- and nine-month periods ended September 30, 1994,
respectively.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AT SEPTEMBER 30, 1995
INTRODUCTION
The operating results for the quarter ended September 30, 1995 are
highlighted by a continued improvement in earnings and further progress in the
resolution of problem assets. Substandard loans, as determined by the Company's
internal risk rating system, peaked at $265 million at December 31, 1993,
following a recessionary period in the local economy. Such loans have been
reduced for the seventh consecutive quarter to $80 million at September 30,
1995. This reflects a reduction of 70 percent or $185 million, since December
1993 and 14 percent or $13 million, during the current 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 trend and were reduced $12 million during the current quarter and $42
million during the first nine months of this year to $45 million. The Company
strategy, originally adopted in 1993 to reduce aggressively the level of problem
assets, will continue into the fourth quarter of this year. The Company
continues to evaluate the feasibility of bulk sales of portions of these assets
with the goal of concluding this initiative in the near term. See "Credit
Quality and Reserve for Possible Loan Losses" herein for a further discussion.
The Company's reduction of problem assets has directly benefited the
earnings results for the quarter and first nine months of this year through a
lower provision for possible loan losses and decreased foreclosed asset and
workout expense. These credit cost reductions when combined with a strong net
interest margin and the Company's initiatives to reduce noninterest expense and
improve efficiency resulted in net income for the quarter ended September 30,
1995 of $4.1 million, or $.23 per share, a substantial increase over net income
of $1.1 million, or $.06 per share, for the corresponding period a year ago. For
the first nine months earnings also increased from $3.4 million, or $.19 per
share, last year to $10.5 million, or $.58 per share this year.
This discussion should be read in conjunction with the financial
statements, notes, and tables included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994. Certain amounts reported for
prior periods have been reclassified to conform with the 1995 presentation.
ASSETS
Total assets at September 30, 1995 were $1.89 billion, an increase of $86
million from December 31, 1994. Excess funds sold to other banks increased $80
million since year end reflecting an increase in short-term borrowings of $45
million, and net cash provided by operating activity of $32 million. Total
loans, excluding the maturity of $10.5 million in commercial paper originally
purchased in the second quarter, decreased $13.9 million during the third
quarter to $1.26 billion. The third quarter decrease compares with a second
quarter increase of $12 million, 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.
9
<PAGE> 10
The following table presents the composition of the loan portfolio:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995 1994 1993
------------- -------- --------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial and financial............ $ 652,103 $ 685,525 $ 677,042 $ 705,075 $ 760,446
Commercial real estate:
Construction...................... 15,170 14,164 14,556 13,109 35,295
Developer, investor and land...... 220,887 242,587 253,963 265,624 321,965
Consumer:
Residential mortgage.............. 87,270 89,677 91,146 90,643 85,889
Home equity....................... 69,549 70,509 68,227 64,068 63,188
Indirect automobile installment... 170,047 139,165 114,332 90,255 31,848
Other consumer.................... 22,887 20,787 20,887 21,964 23,944
Lease financing..................... 26,575 26,459 26,249 25,945 26,348
---------- ---------- ---------- ---------- ----------
Total loans $1,264,488 $1,288,873 $1,266,402 $1,276,683 $1,348,923
========== ========== ========== ========== ==========
</TABLE>
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 supported by the automation of this business unit's
operations. Indirect automobile loans increased 22 percent, or $30.9 million,
for the quarter ended September 30, 1995 and 88 percent, or $79.8 million, for
the nine-month period. The 1995 increase in indirect automobile loans follows
growth of 183 percent, or $58.4 million, during the year ended December 31,
1994.
Securities increased $22.5 million from $401.7 million at year end to
$424.2 million at September 30, 1995. The increase is due primarily to the
reduction in gross unrealized loss on securities available-for-sale of $24.7
million. As the result of sluggish loan demand, sales and maturities of U. S.
Treasury and mortgage-backed securities were offset by the third quarter
purchase of asset-backed securities.
At September 30, 1995, the Company's securities portfolio consisted of
$424.1 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
$4.3 million at September 30, 1995 compared with $29.0 million at December 31,
1994. This reduction in gross unrealized loss on securities available-for-sale
of $24.7 million primarily reflects the improvement in bond prices in the first
half of this year. The upward trend experienced this year 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 the positive effect of increasing stockholders' investment by $21.2 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 $2.5 million, net of a $1.8
million deferred tax benefit at September 30, 1995.
10
<PAGE> 11
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 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 securities
portfolio is currently classified almost entirely as available-for-sale, which
provides the flexibility to sell certain securities based upon changes in
economic or market conditions, interest rate risk and the Company's financial
position and liquidity. A nominal volume of fixed and variable rate residential
mortgage loans are sold to investors as they are originated.
At September 30, 1995, liquidity, which includes excess cash, funds sold
and unpledged securities, totaled approximately $322 million, or 17 percent of
total assets, a $63 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 $1.0 million to $1.49 billion
since December 31, 1994. Savings deposits decreased $82.2 million while time
deposits increased $118.7 million as investors were attracted to the Company's
more aggressive certificate of deposit pricing earlier in the year. Demand
deposits decreased $35.4 million since the beginning of the year.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased $2.9 million during the nine-month period ended September
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. Cash provided by financing
activities was primarily the result of increases in short-term borrowings and
certificates of deposit, partially offset by decreases in nontime deposits and
payments on other borrowings.
At September 30, 1995, the parent company had $1.1 million in cash and
due from banks and $7.5 million in certificates of deposit 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 nine months ended September 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 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 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
The following table summarizes the Company's GAP position at September
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 September 30,
1995, the one-year cumulative GAP position was positive at $23 million, or
approximately 1 percent of total assets.
<TABLE>
<CAPTION>
INTEREST SENSITIVE PERIODS
---------------------------------------------------------
0 - 30 DAY 31-90 DAY 91-365 DAY OVER 1 YEAR TOTAL
---------- --------- ---------- ----------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Loans, net of reserve......................... $ 718 $ 31 $ 103 $ 351 $1,203
Excess funds sold............................. 90 90
Securities.................................... 2 7 55 360 424
Other assets.................................. 6 2 1 162 171
------ ------ ------ ------ ------
Total assets........................... $ 816 $ 40 $ 159 $ 873 $1,888
------ ------ ------ ------ ------
Interest-bearing deposits..................... $ 445 $ 51 $ 286 $ 370 $1,152
Borrowed funds................................ 204 4 208
Noninterest-bearing demand deposits........... 340 340
Other liabilities and stockholders' equity.... 2 186 188
------ ------ ------ ------ ------
Total liabilities and equity........... $ 651 $ 51 $ 290 $ 896 $1,888
------ ------ ------ ------ ======
GAP for period................................ $ 165 $ (11) $ (131) $ (23)
====== ====== ====== ======
Cumulative GAP................................ $ 154 $ 23 $ 0
====== ====== ======
As a percent of total assets.................. 8.74% 8.16% 1.22%
</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 addressing the
rationale supporting the adequacy of the reserve.
12
<PAGE> 13
At September 30, 1995 substandard loans were $80 million compared with
$94 million at the beginning of the quarter and $126 million at December 31,
1994. Loans reported as substandard include loans classified as Substandard or
Doubtful, as determined by the Company in its internal credit risk rating
profile. Under the Company's definition, Substandard loans are characterized by
the distinct possibility that some loss will be sustained if the credit
deficiencies are not corrected. The Substandard classification, however, does
not necessarily imply ultimate loss for each individual loan so classified.
Loans classified as Doubtful have all the weaknesses inherent in Substandard
loans with the added characteristic that the weaknesses make collection of 100
percent of the assets questionable and improbable.
As of September 30, 1995, approximately 60 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 55 percent
were collateralized by commercial real estate development, approximately 30
percent by owner-occupied commercial properties and approximately 10 percent by
residential real estate. The remaining loans were collateralized by real estate
under construction and raw land.
The following table displays the Company's total nonperforming assets and
measures performance regarding key indicators of asset quality:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1995 1995 1995 1994 1994
------------- -------- --------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans*................................ $32,808 $38,170 $44,595 $59,944 $ 84,442
Accruing loans 90 days or more past due.......... 1,021 1,576 478 1,409 1,189
Other real estate owned (OREO), net*............. 4,861 8,822 9,990 9,958 4,875
Restructured loans............................... 6,095 8,265 9,251 15,757 17,701
------- ------- ------- ------- --------
Total nonperforming assets......................... $44,785 $56,833 $64,314 $87,068 $108,207
======= ======= ======= ======= ========
Reserve for possible loan losses*.................. $61,846 $61,439 $61,842 $64,088 $ 64,243
Net chargeoffs for the quarter*.................... $ 2,383 $ 4,073 $ 7,076 $ 4,956 $ 5,514
OREO reserve*...................................... $ 1,361 $ 1,257 $ 1,473 $ 1,044 $ 1,552
Ratios:*
Reserve to nonaccrual loans...................... 188.5% 161.0% 138.7% 106.9% 76.1%
Reserve to total of nonaccrual loans,
accruing loans 90 days or more past due, and
restructured loans............................. 154.9% 128.0% 113.8% 83.1% 62.2%
Reserve to period-end loans...................... 4.9% 4.8% 4.9% 5.0% 5.1%
Nonaccrual loans and accruing loans over
90 days past due to period-end loans........... 2.7% 3.1% 3.6% 4.8% 6.8%
Nonperforming assets to period-end loans
and OREO....................................... 3.5% 4.4% 5.0% 6.8% 8.5%
Annualized net chargeoffs to average loans .8% 1.3% 2.2% 1.6% 1.7%
OREO reserve to OREO............................. 21.9% 12.5% 12.9% 9.5% 24.1%
</TABLE>
* Balances and ratios for 1994 reflect the reclassification of in-substance
foreclosure related amounts consistent with SFAS No. 114. See "Credit
Quality--Impaired Loans" for a further discussion.
Total nonperforming assets, led by declines in nonaccrual loans and other
real estate owned (OREO), decreased $12.0 million during the quarter ended
September 30, 1995 and $42.3 million since the beginning of the year to $44.8
million. The decreased level of nonperforming assets contributed to lower loan
loss provisions, lower foreclosed asset and workout expense, and a decline in
chargeoff activity. Net chargeoffs in the third quarter of
13
<PAGE> 14
1995 were $2.4 million, the lowest quarterly activity level recorded by the
Company over the last three years. The reduction of nonperforming assets is
expected to continue. In order to further accelerate the process, the Company
continues to consider such alternatives as bulk sales of portions of these
assets.
The reserve for possible loan losses has remained relatively level
throughout 1994 and 1995 and is $61.8 million at September 30, 1995. The ratio
of reserve coverage to nonaccrual loans has steadily strengthened and is almost
double the amount of nonaccrual loans at 189 percent on September 30, 1995. This
compares favorably with 76 percent a year ago, 107 percent at year-end 1994 and
161 percent at June 30, 1995.
CREDIT QUALITY - IMPAIRED LOANS
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 September 30, 1995, total
impaired loans were $38.9 million, comprised of $1.9 million that required
reserves of $.4 million and $37.0 million that did not require a related reserve
since there was no impairment as measured by the Statement's provisions. 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 and its amendment.
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 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
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 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.
14
<PAGE> 15
At September 30, 1995 and December 31, 1994, the Company's consolidated
risk-based assets were $1.58 billion and $1.52 billion, respectively. The
capital ratios and regulatory minimum requirements applicable to the Company
were:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Tier 1 capital:
Actual............................. $161.7 10.24% $149.7 9.82%
Minimum required................... $ 63.2 4.00% $ 61.0 4.00%
Total (Tier 1 and Tier 2) capital:
Actual............................. $181.5 11.80% $169.5 11.45%
Minimum required................... $123.0 8.00% $118.5 8.00%
Tier 1 leverage capital:................. $161.7 8.73% $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. The Company and each of
its subsidiary banks are currently in compliance with their respective capital
requirements.
For the nine months ended, September 30, 1995, the Company did not
declare or 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 to its subsidiaries as follows: $1.0 million to UST/Conn
and $6.5 million to JSA Financial Corp.
FORMER AGREEMENTS WITH BANK REGULATORY AGENCIES
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 of the Agreement which is no longer in
effect, refer to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
In June 1995, the Company's Massachusetts-based and largest subsidiary
bank, USTrust, was released 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 percent; (ii) not to pay a dividend
which would cause the Bank's Tier 1 leverage capital ratio to fall below 6
percent; (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 Annual 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 percent. On September 14, 1995, UST/Conn was released by
the Commissioner of Banks for the State of Connecticut from the terms of its
Stipulation and Agreement, originally issued in June 1991. For a discussion of
the Agreement which is no longer in effect, refer to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994. At September
30, 1995 the Tier 1 leverage capital ratios for USTrust, USTC and UST/Conn were
7.78 percent, 49.98 percent and 8.10 percent, respectively. These compare with
7.55 percent, 39.46 percent and 6.40 percent, respectively, at December 31,
1994.
15
<PAGE> 16
STOCK PURCHASE RIGHTS PLAN
On September 22, 1995, the Company declared a special dividend
distribution of one preferred share purchase right for each outstanding share of
the Company's common stock. This dividend was distributed on October 6, 1995 to
stockholders of record as of the close of business on that date.
The rights will become exercisable only if a person or group (i) acquires
15 percent or more of the Company's common stock, (ii) announces a tender offer
that would result in ownership of 15 percent or more of the common stock, or
(iii) is declared to be an "Adverse Person" by the Company's Board of Directors.
"Adverse Person" includes any person or group who owns at least 10 percent of
the Company's common stock and attempts an action that would adversely impact
the Company. Each right would entitle a stockholder to buy 1/100th of a share
of a new series of junior participating preferred stock.
Once a person or group has acquired 15 percent or more of the outstanding
common stock of the Company or is declared an "Adverse Person" by the Company's
Board of Directors, each right may entitle its holder (other than the acquiring
person or Adverse Person) to purchase, at an exercise price of $40, shares of
common stock of the Company (or any organization that acquires the Company) at a
price equal to 50 percent of their current market price. Under certain
circumstances, the Continuing Directors (as defined in the rights plan) may
exchange the rights for common stock (or equivalent securities) on a one-for-one
basis excluding rights held by the acquiring person or Adverse Person.
Until declaration of an Adverse Person, or ten days after public
announcement that any person or group has acquired 15 percent or more of the
Company's common stock, the rights are redeemable at the option of the Company's
Board of Directors, in certain cases with the concurrence of the Continuing
Directors. Thereafter, they may be redeemed by the Continuing Directors in
connection with certain acquisitions not involving any acquiring person or
Adverse Person or in certain circumstances following a disposition of shares by
the acquiring person or Adverse Person. The redemption price is $.001 per
right. The rights will expire on October 6, 2005, unless redeemed prior to that
date. Distribution of the rights is not taxable to stockholders.
The purpose of the rights plan is to assist the Board of Directors in
ensuring that all of the Company's stockholders are treated fairly in any
unsolicited merger or other acquisition. The adoption of the rights plan was
not triggered by any attempt to acquire the Company. In fact, most New England
bank holding companies of the Company's size have similar rights plans in
effect.
STOCK REPURCHASE PROGRAM
Subsequent to the end of the quarter, on October 17, 1995, the Company's
Board of Directors approved a stock repurchase program. Under the program, the
Company is authorized to repurchase up to 500,000 shares, which was
approximately 2.8 percent of the Company's common stock outstanding on the date
of authorization. The stock buyback is authorized to take place from time to
time, subject to prevailing market conditions. Purchases may be made on the
open market or in privately negotiated transactions. As of the date of this
Quarterly Report, there are approximately 18 million shares of the Company's
common stock outstanding.
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 reflect a
combination of SAIF and BIF assessments. The Company received a $700 thousand
rebate of deposit insurance premiums during the quarter as a result of the
aforementioned action to reduce premium rates on insured deposits.
16
<PAGE> 17
Proposed Federal legislation may result in a one-time assessment on
Thrift deposits that would supplement the weaker Thrift deposit insurance fund
followed by a merger of SAIF and BIF. The amount of such a one-time assessment
cannot be determined at this time but 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.
17
<PAGE> 18
RESULTS OF OPERATIONS
COMPARISON OF 1995 WITH 1994
The Company reported net income of $4.1 million, or $.23 per share, for
the third quarter and $10.5 million, or $.58 per share, for the first nine
months of 1995. This compares with net income of $1.1 million, or $.06 per
share, and $3.4 million, or $.19 per share, for the same periods in 1994. The
strong improvement in earnings was the direct result of reductions in the
provision for possible loan losses of $4.4 million in the third quarter and $8.2
million for the first nine months of 1995. In addition, lower foreclosed asset
and workout expense contributed to higher earnings for both the third quarter
and nine months ended September 30, 1995. The nine-month period also benefited
from a higher net interest margin.
NET INTEREST INCOME ANALYSIS
The Company's net interest income on a fully taxable equivalent basis was
$24.0 million in the third quarter, slightly higher than $23.9 million reported
last year. For the first nine months of 1995, net interest income on a fully
taxable equivalent basis was $72.6 million compared with $68.9 million for the
same period last year, an increase of $3.7 million. The increase 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 earlier in the year.
Interest rates moved downward in the third quarter following a plateau
period in the second quarter and a rapid rise from early 1994 through the first
quarter of this year. The result was a third quarter yield on earning assets of
8.52 percent which was below yields earned earlier this year, but 84 basis
points above the 1994 third quarter yield of 7.68 percent. For the nine-month
period, yield on earning assets improved 126 basis points from 7.36 percent last
year to 8.62 percent in 1995. The cost of interest-bearing liabilities, which
consists principally of deposits, was 4.11 percent this quarter and 3.91 percent
for the first nine months compared with 2.93 percent and 2.87 percent for the
corresponding periods in 1994. While the Company initially resisted increasing
deposit rates in the rising interest rate environment of 1994, more aggressive
deposit pricing was adopted in late 1994 and the first quarter of this year. In
the second quarter of 1995, rates for new deposits leveled off as the Company
moved to a less competitive pricing policy. However, the cost of deposits
continued to increase as older certificates of deposit matured and repriced at
the current higher rates. In the fourth quarter, while the cost of deposits is
expected to continue to increase, it should be at a decreasing marginal rate.
The third quarter interest rate spread and margin of 4.41 percent and
5.39 percent, respectively, are below the peak period results achieved in this
year's first quarter of 5.05 percent and 5.92 percent, and have fallen to levels
consistent with the third quarter of 1994 of 4.75 percent and 5.44 percent,
respectively. The lower margin and spread reflect the recent decline in yields
on earning assets and increase in cost of interest-bearing liabilities. The
interest rate spread and margin for the nine-month period improved from a year
ago from 4.50 percent and 5.13 percent, respectively, to 4.71 percent and 5.65
percent this year. The current year spreads and margins are at historically
high levels which appeared to have peaked in the first quarter. The recent
narrowing of spread and margin is a trend that is expected to moderate as the
deposit mix and rates stabilize and the decline in yield on earning assets,
particularly loans, subsides in response to level interest rates. The net
effect from changes in rates this quarter as compared with the same period a
year ago on net interest income was negligible. The net effect for the
nine-month period was a favorable increase of $5.5 million.
18
<PAGE> 19
Average earning assets for the quarter were $1.76 billion compared to
$1.74 billion for the same period last year. The increase in average earning
assets was attributable to the net effect of decreased loans of $12 million,
decreased securities of $42 million and an increase in lower yielding excess
funds of $76 million. For the nine-month period, average earnings assets were
$1.72 billion, or $75 million lower than the same period a year ago, reflecting
declines in average loans of $26 million and securities of $76 million offset by
an increase in excess funds of $27 million. Average interest-bearing
liabilities increased $17 million from last year to $1.34 billion for the
three-month period and decreased $87 million to $1.31 billion for the nine-month
period. In addition, interest-bearing liabilities experienced a shift in
average deposits of approximately $114 million for the three-month period and
$56 million for the nine-month period from savings and money market deposits to
higher cost certificates of deposit. The net effect from changes in volume of
loans, deposits and other interest-bearing balances on net interest income was a
nominal increase for the quarter and a decrease of $1.8 million for the nine
months ended September 30 compared with last year.
The following table attributes changes in interest income and interest
expense to changes in interest rates and changes in the volume of
interest-earning assets and interest-bearing liabilities for the quarter ended
September 30, 1995 when compared with the quarter ended September 30, 1994.
Changes attributable to both rate and volume are allocated on a weighted basis.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM
QUARTER ENDED SEPTEMBER 30, 1994
--------------------------------
AMOUNT DUE TO
CHANGES IN
QUARTER ENDED TOTAL ---------------
SEPTEMBER 30, 1995 CHANGE VOLUME RATE
------------------ ------ ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans*............. $30,066 $3,496 $ (255) $3,751
Interest and dividends on securities:
Taxable............................ 6,010 (644) (581) (63)
Non-taxable*....................... 238 116 (70) 186
Interest on excess funds and other........ 1,582 1,217 1,084 133
------- ------ ------ ------
Total interest income*................ 37,896 4,185 178 4,007
------- ------ ------ ------
Interest expense:
Interest on deposits.................... 11,251 3,325 21 3,304
Interest on short-term borrowings....... 2,554 919 195 724
Interest on other borrowings............ 116 (129) (117) (12)
------- ------ ------ ------
Total interest expense................ 13,921 4,115 99 4,016
------- ------ ------ ------
Net interest income............................ $23,975 $ 70 $ 79 $ (9)
======= ====== ====== ======
<FN>
- ---------------------
* Fully taxable equivalent at the Federal income tax rate of 35 percent in 1995 and 34 percent in 1994, and
includes applicable State taxes, net of Federal benefit. The tax equivalent adjustment on loans was $195
thousand and on non-taxable securities was $75 thousand for the quarter ended September 30, 1995.
</TABLE>
19
<PAGE> 20
The following table attributes changes in interest income and interest
expense to changes in interest rates and changes in the volume of
interest-earning assets and interest-bearing liabilities for the nine months
ended September 30, 1995 when compared with the nine months ended September 30,
1994. Changes attributable to both rate and volume are allocated on a weighted
basis.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM
NINE MONTHS ENDED SEPTEMBER 30, 1994
------------------------------------
AMOUNT DUE TO
CHANGES IN
NINE MONTHS ENDED TOTAL ---------------
SEPTEMBER 30, 1995 CHANGE VOLUME RATE
------------------ ------ ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans*............ $ 89,551 $12,849 $(1,574) $14,423
Interest and dividends on securities:
Taxable........................... 18,191 (2,625) (3,351) 726
Non-taxable*...................... 633 276 (195) 471
Interest on excess funds and other....... 2,415 1,498 1,121 377
-------- ------- ------- -------
Total interest income*............... 110,790 11,998 (3,999) 15,997
-------- ------- ------- -------
Interest expense:
Interest on deposits................... 31,390 6,808 (1,268) 8,076
Interest on short-term borrowings...... 6,356 1,862 (596) 2,458
Interest on other borrowings........... 478 (371) (348) (23)
-------- ------- ------- -------
Total interest expense............... 38,224 8,299 (2,212) 10,511
-------- ------- ------- -------
Net interest income........................... $ 72,566 $ 3,699 $(1,787) $ 5,486
======== ======= ======= =======
</TABLE>
- ---------------------
* Fully taxable equivalent at the Federal income tax rate of 35 percent
in 1995 and 34 percent in 1994, and includes applicable State taxes,
net of Federal benefit. The tax equivalent adjustment on loans was
$572 thousand and on non-taxable securities was $203 thousand for
the nine months ended September 30, 1995.
NONINTEREST INCOME
Noninterest income for the quarter declined $495 thousand from the same
period last year to $7.1 million. This quarter reflects the gain on sale of
equity investments held by a venture capital subsidiary of $335 thousand while
the third quarter of last year included gains on sale of securities of $504
thousand. Also contributing to the decline in noninterest income were declines
in asset management fees, deposit service fees and mutual fund fees.
For the nine-month comparison noninterest income decreased $294 thousand
to $22.8 million compared with the corresponding period in 1994. Asset
management fees were lower in the first nine months of 1995 compared with the
same period last year due to timing differences in the recognition of fee income
in 1994. Partially offsetting the lower asset management fees was a $256
thousand increase in corporate services income and a $764 thousand increase in
gain on sale of securities, principally equity investments.
20
<PAGE> 21
NONINTEREST EXPENSE
Total noninterest expense was reduced 5 percent, or $1.2 million, from
the third quarter of 1994 to $21.3 million. For the nine-month comparison,
noninterest expense decreased $338 thousand to $66.6 million. Contributing to
the lower noninterest expense were declines in foreclosed asset and workout
expense of $621 thousand for the quarter and $1.1 million for the nine-month
period due to the lower level of problem assets compared with 1994. FDIC
deposit insurance assessment decreased in both periods reflecting a $700
thousand rebate received during the quarter following action by the FDIC to
reduce premium rates on insured deposits. See "Deposit Insurance" herein for a
further discussion on FDIC deposit insurance premiums. Salary and employee
benefits decreased $231 thousand in the third quarter due to severance-related
costs recorded last year. For the nine-month period, salary and employee
benefits increased $1.2 million reflecting the impact of increased asset
management division revenue-sharing provisions (See below for a further
discussion of the revenue-sharing provisions). The Company's efforts to
consolidate banking facilities resulted in lower occupancy expense for both
third quarter and nine-month period. Absent any unforeseen events, further
declines in noninterest expense are expected in the fourth quarter and
subsequent quarters as Company initiatives to improve operating efficiencies are
realized and level of problem assets is reduced.
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 nine-month periods ended September 30, 1995 and the
three-month period ended September 30, 1994.
The major components of other noninterest expense were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Furniture and equipment............................... $ 863 $ 784 $ 2,597 $ 2,461
Advertising and promotion............................. 542 444 1,790 1,507
Legal and consulting.................................. 515 608 1,634 2,259
Amortization of intangibles........................... 462 357 1,506 1,071
Service bureau and other data processing.............. 313 289 978 884
Facility consolidation provisions..................... 515 1,389 350
All other............................................. 2,250 2,623 7,591 8,485
------ ------ ------- -------
Total other noninterest expense................ $5,460 $5,105 $17,485 $17,017
====== ====== ======= =======
</TABLE>
Other noninterest expense increased $355 thousand in the third quarter
and $468 thousand for the nine months ended September 30 compared with the same
periods last year. The other noninterest expense increases are the direct
result of 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.
The facility consolidation provisions were $515 thousand in the third quarter
and $1.4 million for the first nine months of this year. In addition, this year
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. As a result,
amortization of intangible assets increased $105 thousand for the quarter to
$462 thousand and increased $435 thousand for the first nine months to $1.5
million.
21
<PAGE> 22
The current intangible asset amortization acceleration program concluded at the
end of the third quarter. Advertising and promotion was ahead of last year for
both the quarter and nine-month periods; however, by year end the expense level
is expected to be approximately consistent with 1994. All other expense was
reduced $373 thousand for the quarter and $894 thousand for the first nine
months due to reductions across numerous expense categories, the largest were
declines in appraisal fees and general insurance expense.
INCOME TAXES
The Company recorded income taxes of $2.6 million and $6.3 million for
the three- and nine-month periods ended September 30, 1995, respectively. This
compares with $447 thousand and $1.5 million for the three- and nine-month
periods ended September 30, 1994. The statutory Federal income tax rate was 35
percent in 1995 and 34 percent in 1994. The effective tax rates for the third
quarter and first nine months of this year were 38.2 percent and 37.5 percent,
respectively, compared with 29.7 percent and 30.4 percent, 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 September 30, 1995, the Company had a deferred tax asset of
approximately $10.9 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--Impaired Loans" herein for a further
discussion.
The FASB issued in March 1995, 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 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.
22
<PAGE> 23
PART II. OTHER INFORMATION
For the quarter ended September 30, 1995, Items 2, 3 and 4 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 5. OTHER MATTERS
The Company's Board of Directors recently authorized the commencement of
a stock repurchase program. See "Stock Repurchase Program" in Management's
Discussion and Analysis of Financial Condition and Results of Operations herein
for further information.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Summary Financial Information.
28. (a) UST Corp.'s Press Release dated September 22, 1995.
(Stock Purchase Rights Plan)
(b) UST Corp.'s Press Release dated October 17, 1995
(Stock Repurchase Program)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Commission on
September 28, 1995 regarding (i) the adoption by the Company of a Stockholder
Stock Purchase Rights Plan; (ii) the release of UST Corp.'s Connecticut banking
subsidiary, UST Bank/Connecticut, from a Stipulation and Agreement by the
Banking Commissioner of the State of Connecticut on September 14, 1995; and
(iii) the appointment of Suzanne Moot as Executive Vice President/Marketing and
Retail Banking and as a member of the Executive Policy Committee of the
Company.
23
<PAGE> 24
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: November 9, 1995 By: /s/ Neal F. Finnegan
--------------------------------
Neal F. Finnegan, President and
Chief Executive Officer
Date: November 9, 1995 By: /s/ James K. Hunt
--------------------------------
James K. Hunt, Executive Vice
President, Treasurer, and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS IS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF UST CORP. AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1.00
<CASH> 90,130
<INT-BEARING-DEPOSITS> 52
<FED-FUNDS-SOLD> 90,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 424,120
<INVESTMENTS-CARRYING> 100
<INVESTMENTS-MARKET> 102
<LOANS> 1,264,488
<ALLOWANCE> 61,846
<TOTAL-ASSETS> 1,888,498
<DEPOSITS> 1,491,822
<SHORT-TERM> 203,635
<LIABILITIES-OTHER> 23,414
<LONG-TERM> 4,321
<COMMON> 11,064
0
0
<OTHER-SE> 154,242
<TOTAL-LIABILITIES-AND-EQUITY> 1,888,498
<INTEREST-LOAN> 88,979
<INTEREST-INVEST> 18,621
<INTEREST-OTHER> 2,415
<INTEREST-TOTAL> 110,015
<INTEREST-DEPOSIT> 31,390
<INTEREST-EXPENSE> 38,224
<INTEREST-INCOME-NET> 71,791
<LOAN-LOSSES> 11,290
<SECURITIES-GAINS> 1,786
<EXPENSE-OTHER> 66,568
<INCOME-PRETAX> 16,733
<INCOME-PRE-EXTRAORDINARY> 16,733
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,459
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<YIELD-ACTUAL> 8.62
<LOANS-NON> 32,808
<LOANS-PAST> 1,021
<LOANS-TROUBLED> 6,095
<LOANS-PROBLEM> 59,500
<ALLOWANCE-OPEN> 64,088
<CHARGE-OFFS> 20,254
<RECOVERIES> 6,722
<ALLOWANCE-CLOSE> 61,846
<ALLOWANCE-DOMESTIC> 61,846
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 30,900
</TABLE>
<PAGE> 1
EXHIBIT 28(a)
[UST CORP LOGO] N E W S R E L E A S E
For: Immediate Release
Contact: Sheila Celata (617) 726-7120
UST CORP.
ADOPTS STOCK PURCHASE RIGHTS PLAN
BOSTON, MASSACHUSETTS, September 22, 1995 -- UST Corp. announced that, at
its regular Board of Directors meeting, the Board declared a special dividend
distribution of one preferred share purchase right for each outstanding share of
UST common stock. This dividend will be distributed on October 6, 1995 to
stockholders of record as of the close of business on that date.
The rights will become exercisable only if a person or group (i) acquires
15% or more of UST's common stock, (ii) announces a tender offer that would
result in ownership of 15% or more of the common stock, or (iii) is declared to
be an "Adverse Person" by the Board of Directors. "Adverse Person" includes any
person or group who owns at least 10% of UST's common stock and attempts an
action that would adversely impact UST. Each right would entitle a stockholder
to buy 1/100th of a share of a new series of junior participating preferred
stock.
Once a person or group has acquired 15% or more of the outstanding common
stock of UST or is declared an "Adverse Person" by the Board of Directors, each
right may entitle its holder (other than the acquiring person or adverse person)
to purchase, at an exercise price of $40, shares of common stock of UST (or of
any company that acquires UST) at a price equal to 50% of their current market
price. Under certain circumstances, the Continuing Directors (as defined in the
rights plan) may exchange the rights for common stock (or equivalent securities)
on a one-for-one basis.
Until declaration of an Adverse Person, or ten days after public
announcement that any person or group has acquired 15% or more of UST's common
stock, the rights are redeemable at the option of the Board of Directors, in
certain cases with the concurrence of the Continuing Directors. Thereafter,
they may be redeemed by the Continuing Directors in connection with certain
acquisitions not involving any acquiring person or Adverse Person or in certain
-More-
<PAGE> 2
-2-
circumstances following a disposition of shares by the acquiring person or
Adverse Person. The redemption price is $.001 per right.
The rights will expire on October 6, 2005, unless redeemed prior to that
date. Distribution of the rights is not taxable to stockholders.
Neal F. Finnegan, President of UST, said: "This rights plan is designed
to help the Board of Directors assure that all UST stockholders are treated
fairly in any unsolicited merger or other acquisition." Mr. Finnegan also
stated that most New England bank holding companies of UST's size have rights
plans in effect, and that adoption of the rights plan was not triggered by any
attempt to acquire the Company.
A detailed description of the rights plan will be mailed to UST's
stockholders at the time of the distribution.
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.
#####
<PAGE> 1
EXHIBIT 28(b)
[UST CORP LOGO] N E W S R E L E A S E
For: Immediate Release
Contact: Sheila Celata (617) 726-7120
UST CORP. APPROVES STOCK REPURCHASE PROGRAM
BOSTON, October 17, 1995: UST Corp announced today that its Board of Directors
has approved a stock repurchase program. Under the program, the Company is
authorized to repurchase up to 500,000 shares, or approximately 2.8% of UST
Corp. common stock outstanding.
The stock buyback is authorized to take place from time-to-time, subject to
prevailing market conditions. Purchases may be made on the open market or in
privately negotiated transactions. As of today, there are approximately 18
million UST Corp. shares of common stock outstanding.
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.
#####
