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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1994 COMMISSION FILE #0-9623
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UST CORP.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2436093
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
40 COURT STREET,
BOSTON, MASSACHUSETTS 02108
(Address of principal executive offices)
(617) 726-7000
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. At April 30, 1994,
there were issued and outstanding 17,359,905 shares of common stock, par value
$0.625 per share.
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UST CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION.
Item 1. Financial Statements
Consolidated unaudited financial statements of UST Corp. and Subsidiaries
for the quarter ended March 31, 1994:
PAGE
-----
Consolidated Balance Sheets.............................................. 1
Consolidated Statements of Income........................................ 2
Consolidated Statements of Cash Flows.................................... 3
Notes to Consolidated Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 5-13
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings........................................................ 14
Item 5. Other Information........................................................ 14
Item 6. Exhibits and Reports on Form 8-K......................................... 15
Signatures............................................................... 15
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PART I. FINANCIAL INFORMATION
UST CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1994 1993
---------- -------------
ASSETS
Cash, due from banks and interest-bearing deposits.............. $ 111,516 $ 90,198
Excess funds sold to banks and other short-term investments..... 31,155 96,647
Securities available-for-sale:
Mortgage-backed securities................................. 230,623 263,435
U.S. Treasury, corporate notes, and other.................. 297,167 210,474
---------- ----------
Total securities available-for-sale................... 527,790 473,909
Loans:
Loans -- net of unearned discount of $4,936 in 1994 and
$7,026 in 1993........................................... 1,287,899 1,338,807
Reserve for loan losses (Note 2)........................... (60,931) (62,547)
---------- ----------
1,226,968 1,276,260
Premises, furniture and equipment, net.......................... 31,851 32,661
Goodwill........................................................ 2,161 2,192
Other real estate owned......................................... 16,190 19,468
Other assets.................................................... 62,458 52,931
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TOTAL ASSETS.......................................... $2,010,089 $2,044,266
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Demand:
Noninterest bearing........................................ $ 320,465 $ 373,793
Interest bearing........................................... 163,764 170,642
Savings:
Money market............................................... 303,841 323,979
Other...................................................... 325,218 320,924
Time:
Certificates of deposit over $100 thousand................. 69,741 72,911
Other...................................................... 365,843 378,549
---------- ----------
Total deposits........................................ 1,548,872 1,640,798
Short-term borrowings........................................... 212,174 226,268
Other borrowings................................................ 14,286 14,286
Other liabilities............................................... 88,829 10,095
Commitments and contingencies (Note 3)
Stockholders' investment:
Preferred stock $1 par value; Authorized -- 4,000,000
shares; Outstanding -- None;
Common stock $.625 par value; Authorized -- 30,000,000
shares; Outstanding -- 17,333,833 and 17,304,795 shares
in 1994 and 1993, respectively........................... 10,834 10,815
Additional paid-in capital................................. 69,872 69,694
Retained earnings.......................................... 69,440 68,437
Unrealized gain (loss) on securities available-for-sale,
net of tax............................................... (4,756) 3,335
Deferred compensation, net................................. 538 538
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Total stockholders' investment........................ 145,928 152,819
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
INVESTMENT.......................................... $2,010,089 $2,044,266
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
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UST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED MARCH 31,
-----------------------
1994 1993
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Interest income:
Interest and fees on loans.................................... $24,517 $28,039
Interest and dividends on securities:
Taxable.................................................. 6,721 7,819
Nontaxable............................................... 51 72
Dividends................................................ 36 41
Income on overnight funds and deposits........................ 562 22
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Total interest income............................... 31,887 35,993
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Interest expense:
Interest on deposits.......................................... 8,453 10,929
Interest on short-term borrowings............................. 1,307 1,767
Interest on other borrowings.................................. 322 432
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Total interest expense.............................. 10,082 13,128
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Net interest income........................................... 21,805 22,865
Provision for loan losses.......................................... 5,450 10,383
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16,355 12,482
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Noninterest income:
Asset management fees......................................... 4,312 4,658
Service charges on deposit accounts........................... 1,234 1,381
Gain on sale of securities, net............................... 23 3,543
Corporate services income..................................... 1,186 1,120
Other......................................................... 1,145 1,839
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Total noninterest income............................ 7,900 12,541
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Noninterest expense:
Salary and employee benefits.................................. 10,202 9,276
Net occupancy expense......................................... 2,376 2,035
Credit card processing expense................................ 930 893
Deposit insurance assessment.................................. 1,174 1,319
Foreclosed asset and workout expense.......................... 2,592 5,759
Other......................................................... 5,325 4,536
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Total noninterest expense........................... 22,599 23,818
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Income before income taxes......................................... 1,656 1,205
Income tax provision.......................................... 653 681
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Net income before change in accounting method...................... 1,003 524
Cumulative effect of change in method of accounting for income
taxes (Note 4)......................................................... 750
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Net income......................................................... $ 1,003 $ 1,274
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Per Share Data:
Net income.................................................... $ .06 $ .09
Cash dividends declared....................................... -- --
Weighted average number of common shares (Note 5).................. 17,774,092 14,318,739
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
($ IN THOUSANDS)
QUARTER ENDED MARCH 31,
---------------------------
1994 1993
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Cash flows from operating activities:
Net income.............................................. $ 1,003 $ 1,274
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting method... (750)
Provision for loan losses.......................... 5,450 10,383
Depreciation and amortization...................... 1,514 1,331
Amortization of gain on sale/leaseback............. (96) (96)
Amortization of security premiums, net............. 126 697
Gain on sale of securities available-for-sale,
net.............................................. (23) (3,543)
(Gain)/loss on sale of other real estate owned,
net.............................................. (294) 1,154
Writedowns of other real estate owned.............. 1,354 4,446
Deferred income tax benefit........................ (1,431)
Increase (decrease) in accruals and other, net..... 74,925 (4,872)
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Net cash provided by operating activities.................... 83,959 8,593
Cash flows provided by investing activities:
Proceeds from securities available-for-sale............. 38,398 161,383
Purchases of securities available-for-sale.............. (106,363) (80,001)
Net decrease in short-term investments.................. 65,492 281
Net loans paid.......................................... 43,408 20,958
Sale of other real estate owned......................... 2,655 4,017
Purchases of premises and equipment..................... (362) (225)
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Net cash provided by investing activities.................... 43,228 106,413
Cash flows used by financing activities:
Net decrease in nontime deposits........................ (76,050) (136,613)
Net payments on certificates of deposit................. (15,876) (29,557)
Net (payments) proceeds on short-term borrowings........ (14,094) 22,006
Issuance of common stock for cash, net.................. 151 85
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Net cash used by financing activities........................ (105,869) (144,079)
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Increase (decrease) in cash and cash equivalents........ 21,318 (29,073)
Cash and cash equivalents at beginning of year.......... 90,198 116,529
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Cash and cash equivalents at end of period.............. $ 111,516 $ 87,456
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................... $ 9,710 $ 13,154
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Income taxes....................................... $ 1,374 $ 676
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Noncash transactions:
Transfers from investment to securities held for sale... $ 81
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---------
Transfers from loans to other real estate owned......... $ 1,512 $ 7,908
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Financed OREO sales..................................... $ 1,078 $ 5,213
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Stock issuance.......................................... $ 46
---------
---------
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
NOTE 1:
The consolidated financial statements 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. It is suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto included in the Company's
Report on Form 10-K for the fiscal year ended December 31, 1993. The results of
operations for the three-month period ended March 31, 1994 are not necessarily
indicative of the results of operations for the full year or any other interim
period.
NOTE 2:
Analysis of the reserve for loan losses for the three months ended March
31, 1994 and 1993 follows:
1994 1993
------- -------
($ IN THOUSANDS)
Balance at beginning of period........................ $62,547 $50,126
Loans charged off..................................... (8,012 ) (6,274 )
Recoveries on loans previously charged off............ 946 832
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Net chargeoffs........................................ (7,066 ) (5,442 )
Provided from operations.............................. 5,450 10,383
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Balance at end of period.............................. $60,931 $55,067
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The reserve for loan loss is based on an established, systematic method
which analyzes the size and risk of the loan portfolio on a monthly basis. See
"Credit Quality and Reserve for Loan Loss" in Management's Discussion and
Analysis of Financial Condition in this Form 10-Q. The increase in the first
quarter of 1993 resulted from a higher level of nonaccrual loans in March 1993
from February 1993 and an overall slower rate of decline over the first quarter
of 1993 compared with previous quarters. The lower level of nonperforming assets
due to paydowns and chargeoffs, and related decline in substandard loans,
resulted in a loan loss provision of $5.4 million for the first quarter of 1994
compared with $10.4 million for the same period of 1993.
NOTE 3:
At March 31, 1994, the Company had the following off-balance sheet
financial instruments whose contract amounts represent credit risk:
AMOUNT
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($ IN THOUSANDS)
Commitments to extend credit............................ $270,000
Standby letters of credit and financial guarantees...... 64,000
Commercial letters of credit............................ 2,000
NOTE 4:
Cumulative effect of accounting change: See Income Taxes on pages 13 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for relevant information.
NOTE 5:
The weighted average number of common shares for calculating earnings per
share includes shares related to the directors deferred compensation plan and
dilutive options totaling 452,527 at March 31, 1994 and 270,528 at March 31,
1993.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AT MARCH 31, 1994
INTRODUCTION
The Company's primary loan market, the New England region, continues to
experience an uneven and slow recovery from the weak economic environment of
1990 to 1993. This climate has contributed to the decline in commercial and
residential real estate values, although there is recent evidence that these
values are stabilizing. Generally, real estate prices and activity have both
improved from extremely depressed levels. Specifically, in the Commonwealth of
Massachusetts, home sales and home construction are both rising due to the
prevailing low mortgage rates, although this growth may slow as a result of the
recent increase in rates by the Federal Reserve Board. The harsh economic
environment over the last few years has adversely affected both the net worth of
certain borrowing customers of the Company's subsidiary banks and the Company's
collateral position with respect to certain loans. Massachusetts has seen both
an exodus and failure of a number of businesses and unemployment continues to
remain high although somewhat lower than experienced during the 1990 to 1993
period. While there have been pockets of growth, they have been sluggish, and
the forecast is for small increases in the overall job market with some
industries increasing modestly and others not at all.
The foregoing factors continued to influence the Company's financial
results for the first quarter of 1994, particularly in the areas of provision
for loan losses and expenses related to foreclosed asset and workout expense,
and may continue to influence future results.
The recent rapid rise in interest rates is likely to have a positive impact
on interest margins; however, securities holdings have and will depreciate in
value. The unrealized loss on securities available-for-sale will be reported as
a reduction in shareholders' equity. Moreover, the recent rise in interest rates
could adversely affect the cash flow on some real estate loans.
Management of the Company has identified the reduction of the aggregate
amount of nonperforming and classified assets as a high priority. Management is
assessing its alternatives with a view to implementing the most effective means
of achieving such a reduction, which could include a further acceleration of the
Company's strategy to handle problem credits expeditiously (including the
possibility of bulk sales). The specific alternatives selected by management
could be affected by the adoption of proposed regulations covering standards for
safety and soundness at banks and bank holding companies, which, if adopted in
their present form, would in effect require the Company to reduce its current
level of "classified assets" (as defined in those regulations). At March 31,
1994 the Company's "classified assets" under the proposed regulations would have
been approximately $238 million, while the maximum amount permitted at that date
under the proposed regulations would have been $207 million. Management believes
that the steps that may be taken to achieve this objective could have a material
adverse effect on the Company's results of operations over the short term, but
does not anticipate a material adverse effect on a long-term basis.
This discussion should be read in conjunction with the financial
statements, notes, and tables included in the Company's Form 10-K for 1993.
Certain previous year numbers have been reclassified to conform with the 1994
presentation.
ASSETS
Total assets at March 31, 1994 were $2.0 billion which is essentially
unchanged from December 31, 1993. The Company's loan portfolio decreased by 4%,
or $51 million, at March 31, 1994. The decrease is primarily due to the
continued weak demand in the Company's market area consistent with the economic
conditions noted above, along with repayments as noted in the Statement of Cash
Flows and increased competition for the small to middle market customers.
Another factor in the reduction of the portfolio was the chargeoffs of certain
credits. See "Credit Quality and Reserve for Loan Loss" on pages 7-8 of this
Form 10-Q.
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Securities available-for-sale totaled $528 million at March 31, 1994,
compared with $474 million at December 31, 1993, an increase of 11%. This
increase is due primarily to the addition of short-term U.S. Treasury
securities. At March 31, 1994, securities available-for-sale consisted primarily
of mortgage-backed securities, U.S. Treasury and Agency securities, and
corporate notes.
On December 31, 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), issued by the Financial Accounting Standards
Board. This Standard deals with the classification of all debt securities and
equity securities that have a ready market. According to SFAS 115, these
securities must be classified as either held-to-maturity, available-for-sale, or
trading and are reported at either amortized cost or fair value, depending upon
the classification. At both March 31, 1994 and December 31, 1993, all securities
in the Company's portfolio were classified as available-for-sale. The
application of SFAS 115 resulted in a decrease of $8.1 million to stockholders'
equity, between December 31, 1993 and March 31, 1994, representing the change
from an unrealized gain in the portfolio of $3.3 million after tax at December
31, 1993 to an unrealized loss of $4.8 million after tax at March 31, 1994. The
decline reflects the rapid increase in interest rates in the first quarter of
1994 and corresponding decline in market prices for bonds. The increase in rates
continued subsequent to quarter end, with the effect that stockholder equity was
reduced an additional $6.1 million, relating to unrealized losses.
LIQUIDITY AND FUNDING
Liquidity is defined as a Company's ability to fulfill its existing and
anticipated financial obligations. It is provided either through the maturity or
sale of an entity's assets, such as loans and securities, liability sources such
as increased deposits and purchased or borrowed funds, or access to the capital
markets.
At March 31, 1994, liquidity, which includes excess cash, excess funds sold
and unpledged securities, totaled approximately $315 million, or 16% of
quarter-end assets, virtually unchanged from December 31, 1993.
The funds needed to support the Company's loan and securities portfolios
are provided primarily by UST Corp.'s retail deposits, which are relatively low
cost and account for 75% of total deposits. Total deposits decreased $91.9
million, or 5.6%, since December 31, 1993. Approximately 42% of the decline
occurred in savings and time deposits as the average yield has fallen from 2.91%
for the fourth quarter of 1993 to 2.71% for the first quarter of 1994, although
the rate of decline slowed late in the first quarter of 1994. Generally,
investors are increasingly utilizing mutual funds and other nonbank vehicles to
obtain higher rates of return. Demand deposits declined $53.3 million due
primarily to seasonal fluctuations.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents increased by approximately $21.3 million during the three-month
period ended March 31, 1994. Cash provided by operations resulted largely from
net interest income from loans and securities and an increase in accruals. Net
cash provided by investing activities was due principally to the net decreases
in short-term investments and loans through repayment and was reduced by $68
million due to excess securities purchases over proceeds from sale of securities
and the net difference of noninterest expense over noninterest income. Net cash
used for financing activities was primarily the result of the aforementioned
decreases in both nontime deposits and certificates of deposit.
At March 31, 1994, the parent company had $4.1 million in cash and $20.0
million in U.S. Treasury securities available-for-sale. This balance is due
primarily to the sale of $2.87 million shares of the Company's common stock to
more than sixty institutional investors in a European offering made under
Regulation S of the United States Securities and Exchange Commission on August
12, 1993. Subsequent to March 31, 1994 these securities were sold and the
proceeds invested in interest-bearing deposits.
Separately, during the first quarter of 1994, United States Trust Company,
a subsidiary bank, received approval from the appropriate regulators to dividend
$1.0 million to the Company. That total, plus an additional $1.0 million from
the parent company, was contributed as capital to the Company's Connecticut
banking subsidiary, UST Bank/Connecticut ("UST/Conn").
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The following table summarizes the Company's GAP position at March 31,
1994. Seventy percent of the loans are included in 0-30 days as they reprice in
response to changes in the interest rate environment. Securities and Demand
Deposits are categorized according to their expected lives. They are evaluated
in conjunction with the Company's asset/liability management strategy and may be
sold in response to changes in interest rates, prepayment risk, loan growth and
similar factors. The reserve for loan losses is included in the "Over 1 Year"
category of loans. At March 31, 1994, the one-year cumulative GAP position was
slightly positive at $20 million, or approximately 1.0% of total assets.
INTEREST SENSITIVITY PERIODS
-----------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- ------
Loans................................. $893 $ 28 $ 88 $218 $1,227
Short-term investments................ 52 52
Securities............................ 18 69 441 528
Other assets.......................... 10 1 10 182 203
---- ---- ---- ---- ------
Total assets.......................... 955 47 167 841 2,010
Interest-bearing deposits............. 692 86 153 298 1,229
Borrowed funds........................ 212 6 8 226
Demand deposits....................... 320 320
Other liabilities and stockholders'
equity.............................. 235 235
---- ---- ---- ---- ------
Total liabilities and equity.......... $904 $ 86 $159 $861 $2,010
---- ---- ---- ---- ------
GAP for period........................ $ 51 $(39) $ (8) $(20)
---- ---- ---- ----
---- ---- ---- ----
Cumulative GAP........................ $ 51 $ 12 $ 20 $ 0
---- ---- ---- ----
---- ---- ---- ----
As a percent of total assets.......... 2.54% .60% 1.00%
---- ---- ----
---- ---- ----
CREDIT QUALITY AND RESERVE FOR LOAN LOSS
The Company maintains a reserve for loan losses to reduce the carrying
value of its loans to an amount estimated to be collectible. Adequacy of the
reserve for loan losses is determined using an established, systematic
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. The Company's credit risk rating
profile uses categories of risk based on those currently used by its primary
regulators while accuracy of the 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.
The Company's reserve for loan losses was $60.9 million at March 31, 1994.
This compares with $62.5 million at December 31, 1993, and $55.1 million at
March 31, 1993. It represents 4.7% of loans at both March 31, 1994 and December
31, 1993. At March 31, 1993 it represented 3.8% of loans. It also represents
125% of nonaccrual loans at March 31, 1994 compared with 127% at December 31,
1993 and 65% at March 31, 1993. The reserve for loan losses constitutes 80.5% of
all nonperforming loans, which includes nonaccrual loans and loans past due 90
days and still accruing, and restructured loans. This compares with 68.5% at
December 31, 1993 and 49.5% at March 31, 1993. The total provision for loan
losses was $5.4 million for the first quarter of 1994 compared with $10.4
million for the same period in 1993. Net chargeoffs were $7.1 million in the
first quarter of 1994 compared with $5.4 million from the first quarter of 1993.
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The following table measures the Company's performance regarding some key
indicators of asset quality:
MARCH 31, DECEMBER 31, MARCH 31,
1994 1993 1993
--------- ------------ ---------
($ IN MILLIONS)
Nonperforming assets:
Nonaccrual loans................................ $48.7 $ 49.3 $ 85.2
Accruing loans 90 days or more past due......... 1.3 .6 .6
Other real estate and automobiles owned
(including in-substance foreclosure).......... 16.2 19.5 36.2
Restructured loans.............................. 25.8 41.5 25.4
----- ------ ------
Total nonperforming assets................. $91.9 $110.8 $147.4
----- ------ ------
----- ------ ------
Reserve for loan losses.............................. $60.9 $ 62.5 $ 55.1
Net chargeoffs....................................... $ 7.1 $ 51.8** $ 5.4
Ratios:
Reserve to nonaccrual loans..................... 125.2% 127.0% 64.6%
Reserve to total of nonaccrual loans and
accruing loans 90 days or more past due....... 121.9% 125.5% 64.2%
Reserve to total of nonaccrual loans, accruing
loans 90 days or more past due and
restructured loans............................ 80.5% 68.5% 49.5%
Reserve to period-end loans..................... 4.7% 4.7% 3.8%
Nonaccrual loans to period-end loans............ 3.8% 3.7% 5.9%
Nonaccrual and accruing loans over 90 days past
due to period-end loans....................... 3.9% 3.8% 6.0%
Nonperforming assets to period-end loans, OREO,
and automobiles owned......................... 7.1% 8.3% 10.0%
Nonperforming assets to total assets............ 4.6% 5.4% 7.3%
Net chargeoffs to average loans................. 2.2%* 3.6%** 1.5%*
<FN>
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* Quarter annualized
** Full year 1993
Toward the end of the second quarter of 1993, a strategy was adopted which
recognized that many troubled credit situations would need to be handled in an
expeditious manner (including the possibility of bulk sales) in order to reduce
the management and staff involvement and, in some cases, carrying costs of these
workouts. This would allow the Company's resources to be redirected toward new
business. It would increase the up-front cost of the workouts, however.
As a result of the Company's change in strategy, net chargeoffs increased
as noted above, for the first quarter of March 31, 1994 compared to the same
period in 1993. These chargeoffs and the decline in restructured loans, in turn,
resulted in a further decrease in nonperforming assets. Nonperforming assets
have declined $18.9 million, or 17%, since December 31, 1993 to $91.9 million.
Nonperforming assets have declined $55.5 million, or 38% from the first quarter
of 1993. The lower level of nonperforming assets, and related decline in
substandard loans, resulted in a loan loss provision of $5.4 million for the
first quarter of 1994 compared with $10.4 million for the same period in 1993.
Adverse economic conditions in the future could result in further
deterioration of the Company's loan portfolio and the value of its OREO
portfolio. The effect of this would likely include increases in delinquencies,
nonperforming assets, restructured loans, and OREO writedowns which individually
or collectively could have a material negative effect on future earnings. These
factors affect the Company's income statement negatively through reduced
interest income, increased provisions for loan losses, and higher costs to
collect loans and maintain repossessed collateral.
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CAPITAL AND REGULATORY AGREEMENTS
There are three capital requirements which bank and bank holding companies
must meet. Two requirements take into consideration risk inherent in
investments, loans and other assets for both on-balance and off-balance sheet
items on a weighted basis ("risk-based assets"). Under these requirements, the
Company must meet minimum Tier 1 and Total risk-based capital ratios (capital as
defined in the regulations divided by risk-based assets) of 4% and 8%,
respectively. Tier 1 capital is essentially shareholders' equity, 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 Company's risk-based assets were $1.59
billion at March 31, 1994 and $1.64 billion at December 31, 1993.
The third requirement is a leverage capital ratio, defined as Tier 1
capital divided by total average assets, net of intangibles. It requires a
minimum of 3% for the highest rated institutions and higher percentages for
others.
At March 31, 1994 and December 31, 1993, the Company's ratios and the
regulatory minimum requirements applicable to the Company were:
MARCH 31, 1994 DECEMBER 31, 1993
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
($ IN MILLIONS)
Tier 1 capital:
Actual........................................... $143.2 9.00% $141.7 8.68%
Minimum required*................................ $63.6 4.00% $65.3 4.00%
Total (Tier 1 and Tier 2) capital:
Actual........................................... $165.5 10.69% $164.5 10.35%
Minimum required*................................ $124.0 8.00% $130.6 8.00%
Tier 1 leverage capital:*............................. $143.2 7.29% $141.7 7.06%
- ---------------
Per current regulatory guidelines, capital ratios have been calculated
excluding the impact of SFAS 115 and the recording of the unrealized gain/loss
on securities available-for-sale per current regulatory instructions.
The Company understands that a modification to current regulations for
regulatory capital calculations, is under consideration which would disallow the
lesser of the amount of deferred tax assets that are dependent upon future
taxable income exceeding one year or 10% of Tier 1 capital. If adopted, Tier 1,
Total capital, and Tier 1 leverage capital ratios at March 31, 1994 would be
8.91%, 10.59%, and 7.21%, respectively.
The Company further understands that a new proposal by the FDIC would
reduce capital by the unrealized loss resulting from SFAS 115. This proposal has
not been put forth by the Federal Reserve Board, the Holding Company's primary
regulator. However, if adopted, Tier 1, total capital and Tier 1, leverage
capital ratios at March 31, 1994 would be 8.70%, 10.38%, 7.04%, respectively.
* See discussion below concerning capital requirements for the Company's banking
subsidiaries resulting from regulatory agreements.
In February 1992, the Company's two Massachusetts-based banking
subsidiaries, United States Trust Company ("USTC") and USTrust, each entered
into a Consent Agreement and Order with the Federal Deposit Insurance
Corporation ("FDIC") and the Commissioner of Banks in the Commonwealth of
Massachusetts ("Massachusetts Commissioner"). In accordance with these
agreements, the banks agreed to, among other things, maintain a Tier 1 leverage
capital ratio at or in excess of 6% by February 1993. At March 31, 1994 the Tier
1 leverage capital ratio of USTrust was 6.72% and was 27.69% for USTC. This
compares with 6.49 and 23.75%, respectively, at December 31, 1993. In February
1994 the FDIC and the Massachusetts Commissioner terminated and lifted the
Consent Agreement and Order with USTC.
Since June 1991, the Company's Connecticut-based banking subsidiary, UST
Bank/Connecticut ("UST/Conn") has been operating under a Stipulation and
Agreement with the Commissioner of Banks for the State of Connecticut. This
agreement was amended in August 1992 and November 1993 and requires
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UST/Conn to maintain a 6% Tier 1 leverage capital ratio. UST/Conn Tier 1
leverage capital ratio at March 31, 1994 was 6.44% compared with 6.21% at
December 31, 1993. Subsequent to the close of the quarter, regulators for
UST/Conn required that a portion of its deferred tax asset not be included in
capital calculations. This had the effect of causing UST/Conn to be below the 6%
requirement, which was rectified promptly with the declaration of a dividend
subject to regulatory approval to UST/Conn by the Company.
Effective August 3, 1992, UST Corp. entered into a written agreement with
the Federal Reserve Bank of Boston and the Massachusetts Commissioner which
requires the Company to maintain Tier 1, Total risk-based and Tier 1 leverage
capital ratios which conform to the Capital Adequacy Guidelines of the Board of
Governors of the Federal Reserve Board, and which take into account the current
and future capital requirements of the subsidiary banks, without specifying a
numeric minimum for the Tier 1 leverage capital ratio. The Company believes its
ratios meet the required minimums.
Additionally, per these 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.
Except as noted above, the Company and each of its subsidiary banks is
currently in compliance with its respective capital requirements under these
regulatory agreements. The Company and each of its subsidiary banks is also in
satisfactory compliance with the other terms of the respective regulatory
agreements, except with respect to the issues related to Director Francis X.
Messina described under Item 1 -- Recent Developments -- Potential Regulatory
Sanctions, in the Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1993. As discussed in Part II, Item 1 below, the Company believes
it is unlikely that the matter will have a material adverse effect on the
Company's financial condition or results of operations.
Even though in February 1994, the FDIC and Massachusetts Commissioner
terminated and lifted the Consent Agreement and Order with USTC, USTC has agreed
to continue to request regulatory consent prior to the payment of dividends.
RESULTS OF OPERATIONS
COMPARISON OF 1994 WITH 1993
The Company reported net income of $1.0 million, or $.06 per share, in the
first quarter of 1994 compared with net income of $1.3 million, or $.09 per
share, for the same period in 1993. The results for the first three months of
1993 include a one-time tax benefit of $750 thousand resulting from the
implementation of SFAS No. 109, "Accounting for Income Taxes" in January 1993.
The results for the first quarter of 1994 reflect declines in net interest
income and noninterest income from the first quarter of 1993, which were more
than offset by a lower loan loss provision and decreases in foreclosed asset and
workout expense.
The Company's net interest income on a fully taxable equivalent basis was
$22 million in the first quarter of 1994 compared with $23.4 million in the
fourth quarter of 1993 and $23.1 million for the same period in 1993. The
Company's interest rate spread and margin declined from the fourth quarter of
1993, and was slightly less than the first quarter of 1993. This trend is the
result of a decline in the volume of loans and the continuing low rate
environment, causing a decrease in loan income. See "Net Interest Income
Analysis" below. Although rising interest rates may improve the Company's
interest rate spread and margin, and while the Company is positioned to benefit
from a rising rate environment, a continued decline in the volume of higher
yielding interest earning assets may not allow net interest income to stabilize.
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RETURN ON AVERAGE EQUITY -- COMPONENT ANALYSIS
QUARTER ENDED
MARCH 31,
-------------------
1994 1993
------ ------
Net interest income................................... 57.28% 62.87%
Provision for loan losses............................. (14.32) (28.55)
------ ------
Net interest income after provision for loan losses... 42.96 34.32
Noninterest income.................................... 20.75 34.48
Noninterest expense................................... (59.36) (65.49)
------ ------
Income before income tax.............................. 4.35 3.31
Income tax provision.................................. 1.72 1.87
------ ------
Income before change in accounting method............. 2.63 1.44
Cumulative effect of change in method of accounting
for income taxes.................................... 2.06
Net income............................................ 2.63% 3.50%
The Company defines core earnings as pretax income before foreclosed asset
expense, securities gains, and other nonrecurring income and expense items.
Management believes that core earnings are a useful measure of a bank's ability
to withstand the adverse effects of nonperforming assets. The following table
reflects the Company's core earnings components on a comparative basis.
QUARTER ENDED
MARCH 31,
-------------------
1994 1993
------ ------
($ IN MILLIONS)
Pretax income (loss).................................. $1.66 $1.21
Add back:
Foreclosed asset expense......................... 1.96 5.37
Securities gains................................. (.02) (3.54)
Other nonrecurring (income)/expense items, net... .48 (.04)
----- -----
Core earnings......................................... $4.08 $3.00
----- -----
----- -----
NET INTEREST INCOME ANALYSIS
Decreases continue to occur in the cost of the Company's interest-bearing
liabilities although the rate of decline slowed late in the first quarter of
1994. Specifically, the cost of interest-bearing funds declined to 2.79% for the
first quarter of 1994 compared with 2.93% for the fourth quarter of 1993 and
3.25% for the first quarter of 1993. Although average interest-bearing deposits
have decreased $89 million from the first quarter of 1993, average loans
outstanding have declined $139 million. This decrease in loans was the primary
reason net interest income declined $1.1 million on a fully taxable basis. Due
to this, the interest rate spread and margin both decreased when compared with
the fourth quarter of 1993 and the first quarter of 1993. The spread in the
first quarter of 1994 was 4.25% compared with 4.44% for the fourth quarter of
1993 and 4.30% for the first quarter of 1993. The margin was 4.80% in the first
quarter of 1994 compared with 5.03% in the fourth quarter of 1993 and 4.82% in
the first quarter of 1993. See "Financial Condition" above for a discussion
regarding loan and deposit decreases.
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The following tables attribute changes in interest income, interest expense
and the related net interest income for the quarter ended March 31, 1994 when
compared with the quarter ended March 31, 1993, either to changes in average
balances or to changes in average rates on interest-bearing assets and
liabilities. In this table, changes attributable to both rate and volume are
allocated on a weighted basis.
INCREASE (DECREASE) FROM
QUARTER ENDED MARCH 31, 1993
-----------------------------
AMOUNTS DUE TO
QUARTER CHANGES IN
MARCH 31, TOTAL ------------------
1994 CHANGE VOLUME RATE
--------- ------- ------- -------
($ IN THOUSANDS)
Interest income:
Interest and fees on loans*.................. $24,721 $(3,552) $(2,656) $ (896)
Interest and dividends on securities:
Taxable................................. 6,731 (1,096) (169) (927)
Nontaxable*............................. 114 (42) (42)
Income on overnight funds and
deposits.............................. 562 540 540
--------- ------- ------- -------
Total interest income*............. 32,128 (4,150) (2,327) (1,823)
--------- ------- ------- -------
Interest expense:
Interest on deposits......................... 8,453 (2,476) (696) (1,780)
Interest on short-term borrowings............ 1,327 (485) (376) (109)
Interest on other borrowings................. 302 (84) (90) 6
--------- ------- ------- -------
Total interest expense............. 10,082 (3,045) (1,162) (1,883)
--------- ------- ------- -------
Net interest income*.............................. $22,046 $(1,105) $(1,165) $ 60
--------- ------- ------- -------
--------- ------- ------- -------
- ---------------
<FN>
* Fully taxable equivalent at the Federal income tax rate of 35% and includes
applicable state taxes net of Federal benefit.
NONINTEREST INCOME
Total noninterest income decreased $4.6 million in the first quarter of
1994 compared with the same period in 1993. The decrease was primarily due to a
decline in securities gains from $3.5 million to $23 thousand in 1994. Sales of
securities decreased in the first quarter of 1994 compared with the first
quarter of 1993. The larger amount of sales in 1993 was in response to a $166
million, or 9%, decrease in total deposits. Asset management fees were $4.3
million in the quarter, down slightly from the same period in 1993. This was due
to a decline in the value of the assets under management, as a result of the
negative returns in the stock and bond markets during the first quarter of 1994.
Other noninterest income decreased $694 thousand in the first quarter of
1994 compared with the same period in 1993, and the following are the more
significant reasons: Lease income decreased $388 thousand due to a decline in
residuals on completed leases. Income from home equity loans purchased from the
Resolution Trust Corporation at a substantial discount in late 1991 decreased
$212 thousand compared with the same period in 1993. All other miscellaneous
noninterest income declined $94 thousand.
NONINTEREST EXPENSE
Total noninterest expense for the first quarter of 1994 decreased to $22.6
million from $23.8 million for the same period in 1993. Foreclosed asset and
workout expense declined $3.2 million to $2.6 million in the quarter due to
decreases in writedowns to fair value minus estimated costs to sell foreclosed
real estate properties. As previously discussed under "Credit Quality and
Reserve for Loan Loss," local economic or market conditions may prevent this
reduction from continuing. Personnel-related costs increased $926 thousand due
to additional staffing and merit increases. Net occupancy expense in the first
quarter of 1994 includes a writedown of $300 thousand to market value on one of
the Company's branch buildings which is being offered for sale. Other
noninterest expense increased $789 thousand in the first quarter comparison.
This was due in large part to an increase of $510 thousand in fees paid for
consulting services on a number of planning and operational improvement
initiatives and for consulting services by former Company executives.
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Appraisal fees increased $266 thousand as the Company ordered new appraisals on
a large number of collateral based loans. These increases were partially offset
by a reduction in the Company's provision for litigation in 1994, due to the
resolution of certain litigation in 1993. No provisions were made during the
first quarter of 1994, while during the first quarter 1993, the provision
totaled $150 thousand.
INCOME TAXES
The Company had a tax provision of $653 thousand in the first quarter of
1994. This compares with a provision from operations of $681 million in the
first quarter of 1993. The variations in operating income taxes are attributable
to the level and composition of pretax income or loss.
In February 1992 the Financial Accounting Standards Board (FASB) issued a
new standard, SFAS No. 109 "Accounting for Income Taxes," a modification of SFAS
No. 96, which changes the accounting for deferred income tax to the "liability
method." The Company adopted SFAS No. 109 on January 1, 1993. This change
increased net income $750 thousand in January 1993. This represented the
cumulative effect of the new standard on the balance sheet.
As of March 31, 1994, the Company had recorded deferred tax assets of
approximately $10.5 million. Of that amount, approximately $3 million may be
recovered against taxable income in carryback periods, and the remainder 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 these
deferred tax assets.
RECENT ACCOUNTING DEVELOPMENTS
FASB has issued Statement No. 112, "Employers' Accounting for
Postemployment Benefits," which requires accrual of a liability for all types of
benefits paid to former or inactive employees after employment but before
retirement. The Company has determined that this FASB statement will have no
material effect on its financial statements. Adoption of the statement is
required for fiscal years beginning after December 15, 1993.
FASB has issued Statement No. 114, "Accounting by Creditors for Impairment
of a Loan," which requires that all creditors value all loans for which it is
probable that the creditor will be unable to collect all amounts due according
to the terms of the loan agreement 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. This statement would apply for
fiscal years beginning after December 15, 1994. The effect on the Company's
results of operations has not yet been determined.
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PART II -- OTHER INFORMATION
For the quarter ended March 31, 1994, Items 1-5 of Part II are either
inapplicable or would elicit a response of "NONE" and therefore no reference
thereto has been made herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS -- NONE.
(b) REPORTS ON FORM 8-K. -- The Company filed a Current Report on Form
8-K/A (containing the Company's financial statements as of December 31,
1993) with the Commission on March 18, 1994. The foregoing Current
Report on Form 8-K/A restated, corrected and amended on Form 8-K filed
with the Commission on March 15, 1994.
UST CORP.
Date May 12, 1994 By:..........................................
NEAL F. FINNEGAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date May 12, 1994 By:..........................................
WILLIAM C. BROOKS
TREASURER AND CHIEF FINANCIAL OFFICER
Date May 12, 1994 By:..........................................
GEORGE T. CLARKE
CONTROLLER
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS -- NONE.
(b) REPORTS ON FORM 8-K. -- The Company filed a Current Report on Form
8-K/A (containing the Company's financial statements as of December 31,
1993) with the Commission on March 18, 1994. The foregoing Current
Report on Form 8-K/A restated, corrected and amended a Current Report
on Form 8-K filed with the Commission on March 15, 1994.
UST CORP.
NEAL F. FINNEGAN
Date May 16, 1994 By:..........................................
NEAL F. FINNEGAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WILLIAM C. BROOKS
Date May 16, 1994 By:..........................................
WILLIAM C. BROOKS
TREASURER AND CHIEF FINANCIAL OFFICER
GEORGE T. CLARKE
Date May 16, 1994 By:..........................................
GEORGE T. CLARKE
CONTROLLER
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