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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MARCH 18, 1994
UST CORP.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2436093
(State or other jurisdiction 0-9623 (IRS Employer
of incorporation) (Commission File Number) 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)
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL
The registrant, UST Corp. (the "Company"), is filing this Current Report on
Form 8-K/A for purposes of future incorporation by reference into registration
statements expected to be filed covering a variety of matters. This document
contains certain financial information pursuant to Regulation S-X.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.............................................. 4
Consolidated Balance Sheets -- December 31, 1993 and 1992............................. 5
Consolidated Statements of Income for the years ended December 31, 1993, 1992 and
1991................................................................................ 6
Consolidated Statements of Changes in Stockholders' Investment for the years ended
December 31, 1993, 1992 and 1991.................................................... 7
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and
1991................................................................................ 8
Notes to Consolidated Financial Statements............................................ 9
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4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of UST Corp.:
We have audited the accompanying consolidated balance sheets of UST Corp.
(a Massachusetts corporation) and Subsidiaries as of December 31, 1993 and 1992,
and the related consolidated statements of income, changes in stockholders'
investment and cash flows for each of the three years in the period ended
December 31, 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of UST Corp.
and Subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and investments by
adopting Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" and Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
January 1, 1993 and December 31, 1993, respectively.
Arthur Andersen & Co.
Boston, Massachusetts
January 31, 1994
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UST CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------------
1993 1992
----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Cash, due from banks and interest-bearing deposits (Note 3).............. $ 90,198 $ 116,529
Excess funds sold to banks and other short-term investments.............. 96,647 1,341
Securities (Notes 1 and 4):
Investment portfolio (Market value: $8,163).......................... 8,122
Securities available-for-sale:
Mortgage-backed securities (Market value: $314,434 in 1992)..... 263,435 307,014
U.S. Treasury, corporate notes, and other
(Market value: $161,313 in 1992).............................. 210,474 161,629
----------- -----------
Total securities available-for-sale............................. 473,909 468,643
----------- -----------
Total securities............................................ 473,909 476,765
Loans (Notes 5, 14, and 16):
Loans--net of unearned discount of $7,026 in 1993 and
$9,094 in 1992..................................................... 1,317,579 1,470,600
Reserve for loan losses.............................................. (62,547) (50,126)
----------- -----------
1,255,032 1,420,474
Premises, furniture and equipment, net (Note 6).......................... 32,661 35,055
Goodwill................................................................. 2,192 2,315
Other real estate owned (Note 7)......................................... 19,468 43,154
Other assets (Notes 2, 10, and 12)....................................... 74,159 82,428
----------- -----------
Total Assets................................................ $2,044,266 $2,178,061
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Demand:
Noninterest bearing............................................. $ 373,793 $ 422,056
Interest bearing................................................ 170,642 148,639
Savings:
Money market.................................................... 323,979 385,305
Other........................................................... 320,924 323,746
Time:
Certificates of deposit over $100,000........................... 72,911 84,822
Other........................................................... 378,549 427,363
----------- -----------
Total deposits.................................................. 1,640,798 1,791,931
Short-term borrowings (Note 8)........................................... 226,268 202,051
Other borrowings (Note 9)................................................ 14,286 18,607
Other liabilities........................................................ 10,095 21,592
Commitments and contingencies (Notes 15 and 16)
Stockholders' investment (Notes 1, 4, 9, 11, and 13):
Preferred stock $1 par value; Authorized -- 4,000,000 shares;
Outstanding -- None
Common stock $.625 par value; Authorized -- 30,000,000 shares;
Outstanding -- 17,304,795 and 14,036,842 shares in 1993 and 1992,
respectively........................................................ 10,815 8,773
Additional paid-in capital........................................... 69,694 47,694
Retained earnings.................................................... 68,437 88,537
Unrealized gain on securities available for sale, net of tax......... 3,335
Unrealized loss on marketable equity securities...................... (17)
Deferred compensation, net........................................... 538 (1,107)
----------- -----------
Total stockholders' investment....................................... 152,819 143,880
----------- -----------
Total Liabilities and Stockholders' Investment.............. $2,044,266 $2,178,061
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
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UST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1992 1991
--------- --------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income:
Interest and fees on loans.................. $ 110,673 $ 122,522 $ 174,344
Interest and dividends on securities:
Taxable................................... 28,635 32,859 30,093
Nontaxable................................ 265 467 665
Dividends................................. 352 278 299
Trading account interest.................... 192 4,870
Other interest income....................... 703 706 11,222
--------- --------- ---------
Total interest income.................. 140,628 157,024 221,493
--------- --------- ---------
Interest expense:
Interest on deposits........................ 40,300 59,444 114,762
Interest on short-term borrowings........... 6,239 7,757 17,922
Interest on other borrowings................ 1,405 1,769 1,956
--------- --------- ---------
Total interest expense................. 47,944 68,970 134,640
--------- --------- ---------
Net interest income......................... 92,684 88,054 86,853
Provision for loan losses (Note 5)............... 64,258 41,893 53,712
--------- --------- ---------
28,426 46,161 33,141
--------- --------- ---------
Noninterest income:
Asset management fees....................... 15,798 12,526 9,070
Service charges on deposit accounts......... 5,356 5,852 5,725
Credit card merchant fees................... 4,926 4,304 4,568
Gain on sale of securities, net (Note 4).... 4,403 13,724 10,560
Writedown of equity securities.............. (181) (44) (7,118)
Trading account profits (losses)............ (132) 7,014
Gain on sale of real estate (Note 6)........ 3,030
Lease residual income....................... 1,148 753 3,354
Corporate services income................... 3,439 3,076 2,421
Other....................................... 1,834 2,300 5,012
--------- --------- ---------
Total noninterest income............... 36,723 42,359 43,636
--------- --------- ---------
Noninterest expense:
Salary and employee benefits (Note 10)...... 38,451 35,370 35,221
Net occupancy expense....................... 7,419 7,384 8,060
Credit card processing expense.............. 3,815 3,416 3,350
Deposit insurance assessment................ 4,931 4,320 5,065
Foreclosed asset and workout expense (Note
7)........................................ 23,356 20,272 14,516
Other....................................... 19,538 25,410 23,110
--------- --------- ---------
Total noninterest expense.............. 97,510 96,172 89,322
--------- --------- ---------
Loss before income taxes......................... (32,361) (7,652) (12,545)
Income tax benefit (Note 12)................ (11,511) (2,931) (4,598)
--------- --------- ---------
Net loss before change in accounting method...... (20,850) (4,721) (7,947)
Cumulative effect of change in method of
accounting for income taxes (Note 1)........... (750)
--------- --------- ---------
Net loss......................................... $ (20,100) $ (4,721) $ (7,947)
--------- --------- ---------
--------- --------- ---------
Per share data:
Net loss.................................... $ (1.31) $ (.34) $ (.58)
Cash dividends declared..................... $ .15
Weighted average number of common shares (Note
11)............................................ 15,362,251 13,984,190 13,793,617
The accompanying notes are an integral part of these consolidated financial
statements.
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UST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
COMMON STOCK CAPITAL IN
---------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS OTHER
------ ------- ----------- --------- -------
(IN THOUSANDS)
Balance, December 31, 1990............... 12,908 $8,067 $40,094 $107,847 $(7,929)
Net loss............................... (7,947 )
Cash dividends declared -- ($.15 per
share) (2,091 )
Stock dividend declared -- (5%)........ 661 413 4,138 (4,551 )
Restricted stock vesting (Note 11)..... 22 14 348
Dividend reinvestment plan issuances... 312 195 1,546
Change in unrealized loss on equity
securities.......................... 7,779
Deferred compensation ESOP (Note 9).... (1,429 )
------ ------- ----------- --------- -------
Balance, December 31, 1991............... 13,903 $8,689 $46,126 $ 93,258 $(1,579)
Net loss............................... (4,721 )
Stock option exercises and restricted
stock
vesting (Note 11)................... 134 84 1,568
Change in unrealized loss on equity
securities (Note 4)................. 133
Changed in deferred compensation (Note
9) 322
------ ------- ----------- --------- -------
Balance, December 31, 1992............... 14,037 $8,773 $47,694 $ 88,537 $(1,124)
Net loss............................... (20,100 )
Common stock sales (Note 13)........... 3,155 1,972 21,271
Stock option exercises and restricted
stock
vesting (Note 11)................... 113 70 729
Cumulative effect of change in method
of
accounting for investment
securities,
net of tax (Note 1)................. 3,335
Change in unrealized loss on equity
securities (Note 4)................. 17
Change in deferred compensation
(Notes 9, 10, and 11)............... 1,645
------ ------- ----------- --------- -------
Balance, December 31, 1993............... 17,305 $10,815 $69,694 $ 68,437 $3,873
------ ------- ----------- --------- -------
------ ------- ----------- --------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
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UST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss........................................................... $ (20,100) $ (4,721) $ (7,947)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of change in accounting method............... (750)
Provision for loan losses...................................... 64,258 41,893 53,712
Depreciation and amortization.................................. 5,029 5,031 5,694
Amortization of gain on sale/leaseback......................... (384) (384) (807)
Amortization of security premiums, net......................... 1,344 1,856 961
Trading account sales.......................................... 209,917 486,878
Trading account purchases...................................... (173,260) (491,865)
Gain on sale of securities, net................................ (4,403) (13,724) (10,560)
Writedown of equity securities................................. 181 44 7,118
Trading account (profits) losses............................... 132 (7,014)
Loss on sale of other real estate owned, net................... 1,120 2,338 1,554
Writedowns of other real estate owned.......................... 16,244 10,783 7,496
Deferred income tax benefit (expense).......................... (4,494) 1,106 (9,911)
Increase (decrease) in accruals and other, net................. (1,241) 17,367 (3,425)
--------- --------- ---------
Net cash provided by operating activities.............................. 56,804 98,378 31,884
Cash flows provided by investing activities:
Sales and maturities of investment securities...................... 5,584 4,889 491,707
Purchase of investment securities.................................. (1,063) (334) (573,792)
Proceeds from securities held for sale............................. 321,517 371,663
Purchases of securities held for sale.............................. (312,866) (402,647)
Net (increase) decrease in short-term investments.................. (95,306) 577 2,082
Net loans paid..................................................... 87,939 117,439 156,490
Loans put back to the RTC (Note 2)................................. 513,572
Sale of other real estate owned.................................... 19,567 13,800 995
Sale of building, net.............................................. 7,965
Purchases of premises and equipment................................ (1,268) (1,257) (10,457)
--------- --------- ---------
Net cash provided by investing activities.............................. 24,104 104,130 588,562
Cash flows used by financing activities:
Net (decrease) increase in nontime deposits........................ (90,408) 3,195 27,663
Net payments on certificates of deposit............................ (60,725) (209,726) (469,240)
Net proceeds (payments) on short-term borrowings................... 24,217 20,528 (210,558)
Payments of other borrowings....................................... (4,000) (4,500)
Cash dividends..................................................... (4,131)
Issuance of common stock for cash, net............................. 23,677 120 1,741
--------- --------- ---------
Net cash used by financing activities.................................. (107,239) (190,383) (654,525)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents................... (26,331) 12,125 (34,079)
Cash and cash equivalents at beginning of year..................... 116,529 104,404 138,483
--------- --------- ---------
Cash and cash equivalents at end of year........................... $ 90,198 $ 116,529 $ 104,404
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest....................................................... $ 48,959 $ 71,233 $ 141,980
--------- --------- ---------
--------- --------- ---------
Income taxes................................................... $ 1,210 $ 2,495 $ 5,228
--------- --------- ---------
--------- --------- ---------
Noncash transactions:
Transfers from investment to trading account....................... $ 25,170
---------
---------
Transfers from loans to other real estate owned.................... $ 39,128 $ 41,751 $ 48,747
--------- --------- ---------
--------- --------- ---------
Transfers to securities held for sale.............................. $ 7,103 $ 436,191
--------- ---------
--------- ---------
Financed OREO sales................................................ $ 25,883 $ 23,184 $ 17,715
--------- --------- ---------
--------- --------- ---------
Stock issuance..................................................... $ 365 $ 1,532 $ 362
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
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UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of UST Corp. and Subsidiaries conform
with generally accepted accounting principles and general practice in the
banking industry. The significant policies are summarized below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. The parent company only financial statements
contained in Note 17 reflect investments in Subsidiaries using the equity method
of accounting.
Certain reclassifications have been made to prior year balances to conform
with the current year presentation. Assets owned by others held in a fiduciary
or agency capacity are not included in the consolidated balance sheets.
SECURITIES
On December 31, 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." This statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Under this statement securities are
classified as held-to-maturity, available-for-sale, or trading. Debt securities
which management has the positive intent and ability to hold to maturity are
classified as held-to-maturity, and are carried at cost adjusted for the
amortization of premium or the accretion of discount. At December 31, 1993 the
Company had no securities classified as held-to-maturity.
Debt and equity securities with readily determinable market values that are
bought and held principally for the purpose of selling them in the near term are
classified as trading securities and are carried at fair value, with unrealized
gains and losses included in current earnings. At December 31, 1993 and 1992,
the Company had no securities classified as trading.
Debt and equity securities not classified as either held-to-maturity or
trading are classified as available-for-sale and carried at fair value, with
unrealized after-tax gains and losses reported as a separate component of
stockholders' investment. The cumulative effect of adopting SFAS 115 was
$5,749,000 before reduction for the income tax effect of $2,414,000.
Prior to December 31, 1993, debt securities were designated at the time
they were purchased as either held-for-sale or held to maturity, based on
management intent at the time. Securities which management had the ability and
intent to hold on a long-term basis or until maturity were classified as
investment portfolio. Securities which were to be held for indefinite periods of
time and not intended to be held to maturity or on a long-term basis were
classified as securities held for sale and carried at the lower of aggregate
cost or market value.
Prior to the adoption of FASB 115 trading account securities were valued at
market.
For mortgage-backed securities, the Company recalculates the effective
yield on the investment to reflect the actual prepayment results and anticipated
future payments. The net investment in these securities is adjusted to the
amount that would have existed had the new estimated average life and effective
yield been applied since the acquisition of the securities. Such adjustments are
charged or credited to interest income in the current period.
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UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company determined the securities sold by the specific identification
method. The amount of taxes paid on gains is dependent upon the overall results
of operations of the subsidiary incurring the gain.
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment are stated at cost, less accumulated
depreciation and amortization. The Company provides for depreciation using the
straight-line method by charges to expense in amounts estimated to amortize the
cost over the estimated useful lives of the respective assets as follows:
Buildings and building improvements........................ 10-40 years
Furniture and equipment.................................... 3-10 years
Leasehold improvements are amortized over the life of the lease agreements.
LOAN INCOME AND FEES
Certain installment loans and commercial time loans are made on a
discounted basis. The unearned discount applicable to such installment loans is
taken into income monthly by use of the actuarial method. Interest income on
nondiscounted loans is accrued based on the principal amount of loans
outstanding.
Loans are placed on nonaccrual, with the reversal of all accrued interest
receivable, when there is doubt as to the collectibility of interest or
principal or if loans are 90 days or more past due unless they are both well
secured and in the process of collection. In every case, a loan reaching 180
days past due is placed on nonaccrual. Interest received on nonaccrual loans is
applied to principal if collection of principal is doubtful; otherwise, it is
reflected in interest income on a cash basis.
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114 (SFAS No. 114), "Accounting by Creditors for Impairment of a Loan,"
which is to become effective for fiscal years beginning after December 15, 1994.
SFAS No. 114 addresses the accounting by creditors for impairment of certain
loans by requiring that the carrying value of impaired loans, as defined, be
measured based upon the present value of expected future cash flows discounted
at the loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent. Management is currently evaluating the effect that
this new standard will have on the Company's reported consolidated financial
position and results of operations.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is maintained at a level considered adequate by
management to provide for possible losses from loans, leases and commitments to
extend credit. Adequacy of the reserve is determined by management using a
consistent methodology which analyzes the size and risk of the loan portfolio on
a monthly basis. Factors in this analysis include past loan loss experience and
asset quality, as reflected by trends of delinquent, 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. The reserve is based on estimates, and ultimate losses may vary from
current estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the current period.
OTHER REAL ESTATE OWNED
Other real estate owned includes both actual and in-substance
repossessions. In December 1992 the Company adopted Statement of Position No.
92-3 ("SOP 92-3") issued by the American Institute of Certified Public
Accountants. This SOP states that foreclosed assets are presumed to be held for
sale. Therefore, they should be carried at the lower of cost or fair value,
minus estimated costs to sell. In 1992 the pretax charge to income resulting
from implementation was $750,000.
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UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company provides for income taxes in accordance with the comprehensive
income tax allocation method. This method recognizes the tax effects of all
income and expense transactions in each year's statement of income regardless of
the year in which the transactions are reported for tax purposes.
The Company follows the deferral method of accounting for investment tax
credits. Under the deferral method, the credit is reflected as a reduction of
tax expense ratably over the period during which the asset is depreciated for
financial reporting purposes.
FASB has issued SFAS No. 109 "Accounting for Income Taxes," a modification
of SFAS No. 96, effective January 1, 1993. While the FASB retained the existing
requirement to record deferred taxes for transactions that are reported in
different years for financial reporting and tax purposes, it revised the
computation of deferred taxes so that the amount of deferred taxes on the
balance sheet is adjusted whenever tax rates or other provisions of the income
tax law are changed. This is known as the "liability method" of providing
deferred income taxes. This change in accounting principle increased net income
$750,000 in January 1993, representing the cumulative effect of the new standard
on the balance sheet at the date of adoption.
EARNINGS (LOSS) PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock and common stock equivalents outstanding. Common stock
equivalents consist primarily of dilutive outstanding stock options computed
under the treasury stock method. Loss per share computations do not include
antidilutive common stock equivalents.
GOODWILL
Cost of purchased businesses in excess of net assets acquired includes
amount being amortized over twenty-and forty-year periods. Amortization expense
was $122,500 in 1993, 1992 and 1991.
RETIREMENT BENEFITS
The Company's policy is to fund pension costs accrued.
In December 1990, the FASB issued SFAS No. 106, "Employer's Accounting for
Post Retirement Benefits Other Than Pensions." SFAS No. 106 is effective for
fiscal years beginning after December 15, 1992. This statement did not have any
impact on the Company's financial position or results of operations.
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." SFAS No. 112 is effective for fiscal years beginning
after December 15, 1993. It is not expected that this statement will have any
impact on the Company's financial position or results of operations.
STATEMENT OF CASH FLOWS
For purpose of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and interest-bearing deposits.
(2) HOME OWNERS PURCHASE AND ASSUMPTION
On September 7, 1990, United States Trust Company ("USTC"), the Company's
principal banking subsidiary at the time, assumed approximately $2 billion in
deposits and acquired certain assets and branches located in the greater Boston
area of the former Home Owners Savings Bank F.S.B. ("Home Owners") in a
transaction with the Resolution Trust Corporation ("RTC"), an arm of the Federal
Government. The Company paid the RTC cash of $6.1 million, approximately the
amount allocated to core deposit intangible which is being amortized over seven
years. As part of the approval process, the Company agreed with the Board of
Governors of the Federal Reserve System and the Federal Deposit Insurance
Corporation to restore
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UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's and USTC's consolidated capital ratios to the levels at which they
stood prior to the Home Owners transaction. Management developed a plan to
achieve these objectives which included putting the $513.6 million loans held
for sale back to the RTC in 1991 and continuing to reduce assets as the high
rate Home Owners certificates of deposit rolled off. This plan is complete.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
At December 31, 1993 and 1992, cash and due from banks included $42,072,000
and $23,659,000, respectively, to satisfy the reserve requirements of the
Federal Reserve Bank.
(4) SECURITIES
Data presented for 1993 includes only securities available-for-sale. Data
presented for 1992 in this footnote includes both the investment portfolio,
consisting primarily of securities of states and municipalities, and other
equity securities, with an amortized cost of $8,122,000, and securities
held-for-sale, consisting primarily of U.S. Treasuries, mortgage-backed and
auto-backed securities, and corporate notes, with an amortized cost of
$468,643,000.
The amortized cost and fair values of the Company's securities are as
follows:
1993
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
Mortgage-backed securities:
FHLMC........................................... $177,600 $2,713 $ (749) $179,564
FNMA............................................ 83,514 1,264 (907) 83,871
-------- ------ -------- --------
Total mortgage-backed securities.............. 261,114 3,977 (1,656) 263,435
US Treasury and Federal agencies..................... 130,192 795 (1,284) 129,703
States and municipalities............................ 3,712 178 (3) 3,887
Foreign governments.................................. 451 451
Corporate debt securities............................ 70,579 2,915 (3) 73,491
Marketable equity securities......................... 2,112 886 (56) 2,942
-------- ------ -------- --------
Total securities.............................. $468,160 $8,751 $ (3,002) $473,909
-------- ------ -------- --------
-------- ------ -------- --------
1992
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET
--------- ---------- ---------- --------
(IN THOUSANDS)
Mortgage-backed securities:
FHLMC........................................... $167,348 $5,176 $172,524
FNMA............................................ 139,666 2,431 $ (187) 141,910
-------- ------ -------- --------
Total mortgage-backed securities.............. 307,014 7,607 (187) 314,434
US Treasury and Federal agencies..................... 74,225 475 (335) 74,365
States and municipalities............................ 5,181 166 (111) 5,236
Foreign governments.................................. 501 501
Corporate debt securities............................ 87,437 1,364 (1,834) 86,967
Marketable equity securities, net of valuation
allowance.......................................... 2,407 2,407
-------- ------ -------- --------
Total securities.............................. $476,765 $9,612 $ (2,467) $483,910
-------- ------ -------- --------
-------- ------ -------- --------
The amortized cost and estimated market value of debt securities at
December 31, 1993 and 1992, by contractual maturity, are shown in the table
below. Actual maturities are expected to differ from contractual maturities
because some borrowers have the right to prepay without prepayment penalty.
Mortagage-backed
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13
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities are shown at their final maturity but are expected to have shorter
average lives. Equity securities, which have no contractual maturity, are
presented in the aggregate.
1993 1992
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
Mortgage-backed securities:
Due after 5 years through 10 years.......... $ 42,187 $ 43,005 $ 55,489 $ 56,434
Due after 10 years.......................... 218,927 220,430 251,525 258,000
--------- --------- --------- ---------
Total mortgage-backed securities....... 261,114 263,435 307,014 314,434
All other debt securities:
Due in 1 year or less....................... 2,255 2,253 3,113 3,141
Due after 1 year through 5 years............ 174,623 177,579 139,629 139,253
Due after 5 years through 10 years.......... 25,889 25,389 22,242 22,366
Due after 10 years.......................... 2,167 2,311 2,360 2,309
--------- --------- --------- ---------
Total debt securities.................. 466,048 470,967 474,358 481,503
Total marketable equity securities, net
of valuation allowance............... 2,112 2,942 2,407 2,407
--------- --------- --------- ---------
Total securities............................ $468,160 $473,909 $476,765 $483,910
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross unamortized premiums and discounts on mortgage-backed securities were
$355,000 and $973,000, respectively, at December 31, 1992.
Proceeds from sales of debt securities held in the investment portfolio,
held-for-sale and trading accounts during 1993 were $162,956,000 and
$514,072,000 during 1992. Gross gains of $3,038,000 for 1993 and $8,315,000 for
1992 and gross losses of $137,000 for 1993 and $939,000 for 1992 were realized
on those sales. Gains on sales of all securities held in the investment
portfolio, held-for-sale and trading accounts were $4,403,000, $13,724,000, and
$10,560,000 for 1993, 1992, and 1991, respectively.
At December 31, 1993, securities carried at $223,156,000 were pledged to
secure public and trust deposits, securities sold under agreements to repurchase
and for other purposes as required by law.
(5) LOANS
The composition of the loan portfolio (net of unearned discount) at
December 31, 1993 and 1992 was as follows:
1993 1992
--------- ---------
(IN THOUSANDS)
Commercial:
Commercial and financial loans....................... $ 762,758 $ 867,433
Real estate:
Construction loans.............................. 35,295 50,427
Developer, investor and land.................... 315,700 359,666
Consumer:
Residential mortgage loans........................... 84,846 56,364
Home equity loans.................................... 63,188 67,010
Indirect automobile installment...................... 31,848 42,786
Other consumer loans................................. 23,944 26,914
---------- ----------
$1,317,579 $1,470,600
Reserve for loan losses.............................. (62,547) (50,126)
---------- ----------
$1,255,032 $1,420,474
---------- ----------
---------- ----------
13
14
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Nonaccrual loans were $49.3 million and $86.6 million at December 31, 1993
and December 31, 1992, respectively. Accruing restructured loans totaled $41.5
million and $44.9 million at December 31, 1993 and 1992, respectively. Had
nonaccruing and accruing restructured loans been paying in accordance with their
original terms, approximately $6,247,000 and $7,728,000 of additional interest
income would have been recorded in 1993 and 1992, respectively.
Most of the Company's business activity is with customers located within
the states of Massachusetts and Connecticut. At year-end 1993, the Company's
exposure to credit risk principally secured by real estate included $499 million
of loans. See Note 16 for additional discussion of concentration of credit risk.
An analysis of the reserve for loan losses for the years ended December 31,
1993, 1992 and 1991 is as follows:
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
Balance at beginning of period.............................. $50,126 $50,100 $36,008
Loans charged off........................................... (55,595) (43,214) (41,316)
Recoveries on loans previously charged off.................. 3,758 1,347 1,696
------- ------- -------
Net chargeoffs.............................................. (51,837) (41,867) (39,620)
Provided from operations.................................... 64,258 41,893 53,712
------- ------- -------
Balance at end of period.................................... $62,547 $50,126 $50,100
------- ------- -------
------- ------- -------
In June 1993, the Company recorded a special $30 million provision for loan
losses which is included in the above table. See footnote 19 for information
regarding this special provision.
(6) PREMISES, FURNITURE AND EQUIPMENT
A summary of the accounts as of December 31, 1993 and 1992 is as follows:
1993 1992
------- -------
(IN THOUSANDS)
Land................................................................... $ 2,899 $ 2,899
Buildings and leasehold improvements................................... 34,499 34,468
Furniture and equipment................................................ 17,744 19,124
------- -------
55,142 56,491
Less -- Accumulated depreciation and amortization...................... 22,481 21,436
------- -------
$32,661 $35,055
------- -------
------- -------
Depreciation and amortization expenses reflected in the consolidated
statements of income were $3,661,558, $3,665,392 and $4,776,896 in 1993, 1992
and 1991, respectively.
On January 3, 1991, the Company sold one of its buildings to a third party
for $8.2 million. A portion of the building, which houses certain staff support
functions of the Company, was leased back from the purchaser. This transaction
resulted in a gain of approximately $5 million of which $3 million was
recognized in 1991 with the difference amortized to income over the life of the
lease.
(7) OTHER REAL ESTATE OWNED
Other real estate owned includes in-substance foreclosures of $8,197,000
and $14,861,000 at December 31, 1993 and 1992, respectively. The balance is
stated net of valuation allowances of $6,553,000 in 1993 and $750,000 in 1992.
In 1993 provisions charged to foreclosed asset and workout expense were
$14,514,000 and chargeoffs were $8,711,000.
14
15
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net cost of other real estate owned included in foreclosed asset and
workout expense in the income statement was $21,256,000, $18,276,000 and
$12,621,000 in 1993, 1992 and 1991, respectively. These costs include reductions
in fair value, net gain or loss on sales and cost of maintaining and operating
the properties.
(8) SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31, 1993 and
1992:
1993 1992
-------- --------
(IN THOUSANDS)
Federal funds purchased....................................... $ 35,913 $ 48,984
Securities sold under agreements to repurchase................ 158,618 132,167
Treasury tax and loan note account............................ 30,751 19,998
Other......................................................... 986 902
-------- --------
$226,268 $202,051
-------- --------
-------- --------
The average outstanding short-term borrowings were $227,944,000 in 1993 and
$247,185,000 in 1992. The approximate weighted average interest rates were 2.7%
in 1993 and 3.1% in 1992. The maximum amount of short-term borrowings
outstanding at any month end was $320,338,000 in 1993 and $300,489,000 in 1992.
(9) OTHER BORROWINGS
Other borrowings consisted of the following at December 31, 1993 and 1992:
1993 1992
------- -------
(IN THOUSANDS)
UST Corp.
8.5% Senior Notes due in installments from 1992 - 1996..... $12,000 $16,000
Guaranteed ESOP debt at 84% of the prime rate, as
established, due in installments to 1996................. 786 1,107
UST Capital Corp.
11.505% note to SBA due 1995............................... 1,500 1,500
------- -------
$14,286 $18,607
------- -------
------- -------
During 1986, the Company issued $20,000,000 of 8.5% subordinated notes to
an insurance company. The debt is payable in annual installments of $4 million
from 1992 through 1996. Under the terms of the agreement, the Company may not
make dividend payments in excess of 60% of cumulative net earnings since
December 31, 1985 plus $7 million.
Payments required under the above obligations were $4,321,000 in 1993 and
will amount to $4,321,000 in 1994, $5,822,000 in 1995, and the balance of
$4,143,000 in 1996.
The Company has an employee stock ownership plan which covers substantially
all of its employees. The plan is administered by a committee designated by the
Board of Directors and is maintained in a separate trust established for that
purpose. The trustee obtained financing to purchase shares of UST Corp. common
stock and UST Corp. has guaranteed this debt. The purchased shares are allocated
to the participants on a pro-rata basis, over the period in which they are
earned.
15
16
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) EMPLOYEE BENEFIT PLANS
The Company has a noncontributory retirement plan covering all employees
who meet specified age and employment requirements. The plan provides pension
benefits that are based on the employee's compensation during the highest
consecutive five of the last ten years before retirement. The following summary
sets forth the plan's funded status and amounts included in the Company's
consolidated balance sheets as of December 31, 1993 and 1992:
1993 1992
------- -------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation............................................ $12,120 $ 9,115
Nonvested benefit obligation......................................... 360 382
------- -------
Accumulated benefit obligation....................................... 12,480 9,497
Effect of projected future compensation levels....................... 4,670 3,762
------- -------
Projected benefit obligation for service rendered to date................. 17,150 13,259
Plan assets, primarily listed stocks and U.S. bonds....................... 17,574 16,766
------- -------
Projected benefit obligation less than plan assets........................ 424 3,507
Unrecognized loss......................................................... 3,423 361
Unrecognized prior service asset.......................................... (32) 531
Unrecognized net asset being recognized over 15 years..................... (1,895) (2,166)
------- -------
Prepaid costs included in other assets.................................... $ 1,920 $ 2,233
------- -------
------- -------
Net pension cost (income) for 1993 and 1992 included the following
components:
1993 1992
------- -------
(IN THOUSANDS)
Service cost benefit earned during the period............................. $ 880 $ 866
Interest cost on projected benefit obligation............................. 1,179 1,059
Return on plan assets..................................................... (1,232) (939)
Net amortization and deferral............................................. (463) (1,251)
------- -------
Net pension cost (income)............................................ $ 364 $ (265)
------- -------
------- -------
The weighted-average discount rate and rate of increase of future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 7.0% and 5.0%, respectively, for 1993 and 8.5%
and 6%, respectively, for 1992. The expected long-term rate of return on assets
used was 9.5% and 12%, respectively, for 1993 and 1992.
The Company has a qualified profit-sharing plan covering substantially all
employees. Under the plan, up to six percent of net income before income taxes,
as defined, may be contributed to the profit-sharing trust. The Company did not
make a contribution to the profit-sharing trust in 1993, 1992 or 1991.
In January 1994, the Company added an Employee's Savings feature to the
existing Profit-Sharing Plan that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. The revised plan was renamed
the UST Corp. Employee Savings Plan. Under the Savings Plan, participating
employees may defer a portion up to 4% of their pretax earnings not to exceed
the Internal Revenue Service annual contribution limits. The Company matches 25%
of each employee's contributions up to 4% of the employee's earnings. Since the
Savings Plan started in 1994, the Company did not make a contribution in 1993.
The Company also has an employee stock ownership plan for substantially all
salaried employees. Under the plan, the Company shall contribute either a fixed
amount or a percentage of compensation of all participants as determined by the
Board of Directors.
16
17
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a restricted stock ownership plan for key employees under
which 389,375 shares of common stock have been granted. The shares vest to the
employee from the first to the seventh year after the date of grant. The
unvested shares granted are excluded from outstanding shares and included in the
calculation of earnings per share, if dilutive, in periods of profit.
Expenses (income) relating to the plans were as follows:
YEAR ENDED EMPLOYEE RESTRICTED
DECEMBER 31, PENSION STOCK OWNERSHIP STOCK
------------ ------- --------------- ----------
(IN THOUSANDS)
1993............................................ $ 364 $ 319 $399
1992............................................ (265) 425 287
1991............................................ (628) 600 178
(11) STOCK OPTIONS
At December 31, 1993, 479,759 shares of the Company's common stock were
reserved for future grants to officers and key employees. Under the Company's
incentive stock option plan, options may be granted at prices not less than the
fair market value of the Company's common stock at the date of grant.
In May 1990, the stockholders approved a director's stock option plan under
which each outside director would receive a grant of 5,250 shares. The total
number of shares issuable under this plan is 63,000. All shares to current
outside directors have been granted. Each option is exercisable to the extent of
20% after one year from the date of grant and an additional 20% each succeeding
year. In addition, the Company has a Director's Deferred Compensation Program
under which up to 250,000 shares of the Company's common stock may be granted to
Directors of the Company or its banking subsidiaries who choose to receive their
Director's fees or stipend in shares of the Company in lieu of cash. The shares
vest when the person ceases to be a Director.
NUMBER OF SHARES OPTION PRICE
UNDER OPTION PER SHARE TOTAL
---------------- ------------- ----------
Outstanding at December 31, 1993................ 656,859 $5.00-$9.00 $4,463,412
1992................ 583,886 $5.00-$9.125 $3,596,327
1991................ 593,047 $6.07 $3,600,600
Exercisable at December 31, 1993................ 290,492 $5.00-$8.62 $1,770,462
1992................ 221,592 $5.00-$6.07 $1,344,923
1991................ 101,411 $6.07 $ 615,700
Exercised during the year 1993................ 65,696 $6.07 $ 398,869
1992................ 19,621 $6.07 119,115
1991................ -- -- --
In 1993, 24,233 restricted shares vested under the Company's restricted
stock ownership plan.
In December 1989, April 1990, and April 1991, the Board of Directors
authorized an option substitution program permitting employees to surrender
options with an option price of more than $14.29, $10.00, and $6.07,
respectively, in exchange for new options. Outstanding options for 149,331,
513,817, and 516,502, respectively, were exchanged under the program. Options
were exchanged on a one-for-one basis at an option price of $14.29, $10.00, and
$6.07, respectively, per share, the fair market value of the Company's common
stock on the date of authorization. The new options vest ratably over a
five-year period.
17
18
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) INCOME TAXES
The income tax benefit shown on the consolidated statements of income consisted
of the following:
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
Current tax expense (benefit):
Federal................................................... $(8,302) $(6,513) $ 3,671
State..................................................... 1,285 2,476 1,642
-------- ------- -------
(7,017) (4,037) 5,313
-------- ------- -------
Deferred tax expense (benefit):
Federal................................................... (4,448) 1,550 (10,006)
State..................................................... (46) (444) 95
-------- ------- -------
(4,494) 1,106 (9,911)
-------- ------- -------
Total....................................................... $(11,511) $(2,931) $(4,598)
-------- ------- -------
-------- ------- -------
The deferred tax provisions (benefit) consisted of the following:
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
-------- ------- --------
(IN THOUSANDS)
Provision for loan losses for tax purposes less than book
provision................................................... $(5,250) $ (9) $(5,993)
Investment tax credit......................................... (2,602)
Net operating losses.......................................... (1,700)
Tax deductions associated with leverage leases deferred for
book........................................................ (1,316) (65) 3,359
Alternative minimum tax credit................................ (1,284) (1,741)
Book writedowns or OREO, not deductible for tax............... (507) (460) (1,943)
Depreciation for books in excess of tax....................... (185) (506) (283)
Deferred compensation benefits (expenses) not recognized for
tax......................................................... (115) 518 (58)
Loss on adjustment of loan basis to market value for tax...... 7,390
Nondeductible accruals........................................ 782 (761) (270)
Security recoveries (writedowns) recognized for book, not for
tax......................................................... 354 2,000 (2,172)
Gains (losses) relating to securitization program recognized
for book not for tax........................................ 300 (364)
Other losses (gains) deferred for book, not for tax........... 162 (716)
Other, net.................................................... (61) (73) 270
------- ------ -------
$(4,494) $1,106 $(9,911)
------- ------ -------
------- ------ -------
At December 31, 1993 and 1992, cumulative deferred income tax benefits
amounting to $10,911,000 and $6,177,000 were included in the balance sheet as
other assets. Additionally, at December 31, 1993 and December 31, 1992 there
were tax refund receivables of $9,549,000 and $7,400,000, respectively, included
in other assets.
18
19
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset at December 31, 1993 were as
follows:
Book provision for loan losses in excess of tax......................... $26,253
Alternative minimum tax credit.......................................... 6,239
Investment tax credits.................................................. 3,809
Book writedowns on foreclosed real estate, not deducted for tax......... 3,009
Net operating losses.................................................... 1,700
Deferred compensation benefits not deducted for tax..................... 1,187
Tax deductions on leveraged leases deferred for book.................... (19,185)
Loan mark to market adjustment for tax.................................. (7,390)
Securities mark to market adjustment deferred for tax................... (2,832)
Tax basis in core deposits less than book............................... (1,115)
Pension expense deducted for tax not book............................... (1,043)
Cumulative tax depreciation in excess of book........................... (781)
Tax basis in partnership investment less than book...................... (597)
Valuation allowance (state)............................................. (538)
Other................................................................... 2,195
-------
Total deferred tax asset........................................... $10,911
-------
-------
The provisions for income taxes differ from the amounts computed by
applying the U.S. statutory Federal tax rate of 35% in 1993 and 34% in prior
years to income (loss) before income taxes, principally due to:
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
Tax benefit at statutory rate............................... $(11,326) $(2,601) $(4,265)
Increases (reductions) from:
Tax-exempt income on investment securities and loans...... (832) (1,082) (1,273)
State income taxes, net of Federal income tax benefit..... 818 1,340 1,147
Low income housing credits................................ (862) (750) (252)
Other, net................................................ 691 162 45
-------- ------- -------
Tax benefit recorded........................................ $(11,511) $(2,931) $(4,598)
-------- ------- -------
-------- ------- -------
(13) CAPITAL AND REGULATORY AGREEMENTS
On June 2, 1993 the Company sold 500,000 shares of its unregistered common
stock in a private placement for a cash price of $3,750,000. Substantially all
of the net proceeds of that placement were used to repay principal on the
Company's long-term debt. On August 12, 1993, the Company sold 2.87 million
shares of its common stock in a European offering. These shares were placed with
more than sixty institutional investors and the offering was made under
Regulation S of the United States Securities and Exchange Commission. Net
proceeds of this placement were approximately $21 million after expenses.
The Company and its banking subsidiaries' ability to pay dividends is
subject to certain limitations imposed by statutes of the Commonwealth of
Massachusetts and the State of Connecticut, and limitations imposed by bank and
bank holding company regulators. Massachusetts statutes restrict the amount of
dividends payable by banks to be the balance of their undivided profits, net of
any amount transferred to capital in excess of par value. In the case of
Connecticut law, the limit is undivided profits plus reserve for loan losses. In
any event, it is not likely that bank and bank holding company regulators would
allow an institution to dividend any amounts which would reduce that
institution's capital to below the minimum capital requirement in effect at that
time.
The Company and its two Massachusetts-based banking subsidiaries, United
States Trust Company ("USTC") and USTrust, have signed written agreements with
the FRB, FDIC and the Banking Commis-
19
20
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sioner of the Commonwealth of Massachusetts ("Massachusetts Commissioner"). In
accordance with the agreements the Company has agreed not to pay any dividends
to stockholders, nor take any dividends from its banking subsidiaries, without
prior regulatory approval. Similarly, the banking subsidiaries have agreed to
refrain from transferring funds in the form of dividends to the Company without
prior regulatory approval. In 1993, the Company and USTC received approval from
the appropriate regulators such that USTC was allowed to transfer $5,250,000 in
dividends to the Company. These proceeds were then contributed as equity to
USTrust and the Company's Connecticut banking subsidiary, UST Bank/Connecticut
("UST/Conn"). The banks also agreed to, among other matters, maintain a Tier 1
leverage capital ratio at or in excess of 6% beginning in February 1993. Tier 1
leverage capital ratio is defined by the Company's Federal regulators to be
essentially stockholders' equity, less intangible assets, divided by total
average assets, less intangible assets. In February 1994, the FDIC and the
Massachusetts Commissioner terminated and lifted the Consent Agreement and Order
with USTC. Despite the termination of its Regulatory Agreement, USTC has agreed
to continue to request regulatory consent prior to the payment of dividends.
UST/Conn is under a Stipulation and Agreement with the Banking Commissioner
of the State of Connecticut. In accordance with the agreement, the bank, among
other matters, must maintain a Tier 1 leverage capital ratio of 6%. Based on
average total assets, at December 31, 1993, the Tier 1 leverage capital ratio
was 23.75% for United States Trust Company, 6.49% for USTrust, and 6.21% for UST
Bank/Connecticut.
Additionally, the Company agreed to maintain its capital at levels
consistent with the FRB's Capital Adequacy Guidelines. At December 31, 1993,
based on period-end assets the Company's consolidated Tier 1 leverage capital
ratio was 6.96% compared with 6.21% at December 31, 1992. Based on average total
assets, this ratio was 7.06% at December 31, 1993.
(14) RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company's banking subsidiaries have
granted loans to certain of the Company's directors and executive officers. All
such transactions are made on substantially the same terms as those prevailing
at the same time for individuals not affiliated with the Company and its
subsidiaries and do not involve more than the normal risk of collectibility. At
December 31, 1993, none of these transactions were on nonaccrual status, nor did
they involve delinquent or restructured loans. However, at December 31, 1993
loans to a Director of the Company or to his affiliated companies in the amount
of approximately $25 million were characterized as Substandard, in the Company's
internal risk rating profile. Under the Company's definition, Substandard assets
are characterized by the distinct possibility that some loss will be sustained
if the credit deficiencies are not corrected. However, the Substandard
classification does not imply ultimate loss for each individual asset so
classified. Subsequent to December 31, 1993, $6.4 million of these loans were
repaid. See Footnote 15 hereunder.
An analysis of loans outstanding in excess of $60,000 to directors and
officers related to the foregoing entities at december 31, 1993 is as follows:
($ IN THOUSANDS)
Balance, December 31, 1992.............................. $ 62,284
Additions............................................... 945
Repayments.............................................. (12,796)
Other reductions........................................ (5,936)
--------
Balance, December 31, 1993.............................. $ 44,497
--------
--------
20
21
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) COMMITMENTS AND CONTINGENCIES
Lease commitments for certain premises expire at various dates through
2012. At December 31, 1993, minimum rental commitments for noncancelable leases
are as follows:
($ IN THOUSANDS)
1994.................................................... $ 4,031
1995.................................................... 3,955
1996.................................................... 3,654
1997.................................................... 3,520
1998.................................................... 1,852
thereafter.............................................. 2,976
-------
Total.............................................. $19,988
-------
-------
Rent expense for the years ended December 1993, 1992 and 1991 was
$3,932,074, $4,432,156 and $4,179,740, respectively.
In the ordinary course of business, the Company and its subsidiaries become
defendants in a variety of judicial and administrative proceedings. In the
opinion of management there is no proceeding pending, or to the knowledge of
management threatened, which in the event of an adverse decision, would be
likely to result in a material adverse change in the financial condition or
results of operations of the Company and its subsidiaries.
POTENTIAL REGULATORY SANCTIONS
Certain apparent and inadvertent violations of the insider lending
provisions (and related lending limit provisions) of Regulation O of the FRB
related to extensions of credit by USTrust to Director Francis X. Messina have
led the FDIC to require that corrective action be taken and to advise USTrust
orally that the FDIC may consider the imposition of civil money penalties with
respect to such matters. No FDIC representative has suggested to USTrust or the
Company that there was any willful or intentional misconduct on the part of
USTrust, Director Messina or USTrust's other institution-affiliated parties in
connection with these matters. See Note 14 to Consolidated Financial Statements.
To address these issues, USTrust and Director Messina have undertaken a
program to reduce the aggregate balance of Mr. Messina's outstanding loans from
USTrust and to improve the collateral support for the remaining outstanding loan
balance. The elements of this program have been communicated to and reviewed by
the FDIC. In furtherance of the program since late 1993, the outstanding
principal of the aggregate loans to Director Messina and his related interests
has been reduced by more than $11 million from approximately $30 million to less
than $19 million, and such loans are now below all applicable lending limits. To
date, the Company has incurred no losses with respect to any of these loans,
although they are characterized as "Substandard" in the Company's internal risk
rating profile, and all such loans are current as to both principal and
interest.
There has been no further action taken by any bank regulatory agency to
date. The FDIC has the authority to levy civil money penalties of various
amounts for violations of law or regulations, orders and written conditions and
agreements, which, depending upon the nature and severity of the violations, may
be, in situations where conduct has been egregious, as high as $1 million per
day for the period during which such violation continues. In connection with the
apparent violations described above, the FDIC has the authority to impose
penalties on any of USTrust, its Board of Directors, officers of the Bank,
Director Messina personally, "institution-affiliated parties" of USTrust or any
combination thereof.
While it is not possible to predict with certainty the probability of
penalties being assessed, the person or persons upon whom any penalty would be
assessed or the amounts of any such penalties, were they to be assessed,
management of the Company believes that it is unlikely that this matter will
have a material adverse effect on its financial condition or results of
operations. Consequently, no provision in respect of penalties has been made in
the Company's Consolidated Financial Statements.
21
22
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) FINANCIAL INSTRUMENTS WITH ON-AND OFF-BALANCE-SHEET RISK
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extent credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, credit risk in excess of the amount contained in the balance
sheet. The contract or notional amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument or commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The Company generally requires collateral or other security to support
financial instruments with credit risk.
CONTRACT OR NOTIONAL AMOUNT
-------------------------------
DECEMBER 31, DECEMBER 31,
1993 1992
-------------- ------------
(IN THOUSANDS)
Financial instruments whose contract amount represents credit
risk:
Commitments to extend credit............................. $268,000 $258,000
Standby letters of credit and financial guarantees
written................................................ 63,000 71,000
Commercial letters of credit............................. 3,000 5,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract during its
term. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being fully drawn upon and, in fact, have a maturity
of less than one year, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Of the total commitments to extend credit,
approximately $31 million and $33 million were secured by real estate at
December 31, 1993 and 1992, respectively.
The amount of collateral obtained is based on management's evaluation of
the credit risk. Collateral held on commitments and loans varies but may include
cash, accounts receivable, inventory, property, plant and equipment.
Standby and commercial letters of credit and financial guarantees written
are conditional commitments issued by the Company to guarantee the performance
of, or payment by, a customer to a third party. Those guarantees are primarily
issued to support private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. The Company holds various collateral to support
these commitments including (but not limited to) cash, accounts receivables,
inventory, property plant and equipment. The extent of collateral held for those
commitments varies from zero to one hundred percent. Of the total standby and
commercial letters of credit, approximately $4 million and $13 million were
secured by real estate at December 31, 1993 and 1992, respectively.
The Company's primary loan market is the New England region. Most of the
loans outstanding are from eastern Massachusetts and a substantial portion of
these loans are various types of real estate loans; still others have real
estate as additional collateral. Over 90% of the Company's outstanding
commercial and real estate loans are collateralized.
The Company's securities portfolio consists largely of mortgage-backed
securities. These securities carry prepayment risk due to the fact that
prevailing interest rates could continue to decline. Under such circumstances an
unusually high percentage of homeowners may choose to refinance their first
mortgages to take advantage of these lower rates with the result that, under the
Company's accounting policy, adjustments
22
23
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reducing gross unamortized premiums would be required. See Note (1), Securities
and Trading Account Policies.
(17) PARENT COMPANY FINANCIAL INFORMATION
Summarized information relative to the balance sheets at December 31, 1993
and 1992 and statements of income and cash flows for the three years in the
period ended December 31, 1993 of UST Corp. are presented as follows. All
dividend income in the periods shown below are from banking subsidiaries:
BALANCE SHEETS -- PARENT COMPANY ONLY
DECEMBER 31,
-----------------------
1993 1992
-------- --------
(IN THOUSANDS)
Assets:
Investment in banking subsidiaries............................. $143,719 $159,305
Investment in nonbanking subsidiaries.......................... 46 45
Excess funds and other investments............................. 21,050
Premises, furniture and equipment, net......................... 72 75
Other assets................................................... 6,797 7,465
-------- --------
Total assets.............................................. $171,684 $166,890
-------- --------
-------- --------
Liabilities and Stockholders' Investment:
Borrowings..................................................... $ 12,786 $ 17,107
Other liabilities.............................................. 6,079 5,903
Stockholders' investment....................................... 152,819 143,880
-------- --------
Total liabilities and stockholders' investment............ $171,684 $166,890
-------- --------
-------- --------
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- ------- -------
(IN THOUSANDS)
Dividend income............................................ $ 5,250 $ 2,250
Undistributed equity in net loss of subsidiaries........... (24,065) $(4,219) (9,880)
Other income............................................... 292 902 857
-------- ------- -------
(18,523) (3,317) (6,773)
Expenses................................................... 1,577 1,404 1,174
-------- ------- -------
Net loss......................................... $(20,100) $(4,721) $(7,947)
-------- ------- -------
-------- ------- -------
23
24
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
-------- ------- -------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss................................................... $(20,100) $(4,721) $(7,947)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization........................... 447 447 125
Amortization of gain on sale............................ (488)
Undistributed losses of affiliates...................... 24,065 4,219 9,880
Gain on sale of securities.............................. (8) (581)
(Increase) decrease in other assets..................... (338) 837 (2,309)
Increase (decrease) in other liabilities................ 1,543 (2,122) 979
-------- ------- -------
Net cash provided (used) by operating activities...... 5,617 (1,348) (341)
Cash flows provided (used) by investing activities:
Sale of investment securities.............................. 26,700 4,791 1,349
Purchase of investment securities.......................... (47,750) (4,700)
Loans repaid by affiliates................................. 10,450 2,300
Equity contributed to affiliates........................... (5,250) (6,261) (884)
-------- ------- -------
Net cash provided (used) by investing activities...... (26,300) 4,280 2,765
Cash flows provided (used) by financing activities:
Repayment of borrowings.................................... (4,000) (4,000)
Proceeds from issuance of common stock, net................ 23,677 1,652 2,103
Dividends paid............................................. (4,131)
-------- ------- -------
Net cash provided (used) by financing activities...... 19,677 (2,348) (2,028)
Net increase (decrease) in cash and cash equivalents....... (1,006) 584 396
Cash and cash equivalents beginning of year................ 3,275 2,691 2,295
-------- ------- -------
Cash and cash equivalents end of year...................... $ 2,269 $ 3,275 $ 2,691
-------- ------- -------
-------- ------- -------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 1,415 $ 1,753 $ 1,740
-------- ------- -------
-------- ------- -------
Income taxes............................................ $ 180 $ 921
------- -------
------- -------
Cash dividends paid to the Company in 1993 by bank subsidiaries totaled
$5,250,000. There were no cash dividends paid to the Company in 1992. In 1991
the amount was $2,250,000. No cash dividends were paid to the Company by other
subsidiaries in these years.
(18) FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." SFAS No. 107 is effective for fiscal years
ending after December 15, 1992. SFAS 107 requires disclosure of the fair market
value of financial instruments, whether assets, liabilities or off-balance sheet
commitments, if practicable. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments. Fair value
estimates which were derived from discounted cash flows or broker quotes cannot
be substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument.
24
25
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND DUE FROM BANKS, EXCESS FUNDS SOLD AND OTHER SHORT-TERM INVESTMENTS
For these short-term instruments the carrying amount is a reasonable
estimate of fair value.
INVESTMENT PORTFOLIO AND SECURITIES HELD FOR SALE
For marketable securities fair values are based on quoted market prices or
dealer quotes. Nonmarketable investment securities are valued at cost.
LOANS
For certain homogenous categories of loans, such as residential mortgages
and home equity loans, fair value is estimated based on broker quotes on sales
of similar loans. The fair value of fixed rate loans was estimated by
discounting anticipated future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of performing variable rate loans is the
same as the book value at the reporting date because the loans reprice when the
market changes.
DEPOSIT LIABILITIES
The fair value of noncertificate deposit accounts is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated by discounting the anticipated future cash payments using
the rates currently offered for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS
For these short-term instruments the carrying amount is a reasonable
estimate of fair value.
OTHER BORROWINGS
The fair value of other borrowings were determined by discounting the
anticipated future cash payments by using the rates currently available to the
Company for debt with similar terms and remaining maturities.
COMMITMENTS TO EXTEND CREDIT/SELL LOANS
The great majority of commitments, standby letters of credit and commercial
letters of credit are short term in nature and therefore have been valued at
their carrying amount.
VALUES NOT DETERMINED
SFAS No. 107 excludes certain assets from its disclosure requirements
including real estate included in banking premises and equipment, and the
intangible value inherent in the Company's deposit relationships (i.e., core
deposits). Accordingly, the aggregate fair value amounts presented below do not
represent the underlying value of the Company.
25
26
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount and estimated fair values of the Company's financial
instruments at December 31, 1993 and 1992 are as follows:
1993 1992
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Financial instrument assets:
Cash and due from banks................ $ 90,198 $ 90,198 $ 116,529 $ 116,529
Securities............................. 473,909 473,909 476,765 483,910
Excess funds sold to banks and other
short-term investments............... 96,647 96,647 1,341 1,341
Loans, net............................. 1,255,032 1,268,576 1,420,474 1,433,192
Financial instrument liabilities:
Deposits
Demand............................ $ 373,793 $ 373,793 $ 422,056 $ 422,056
Savings........................... 491,566 491,566 472,385 472,385
Money market...................... 323,979 323,979 385,305 385,305
Time.............................. 451,460 457,075 512,185 517,378
Short-term borrowings............. 226,268 226,268 202,051 202,051
Other borrowings.................. 14,286 15,362 18,607 19,359
Unrecognized financial instruments:
Commitments to extend credit........... $ 268,000 $ 268,000 $ 258,000 $ 258,000
Standby letters of credit and financial
guarantees written................... 63,000 63,000 71,000 71,000
Commercial letters of credit........... 3,000 3,000 5,000 5,000
(19) CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR YEAR ENDED DECEMBER 31, 1993 FOR YEAR ENDED DECEMBER 31, 1992
---------------------------------------- ----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income............ $34,013 $35,210 $35,410 $35,995 $35,836 $39,645 $41,172 $40,371
Interest expense........... 10,862 11,725 12,229 13,128 13,887 16,051 18,568 20,464
Net interest income........ 23,151 23,485 23,181 22,867 21,949 23,594 22,604 19,907
Provision for loan
losses................... 3,175 8,050 42,650 10,383 13,450 14,722 5,695 8,026
Net interest income (loss)
after provision for loan
losses................... 19,976 15,435 (19,469) 12,484 8,499 8,872 16,909 11,881
Noninterest income......... 7,247 8,078 8,857 12,541 7,894 18,076 8,334 8,055
Noninterest expense........ 25,149 20,656 27,887 23,818 26,749 25,405 24,476 19,542
Income tax expense
(benefit)................ 540 834 (13,567) (68) (4,231) 1,166 248 (114)
Net income (loss).......... 1,534 2,023 (24,932) 1,275 (6,125) 377 519 508
Earnings (loss) per
share.................... $ .09 $ .12 $(1.76) $ .09 $ (.44) $ .03 $ .04 $ .04
As shown above, the Company recorded high provisions for loan losses in the
second quarter of 1993 and third and fourth quarters of 1992. Provisions for
loan loss are recorded as necessary in order to maintain an adequate reserve for
loan loss based upon the Company's methodology for quantifying the risk inherent
in the loan portfolio.
Toward the end of the second quarter of 1993, management changed its
strategy regarding troubled credit situations. While the change would result in
the handling of these situations in an expeditious manner, it was recognized
that the up-front costs of these workouts would increase. As a result, the
reserve for loan losses was increased by $19.8 million during the second
quarter. To achieve the higher reserve level, the Company
26
27
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded a $42.7 million provision for loan losses in the second quarter.
Included in that amount was a special provision of $30 million. This special
provision was management's estimate of the additional losses to be incurred from
the strategic change referred to above and the continued sluggish economic
climate and losses occurring during the remainder of 1993 on these and other
credits.
An increase in nonaccruals in the third quarter of 1992 was a major factor
in the increased provisions for the last two quarters of 1992. In the third
quarter of 1992, the Company achieved gains on sale of securities of $10.8
million, which was a significant factor in the results for that quarter.
Noninterest income decreased after the first quarter of 1993 due primarily to a
decrease in gains on sale of securities. Noninterest expense increased or
decreased over the quarters presented due primarily to increases or decreases in
the writedowns to fair value of foreclosed real estate properties.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UST CORP.
/S/ WILLIAM C. BROOKS
SENIOR VICE PRESIDENT AND TREASURER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
Date: March 18, 1994
28
29
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Form 8-K/A of our report dated January 31, 1994 included in
Registration Statement File No. 0-9623. It should be noted that we have not
audited any financial statements of the company subsequent to December 31, 1993
or performed any audit procedures subsequent to the date of our report.
Arthur Andersen & Co.
Boston, Massachusetts
March 16, 1994
29