1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE #0-9623
UST CORP.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2436093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
40 COURT STREET, 02108
BOSTON, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(617) 726-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.625
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by Reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The number of shares of common stock held by nonaffiliates of the
registrant as of March 10, 1995 was 15,081,592 for an aggregate market value of
$162,127,114.
At March 10, 1995, there were issued and outstanding 17,635,425 shares of
common stock, par value $0.625 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 1995 Annual Meeting
are incorporated by reference in Items 10, 11, 12 and 13 of Part III.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business..................................................................... 1
Item 2 Properties................................................................... 9
Item 3 Legal Proceedings............................................................ 10
Item 4 Submission of Matters to a Vote of Security Holders.......................... 10
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters..... 11
Item 6 Selected Financial Data...................................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition at December 31, 1994..................................... 13
Results of Operations........................................................ 24
Item 8 Financial Statements and Supplementary Material.............................. 30
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................................ 55
PART III
Item 10 Directors and Executive Officers of the Registrant........................... 55
Item 11 Executive Compensation....................................................... 57
Item 12 Security Ownership of Certain Beneficial Owners and Management............... 57
Item 13 Certain Relationships and Related Transactions............................... 57
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 57
Signatures................................................................... 61
3
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
UST Corp. (the "Company"), a bank holding company registered with the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), was
organized as a Massachusetts business corporation in 1967. The Company is
subject to examination by, and is required to file reports with, the
Commissioner of Banks of the Commonwealth of Massachusetts (the "Massachusetts
Commissioner"). The Company's banking subsidiaries are USTrust and United States
Trust Company ("USTC"), each headquartered in Boston and each a Massachusetts
trust company, and UST Bank/Connecticut ("UST/Conn"), headquartered in
Bridgeport, a Connecticut trust company. All of the common stock of USTrust,
USTC, and UST/Conn is issued to and owned by the Company. In addition, the
Company owns, indirectly through its banking subsidiaries, all of the
outstanding stock of three active nonbanking subsidiaries, all Massachusetts
corporations: UST Leasing Corporation, UST Data Services Corp. and UST Capital
Corp.
The Company engages in one line of business, that of providing financial
services through its banking and nonbanking subsidiaries. A broad range of
financial services is provided principally to individuals and small- and
medium-sized companies in New England including those located in low- and
moderate-income neighborhoods. In addition, an important component of the
Company's financial services is the provision of trust and money management
services to professionals, corporate executives, nonprofit organizations, labor
unions, foundations, mutual funds and owners of closely-held businesses in the
New England region.
As of the close of business on December 31, 1994, the Company's total
assets were approximately $1.8 billion and USTrust, the lead bank, had over $1.7
billion or 94% of the Company's consolidated assets.
THE SUBSIDIARY BANKS
USTrust and UST/Conn are engaged in a general commercial banking business
and accept deposits which are insured by the Federal Deposit Insurance
Corporation ("FDIC"). USTC, which has full banking powers and accepts deposits
which are insured by the FDIC, focuses its activity on trust and money
management, venture capital and other fee generating businesses. Two of the
Company's banking subsidiaries are located in Massachusetts and one is located
in Connecticut.
RECENT DEVELOPMENTS
Recent Operating History and Asset Quality Summary
The Company reported net income of $4.75 million, or $0.27 per share for
1994, as compared with a net loss of $20.1 million, or $1.31 per share in 1993.
Non-performing assets at December 31, 1994, consisting of nonaccrual loans,
restructured loans, accruing loans greater than 90 days past due and other real
estate owned, were $84.9 million, down from a level of $110.8 million at
December 31, 1993. Loans measured as substandard by the Company's internal risk
rating system, also declined during the year from a level of $255 million at
December 31, 1993 to $115 million at December 31, 1994. Under the Company's
definition, substandard loans are characterized by the distinct possibility that
some loss will be sustained if the credit deficiencies are not corrected. The
substandard classification, however, does not necessarily imply ultimate loss
for each individual loan so classified. See pages 20 and 24 in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Bank Regulatory Agreements and Orders
In February 1992, USTC and USTrust entered into separate Consent Agreements
and Orders with the FDIC and the Massachusetts Commissioner. The Company also
entered into a written agreement with the Federal Reserve Bank of Boston (the
"FRB-Boston") and the Massachusetts Commissioner in August 1992. Since June
1991, the Company's Connecticut-based banking subsidiary, UST/Conn, has been
operating under a Stipulation and Agreement with the Commissioner of Banks for
the State of Connecticut (the "Connecticut Commissioner"), which agreement was
amended in August 1992, November 1993 and July
1
4
1994. (The foregoing are hereinafter collectively referred to as the "Regulatory
Agreements."). In February 1994, the FDIC and the Massachusetts Commissioner
terminated and lifted the Consent Agreement and Order with USTC.
The remaining Regulatory Agreements require that the Company, USTrust and
UST/Conn refrain from paying dividends without prior regulatory consent and the
Company has not paid a cash dividend to its stockholders since July 1991.
Despite the termination of its Regulatory Agreement, USTC has agreed to continue
to request regulatory consent prior to the payment of dividends. The Regulatory
Agreements further require USTrust and UST/Conn to maintain Tier 1 leverage
capital ratios at or in excess of 6%. Each of the Company's subsidiary banks is
in compliance with its respective capital requirements. As provided in the
Regulatory Agreements, the Company, USTrust and UST/Conn have reduced levels of
nonperforming assets and have implemented written plans and policies concerning,
among other matters credit administration, loan review and intercompany
transactions. USTrust and UST/Conn have also revised and expanded their
investment and funds management policies as required by the Regulatory
Agreements. Moreover, the Company has agreed to give the FRB-Boston and the
Massachusetts Commissioner prior notice of certain significant expenditures and
certain increases in management compensation. The Company has filed (and will
continue to file) with the regulatory agencies a broad range of periodic reports
and updated strategic plans. For a discussion of capital in the context of the
Regulatory Agreements, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital" on page 18.
In addition to the foregoing, in 1994, UST/Conn entered into an informal
Memorandum of Understanding with the FDIC under the significant terms of which
UST/Conn undertook to: increase the level of Board monitoring of UST/Conn's
Community Reinvestment Act ("CRA") activities and lending data; develop and
implement an improved CRA marketing program; and consider more effective
utilization of available government lending programs and certain other matters.
Asset Management Employment Agreements
As of January 1, 1995, the Company and USTC, subject to regulatory
approval, entered into Employment Agreements with five key executives in the
Asset Management Division of USTC. These Employment Agreements are designed: (i)
to induce those key executives to continue in the employ of USTC and to accept
certain non-competition agreements; (ii) to raise the share of Asset Management
Division revenues retained by Management of the Division; (iii) to provide
assurances to those key executives that they will be allowed to continue to
manage the Division with the degree of independence they currently enjoy; and
(iv) to provide strong economic incentives for those executives to increase the
Division's aggregate revenues. Although the foregoing Employment Agreements were
entered into as of January 1, 1995, the revised revenue sharing arrangements
were effective as of July 1, 1994 and were reflected in the previously reported
third and fourth quarter financial results of the Company. Each of the
Employment Agreements provide for two and one-half year original terms
commencing January 1, 1995 and (unless terminated by the employee by giving the
Company and USTC six months prior notice) successive six month renewal terms
thereafter. In the event, however, that a Triggering Event or change in
ownership of USTC or the Company (as defined in the Employment Agreements)
occurs during the original term or a renewal term, a new, approximately
three-year term will be triggered and the key employee will receive in exchange
for an extension of his or her employment period together with the related
noncompetition agreements, a Formula Payment, as defined in the Employment
Agreement, which will be based upon the Asset Management Division's revenues
during the year preceding the Triggering Event. For a further discussion of the
financial impact of these new compensation arrangements, see pages 26 and 27 in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
BUSINESS SERVICES
USTrust and UST/Conn provide commercial banking services, including
deposit, investment, cash management, payroll, wire transfer, leasing and
lending services throughout New England. Commercial and industrial lending takes
the form primarily of direct loans and includes lines of credit, revolving
credits, domestic and foreign letters of credit, term loans, mortgage loans,
receivable, inventory and equipment loans
2
5
and other specialized lending services. Furthermore, the Company provides
additional services to small business customers through utilization of
government sponsored and assisted loan programs and through the Company's
Minority Enterprise loan program. In 1994, USTrust was certified by the SBA as a
"Small Business Association Lender". USTrust also provides merchant credit card
services. USTC provides deposit services and other banking services, but focuses
its activities on money management, venture capital and other fee generating
services. Through loan participations, each bank is able to provide credit to
businesses in its area up to the limit available to the combined banks. At
December 31, 1994, the combined lending limit to a single borrower of the
subsidiary banks was approximately $29 million.
CONSUMER SERVICES
Consumer services are provided by USTrust and UST/Conn to customers in
their respective areas. These services include savings and checking accounts,
NOW and money market accounts, consumer loans, night depositories, credit cards
(through a private label arrangement), safe deposit box facilities and
travelers' checks. In 1994 the Company repriced and added further enhancements
to its Choice Checking retail account product, which combines a relatively
modest fee structure with ancillary travel, insurance and other "lifestyle"
benefits. The Company in 1994 also began offering a basic savings account
service to accompany its basic checking account service, both of which are
designed to serve the needs of individual customers of moderate means. Consumer
loans include residential first mortgage and home equity loans and loans to
finance education costs as well as open-ended credit via cash reserve
facilities. Automobile loans reached a volume of approximately $94 million as of
December 31, 1994. In 1994, the Company's Affordable Mortgage Program, designed
to provide certain customers of USTrust and UST/Conn who may not qualify for
traditional mortgage financing with an alternate means of financing or
refinancing a residence, saw increased volume. The Company's banking
subsidiaries, which currently have an aggregate of 33 banking offices, maintain
an automated teller machine system which through membership in the Cirrus and
InfiNet Payment Services, Inc. networks provides the Company's customers with
access to their accounts at locations throughout the United States. Most of the
Company's ATM machines provide information to customers in three languages,
English, Spanish and Portuguese. The Company provides a broad range of services
in connection with its consumer automobile lending program. The Company's
banking subsidiaries offer an integrated Preferred Banking Services which
combines a wide range of the Company's retail banking products.
INVESTMENT SERVICES
The Investment Group located at USTrust and UST/Conn was formed in May
1994. The Investment Group, through Essex National Securities, Inc., an
unaffiliated, licensed broker-dealer, offers mutual funds (whose investments are
managed by nonaffiliated third parties), treasury bills, notes, corporate bonds,
state, federal and municipal bonds and discount brokerage services to the
customers of USTrust and UST/Conn.
SPECIALIZED SERVICES FOR INDIVIDUALS
The Company provides services to meet the financial needs of individuals,
such as self-employed professionals, corporate executives and entrepreneurs. The
Company's services include deposit accounts, specialized credit facilities, an
account management system for escrow funds, consumer banking and other personal
financial products.
REAL ESTATE SERVICES
USTrust and UST/Conn provide a broad range of industrial and commercial
real estate lending services, residential mortgage banking services and other
related financial services.
ASSET AND MONEY MANAGEMENT AND TRUST SERVICES
Asset and money management, custodial and trust services are provided by
USTC. In addition, USTC provides services as executor, administrator and trustee
of estates and acts, under the terms of agreements, in various capacities such
as escrow agent, bond trustee and trustee and agent of pension, profitsharing
and other employee benefit trusts. At December 31, 1994, the total assets under
management of USTC were
3
6
approximately $3.1 billion. See "Recent Developments -- Asset Management
Employment Agreements", above.
SECURITIES PORTFOLIOS MAINTAINED BY THE COMPANY
The subsidiary banks maintain securities portfolios consisting primarily of
U.S. Treasury, U.S. Government Agency, corporate and municipal securities.
Essentially all of the Company's securities are deemed "available-for-sale"
which enhances the liquidity position of the Company and allows for flexibility
in management of interest rate risk. USTrust's securities portfolio also
includes certain other equity investments as allowed within limits prescribed by
Massachusetts law. Such investments currently include, among others, equity
interests in the Massachusetts Housing Investment Corporation's Limited
Partnership Equity Fund for Affordable Housing, and in the Massachusetts
Minority Enterprise Corporation. The Treasury Division of the Company provides
securities portfolio advisory services to the Company's affiliated banks.
PRINCIPAL NONBANKING SUBSIDIARIES
UST Leasing Corporation, a subsidiary of USTrust organized in 1987,
provides a broad range of equipment leasing services to major corporations
headquartered throughout the United States. In 1994, UST Leasing Corporation
developed a line of leasing products designed to meet the needs of the Company's
small business customers and other business entities with similar needs. As of
December 31, 1994, UST Leasing Corporation's total assets were approximately
$26.8 million.
UST Data Services Corp., organized in 1981 and a subsidiary of USTrust,
provides a full range of electronic data processing, deposit and other
operations services to the Company and its affiliates.
UST Capital Corp., organized in 1961 and acquired by the Company in 1969,
is a subsidiary of USTC and is a licensed Small Business Investment Company. It
specializes in equity and longterm debt financing for growth-oriented companies.
COMPETITIVE CONDITIONS
The Company's banking and nonbanking subsidiaries face substantial
competition throughout Massachusetts and Connecticut. This competition is
provided by commercial banks, savings banks, credit unions, consumer finance
companies, insurance companies, "nonbank banks," money market mutual funds,
government agencies, investment management companies, investment advisors,
brokers and investment bankers. In addition, the Company anticipates increased
competition from out-of-state and foreign banks and bank holding companies as
those entities increase their usage of interstate banking powers granted since
1983 as well as by the September 1994 enactment of the Riegle-Neal Interstate
Banking and Branching Act (discussed under "Supervision and Regulation of the
Company and its Subsidiaries" below). During the past several years, the
closing by regulators of a number of banks and bank holding companies in
Eastern Massachusetts and Connecticut followed, in general, by acquisitions of
small- and medium-sized banks and bank holding companies by the largest New
England bank holding companies, as well as recently somewhat improved economic
conditions within the region have resulted in fewer but financially stronger
competitors in the local markets served by the Company's banking subsidiaries.
SUPERVISION AND REGULATION OF THE COMPANY AND ITS SUBSIDIARIES
GENERAL
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended (the "BHC Act"), the Company is subject to substantial
regulation and supervision by the Federal Reserve Board. As state-chartered
banks, USTC, USTrust and UST/Conn (collectively, the "Subsidiary Banks") are
subject to substantial regulation and supervision by the FDIC and the applicable
state bank regulatory agencies. Such activities are often intended primarily for
the protection of depositors or are aimed at carrying out broad public policy
goals that may not be directly related to the financial services provided by the
Company and its subsidiaries. Federal and state banking and other laws impose a
number of requirements and restrictions on the business operations, investments
and other activities of depository institutions and their affiliates. Since
4
7
1992, the Company and its banking subsidiaries have been operating under
regulatory agreements and orders with state and federal bank regulatory
authorities. In February 1994, the order under which USTC was operating was
lifted and terminated. See "Recent Developments-Bank Regulatory Agreements and
Orders" above.
GENERAL SUPERVISION AND REGULATION
The Company, as a bank holding company under the BHC Act, is registered
with the Federal Reserve Board and is regulated under the provisions of the BHC
Act. Under the BHC Act the Company is prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and from engaging in any business
other than that of banking, managing or controlling banks or furnishing services
to, or acquiring premises for, its affiliated banks, except that the Company may
engage in and own voting shares of companies engaging in certain activities
determined by the Federal Reserve Board, by order or by regulation, to be so
closely related to banking or to managing or controlling banks "as to be a
proper incident thereto."
The Company is required by the BHC Act to file with the Federal Reserve
Board an annual report and such additional reports as the Federal Reserve Board
may require. The Federal Reserve Board also makes periodic inspections of the
Company and its subsidiaries. The BHC Act requires every bank holding company to
obtain the prior approval of the Federal Reserve Board before it may acquire
substantially all of the assets of any bank, or ownership or control of any
voting shares of any bank, if, after such acquisition, it would own or control,
directly or indirectly, more than 5% of the voting shares of such bank.
Because the Company is also a bank holding company under the Massachusetts
General Laws, the Massachusetts Commissioner has authority to require certain
reports from the Company from time to time and to examine the Company and each
of its subsidiaries. The Massachusetts Commissioner also has enforcement powers
designed to prevent banks from engaging in unfair methods of competition or
unfair or deceptive acts or practices involving consumer transactions. Prior
approval of the Massachusetts Board of Bank Incorporation is also required
before the Company may acquire any additional commercial banks located in
Massachusetts or in those states which permit acquisitions of banking
institutions located in their states by Massachusetts bank holding companies.
The Connecticut General Statutes require that the Company furnish to the
Connecticut Commissioner such reports as the Connecticut Commissioner deems
appropriate to the proper supervision of the Company. The Connecticut
Commissioner is also authorized to make examinations of the Company and its
Connecticut subsidiaries including UST/Conn, and to order the Company to cease
and desist from engaging in any activity which constitutes a serious risk to the
financial safety, soundness or stability of the Company or UST/Conn, or is
inconsistent with sound banking principles or the provisions of the banking laws
of Connecticut.
The location of nonbank subsidiaries of the Company is not restricted
geographically under the BHC Act. In 1989, after the passage of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the
Federal Reserve Board amended its regulations under the BHC Act to permit bank
holding companies, as a nonbanking activity, to own and operate savings
associations without geographical restrictions. Furthermore, in September, 1994,
the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate
Banking Act") was enacted. The Interstate Banking Act's provisions, among other
things: (i) permit bank holding companies, under certain circumstances, to
acquire control of banks in any state beginning September 28, 1995, subject to
(a) specified maximum national and state deposit concentration limits; (b) any
applicable state law provisions requiring that the acquired bank has to have
been in existence for a specified period of up to 5 years; (c) any applicable
nondiscriminatory state provisions that make an acquisition of a bank contingent
upon a requirement to hold a portion of such bank's assets available for call by
a state sponsored housing entity; and (d) applicable anti-trust laws; (ii)
authorize interstate mergers by banks in different states, including branching
through bank mergers, beginning June 1, 1997, subject to the provisions noted in
(i) and to any state laws that opt in as of an earlier date or opt out of the
provision entirely; (iii) authorize states to enact legislation permitting
interstate de novo branching; and (iv) provide for parity of treatment for
foreign bank branch activities. Proposed legislation has been filed in each of
Massachusetts and
5
8
Connecticut which, if enacted, would cause those jurisdictions to "opt-in" prior
to June 1, 1997. The full impact of the Interstate Banking Act will not be clear
until the state legislatures have voted and the banking regulatory agencies have
adopted final regulations.
The Subsidiary Banks, whose deposits are insured by the FDIC, and the
subsidiaries of such banks are subject to a number of regulatory restrictions,
including certain restrictions upon: (i) extensions of credit to the Company and
the Company's nonbanking affiliates (collectively with the Company, the
"Affiliates"), (ii) the purchase of assets from Affiliates, (iii) the issuance
of a guarantee or acceptance of a letter of credit on behalf of Affiliates and
(iv) investments in stock or other securities issued by Affiliates or acceptance
thereof as collateral for an extension of credit. In addition, all transactions
among the Company and its direct and indirect subsidiaries must be made on an
arm's length basis and valued on fair market terms. The Subsidiary Banks pay
substantial deposit insurance premiums to the FDIC. Such deposit premium rates
were substantially increased in 1992 pursuant to regulations issued under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). In
early 1995, the FDIC proposed that deposit premiums be reduced substantially,
except for banks with the most unfavorable risk profiles. It is too early to
determine whether this proposal will be implemented or what effect it will have
on the Company's earnings.
Federal Reserve Board Policy requires bank holding companies to serve as a
source of strength to their subsidiary banks by standing ready to use available
resources to provide adequate capital funds to subsidiary banks during periods
of financial stress or adversity. A bank holding company also can be liable
under certain provisions of FDICIA for the capital deficiencies of an
undercapitalized bank subsidiary. In the event of a bank holding company's
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be
deemed to have assumed and is required to cure immediately any deficit under any
commitment by the debtor to any of the federal banking agencies to maintain the
capital of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims. Under
the cross-guarantee provisions of the Federal Deposit Insurance Act, if any or
all of the Subsidiary Banks were placed in conservatorship or receivership, the
Company, as sole stockholder, would likely lose its investment in the applicable
Subsidiary Bank or Subsidiary Banks, and, in addition, its investment in its
other Subsidiary Bank or Subsidiary Banks would be at risk.
The Company and all its subsidiaries are also subject to certain
restrictions with respect to engaging in the issue, flotation, underwriting,
public sale or distribution of certain types of securities. In addition, under
both Section 106 of the 1970 Amendments to the BHC Act and regulations which
have been issued by the Federal Reserve Board, the Company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of any property or the furnishing of any
service. Various consumer laws and regulations also affect the operations of the
Subsidiary Banks.
The Subsidiary Banks, two of which are chartered under Massachusetts law
and one of which is chartered under Connecticut law, are subject to federal
requirements to maintain cash reserves against deposits, and to state mandated
restrictions upon the nature and amount of loans which may be made by the banks
(including restrictions upon loans to "insiders" of the Company and its
subsidiary banks) as well as to restrictions relating to dividends, investments,
branching and other bank activities.
FDICIA prescribes the supervisory and regulatory actions that will be taken
against undercapitalized insured depository institutions for the purposes of
promptly resolving problems at such institutions at the least possible long-term
loss to the FDIC. Five categories of depository institutions have been
established by FDICIA in accordance with their capital levels: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." The federal banking
agencies have adopted uniform regulations to implement the prompt regulatory
action provisions of FDICIA.
Under the uniform regulations, a well-capitalized institution has a minimum
tier 1 capital-to-total risk-based assets ratio of 6 percent, a minimum total
capital-to-total risk-based assets ratio of 10 percent and a minimum leverage
ratio of 5 percent and is not subject to any written agreement, order or capital
directive. An adequately capitalized institution meets all of its minimum
capital requirements under the existing capital adequacy guidelines. An
undercapitalized institution is one that fails to meet any one of the three
minimum capital requirements. A significantly undercapitalized institution has a
tier 1 capital-to-total risk-based assets
6
9
ratio of less than 3 percent, a tier 1 leverage ratio of less than 3 percent or
a total capital-to-total risk-based assets ratio of less than 6 percent. A
critically undercapitalized institution has a tier 1 leverage ratio of 2 percent
or less. An institution whose capital ratios meet the criteria for a well
capitalized institution may be classified as an adequately capitalized
institution due to qualitative and/or quantitative factors other than capital
adequacy. An adequately capitalized institution or undercapitalized institution,
may under certain circumstances, be required to comply with supervisory action
as it if were in the next lower category.
An undercapitalized institution is required to submit a capital restoration
plan for acceptance by the appropriate federal banking agency and will be
subject to close monitoring of both its condition and compliance with, and
progress made pursuant to, its capital restoration plan. The capital restoration
plan will be accepted only if (i) it specifies the steps that will be taken to
become adequately capitalized and the activities in which the institution will
engage, (ii) it is based upon realistic assumptions and it is likely to succeed
in restoring the institution's capital, (iii) it does not appreciably increase
the institution's risk exposure and (iv) each holding company that controls the
institution provides appropriate assurances of performance and guaranties that
the institution will comply with the plan until the institution is adequately
capitalized on an average basis for each of four consecutive quarters. Liability
under the guaranty is the lesser of (i) five percent of the institution's total
assets at the time it become undercapitalized and (ii) the amount necessary to
bring the institution into compliance with all applicable capital standards as
of the time the institution fails to comply with the plan. An institution that
fails to submit an acceptable plan may be placed into conservatorship or
receivership unless its capital restoration plan is accepted. An
undercapitalized institution will also be subject to restrictions on asset
growth, acquisitions, branching, new activities, capital distributions and the
payment of management fees.
FDICIA requires the appropriate regulatory agencies to take one or more
specific actions against significantly undercapitalized institutions and
undercapitalized institutions that fail to submit acceptable capital restoration
plans, which actions include but are not limited to (i) requiring the
institution to sell shares or other obligations to raise capital, (ii) limiting
deposit interest rates, (iii) requiring the election of a new board of directors
and/or dismissing senior executive officers and directors who held such
positions for more than 180 days before the institution became undercapitalized,
(iv) prohibiting receipt of deposits from correspondent banks, (v) requiring
divestiture or liquidation of one or more subsidiaries and (vi) requiring the
parent company to divest the institution if such divestiture will improve the
institution's financial condition and future prospects. In addition, an insured
institution that receives a less-than-satisfactory rating for asset quality,
management, earnings or liquidity may be deemed by its appropriate federal
banking regulator to be engaging in an unsafe or unsound practice for purposes
of issuing an order to cease and desist or to take certain affirmative actions.
If the unsafe or unsound practice is likely to weaken the institution, cause
insolvency or substantial dissipation of assets or earnings or otherwise
seriously prejudice the interest of depositors or the FDIC, a receiver or
conservator could be appointed. Finally, subject to certain exceptions FDICIA
requires critically undercapitalized institutions to be placed into receivership
or conservatorship within 90 days after becoming critically undercapitalized.
The Federal Reserve Board has indicated that it will consult with each
federal banking agency regulating the bank subsidiaries of a holding company to
monitor required supervisory actions, and based upon an assessment of these
developments, will take appropriate action at the holding company level.
Under FDICIA, federal bank regulators are also required to see that changes
are made in the operations and/or management of a bank or bank holding company
if the financial institution is deemed to be "undercapitalized." Under FDICIA, a
depository institution that is "adequately capitalized" but not "well
capitalized" is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market. In addition, "pass through" insurance coverage may not be available for
certain employee benefit accounts. The Company believes that the application of
these limitations to it would not have a material effect on its funding or
liquidity.
USTC is currently classified as "well capitalized" and USTrust and UST/Conn
are each currently classified as "adequately capitalized".
7
10
Additional regulations adopted pursuant to FDICIA include: (1) real estate
lending standards for depository institutions, which provide guidelines
concerning loan-to-value ratios for various types of real estate loans; (2)
rules requiring depository institutions to develop and implement internal
procedures to evaluate and control credit and settlement exposure to their
correspondent banks; (3) rules implementing the FDICIA provisions prohibiting,
with certain exceptions, insured state banks from making equity investments or
engaging in activities of the types and amounts not permissible for national
banks; and (4) rules and guidelines for enhanced financial reporting and audit
requirements. Rules currently proposed for adoption pursuant to FDICIA include:
(1) revisions to the risk-based capital guidelines regarding interest rate risk,
concentrations of credit risk and the risks posed by "nontraditional
activities", and (2) rules addressing various "safety and soundness" issues,
including operations and managerial standards, standards for asset quality,
earnings and compensation standards.
The status of the Company as a registered bank holding company does not
exempt it from certain federal and state laws and regulations applicable to
corporations generally, including, without limitation, certain provisions of the
federal securities laws and the Massachusetts corporate laws. With the passage
of FIRREA in 1989, the Crime Control Act in 1990 and FDICIA in 1991, federal
bank regulatory agencies including the Federal Reserve Board and the FDIC were
granted substantially broader enforcement powers to restrict the activities of
financial institutions and to impose or seek the imposition of increased civil
and/or criminal penalties upon financial institutions, the individuals who
manage or control such institutions and "institution affiliated parties" of such
entities.
Pursuant to the Community Reinvestment Act ("CRA"), federal regulatory
authorities review the performance of the Company and its subsidiary banks in
meeting the credit needs of the communities served by the subsidiary banks. The
applicable federal regulatory authority considers compliance with this law in
connection with applications for, among other things, approval of branches,
branch relocations and acquisitions of banks and bank holding companies.
USTrust's current CRA rating is "outstanding" and UST/Conn's current CRA rating
is "needs improvement". UST/Conn in 1994 entered into an informal Memorandum of
Understanding concerning CRA matters with the FDIC as described under "Recent
Developments -- Bank Regulatory Agreements and Orders" above. The FDIC has
determined that it will no longer examine USTC, which focuses upon trust and
asset management activities, for CRA compliance. The Massachusetts Commissioner
has continued to examine USTC for CRA compliance, and currently rates USTC
"satisfactory".
On September 23, 1994, the federal Riegle Community Development and
Regulatory Improvement Act of 1994 (the "Community Development Act") was
enacted. The Community Development Act establishes financial and other
assistance for entities involved primarily in community development activities.
The Community Development Act's provisions also make changes in a number of
areas including, among others: (i) increasing restrictions on some types of high
interest loans; (ii) improving small business access to capital; (iii) requiring
federal banking agencies to, among other things, coordinate examinations and
establish uniform regulations and guidelines where appropriate; (iv) simplifying
and expediting the processing and approvals for certain applications; (v)
expanding the exemptions available to a holding company's subsidiary banks with
respect to FDICIA's audit requirements; (vi) adding flexibility to FDICIA's
safety and soundness standards by, among other things, permitting their issuance
as guidelines and allowing banking agencies more discretion in handling
noncompliance; (vii) amending certain requirements on insider loans; (viii)
modifying local residency requirements for national bank directors; (ix)
limiting the applicability of certain real estate settlement procedures; and (x)
extending some management interlocks exemptions. It is anticipated that the
Community Development Act will reduce slightly certain regulatory burdens on
financial institutions, including the Company's subsidiaries.
From time to time various proposals are made in the United States Congress
as well as state legislatures which would alter the powers of, and place
restrictions on, different types of bank organizations as well as bank and
nonbank activities. Such legislative proposals include proposals related to
expansion of bank powers and increased consumer compliance disclosure
requirements. It is impossible to predict whether any of the current proposals
will be adopted and the impact of such adoption on the business of the Company
or its subsidiaries.
8
11
Supervision, regulation and examination of the Subsidiary Banks by the bank
regulatory agencies are not intended for the protection of the Company's
security holders.
GOVERNMENTAL POLICIES, ECONOMIC CONDITIONS AND CREDIT RISK CONCENTRATION
The earnings and business of the Company's subsidiaries are and will be
affected by a number of external influences, including general economic
conditions in the United States and particularly in New England and the policies
of various regulatory authorities of the United States, including the Federal
Reserve Board. The Federal Reserve Board regulates the supply of money and of
bank credit to influence general economic conditions within the United States
and throughout the world. From time to time, the Federal Reserve Board takes
specific steps to dampen domestic inflation and to control the country's money
supply. The instruments of monetary policy employed by the Federal Reserve Board
for these purposes (including the level of cash reserves banks, including
nonmember banks such as all three of the Company's banking subsidiaries, are
required to maintain against deposits) influence in various ways the interest
rates paid on interest-bearing liabilities and the interest received on earning
assets, and the overall level of bank loans, investments and deposits. The
impact upon the future business and earnings of the Company of prospective
domestic economic conditions, and of the policies of the Federal Reserve Board
as well as other U.S. regulatory authorities, cannot be predicted accurately.
During the period from 1990 through 1993, the Company's primary loan
market, the New England region, suffered from a weak economic environment. The
economic climate contributed to a decline in real estate values and adversely
affected the net worth of certain borrowing customers of the Company's
subsidiary banks and the Company's collateral position with respect to certain
loans. The New England regional economy improved somewhat in 1994, which aided
the Company's loan workout efforts in 1994. The New England region, however,
still lags behind the economic growth experienced in the other regions of the
United States. Most of the Company's loans outstanding are from borrowers
located in Eastern Massachusetts and a substantial portion of these loans are
various types of real estate loans; still others have real estate as additional
collateral. At year-end 1994, the Company's exposure to credit risk from
borrowers who had real estate as their primary collateral support, included $426
million of loans. In addition to the foregoing, during the second half of 1994
and early 1995 prevailing interest rates rose substantially. The current
increase and further increases, if any, in the Base Lending Rate used by the
Company's subsidiary banks may have an adverse effect upon the ability of some
borrowers to repay their loans. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" below.
GENERAL
No significant portion of the loans or deposits of any of the Company's
banking subsidiaries results from one or several accounts, the loss of which
would materially affect its business. The Company does not experience
significant seasonal fluctuations in its business.
EMPLOYEES
As of December 31, 1994, the Company and its subsidiaries employed
approximately 870 full-time plus part-time people.
ITEM 2. PROPERTIES
USTrust owns a twelve-story brick and steel building constructed in 1915
and located at Government Center, 30-40 Court Street, Boston, Massachusetts. The
banking premises of USTrust, USTC and the offices of the Company and all of its
nonbanking subsidiaries utilize 99.9% of the 89,014 square feet in the building
and the remaining space is leased as offices to one tenant.
The Company currently leases a three-story brick office building of
approximately 37,900 square feet as well as 29,003 square feet in a
recently-constructed adjacent office tower at 141 Portland Street, Cambridge,
Massachusetts, all of which is used by USTrust and UST Data Services Corp.
USTrust also leases approximately 26,080 square feet of space at 25-55 Court
Street, Boston, which is used primarily to house staff
9
12
support services. In 1991, USTC sold the 25-55 Court Street, Boston, building to
a third party, unaffiliated with the Company.
USTrust owns six branch offices in Boston, Milton Village, Norwood,
Randolph, Stoughton and Swampscott, Massachusetts, all of which were acquired by
the Company in 1991 from the Resolution Trust Corporation as part of the
acquisition and assumption of certain assets, deposits and branches of Home
Owners Savings Bank F.S.B. USTrust also owns four branch offices in Canton,
Gloucester, Milton, and Natick, Massachusetts. UST/Conn owns one branch office
in Huntington, Connecticut. UST/Conn also owns a former branch building in
Shelton, Connecticut, which it expects to sell to a non-affiliated third party
in 1995. The remaining branch offices of the Company occupy leased premises.
The 1995 annual leasehold commitment for all premises leased by the
Company's subsidiaries totals approximately $3,955,000, not including expenses
related to tax or maintenance escalation provisions. See Note 14 to the
Company's Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of operations, the Company and its subsidiaries
become defendants in a variety of judiciary and administrative proceedings. In
the opinion of management, however, there is no proceeding pending, or to the
knowledge of management threatened, which is likely to result in a material
adverse change in the financial condition or results of operations of the
Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--NONE--
10
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The common stock of the Company is traded over the counter and its price is
quoted on the NASDAQ National Market System. During the period January 1, 1993,
to December 31, 1994, the range of bid prices was as follows:
1994 1993
-------------------------- --------------------------
LOWEST BID HIGHEST BID LOWEST BID HIGHEST BID
---------- ----------- ---------- -----------
1st quarter......................... 10 1/2 13 1/2 8 3/4 12 1/2
2nd quarter......................... 12 5/8 14 3/8 7 3/8 9 1/2
3rd quarter......................... 11 1/4 13 1/2 7 1/2 10 7/8
4th quarter......................... 8 3/4 11 3/4 10 1/4 12
Such over-the-counter market quotations reflect inter-dealer prices,
without retail markup, markdown or commission and may not represent actual
transactions.
The number of holders of record of common stock of the Company was 2,059 at
January 31,1995.
There were no dividends declared during 1994 and 1993.
Future dividends will depend upon the financial condition and earnings of
the Company and its subsidiaries, their need for funds and other factors,
including applicable government regulations and regulatory consent. See "Recent
Developments -- Bank Regulatory Agreements and Orders" in Part 1, Item 1 above,
and the discussion of capital in Management's Discussion and Analysis of
Financial Condition and Results of Operations below.
In connection with the $20 million senior debt private placement
transaction of August 1986 of which $8 million currently remains outstanding
(see Note 8 to the Notes to Consolidated Financial Statements of the Company),
the Company agreed not to make dividend payments in excess of 60% of cumulative
net earnings since December 31, 1985 plus $7 million. The Company does not
expect that this provision will adversely affect its ability to pay future
dividends which it deems appropriate.
11
14
ITEM 6. SELECTED FINANCIAL DATA
UST CORP.
CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA(1)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Earnings Data:
Interest income............... $ 132,312 $ 140,628 $ 157,024 $ 221,493 $ 272,949
Interest expense.............. 40,213 47,944 68,970 134,640 181,850
---------- ---------- ---------- ---------- ----------
Net interest income........... 92,099 92,684 88,054 86,853 91,099
Provision for possible loan
losses...................... 23,125 64,258 41,893 53,712 43,663
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for possible loan
losses...................... 68,974 28,426 46,161 33,141 47,436
Noninterest income............ 30,334 36,723 42,359 43,636 25,575
Noninterest expense........... 92,511 97,510 96,172 89,322 72,812
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes....................... 6,797 (32,361) (7,652) (12,545) 199
---------- ---------- ---------- ---------- ----------
Applicable income taxes
(benefit)................... 2,051 (12,261) (2,931) (4,598) (1,667)
---------- ---------- ---------- ---------- ----------
Net income (loss)............. $ 4,746 $ (20,100) $ (4,721) $ (7,947) $ 1,866
========= ========= ========= ========= =========
Per share data(2):
Net income (loss)............. $ .27 $ (1.31) $ (.34) $ (.58) $ .14
Cash dividends declared....... -- -- -- $ .15 $ .60
Weighted average common shares
outstanding...................... 17,780,032 15,362,251 13,984,190 13,793,617 13,564,369
Consolidated Average Balances(4):
Total assets.................. $1,881,429 $2,042,567 $2,270,874 $2,696,992 $2,864,771
Loans......................... 1,274,090 1,422,497 1,570,206 1,776,261 1,865,423
Deposits...................... 1,527,113 1,635,178 1,826,738 2,172,984 2,081,321
Funds borrowed(3)............. 192,115 244,775 268,519 350,367 560,936
Stockholders' investment...... 152,256 143,149 147,440 150,193 159,559
Consolidated Ratios:
Net income (loss) to average
total assets................ .25% (.98)% (.21)% (.30)% .07%
Net income (loss) to average
stockholders' investment.... 3.12 (14.04) (3.20) (5.29) 1.17
Average stockholders'
investment to average total
assets...................... 8.09 7.01 6.49 5.57 5.57
Net chargeoffs to average
loans....................... 1.86 3.64 2.67 2.23 1.41
Reserve for possible loan
losses to period end
loans....................... 4.89 4.67 3.36 2.99 1.90
Average earning assets to
average total assets........ 93.45 92.40 90.62 90.65 90.95
Not
Dividend Payout Ratio......... meaningful 428.57
---------------
<FN>
(1) This information should be read in connection with Management's Discussion
and Analysis of Financial Condition and Results of Operations on pages 13 to
29 of this Form 10-K with particular reference to Credit Quality and Reserve
for Possible Loan Losses.
(2) The Company declared a 5% stock dividend to holders of record on September
30, 1991. All prior share and per share data have been adjusted to reflect
this transaction.
(3) Includes federal funds purchased, repurchase agreements, short-term and
other borrowings.
(4) Average balances do not include the effect of fair value adjustments under
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities".
12
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AT DECEMBER 31, 1994
INTRODUCTION
During 1994 the Company continued its emphasis on the resolution of problem
assets. As a result, the Company successfully reduced the level of substandard
loans, as measured by the Company's internal risk rating system, by over 50
percent from a level of $255 million at December 31, 1993 to $115 million at
December 31, 1994. See "Credit Quality and Reserve for Possible Loan Losses" on
page 20 of this Form 10-K for a further discussion.
During the period 1990 to 1993, the Company's primary loan market, the New
England region, suffered from a weak economic environment. The economic climate
contributed to a decline in real estate values and adversely affected the net
worth of certain borrowing customers of the Company's subsidiary banks and the
Company's collateral position with respect to certain loans. The New England
regional economy improved throughout 1994 which has aided loan workout efforts.
The region, however, still lags behind the economic growth experienced
nationally.
The local economic factors and the Company's efforts to reduce
nonperforming assets and substandard loans continued to influence the Company's
financial results for 1994; particularly with regard to the provision for
possible loan losses and the high level of expenses associated with foreclosed
assets and loan workout.
This discussion should be read in conjunction with the financial
statements, notes, and tables included elsewhere in this Form 10-K. Certain
amounts reported for prior periods have been reclassified to conform with the
1994 presentation.
ASSETS
Total assets at December 31, 1994 were $1.80 billion compared with $2.04
billion a year ago. The Company's loan portfolio decreased 5 percent, or $72.7
million, to $1.27 billion. The decrease reflects a combination of normal
amortization and increased competition for the small-to-middle market credits.
Another factor in the reduction of the loan portfolio was the outflow of problem
loans through collection, chargeoff or third-party refinancing. See "Credit
Quality and Reserve for Possible Loan Losses" herein.
Presently, the Company anticipates a modest growth in earning assets in the
coming year from a combination of business development efforts to expand the
commercial and retail loan portfolios moderated by the continued reduction of
existing problem assets. Funding for asset growth will be provided by deposit
growth achieved through more aggressive pricing and deposit product promotion.
13
16
Loans
The following table presents the composition of the loan portfolio:
DECEMBER 31,
--------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial and financial(1).......... $ 702,134 $ 757,638 $ 858,465 $ 870,134 $1,000,174
Real estate:
Construction....................... 13,109 35,295 50,427 71,264 107,600
Developer, investor and land(1).... 259,065 315,700 359,666 462,133 491,819
Consumer:
Residential mortgage loans......... 89,551 84,846 56,364 51,395 43,275
Home equity loans.................. 64,068 63,188 67,010 67,179 67,709
Indirect automobile installment.... 90,255 31,848 42,786 83,039 104,861
Other consumer..................... 21,964 23,944 26,914 40,026 45,474
Lease financing(2)................... 25,945 26,348 28,312 31,561 30,833
---------- ---------- ---------- ---------- ----------
Total loans................ 1,266,091 1,338,807 1,489,944 1,676,731 1,891,745
Less:
Reserve for possible loan losses... 61,945 62,547 50,126 50,100 36,008
---------- ---------- ---------- ---------- ----------
$1,204,146 $1,276,260 $1,439,818 $1,626,631 $1,855,737
========= ========= ========= ========= =========
---------------
<FN>
(1) Certain loans for which the principal source of repayment is not real estate
collateral have been classified as commercial and financial for the 1992
through 1994 presentations. For 1991 and prior years these loans were
included in the Real Estate category. Information is not readily available
to reclassify loans for these years.
(2) Lease financing receivables have been included in loans beginning in 1994.
Prior years have been reclassified.
Indirect automobile installment loans represent loans purchased without
recourse from automobile dealers. Automobile loans made directly to consumers
are not significant and are included with other consumer loans.
As a result of a 1990 transaction with the Resolution Trust Corporation
("RTC") wherein the Company purchased certain assets and assumed certain deposit
liabilities of a failed savings and loan institution, Home Owners Federal
Savings Bank F.S.B., the Company had $513.6 million of loans held for sale at
December 31, 1990, and, therefore, not included in the above table. All of these
loans were repurchased by the RTC in 1991.
Loan Maturity Distribution
The following table reflects the maturity and interest sensitivity of
commercial and financial, and real estate loans, at December 31, 1994:
AFTER 1 YEAR
1 YEAR OR LESS THROUGH 5 YEARS AFTER 5 YEARS TOTAL
-------------- --------------- ------------- ---------
(DOLLARS IN THOUSANDS)
Commercial and financial................ $388,750 $ 245,973 $67,411 $ 702,134
Real estate:
Construction....................... 4,559 6,290 2,260 13,109
Developer, investor and land....... 71,113 160,186 27,766 259,065
-------------- --------------- ------------- ---------
$464,422 $ 412,449 $97,437 $ 974,308
========== =========== ========== ========
Interest sensitivity of above loans;
With predetermined interest
rates............................ $ 75,829 $ 120,852 $56,403 $ 253,084
With floating interest rates....... 388,593 291,597 41,034 721,224
-------------- --------------- ------------- ---------
$464,422 $ 412,449 $97,437 $ 974,308
========== =========== ========== ========
The Company does not have an automatic rollover (renewal) policy for
maturing loans. Renewal requests are reviewed and approved in substantially the
same manner as applications by new customers for extensions
14
17
of credit. Additionally, any renewal of a loan rated Substandard or lower in the
Company's risk rating profile, irrespective of size, requires Senior Lending
Management and Board of Directors approval.
Securities
Securities decreased $72.3 million since year-end 1993 to $401.6 million at
December 31, 1994, reflecting the maturity of short-term U. S. Treasury and
Agency securities. At December 31, 1994, securities were principally comprised
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 No. 115"), "Accounting for Certain Investments in Debt
and Equity Securities," issued by the Financial Accounting Standards Board. The
Statement addresses the accounting and reporting for debt and equity securities
that have readily determinable market values. According to SFAS No. 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. Refer to Note 1 to the Notes to Consolidated Financial
Statements of this Form 10-K for a further discussion on SFAS No. 115. At
December 31, 1994, the Company's portfolio consisted of $.1 million of
securities held-to-maturity and $401.5 million available-for-sale. At December
31, 1993, all securities were classified in the available-for-sale category. The
application of SFAS No. 115 resulted in a net decrease of $26.9 million to
stockholders' investment in 1994, representing the change from an unrealized
gain of $3.3 million after tax at December 31, 1993 to an unrealized loss of
$23.6 million after tax at December 31, 1994. In light of the size of the
unrealized loss and its current level of taxable income, the Company concluded
that full recognition of the deferred tax amount was not appropriate and as such
limited the amount of the recorded benefit to $5.4 million at December 31, 1994.
The decline in market value reflects the rapid increase in interest rates and
corresponding decline in market prices for bonds, which occurred throughout
1994.
The Company has a policy of purchasing securities primarily rated A or
better by Moody's Investors Services and in U.S. Government securities. Due to
the Tax Reform Act of 1986, and the resulting reduction in their tax-exempt
nature, the Company decided to forego major new investments in its tax-exempt
portfolio. The following table sets forth the book value of the securities owned
by the Company. Data presented for 1994 and 1993 includes securities
available-for-sale at fair value of $401.5 million and $473.9 million,
respectively. Data presented for 1992 includes both the investment portfolio and
securities held for sale.
DECEMBER 31,
------------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage-backed securities..................................... $195,009 $263,435 $307,014
U.S. Treasury securities and securities of other
U.S. Government agencies and corporations.................... 142,414 129,703 74,225
Obligations of states and political subdivisions(1)............ 3,593 3,887 5,181
Other securities............................................... 60,558 76,884 90,345
-------- -------- --------
Total................................................ $401,574 $473,909 $476,765
======== ======== ========
---------------
<FN>
(1) Non-taxable
15
18
The following table includes securities available-for-sale with their
maturities at December 31, 1994, and the approximate weighted tax equivalent
yields (at the statutory federal tax rate of 34%). Mortgage-backed securities
are shown at or based on their final maturity but are expected to have shorter
average lives. Yields presented in this table have been computed using the
amortized cost of the securities.
SECURITIES MATURING IN
-----------------------------------------------------------------------------------------------
ONE YEAR 10 YRS. OR MORE EQUITY
OR LESS 1-YR. THRU 5 5-YRS. THRU 10 SECURITIES TOTAL
-------------- --------------- -------------- --------------- -------------- --------
BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE
------- ----- -------- ----- ------- ----- -------- ----- ------- ----- --------
(DOLLARS IN THOUSANDS)
Available-for-sale:
Mortgage-backed securities.... $25,967 7.47 % $169,042 6.47 % $195,009
US Treasury securities and
securities of other US
Government agencies and
corporations................ $17,547 3.90 % $104,183 4.80 % 20,684 5.48 % 142,414
Obligations of states and
political subdivisions...... 1,300 5.66 % 824 5.94 % 1,369 6.34 % 3,493
Other securities.............. 5,077 5.74 % 53,564 7.09 % 67 4.67 % 30 5.50 % $1,820 8.40 % 60,558
------- -------- ------- -------- ------- --------
Total................... $22,624 4.31 % $159,047 5.58 % $47,542 6.63 % $170,441 6.47 % $1,820 8.40 % $401,474
======= ======== ======= ======== ======= ========
Held-to-maturity:
Obligations of states and
political subdivisions........ 100 7.30 % 100
-------- --------
Total................... $ 100 $ 100
======== ========
At December 31, 1994 the Company owned the following corporate notes, whose
aggregate fair value was in excess of 10% of stockholders' investment.
AGGREGATE
MARKET VALUE
----------------------
(DOLLARS IN THOUSANDS)
Ford Motor Credit Corp.................................... $ 18,677
General Motors Acceptance Corp............................ 19,543
Sears, Roebuck Medium Term Notes.......................... 20,051
These securities are unsecured corporate notes of investment grade. They
carry the normal credit risk associated with such instruments.
All securities carry interest rate risk. Additionally, mortgage-backed
securities carry prepayment risk. See Note 1 to the Notes to Consolidated
Financial Statements, "Summary of Significant Accounting Policies" on page 36 of
this Form 10-K for a discussion of prepayment risk.
LIQUIDITY AND FUNDING
Liquidity involves the Company's ability to raise or gain access to funds
in order to fulfill its existing and anticipated financial obligations. It may
be provided through the maturity or sale of an entity's assets, such as loans
and securities available-for-sale, liability sources such as increased deposits
and purchased or borrowed funds, and access to the capital markets. While the
Company's security portfolio is currently classified almost entirely as
available-for-sale, the Company has no present intention or need to sell any of
its securities or existing loan portfolio, other than a nominal volume of
fixed-rate residential mortgage loans sold to investors as they are originated.
At December 31, 1994, liquidity, which includes excess cash, excess funds
sold and unpledged securities, totaled approximately $259 million, or 14% of
total assets, a $51 million decrease from 1993.
The funds needed to support the Company's loan and securities portfolios
are provided through a combination of commercial and retail deposits and
short-term borrowings. Total deposits decreased $150 million, or 9%, to $1.5
billion since December 31, 1993. Approximately 97% of the decline occurred in
savings and time deposits. For most of 1994, rate-conscious investors utilized
mutual funds and other nonbank
16
19
vehicles to obtain higher rates of return but began to take advantage of the
bank's competitive certificate of deposit rates by the end of the year.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents increased $2.9 million during 1994. Cash provided by operations
resulted largely from net interest income from loans and securities, less the
net difference of noninterest expense over noninterest income. Cash provided by
investing activities was due principally to the net decreases in short-term
investments, net decreases in loans through repayment, and to an excess of
proceeds from sales and maturities of securities over securities purchases. Cash
used for financing activities was primarily the result of decreases in both
demand deposits and certificates of deposit and a net decrease in short-term
borrowings.
At December 31, 1994, the parent company had $16 million in securities
available-for-sale. This balance reflects the investment of proceeds received
from 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. These
investments were reduced from $21 million to $16 million during 1994 as the
Company paid its third annual principal installment of $4 million and accrued
interest on its 8.5% Senior Notes.
For the year ended December 31, 1994, the Company received a total of $3
million in dividends from its asset management and trust subsidiary, United
States Trust Company ("USTC"). During the same period $4.9 million was
contributed to UST Bank/Connecticut ("UST/Conn") and $500 thousand was
contributed to USTrust by the Company to supplement their respective equity
capital accounts.
Deposits
The following table sets forth the remaining maturities of certificates of
deposit in the amount of $100 thousand or more at December 31, 1994:
AMOUNT IN THOUSANDS
-------------------
Less than three months.................................. $50,944
Three to six months..................................... 14,042
Six to twelve months.................................... 9,865
Over twelve months...................................... 4,522
-------
Total......................................... $79,373
==================
Short-term Borrowings
The Company's short-term borrowings consist primarily of federal funds
purchased and securities sold under agreements to repurchase. These instruments
are generally overnight funds.
DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------------- ----------------------------------------------------
WEIGHTED AVERAGE MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
BALANCE INTEREST RATE AT ANY MONTH END OUTSTANDING INTEREST RATE
-------- ---------------- ---------------- -------------- ----------------
(DOLLARS IN THOUSANDS)
Federal funds purchased:
1994............... $ 19,296 6.00% $ 35,061 $ 29,090 4.14%
1993............... 35,913 3.25 80,126 42,965 3.14
1992............... 48,984 3.13 78,519 61,607 3.58
Securities sold under agreements to repurchase:
1994............... $126,597 4.48% $155,709 $137,139 3.22%
1993............... 158,618 2.31 221,549 167,696 2.55
1992............... 132,167 2.34 228,282 174,383 2.93
INTEREST RATE RISK
Volatility in interest rates requires the Company to manage interest rate
risk which arises from differences in the timing of repricing of assets and the
liabilities. Management monitors and adjusts the difference between
interest-sensitive assets and interest-sensitive liabilities ("GAP" position)
within various
17
20
time frames. An institution with more assets repricing than liabilities within a
given time frame is considered asset sensitive ("positive GAP") and in time
frames with more liabilities repricing than assets it is liability sensitive
("negative GAP"). Within GAP limits established by the Board of Directors, the
Company seeks to balance the objective of insulating the net interest margin
from rate exposure with that of taking advantage of anticipated changes in rates
in order to enhance income. The Company's policy is to limit its one-year
cumulative GAP position to 2.5 times equity, presently equal to approximately
18% of total assets. The Company manages its interest rate GAP primarily by
lengthening or shortening the maturity structure of the Company's securities
portfolio.
The Company's GAP presentation may not reflect the degrees to which
interest-earning assets and core deposit costs respond to changes in market
interest rates. The Company's rate-sensitive assets consist primarily of loans
tied to the prime rate. As interest rates rose during 1994, the prime rate and,
therefore, the Company's yield on earning assets increased faster than the rate
paid on interest-bearing liabilities.
The following table summarizes the Company's GAP position at December 31,
1994. The majority of loans are included in 0-30 days as they reprice in
response to changes in the interest rate environment. Interest-bearing deposits
are classified according to their expected interest rate sensitivity. Actual
sensitivity of these deposits is reviewed periodically and adjustments are made
in the Company's GAP analysis that management deems appropriate. Securities and
noninterest-bearing demand deposits are categorized according to their expected
lives based on published industry prepayment estimates in the case of securities
and current management estimates for demand deposits. Securities are evaluated
in conjunction with the Company's asset/liability management strategy and may be
purchased or sold in response to expected or actual changes in interest rates,
prepayment risk, loan growth and similar factors. The reserve for possible loan
losses is included in the "Over 1 Year" category of loans. At December 31, 1994,
the one-year cumulative GAP position was slightly positive at $50 million, or
approximately 3% of total assets.
During the fourth quarter of 1994, management reclassified certain deposit
liabilities from 0-30 days to periods greater than 30 days. The effect of this
reclassification was an increase in cumulative GAP and higher percentages of
total assets for all periods presented.
INTEREST SENSITIVITY PERIODS
-------------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- ------
(DOLLARS IN MILLIONS)
Loans, net of reserve...................... $ 812 $ 23 $ 83 $ 286 $1,204
Excess funds and other..................... 10 10
Securities................................. 1 5 18 378 402
Other assets............................... 5 182 187
----- ---- ----- ----- ------
Total assets..................... $ 823 $ 28 $ 106 $ 846 $1,803
----- ---- ----- ----- ======
Interest-bearing deposits.................. $ 487 $ 59 $ 185 $ 388 $1,119
Borrowed funds............................. 159 10 169
Noninterest-bearing demand deposits........ 17 355 372
Other liabilities and Stockholders'
equity................................... 143 143
----- ---- ----- ----- ------
Total liabilities and equity..... $ 663 $ 59 $ 185 $ 896 $1,803
----- ---- ----- ----- ======
GAP for period............................. $ 160 $(31) $ (79) $ (50)
===== ---- ----- ----- ------
Cumulative GAP............................. $129 $ 50 $ 0
===== ===== =====
As a percent of total assets............... 8.87% 7.15% 2.77%
CAPITAL
There are three capital requirements which banks and bank holding companies
must meet. Two requirements take into consideration risks inherent in assets for
both on-balance and off-balance sheet items on a risk weighted basis
("risk-based assets"). Risk weightings are as determined by banking regulators
for the industry as a whole. Under these requirements, the Company must meet
minimum Tier 1 and Total risk-based capital ratios (capital, as defined in the
regulations, divided by risk-based assets) of 4% and 8%,
18
21
respectively. Tier 1 capital is essentially shareholders' investment, net of
intangible assets and Tier 2 capital is the allowable portion of the loan loss
reserve (as defined) and discounted subordinated debt. Total capital is the
combination of Tier 1 and Tier 2. The third requirement is a leverage capital
ratio, defined as Tier 1 capital divided by total average assets, net of
intangibles. All but the most highly-rated banks are required to maintain a
minimum of 4%. While the Company has not been notified of a specific requirement
above the minimum, two of the Company's banking subsidiaries are required under
regulatory agreements to maintain, and in fact have, over 6% Tier 1 leverage
capital. Those two banking subsidiaries comprise almost all of the consolidated
assets of the Company. See discussion below concerning capital requirements for
the Company and its banking subsidiaries resulting from regulatory agreements.
At December 31, 1994 and 1993, the Company's consolidated risk-based assets
were $1.52 billion and $1.64 billion, respectively. The capital ratios and
regulatory minimum requirements applicable to the Company were:
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN MILLIONS)
Tier 1 capital:
Actual........................................... $149.7 9.82% $141.7 8.68%
Minimum required................................. 61.0 4.00% 65.3 4.00%
Total (Tier 1 and Tier 2) capital:
Actual........................................... 169.5 11.45% 164.5 10.35%
Minimum required................................. 118.5 8.00% 130.6 8.00%
Tier 1 leverage capital:.............................. $149.7 8.27% $141.7 7.06%
Capital ratios have been calculated consistent with regulatory policy which
excludes the impact of SFAS No. 115 and the recording of an unrealized gain/loss
on securities available-for-sale. However, as required, any net unrealized loss
on marketable equity securities has been deducted from Tier 1 capital.
Effective August 3, 1992, UST Corp. entered into a written agreement with
the FRB-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 System, 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
consolidated ratios meet the required minimums.
Additionally, per this agreement, 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 in
agreements with their primary regulators have agreed to refrain from
transferring funds in the form of dividends to the Company without prior
regulatory approval. See "Recent Developments -- Bank Regulatory Agreements and
Orders," page 1. The FDIC and Massachusetts Commissioner terminated and lifted
the Consent Agreement and Order with USTC in February 1994; however, USTC has
agreed to continue to request regulatory consent prior to the payment of
dividends. As previously mentioned in this Form 10-K, regulatory approval was
obtained for dividends to the Company of $3 million from USTC and the Company's
capital contribution of $4.9 million to UST/Conn and $500 thousand to USTrust.
The Tier 1 leverage capital ratios and regulatory minimum requirements for
the Company's subsidiary banks at December 31, 1994 and 1993 were:
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------------- -------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------------- ----------------- ----------------- -----------------
MINIMUM MINIMUM MINIMUM MINIMUM
ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
USTrust............... $129.2 $102.6 7.55 % 6.00% $122.7 $113.4 6.49 % 6.00%
USTC.................. 4.3 .7 39.46 % n/a 2.7 .7 23.75 % 6.00%
UST/Conn.............. 6.7 6.3 6.40 % 6.00% 7.2 7.0 6.21 % 6.00%
19
22
In February 1992, the Company's two Massachusetts-based banking
subsidiaries, USTC and USTrust, each entered into a Consent Agreement and Order
with the FDIC and the 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. In February 1994, the FDIC
and Massachusetts Commissioner terminated and lifted the Consent Agreement and
Order with USTC. Since June 1991, the Company's Connecticut-based banking
subsidiary, 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, November 1993 and July 1994 and requires UST/Conn to
maintain a 6% Tier 1 leverage capital ratio.
Recent amendments to risk-based capital guidelines will affect the amount
of deferred tax assets that may be included in Tier 1 capital for risk-based and
leverage capital purposes. Under the new rule, which becomes effective April 1,
1995, deferred tax assets would be limited to the amount that an institution
expects to realize within one year, or 10% of Tier 1 capital, whichever is less.
The Company's consolidated Tier 1, Total risk-based capital and leverage capital
ratios at December 31, 1994 would be unaffected by this new regulation. The
revised regulation would have an insignificant effect on the Tier 1 leverage
capital ratios of USTrust and USTC. Earlier this year UST/Conn's FDIC and state
regulators indicated that the bank should be using the more stringent
calculation which the December 31, 1994 numbers above reflect.
The Company and each of its subsidiary banks are currently in compliance
with their respective capital requirements under these regulatory agreements.
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES
In 1993 a strategy was adopted which recognized that many troubled credit
situations will need to be handled in an expeditious manner 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, the company recorded a $64.3 million provision for possible loan losses
in that year. Included in that amount was a special provision of $30 million
recorded in the second quarter of 1993. This special provision was management's
estimate of the additional losses to be incurred from the strategic change
referred to above, the continued sluggish economic climate and losses to be
recorded during the remainder of 1993 on these and other credits as a result of
recent events or new facts.
In 1994 the Company continued with its strategy to reduce the level of
problem credits while maintaining its reserve for possible loan losses position.
Net chargeoffs for the year were $23.7 million which were almost entirely
matched by provisions to the loan loss reserve. As a result, the reserve for
possible loan losses decreased only slightly to $61.9 million and equaled 4.9%
of loans outstanding, 126% of nonaccrual loans and 73% of total nonperforming
assets compared with 4.7%, 127% and 56%, respectively, a year ago. Total
nonperforming assets were reduced $25.9 million to $84.9 million, primarily as a
result of a lower level of troubled debt restructurings.
Loans classified as Substandard, Doubtful or Loss, as determined by the
Company in its internal credit risk rating profile, were $115 million at
December 31, 1994 compared with $255 million a year ago, a decrease of $140
million. Loans classified as Substandard and Doubtful were $96 million and $19
million, respectively, at year-end 1994 and no loans were classified as Loss.
The level of loans in these categories and their total are an important factor
in the Company's analysis of the adequacy of its reserve for possible loan
losses. Under the Company's definition, Substandard loans are characterized by
the distinct possibility that some loss will be sustained if the credit
deficiencies are not corrected. The Substandard classification, however, does
not necessarily imply ultimate loss for each individual loan so classified.
Loans classified as Doubtful have all the weaknesses inherent in Substandard
loans with the added characteristic that the weaknesses make collection of 100
percent of the assets questionable and improbable.
As of year end 1994, approximately 70 percent of loans classified as
Substandard or Doubtful were collateralized with real estate, and the remainder
were collateralized with accounts receivable, inventory, equipment and other
business assets. Of the loans secured by real estate, approximately 55 percent
were collateralized by commercial real estate development, approximately 30
percent by owner-occupied commer-
20
23
cial properties and approximately 10 percent by residential real estate. The
remaining loans were collateralized by real estate under construction and raw
land.
Nonperforming Assets
The following table displays the Company's total nonperforming assets and
measures performance regarding key indicators of asset quality:
DECEMBER 31,
---------------------------------------------------
1994 1993 1992 1991 1990
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Nonperforming assets:
Nonaccruals:(1)
Commercial and financial................ $33,814 $ 25,703 $ 51,768 $ 42,221 $ 15,724
Real estate:
Construction.......................... 551 1,025 16,558 12,830 13,570
Developer, investor and land.......... 11,887 19,210 15,256 27,726 34,413
Consumer:
Residential........................... 2,281 2,558 986 2,807 2,039
Home equity loans..................... 656 190 1,240 2,625 1,147
Indirect automobile installment....... 134 40 271 945 1,402
Other consumer........................ 29 540 550 246 1,085
Lease financing.........................
------- -------- -------- -------- --------
Total nonaccrual........................... 49,352 49,266 86,629 89,400 69,380
Accruing loans 90 days or more past due.... 1,409 557 1,091 8,554 26,550
Other real estate owned (OREO), net(2)..... 18,407 19,468 43,154 51,511 30,524
Restructured loans(1)(3)................... 15,757 41,477 44,899 36,311 4,108
------- -------- -------- -------- --------
Total nonperforming assets................... $84,925 $110,768 $175,773 $185,776 $130,562
======= ======== ======== ======== ========
Reserve for possible loan losses............. $61,945 $ 62,547 $ 50,126 $ 50,100 $ 36,008
Net chargeoffs............................... $23,727 $ 51,837 $ 41,867 $ 39,620 $ 26,372
OREO reserve(4).............................. $ 3,187 $ 6,553 $ 750
Ratios:
Reserve to nonaccrual loans.................. 125.5% 127.0% 57.9% 56.0% 51.9%
Reserve to total of nonaccrual loans,
accruing loans 90 days or more past due
and restructured loans..................... 93.1% 68.5% 37.8% 37.3% 36.0%
Reserve to period-end loans.................. 4.9% 4.7% 3.4% 3.0% 1.9%
Nonaccrual loans to period-end loans......... 3.9% 3.7% 5.8% 5.3% 3.7%
Nonaccrual loans and accruing loans over 90
days past due to period-end loans.......... 4.0% 3.7% 5.9% 5.8% 5.1%
Nonperforming assets to period-end loans and
OREO....................................... 6.6% 8.2% 11.5% 10.7% 6.8%
Nonperforming assets to total assets......... 4.7% 5.4% 8.1% 7.9% 4.3%
Net chargeoffs to average loans.............. 1.9% 3.7% 2.7% 2.3% 1.4%
OREO reserve to OREO(4)...................... 14.8% 25.2% 1.7%
---------------
(1) The amount of interest on December 31, 1994 nonaccrual and restructured
loans that would have been recorded had the loans been paying in accordance
with their original terms during 1994 was approximately $6,259,000. The
amount of interest income on these loans included in net income in 1994 was
approximately $3,188,000.
(2) Other real estate owned ("OREO") represents assets to which title to the
collateral has been taken through foreclosure or in-substance. Other real
estate owned is recorded at the lower of the recorded investment in the loan
or fair value minus estimated costs to sell ("net realizable value"). Prior
to 1992, other real estate owned was recorded at the lower of recorded
investment in the loan or fair value. Included in OREO are automobiles owned
which are vehicles repossessed for reason of nonpayment. The balance is
stated at the lower of the recorded investment in the loan or net realizable
value.
(3) Restructured loans are those where interest rates and/or principal
repayments have been restructured to defer or reduce payment as a result of
financial difficulties of the borrower.
(4) Prior to December 1992, when the Company adopted AICPA Statement of Position
92-3, OREO was reduced to its fair value by direct charges to the asset.
Since then, the Company, like other bank holding companies, has used
reserves to indicate the net realizable value of its OREO.
21
24
At December 31, 1994, in addition to loans on nonaccrual, loans over 90
days and accruing, troubled debt restructurings and other real estate owned, $67
million of accruing commercial and real estate loans, of which, 99 percent were
current, have nonetheless been classified as Substandard in the Company's
internal risk rating profile. This compares with $206 million a year ago.
Also, at December 31, 1994 loans rated Special Mention in the Company's
internal risk rating profile amounted to $16 million, of which 96 percent were
current. This compares with $30 million a year ago. Special Mention loans, as
defined by the Company, have potential weaknesses that deserve management's
close attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the assets. There were no loans
classified Doubtful that were not disclosed in the above table.
Adverse economic conditions in the future could result in further
deterioration of the Company's loan portfolio and the value of its OREO
portfolio. Such conditions would also likely result in increases in
delinquencies, nonperforming assets, restructured loans, and OREO writedowns
which individually or collectively could have a material negative effect on
future earnings through reduced interest income, increased provisions for
possible loan losses, and higher costs to collect loans and maintain repossessed
collateral.
CREDIT QUALITY MONITORING
Credit quality within the commercial and commercial real estate loan
portfolios of each subsidiary is quantified by a corporate credit rating system
designed to parallel regulatory criteria and categories of loan risk. Lenders
monitor their loans to ensure appropriate rating assignments are made on a
timely basis. Risk ratings and overall loan quality are also assessed on a
regular basis by an independent Loan Review Department which reports to the
Company's Board of Directors and its Asset Quality Committee. Loan Review
personnel conduct ongoing portfolio trend analyses and individual credit reviews
to evaluate loan risk and compliance with corporate lending policies. Results
and recommendations from this process provide senior management and the Board of
Directors with independent information on loan portfolio condition.
Installment and credit card loan quality is evaluated on the basis of
delinquent data due to the large number of such loans and relatively small size
of individual credits. Historical trend analysis reports are reviewed on a
monthly basis by senior lending officers and the Company's Board of Directors.
All past due loans, nonaccrual loans, and troubled debt restructurings are
reviewed at least quarterly by Loan Review Department management and Senior
Credit Committee whose membership includes the Chief Executive Officer of the
Company and the most senior lending officers in the major lending and
credit-related divisions. Loans are placed on nonaccrual 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.
Greater levels of Board and Management attention are being focused on asset
quality. In 1992 an Asset Quality Committee of the Company's Board of Directors
was established which monitors asset quality trends, reviews the loan loss
reserve analyses monthly and actively monitors the large credit exposures. In
1994 this committee began reporting to the Audit Committee. Also in 1992 a new
loan administration function, the Credit Risk Control Department, was assigned
the responsibility of ensuring compliance with the lending policies, procedures
and administrative guidelines of the commercial lending portfolio. The
Department head reports to the Chief Executive Officer. An appraisal review
function was established within the group to review third-party appraisals for
adherence to Federal requirements and to establish policies relating to
collateral appraisal.
In a further step to increase the level of control over the troubled loan
portfolio and in order to focus specialized expertise, a Workout Department was
established during 1992. Most nonaccrual and other troubled loans are handled by
this group or in the Commercial Real Estate Department which is under the
22
25
direction of the Workout Department management thereby allowing Commercial Loan
officers to concentrate their efforts on developing new lending relationships.
In 1993 staffing was increased in both the Loan Review and the Credit Risk
Control Departments. Furthermore, a number of systems changes were implemented
in 1993 and 1994 to improve control over credit administration. Smaller
commercial loans were transferred to the Installment Lending Department where
they can be more efficiently monitored.
RESERVE FOR POSSIBLE LOAN LOSSES
The Company maintains a reserve for possible loan losses to absorb future
chargeoffs of loans and leases in the existing portfolio. The reserve is
increased when a loan loss provision is recorded in the income statement. When a
loan, or portion thereof, is considered uncollectible, it is charged against the
reserve. Recoveries on amounts previously charged-off are added to the reserve
when collected. Adequacy of the reserve for possible loan losses is determined
using a consistent, systematic methodology which analyzes the size and risk of
the loan and lease portfolio on a monthly basis. Factors in this analysis
include historical loss experience and asset quality, as reflected by
delinquency trends, nonaccrual and restructured loans and the Company's credit
risk rating profile. The Company's credit risk rating profile uses categories of
risk based on those currently utilized by its primary regulators. Accuracy of
assigned ratings is monitored by an ongoing evaluation by the Company's Loan
Review Department. Consideration is also given to the current and expected
economic conditions and in particular how such conditions affect the types of
credits in the portfolio and the market area in general. This analysis is
documented monthly using a combination of numerical, statistical and qualitative
analysis (including sensitivity tests) and a written conclusion discussing the
rationale supporting the monthly adequacy of the loan loss reserve.
No portion of the reserve is restricted to any loan or group of loans, and
the entire reserve is available to absorb future realized losses. Realized
losses and the timing thereof may vary from current estimates. An allocation of
the loan loss reserve and ratio of loans in each category to total loans at
December 31, 1990 through 1994 is presented below:
DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1994 1993 1992 1991
----------------------- ------------------------ ------------------------ ------------------------
LOANS AS LOANS AS LOANS AS LOANS AS
A PERCENT A PERCENT A PERCENT A PERCENT
ALLOCATION OF TOTAL ALLOCATION OF TOTAL ALLOCATION OF TOTAL ALLOCATION OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
Amount of loan loss
reserve:
Commercial and
financial............ $ 29,471 55.5% $36,874 56.6% $25,583 57.6% $23,625 51.7%
Real Estate:
Construction....... 515 1.0% 1,601 2.6% 1,399 3.4% 1,790 4.3%
Developer, investor
and land......... 8,256 20.5% 11,804 23.6% 8,220 24.1% 9,847 27.6%
Consumer(1)........... 6,028 21.0% 5,470 15.2% 4,762 13.0% 5,324 14.5%
Lease financing....... 130 2.0% 132 2.0% 142 1.9% 158 1.9%
Unallocated........... 17,545 6,666 10,020 9,356
-------- ------ ------- ------ ------- ------ ------- ------
Total.......... $ 61,945 100.0% $62,547 100.0% $50,126 100.0% $50,100 100.0%
======== ====== ======= ====== ======= ======= ======= =======
1990
------------------------
LOANS AS
A PERCENT
ALLOCATION OF TOTAL
AMOUNT LOANS
----------- ----------
Amount of loan loss
reserve:
Commercial and
financial............ $17,224 52.9%
Real Estate:
Construction....... 1,716 5.7%
Developer, investor
and land......... 6,567 26.0%
Consumer(1)........... 7,954 13.8%
Lease financing....... 154 1.6%
Unallocated........... 2,393
------- ------
Total.......... $36,008 100.0%
======= ======
---------------
<FN>
(1) Consumer loans include indirect automobile installment loans, residential
mortgages and home equity lines of credit, credit cards, and check credit
loans.
23
26
A summary of loan loss experience for the years ended December 31, 1990
through 1994 is presented below:
DECEMBER 31,
--------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Reserve for loan losses at beginning
of period.......................... $ 62,547 $ 50,126 $ 50,100 $ 36,008 $ 18,717
---------- ---------- ---------- ---------- ----------
Chargeoffs:
Commercial and financial
loans......................... $ 15,062 29,067 24,012 17,613 19,845
Real estate:
Construction loans............ 197 1,705 924 2,242
Developer, investor and
land....................... 12,906 21,774 10,788 10,366 1,978
Consumer:
Residential mortgage loans.... 801 418 1,250 2,839 469
Home equity loans(1).......... 119 370 673
Indirect automobile
installment................ 806 1,981 2,181 5,366 3,035
Other consumer................ 237 280 3,386 2,890 2,287
Lease financing.................
---------- ---------- ---------- ---------- ----------
Total chargeoffs................ 30,128 55,595 43,214 41,316 27,614
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial and financial
loans......................... 4,319 1,628 688 735 735
Real estate:
Construction loans............ 32 24 9
Developer, investor and
land....................... 1,034 928 56
Consumer:
Residential mortgage loans.... 62 11 36 78
Home equity loans(1).......... 48 101 66
Indirect automobile
installment................ 820 1,046 219 564 285
Other consumer................ 86 20 329 263 222
Lease financing.................
---------- ---------- ---------- ---------- ----------
Total recoveries.............. 6,401 3,758 1,347 1,696 1,242
---------- ---------- ---------- ---------- ----------
Net chargeoffs....................... 23,727 51,837 41,867 39,620 26,372
Provision charged to operations...... 23,125 64,258 41,893 53,712 43,663
---------- ---------- ---------- ---------- ----------
Reserve for loan losses at end of
period............................. $ 61,945 $ 62,547 $ 50,126 $ 50,100 $ 36,008
========== ========== ========== ========== ==========
Average loans........................ $1,274,090 $1,422,497 $1,570,206 $1,776,261 $1,865,423
Ratio of net chargeoffs to average
loans.............................. 1.86% 3.64% 2.67% 2.23% 1.41%
---------------
<FN>
(1) This information is available separately for 1994, 1993 and 1992 only. Prior
to 1992 the information is included in the other consumer category.
RESULTS OF OPERATIONS
COMPARISON OF 1994 WITH 1993
For the year ended December 31, 1994, net income was $4.75 million, or
$0.27 per share, compared with a net loss of $20.1 million, or $1.31 per share
in 1993. A key factor behind 1994's positive results was a provision for
possible loan loss of $23.1 million compared with $64.3 million in 1993. In
addition, 1994 writedowns of other real estate owned were $3.8 million compared
with $16.2 million in 1993, a decrease of $12.4 million.
The Company's net interest income on a fully taxable equivalent basis
decreased slightly from $93.9 million in 1993 to $93.1 million. The decrease
reflects a lower volume of interest-earning assets offset by
24
27
an improvement in interest rate spread and margin. Spread and margin benefited
from interest rate increases throughout the year. See "Net Interest Income
Analysis" below.
A comparative analysis for return on average assets and return on average
stockholder's investment is shown below:
Return on Average Assets -- Component Analysis
YEAR ENDED
DECEMBER 31,
-----------------
1994 1993
----- -----
Net interest income................................................ 4.90% 4.54%
Provision for possible loan losses................................. (1.23) (3.15)
----- -----
Net interest income after provision for possible loan losses....... 3.67% 1.39%
Noninterest income................................................. 1.61 1.80
Noninterest expense................................................ (4.92) (4.77)
----- -----
Income (loss) before income tax.................................... .36 (1.58)
Income tax provision (benefit)..................................... .11 (.56)
----- -----
Net income (loss) before change in accounting method............... .25 (1.02)
Cumulative effect of change in method of accounting for income
taxes............................................................ .04
----- -----
Net income (loss)........................................ .25% (.98)%
===== =====
Return on Average Equity -- Component Analysis
YEAR ENDED
DECEMBER 31,
-------------------
1994 1993
------ ------
Net interest income.............................................. 60.49% 64.75%
Provision for possible loan losses............................... (15.19) (44.89)
------ ------
Net interest income after provision for possible loan losses..... 45.30% 19.86%
Noninterest income............................................... 19.92 25.65
Noninterest expense.............................................. (60.76) (68.12)
------ ------
Income (loss) before income tax.................................. 4.46 (22.61)
Income tax provision (benefit)................................... 1.34 (8.04)
------ ------
Net income (loss) before change in accounting method............. 3.12 (14.57)
Cumulative effect of change in method of accounting for income
taxes.......................................................... .53
------ ------
Net income (loss)...................................... 3.12% (14.04)%
====== ======
Net Interest Income Analysis
After a decline in yield on earning assets, principally loans, in the
fourth quarter of 1993 and early 1994, yields, driven by higher interest rates,
rose considerably throughout the remainder of the year. The result was an
improvement in yield on earning assets from 7.51 percent in 1993 to 7.58 percent
in 1994. The cost of interest-bearing liabilities, principally deposits,
remained relatively stable during 1994 until the fourth quarter when the Company
adopted more aggressive deposit pricing. The cost of interest-bearing
liabilities for the year was 2.94 percent compared with 3.13 percent in 1993.
The increased yield on earning assets, which outpaced increases in the cost of
interest-bearing liabilities, produced an improvement in interest rate spread
and margin from 4.38 percent and 4.97 percent in 1993 to 4.64 percent and 5.29
percent, respectively, in 1994. The net effect from changes in rates was an
increase in net interest income of $5.4 million.
Current spreads and margins are at historically high levels and are not
expected to continue into the future. Rates on loans and other interest-earning
assets may continue to increase; however, rates on deposits are expected to rise
at a persistent pace, and narrow the current levels of spread and margin.
25
28
Average loans outstanding during the year were $1.27 billion, a decrease of
$148 million from 1993. Average interest-bearing deposits were $1.18 billion,
$111 million below the 1993 level. The effect from changes in volume of loans,
deposits and other interest-bearing balances was a decrease in net interest
income of $6.2 million.
The following table attributes changes in interest income and interest
expense to changes in interest rates and changes in the volume of
interest-earning assets and interest-bearing liabilities for the year ended
December 31, 1994 when compared with the year ended December 31, 1993. Changes
attributable to both rate and volume are allocated on a weighted basis.
INCREASE (DECREASE) FROM YEAR ENDED
DECEMBER 31, 1993
-------------------------------------
AMOUNT DUE TO
CHANGES IN
YEAR ENDED --------------------
DECEMBER 31, 1994 TOTAL CHANGE VOLUME RATE
----------------- ------------ -------- -------
(DOLLARS IN THOUSANDS)
Interest income:
Interest and fees on loans*.... $ 104,322 $ (7,264) $(12,001) $ 4,737
Interest and dividends on
securities:
Taxable................... 26,688 (2,008) 262 (2,270)
Non-taxable*.............. 556 (263) (499) 236
Interest on excess funds and
other........................ 1,716 1,013 792 221
--------- -------- -------- -------
Total interest
income*............ 133,282 (8,522) (11,446) 2,924
--------- -------- -------- -------
Interest expense:
Interest on deposits........... 32,907 (7,393) (3,323) (4,070)
Interest on short-term
borrowings................... 6,240 1 (1,455) 1,456
Interest on other borrowings... 1,066 (339) (448) 109
--------- -------- -------- -------
Total interest
expense............ 40,213 (7,731) (5,226) (2,505)
--------- -------- -------- -------
Net interest income................. $ 93,069 $ (791) $ (6,220) $ 5,429
========= ======== ======== =======
---------------
<FN>
* Fully taxable equivalent at the Federal income tax rate of 34% and includes
applicable State taxes net of Federal benefit. The tax equivalent adjustment
on loans was approximately $.8 million and on non-taxable securities was
approximately $.2 million.
Noninterest Income
Total noninterest income was $30.3 million in 1994, a decrease of $6.4
million from 1993. Gains from the sale of securities decreased $3.3 million,
Asset Management fees decreased $1.4 million and service charges on deposit
accounts decreased $.5 million due to decline in fee-based deposit accounts as
well as higher average individual customer account balances which reduced the
amount of fees assessed. Residual income on maturing equipment leases decreased
$.8 million.
Other noninterest income of $1.4 million declined $.3 million from 1993.
Income recognized in connection with home equity loans purchased from the
Resolution Trust Corporation decreased $.4 million. These loans were originally
purchased at a substantial discount in 1991 and have returned principal on a
schedule closer to the original contractual amount. These decreases to other
noninterest income were partially offset by fees derived from sales of mutual
funds, a new product introduced in May 1994.
Noninterest Expense
Total noninterest expense decreased $5 million to $92.5 million in 1994.
Foreclosed asset and workout expense declined $13.4 million as a result of lower
writedowns of other real estate owned. Salary and employee benefits increased
$4.2 million over 1993. In 1994 salary and employee benefits includes expenses
related to severance agreements of $1 million and a $1.2 million asset
management division revenue-sharing provision (see discussion below). The
increase in salary and employee benefits also reflects the addition of a
qualified mutual fund sales staff and increases in professional staff to improve
loan administration and monitoring of
26
29
credit quality. In addition, the rise reflects normal merit raises and employee
benefit cost increases. Occupancy expenses were $.9 million higher reflecting
writedowns of $.5 million in connection with a sale of two former UST/Conn
branch buildings. FDIC deposit insurance premiums declined $.4 million as a
result of a lower level of deposits compared with 1993.
Other noninterest expense increased $3.5 million in 1994, reflecting $1
million in increased legal fees, $1 million in advertising and promotion, $.4
million in collateral appraisal fees and $.9 million in fees for consulting
services by certain former Company executives. The higher other noninterest
expense also stems from a $.8 million reduction in the Company's reserve for
litigation recorded in 1993. The increases were partially offset by a reduction
in property and casualty insurance of $.4 million.
In 1994, the Company and senior executives of USTC's Asset Management
Division negotiated the terms of employment agreements designed to maximize the
profitability and grow the assets under management of the asset management
business. The agreements, which remain subject to regulatory approval, are
designed to increase the foregoing executives' participation in the value
created in the asset management business and, in a change-in-control situation,
increase the likelihood that a prospective purchaser will retain the services of
the executives. The agreements contain revenue-sharing provisions which will
permit the asset management division to use a specified percentage of its base
revenues for the payment of expenses of the operation, including incentive
compensation. In connection therewith, the Company recorded in 1994 a
revenue-sharing provision of $1.2 million.
Income Taxes
The Company recorded income taxes of $2.1 million in 1994 compared with a
$11.5 million tax benefit in 1993. The variations in income taxes are
attributable to the level and composition of pretax income or loss. Refer to
Note 11 to the Notes to Consolidated Financial Statements of this Form 10-K for
a further discussion of income taxes.
In 1993 the Company adopted Financial Accounting Standard No. 109
"Accounting for Income Taxes." This Standard changed the accounting for deferred
income tax to the "liability method." This change, a one-time event, increased
net income by $750 thousand in January 1993 representing the cumulative effect
of adopting the new standard on the balance sheet. Refer to Note 1 to the Notes
to Consolidated Financial Statements of this Form 10-K for a further discussion
of this matter.
As of December 31, 1994, the Company had a deferred tax asset of
approximately $11.7 million, net of a valuation allowance of $6.4 million,
included in other assets which is expected to be realized against future taxable
income. Management believes that it is more likely than not that the Company
will realize the benefit of these deferred assets.
Fair Value of Financial Instruments
In December 1991, the FASB approved SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," effective for fiscal year ending December 31,
1992. The methods and assumptions used by the Company to estimate the fair value
of each class of financial instruments as of December 31, 1994 and 1993 are
disclosed in Note 17 to the Notes to Consolidated Financial Statements of this
Form 10-K. Financial instruments do not include all of the assets and
liabilities recorded on a company's balance sheet. Therefore, the aggregate fair
value amounts of the financial instruments do not represent the underlying value
of a company.
As a result of those assumptions and valuation methodologies, the estimated
fair value of Financial Instrument assets and liabilities of the Company as of
December 31, 1994 was $1.70 billion and $1.66 billion, respectively. The
estimated fair value of Financial Instrument assets and liabilities of the
Company as of December 31, 1993 was $1.92 billion and $1.89 billion,
respectively. The excess of fair value over the carrying value of Financial
Instrument assets increased slightly from a year ago. In the opinion of
management, the effect of higher interest rates on certain fair value
calculations at December 31, 1994, was more than offset by the positive effect
of lower substandard loans and resulting reduction in credit risk. The decreased
amount of excess in the valuation of Financial Instrument liabilities over their
carrying values, in the opinion of management, is attributed primarily to the
increase in interest rates. Refer to Note 17 to the Notes to Consolidated
Financial Statements of this Form 10-K for a further discussion.
27
30
COMPARISON OF 1993 WITH 1992
Net Interest Income Analysis
The following table attributes changes in interest income and interest
expense to changes in interest rates and changes in the volume of
interest-earning assets and interest-earning liabilities for the year ended
December 31, 1993 when compared with the year ended December 31, 1992. Changes
attributable to both rate and volume are allocated on a weighted basis.
INCREASE (DECREASE) FROM YEAR
ENDED
DECEMBER 31, 1992
----------------------------------
AMOUNT DUE TO
CHANGES IN
YEAR ENDED -------------------
DECEMBER 31, 1993 TOTAL CHANGE VOLUME RATE
----------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
Interest income:
Interest and fees on loans*......... $ 111,586 $(12,161) $(11,483) $ (678)
Interest and dividends on
securities:
Taxable........................ 28,696 (4,209) (1,274) (2,935)
Non-taxable*................... 819 (208) (368) 160
Income on excess funds and other.... 703 (195) (113) (82)
--------- -------- -------- --------
Total interest income*.... 141,804 (16,773) (13,238) (3,535)
--------- -------- -------- --------
Interest expense:
Interest on deposits................ 40,300 (19,144) (7,485) (11,659)
Interest on short-term borrowings... 6,239 (1,518) (575) (943)
Interest on other borrowings........ 1,405 (364) (267) (97)
--------- -------- -------- --------
Total interest expense.... 47,944 (21,026) (8,327) (12,699)
--------- -------- -------- --------
Net interest income...................... $ 93,860 $ 4,253 $ (4,911) $ 9,164
========= ======== ======== ========
---------------
<FN>
* Fully taxable equivalent at the federal income tax rate of 34% and includes
applicable State taxes net of federal benefit. The tax equivalent adjustment
on loans was approximately $.9 million and on non-taxable securities was
approximately $.2 million.
Noninterest Income
Total noninterest income of $36.7 million declined $5.6 million in 1993.
Gains on sale of securities decreased $9.3 million. Asset management fees rose
by $3.3 million due to new business and appreciation of existing clients' asset
portfolios, partly offsetting the decrease in securities gains noted above.
Corporate services income increased $1 million, or 13%, in 1993 due to changes
in the fee system and continued expansion of the product base.
Other noninterest income decreased $.5 million in 1993 and the following
are the more significant reasons: Leasing fee income declined $.3 million as the
Company continued to minimize its activity in this area until taxable income
increases sufficiently. Real estate appraisal fees decreased $.2 million due to
a curtailment of third-party activities. Home equity loans purchased from the
Resolution Trust Corporation at a substantial discount in late 1991 returned
principal on a schedule closer to the original contractual amount. This
accounted for an increase of $.4 million compared with 1992 and partially offset
the decreases noted above. Additionally, in the first quarter of 1992, the
Company sold $5.7 million of its credit card portfolio to an unaffiliated bank.
This transaction produced a gain of $.2 million for the quarter ended March 31,
1992. All other miscellaneous noninterest income declined $.2 million.
Noninterest Expense
Noninterest expense of $97.5 million remained essentially unchanged in 1993
compared with 1992. Increases in foreclosed asset and workout expense amounted
to $3.1 million. Increases in writedowns of foreclosed real estate properties
totaled $1.7 million while other foreclosed asset and workout expenses increased
$1.4 million. Other noninterest income decreased $5.9 million in 1993. In 1992,
the Company added $3.8 million to a reserve for losses arising from securitized
loans. These losses resulted from an unexpectedly high delinquency and default
rate on securitized automobile loans, which, when recalculating the gain or loss
on the transactions during the Company's regular and systematic review,
necessitated the charge to earnings. There was no comparable expense for 1993 as
there were no loans securitized. The remaining decrease in other noninterest
expense was principally due to a reduction in the Company's provision for
litigation in 1993 as compared with 1992.
28
31
AVERAGE BALANCES, INTEREST RATES AND INTEREST RATE DIFFERENTIAL
The table below presents the following information: average earning assets
(including nonaccrual loans) and average interest-bearing liabilities supporting
earning assets; and interest income and interest expense expressed as a
percentage of the related asset or liability. The average balances and,
therefore, the rates presented do not include the effect of fair value
adjustments under SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities."
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks..... $ 95,717 $ 100,755 $ 109,305
Excess funds sold to banks
and other................. 43,489 $ 1,716 3.95% 22,460 $ 703 3.13% 18,254 $ 706 3.87%
Securities(1)
Taxable................... 435,210 26,688 6.13 431,242 28,696 6.65 449,121 32,905 7.33
Non-taxable(2)............ 5,559 556 10.00 11,175 819 7.33 17,413 1,027 5.90
---------- -------- ---------- -------- ---------- --------
Total securities.......... 440,769 27,244 6.18 442,417 29,515 6.67 466,534 33,932 7.27
Trading account............. 2,967 192 6.47
Loans(2)(3)................. 1,274,09 104,322 8.19 1,422,497 111,586 7.84 1,570,206 123,747 7.88
Reserve for possible loan
losses.................... (62,203) (63,134) (51,298)
---------- ---------- ----------
Net loans................. 1,211,887 1,359,363 1,518,908
Other assets................ 89,567 117,572 154,906
---------- -------- ---------- -------- ---------- --------
Total assets/interest
income................ $1,881,429 $133,282 7.08% $2,042,567 $141,804 6.94% $2,270,874 $158,577 6.98%
========= ======== ========= ======== ========= ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Noninterest-bearing
demand.................... $ 350,405 $ 346,980 $ 333,319
Interest-bearing demand (NOW
accounts)................. 163,841 $ 2,343 1.43% 144,255 $ 2,693 1.87% 134,274 $ 3,505 2.61%
Money market savings........ 288,489 6,372 2.21 346,314 8,429 2.43 429,963 13,986 3.25
Other savings............... 311,139 7,745 2.49 320,357 9,338 2.91 322,259 11,238 3.49
Time........................ 413,239 16,447 3.98 477,272 19,840 4.16 606,923 30,715 5.06
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits.............. 1,176,708 32,907 2.80 1,288,198 40,300 3.13 1,493,419 59,444 3.98
---------- ---------- ----------
Total deposits.......... 1,527,113 1,635,178 1,826,738
Short-term borrowings....... 180,325 6,240 3.46 227,944 6,239 2.74 247,185 7,757 3.14
Other borrowings............ 11,790 1,066 9.04 16,831 1,405 8.35 21,334 1,769 8.29
Other liabilities........... 9,945 19,465 28,177
Stockholders' investment.... 152,256 143,149 147,440
---------- -------- ---------- -------- ---------- --------
Total liabilities and
stockholders'
investment/interest
expense............... $1,881,429 $ 40,213 2.14% $2,042,567 $ 47,944 2.35% $2,270,874 $ 68,970 3.04%
========= ======== ========= ======== ========= ========
Earning assets -- interest
income.................... $1,758,348 $133,282 7.58% $1,887,374 $141,804 7.51% $2,057,961 $158,577 7.71%
Interest-bearing
liabilities -- interest
expense................... $1,368,823 40,213 2.94 $1,532,973 47,944 3.13 $1,761,938 68,970 3.91
-------- -------- --------
Net interest spread(4)...... 4.64 4.38 3.80
Net interest margin(5)...... $ 93,069 5.29% $ 93,860 4.97% $ 89,607 4.35%
======== ======== ========
---------------
<FN>
(1) For the purpose of this analysis, in 1994 and 1993, securities include
securities available-for-sale and securities held-to-maturity. For 1992,
securities include the investment portfolio and securities held for sale.
(2) Interest on loans to and obligations of public entities is not subject to
federal income tax. In order to make pretax yields comparable to taxable
loans and investments, a tax equivalent adjustment is utilized. The
adjustment is based on a 34% federal income tax rate and includes applicable
state taxes net of Federal tax benefit.
(3) For the purpose of this analysis, nonaccrual loans are included in the loan
category.
(4) Net interest spread is the excess of the interest rate on average earning
assets over the interest rate on average interest-bearing liabilities.
(5) Net interest margin is the excess of the interest earned over interest
expense divided by average earning assets.
29
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE
---------------------------------------------------------------------------------------- ----
Report of Independent Public Accountants................................................ 31
Consolidated Balance Sheets -- December 31, 1994 and 1993............................... 32
Consolidated Statements of Income for the years ended December 31, 1994, 1993 and
1992.................................................................................. 33
Consolidated Statements of Changes in Stockholders' Investment for the years ended
December 31, 1994, 1993 and 1992...................................................... 34
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and
1992.................................................................................. 35
Notes to Consolidated Financial Statements.............................................. 36
30
33
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, 1994 and 1993,
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, 1994. 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, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, 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 LLP
Boston, Massachusetts
January 30, 1995
31
34
UST CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1994 1993
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash, due from banks and interest-bearing deposits (Note 2)......... $ 93,079 $ 90,198
Excess funds sold to banks and other short-term investments......... 10,166 96,647
Securities (Notes 1 and 3):
Securities available-for-sale:
Mortgage-backed securities................................ 195,009 263,435
U.S. Treasury, corporate notes, and other................. 206,465 210,474
---------- ----------
Total securities available-for-sale.................. 401,474 473,909
Securities held-to-maturity.................................... 100
---------- ----------
Total securities..................................... 401,574 473,909
Loans (Notes 4, 13, and 15):
Loans -- net of unearned discount of $17,589,000 in 1994 and
$11,359,000 in 1993........................................... 1,266,091 1,338,807
Reserve for possible loan losses............................... (61,945) (62,547)
---------- ----------
Total loans, net..................................... 1,204,146 1,276,260
Premises, furniture and equipment, net (Note 5)..................... 32,403 32,661
Goodwill............................................................ 2,070 2,192
Other real estate owned, net (Note 6)............................... 18,407 19,468
Other assets (Notes 9 and 11)....................................... 41,387 52,931
---------- ----------
Total Assets......................................... $1,803,232 $2,044,266
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Demand:
Noninterest-bearing....................................... $ 371,716 $ 373,793
Interest-bearing.......................................... 168,434 170,642
Savings:
Money market.............................................. 271,898 323,979
Other..................................................... 285,350 320,924
Time:
Certificates of deposit over $100,000..................... 79,373 72,911
Other..................................................... 314,035 378,549
---------- ----------
Total deposits....................................... 1,490,806 1,640,798
Short-term borrowings (Note 7)...................................... 158,989 226,268
Other borrowings (Note 8)........................................... 9,964 14,286
Other liabilities................................................... 10,839 10,095
---------- ----------
Total liabilities.................................... 1,670,598 1,891,447
Commitments and contingencies (Notes 14 and 15)
Stockholders' investment (Notes 1, 3, 8, 10, and 12):
Preferred stock $1 par value; Authorized -- 4,000,000 shares;
Outstanding -- None
Common stock $.625 par value; Authorized -- 30,000,000 shares;
Outstanding -- 17,614,792 and 17,304,795 shares in 1994 and
1993, respectively............................................ 11,009 10,815
Additional paid-in capital..................................... 72,129 69,694
Retained earnings.............................................. 73,183 68,437
Unrealized gain (loss) on securities available-for-sale, net of
tax........................................................... (23,601) 3,335
Deferred compensation and other................................ (86) 538
---------- ----------
Total stockholders' investment................................. 132,634 152,819
---------- ----------
Total Liabilities and Stockholders' Investment....... $1,803,232 $2,044,266
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
32
35
UST CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
Interest income:
Interest and fees on loans.................................. $ 103,526 $ 110,673 $ 122,522
Interest and dividends on securities:
Taxable................................................... 26,687 28,635 32,859
Non-taxable............................................... 215 265 467
Dividends................................................. 168 352 278
Interest on excess funds and other.......................... 1,716 703 898
----------- ----------- -----------
Total interest income................................ 132,312 140,628 157,024
----------- ----------- -----------
Interest expense:
Interest on deposits........................................ 32,907 40,300 59,444
Interest on short-term borrowings........................... 6,240 6,239 7,757
Interest on other borrowings................................ 1,066 1,405 1,769
----------- ----------- -----------
Total interest expense............................... 40,213 47,944 68,970
----------- ----------- -----------
Net interest income......................................... 92,099 92,684 88,054
Provision for possible loan losses (Note 4)................... 23,125 64,258 41,893
----------- ----------- -----------
Net interest income after provision for possible loan
losses.................................................... 68,974 28,426 46,161
----------- ----------- -----------
Noninterest income:
Asset management fees....................................... 14,419 15,798 12,526
Service charges on deposit accounts......................... 4,893 5,356 5,852
Gain on sale of securities, net (Note 3).................... 1,105 4,403 13,724
Lease residual income....................................... 362 1,148 753
Corporate services income................................... 8,198 8,365 7,380
Other....................................................... 1,357 1,653 2,124
----------- ----------- -----------
Total noninterest income............................. 30,334 36,723 42,359
----------- ----------- -----------
Noninterest expense:
Salary and employee benefits (Note 9)....................... 42,625 38,451 35,370
Net occupancy expense....................................... 8,317 7,419 7,384
Credit card processing expense.............................. 3,955 3,815 3,416
Deposit insurance assessment................................ 4,566 4,931 4,320
Foreclosed asset and workout expense........................ 9,976 23,356 20,272
Other (Note 18)............................................. 23,072 19,538 25,410
----------- ----------- -----------
Total noninterest expense............................ 92,511 97,510 96,172
----------- ----------- -----------
Income (loss) before income taxes............................. 6,797 (32,361) (7,652)
Income tax provision (benefit) (Note 11).................... 2,051 (11,511) (2,931)
----------- ----------- -----------
Net income (loss) before change in accounting method.......... 4,746 (20,850) (4,721)
Cumulative effect of change in method of accounting for income
taxes (Note 1).............................................. (750)
----------- ----------- -----------
Net income (loss).................................... $ 4,746 $ (20,100) $ (4,721)
=========== =========== ===========
Per share data:
Net income (loss)........................................... $ .27 $ (1.31) $ (.34)
Cash dividends declared..................................... -- -- --
Weighted average number of common shares (Note 10)............ 17,780,032 15,362,251 13,984,190
The accompanying notes are an integral part of these consolidated financial statements.
33
36
UST CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
COMMON STOCK ADDITIONAL UNREALIZED DEFERRED
---------------- PAID-IN RETAINED GAIN/(LOSS) COMPENSATION
SHARES AMOUNT CAPITAL EARNINGS ON SECURITIES AND OTHER
------ ------- ---------- -------- ------------- ------------
(DOLLARS AND SHARES IN THOUSANDS)
Balance December 31, 1991......... 13,903 $ 8,689 $ 46,126 $ 93,258 $ (150) $ (1,429)
Net loss........................ (4,721)
Stock option exercises and stock
issued under restricted stock
plans (Notes 9 and 10)....... 134 84 1,568
Change in unrealized loss on
equity securities (Note 3)... 133
Reduction in ESOP loan guarantee
(Note 8)..................... 322
------ ------- -------- -------- --------- --------
Balance December 31, 1992......... 14,037 8,773 47,694 88,537 (17) (1,107)
Net loss........................ (20,100)
Common stock sales (Note 12).... 3,155 1,972 21,271
Stock option exercises and stock
issued under restricted stock
plans (Notes 9 and 10)....... 96 59 622
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 3)... 17
Reduction in ESOP loan guarantee
(Note 8)..................... 321
Activity in Directors Deferred
Compensation Program, net
(Note 10).................... 17 11 107 1,324
------ ------- -------- -------- --------- --------
Balance December 31, 1993......... 17,305 10,815 69,694 68,437 3,335 538
Net income...................... 4,746
Stock option exercises and stock
issued under restricted stock
plans (Notes 9 and 10)....... 258 162 2,108 (664)
Change from net unrealized gain
to loss on securities
available-for-sale, net of
tax (Note 1)................. (26,936)
Reduction in ESOP loan guarantee
(Note 8)..................... 322
Activity in Directors Deferred
Compensation Program, net
(Note 10).................... 52 32 327 (282)
------ ------- -------- -------- --------- --------
Balance December 31, 1994......... 17,615 $11,009 $ 72,129 $ 73,183 $ (23,601) $ (86)
====== ======= ======== ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements.
34
37
UST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)................................................... $ 4,746 $ (20,100) $ (4,721)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of change in accounting method.................. (750)
Provision for possible loan losses................................ 23,125 64,258 41,893
Depreciation and amortization..................................... 5,295 5,029 5,031
Amortization of gain on sale/leaseback............................ (384) (384) (384)
Amortization of security premiums, net............................ 732 1,344 1,856
Trading account sales............................................. 209,917
Trading account purchases......................................... (173,260)
Gain on sale of securities, net................................... (1,105) (4,403) (13,724)
Writedowns of equity securities................................... 181 44
Trading account losses............................................ 132
(Gain) loss on sale of other real estate owned, net............... (515) 1,120 2,338
Writedowns of other real estate owned............................. 3,810 16,244 10,783
Deferred income tax benefit (expense)............................. 3,902 (4,494) 1,106
Increase (decrease) in accruals and other, net.................... 15,949 (1,241) 17,367
--------- --------- ---------
Net cash provided by operating activities.................... 55,555 56,804 98,378
Cash flows provided by investing activities:
Sales and maturities of investment securities....................... 5,584 4,889
Purchase of investment securities................................... (1,063) (334)
Proceeds from securities held for sale.............................. 321,517 371,663
Proceeds from sales of securities available-for-sale................ 61,669
Proceeds from maturities of securities available-for-sale........... 121,462
Purchases of securities held for sale............................... (312,866) (402,647)
Purchases of securities available-for-sale.......................... (144,794)
Purchases of securities held-to-maturity............................ (100)
Net decrease (increase) in short-term investments................... 86,481 (95,306) 577
Net loans paid...................................................... 34,266 87,939 117,439
Proceeds from other real estate owned............................... 12,491 19,567 13,800
Purchases of premises and equipment................................. (3,670) (1,268) (1,257)
--------- --------- ---------
Net cash provided by investing activities.................... 167,805 24,104 104,130
Cash flows used by financing activities:
Net (decrease) increase in nontime deposits......................... (91,940) (90,408) 3,195
Net payments on certificates of deposit............................. (58,052) (60,725) (209,726)
Net (payments) proceeds on short-term borrowings.................... (67,279) 24,217 20,528
Net payments on other borrowings.................................... (4,000) (4,000) (4,500)
Issuance of common stock for cash, net.............................. 792 23,677 120
--------- --------- ---------
Net cash used by financing activities........................ (220,479) (107,239) (190,383)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.................... 2,881 (26,331) 12,125
Cash and cash equivalents at beginning of year...................... 90,198 116,529 104,404
--------- --------- ---------
Cash and cash equivalents at end of year............................ $ 93,079 $ 90,198 $ 116,529
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.......................................................... $ 39,853 $ 48,959 $ 71,233
========= ========= =========
Income taxes...................................................... $ 2,204 $ 1,210 $ 2,495
========= ========= =========
Noncash transactions:
Transfers from investment portfolio to securities held for sale..... $ 7,103
=========
Transfers from other assets to securities available-for-sale........ $ 300
=========
Transfers from loans to other real estate owned..................... $ 29,640 $ 39,128 $ 41,751
========= ========= =========
Financed other real estate owned sales.............................. $ 14,917 $ 25,883 $ 23,184
========= ========= =========
Common stock issuance............................................... $ 1,837 $ 365 $ 1,532
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
35
38
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of UST Corp. (the "Company") 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 16 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 and 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 No. 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 such securities
are classified as held-to-maturity, trading, or available-for-sale.
Securities Held-to-Maturity -- 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.
Trading Securities -- 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, 1994 and 1993, the Company had no securities classified as trading.
Securities Available-for-Sale -- 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. At December 31, 1994,
stockholders' investment was reduced by an unrealized loss related to SFAS No.
115 of $29,023,000 net of an income tax benefit of $5,422,000.
Securities that do not have readily determinable market values are carried
at cost and classified in other assets. At December 31, 1994 and 1993 such
securities amounted to $3,908,000 and $5,071,000, respectively.
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 held to
maturity. 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.
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
36
39
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
applied since the acquisition of the securities. Such adjustments are charged or
credited to interest income in the current period.
The Company determines 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 loans is recorded as
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.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118. SFAS No. 114 requires that
impaired loans, as defined, be measured based on the present value of the
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. This
Statement is effective for fiscal years beginning after December 15, 1994.
Management believes that adoption of this Statement will not have a material
effect on the financial condition or results of operations of the Company.
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible 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. This analysis is documented using a combination
of numerical, statistical and qualitative analysis (including sensitivity
tests), and a written conclusion discussing the rationale supporting reserve
adequacy. 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.
37
40
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("net realizable value"). In 1992 the pretax
charge to income resulting from implementation was $750,000.
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. Average dilutive common stock equivalents were
379,059 for 1994. Loss per share computations for 1993 and 1992 do not include
common stock equivalents due to their antidilutive effect. The dual presentation
of primary and fully diluted earnings per share is not presented since the
difference from earnings per share is less than 3 percent.
GOODWILL AND CORE DEPOSIT INTANGIBLES
Goodwill and core deposit intangibles are stated at cost less accumulated
amortization. Cost of purchased businesses in excess of net assets acquired
("goodwill") includes amounts being amortized over twenty- and forty-year
periods. Amortization expense was $122,500 in each of 1994, 1993 and 1992.
Values assigned to deposits of purchased businesses ("core deposit intangibles")
are being amortized over seven- and thirteen-year periods. Amortization expense
was $1,245,000 in each of 1994, 1993 and 1992.
On a periodic basis, the Company reviews its goodwill and core deposit
intangible assets for events or changes in circumstances that may indicate that
the carrying amount of the assets may not be recoverable.
RETIREMENT BENEFITS
In December 1990, the FASB issued SFAS No. 106, "Employers' Accounting for
Postretirement 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.
38
41
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. This statement did not have any impact on the Company's
financial position or results of operations.
STATEMENTS OF CASH FLOWS
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and interest-bearing deposits.
(2) RESTRICTIONS ON CASH AND DUE FROM BANKS
At December 31, 1994 and 1993, cash and due from banks included $34,173,000
and $42,072,000, respectively, to satisfy the reserve requirements of the
Federal Reserve Board.
(3) SECURITIES
A comparison of the amortized cost, estimated fair value and gross
unrealized gains and losses as of December 31, 1994 and December 31, 1993 for
securities available-for-sale and held-to-maturity follows:
1994
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Mortgage-backed securities:
FHLMC...................................... $ 132,241 $ 97 $ (8,765) $123,573
FNMA....................................... 77,761 45 (6,370) 71,436
--------- ---- --------- --------
Total mortgage-backed securities...... 210,002 142 (15,135) 195,009
US Treasury and Federal agencies.............. 154,823 5 (12,414) 142,414
States and municipalities..................... 3,577 49 (133) 3,493
Foreign governments........................... 425 425
Corporate debt securities..................... 59,716 208 (1,611) 58,313
Marketable equity securities.................. 1,954 120 (254) 1,820
--------- ---- --------- --------
Total................................. $ 430,497 $524 $ (29,547) $401,474
========= ==== ========= ========
Securities held-to-maturity:
States and municipalities..................... 100 (3) 97
--------- --------- --------
Total................................. $ 100 $ (3) $ 97
========= ========= ========
39
42
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1993
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS 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
========= ====== ======== ========
The amortized cost and estimated market value of debt securities at
December 31, 1994 and 1993, 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.
Mortgage-backed 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.
1994 1993
----------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Mortgage-backed securities:
Due after 5 years through 10 years.......... $ 26,144 $ 25,967 $ 42,187 $ 43,005
Due after 10 years.......................... 183,858 169,042 218,927 220,430
--------- --------- --------- ---------
Total mortgage-backed securities.... 210,002 195,009 261,114 263,435
All other debt securities:
Due in 1 year or less....................... 22,706 22,624 2,255 2,253
Due after 1 year through 5 years............ 168,449 159,047 174,623 177,579
Due after 5 years through 10 years.......... 25,935 21,575 25,889 25,389
Due after 10 years.......................... 1,451 1,399 2,167 2,311
--------- --------- --------- ---------
Total debt securities............... 428,543 399,654 466,048 470,967
Total marketable equity
securities........................ 1,954 1,820 2,112 2,942
--------- --------- --------- ---------
Total............................... $ 430,497 $ 401,474 $ 468,160 $ 473,909
======== ======== ======== ========
Securities held-to-maturity:
Due after 1 year through 5 years............ 100 97
--------- ---------
Total............................... $ 100 $ 97
======== ========
Proceeds from sales of debt securities held in the investment portfolio,
held for sale, or available-for-sale during 1994 were $60,061,000 and
$162,956,000 during 1993. Gross gains of $79,000 for 1994 and $3,038,000 for
1993 and gross losses of $137,000 for 1993 and none for 1994 were realized on
those sales. Net gains on sales of all securities held in the investment
portfolio, held for sale, trading accounts, and available-for-sale
40
43
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were $1,105,000, $4,403,000, and $13,724,000 for 1994, 1993, and 1992,
respectively. The 1994 gains were comprised principally from the sale of equity
securities.
At December 31, 1994, securities carried at $203,246,000 were pledged to
secure public and trust deposits, securities sold under agreements to repurchase
and for other purposes as required by law.
(4) LOANS
The composition of the loan portfolio (net of unearned discount) at
December 31, 1994 and 1993 was as follows:
1994 1993
---------- ----------
(DOLLARS IN THOUSANDS)
Commercial and financial loans.............................. $ 702,134 $ 757,638
Real estate:
Construction loans........................................ 13,109 35,295
Developer, investor and land.............................. 259,065 315,700
Consumer:
Residential mortgage loans................................ 89,551 84,846
Home equity loans......................................... 64,068 63,188
Indirect automobile installment........................... 90,255 31,848
Other consumer loans...................................... 21,964 23,944
Lease financing............................................. 25,945 26,348
---------- ----------
1,266,091 1,338,807
Reserve for possible loan losses............................ (61,945) (62,547)
---------- ----------
$1,204,146 $1,276,260
========== ==========
Nonaccrual loans were $49.4 million and $49.3 million at December 31, 1994
and December 31, 1993, respectively. Accruing restructured loans totaled $15.8
million and $41.5 million at December 31, 1994 and 1993, respectively. Had
nonaccruing and accruing restructured loans been paying in accordance with their
original terms, approximately $3,071,000 and $6,247,000 of additional interest
income would have been recorded in 1994 and 1993, respectively.
Most of the Company's business activity is with customers located within
the states of Massachusetts and Connecticut. At year-end 1994, the Company's
exposure to credit risk principally secured by commercial real estate, home
equity and residential real estate included $426 million of loans. See Note 15
for additional discussion of concentration of credit risk.
Analysis of the reserve for possible loan losses for the three years ended
December 31, 1994, 1993 and 1992 is as follows:
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period......................... $ 62,547 $ 50,126 $ 50,100
Loans charged-off...................................... (30,128) (55,595) (43,214)
Recoveries on loans previously charged-off............. 6,401 3,758 1,347
-------- -------- --------
Net chargeoffs......................................... (23,727) (51,837) (41,867)
Provided from operations............................... 23,125 64,258 41,893
-------- -------- --------
Balance at end of period............................... $ 61,945 $ 62,547 $ 50,126
======== ======== ========
In June 1993 the Company recorded a special $30 million provision for loan
losses which is included in the above table.
41
44
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) PREMISES, FURNITURE AND EQUIPMENT
A summary of the accounts as of December 31, 1994 and 1993 is as follows:
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
Land............................................................. $ 2,839 $ 2,899
Buildings and leasehold improvements............................. 34,861 34,499
Furniture and equipment.......................................... 15,450 17,744
------- -------
53,150 55,142
Less -- Accumulated depreciation and amortization................ 20,747 22,481
------- -------
$32,403 $32,661
======= =======
Depreciation and amortization expenses reflected in the consolidated
statements of income were $3,927,000, $3,662,000 and $3,665,000 in 1994, 1993
and 1992, respectively.
On January 3, 1991, the Company sold one of its buildings to an
unaffiliated third party for $8.2 million. A portion of the building houses
certain functions of the Company which were 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.
(6) OTHER REAL ESTATE OWNED
Other real estate owned includes in-substance foreclosures of $8,448,000
and $8,197,000 at December 31, 1994 and 1993, respectively. The balance is
stated net of valuation allowances of $3,187,000 in 1994 and $6,553,000 in 1993.
In 1994 provisions charged to foreclosed asset and workout expense were
$3,093,000 and chargeoffs recorded against the valuation reserve were
$6,883,000.
The net cost of other real estate owned included in foreclosed asset and
workout expense in the income statement was $6,504,000, $21,256,000 and
$18,276,000 in 1994, 1993 and 1992, respectively. These costs include the
above-mentioned provisions to reflect reductions in net realizable value, net
gain or loss on sales and cost of maintaining and operating the properties.
(7) SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31, 1994 and
1993:
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
Federal funds purchased........................................ $ 19,296 $ 35,913
Securities sold under agreements to repurchase................. 126,597 158,618
Treasury tax and loan note account............................. 13,096 30,751
Other.......................................................... 986
-------- --------
$158,989 $226,268
======== ========
The weighted average interest rates at December 31, 1994 and 1993 were
4.74% and 3.35%. The average outstanding short-term borrowings were $180,325,000
in 1994 and $227,944,000 in 1993. The approximate weighted average interest
rates during the year were 3.46% in 1994 and 2.74% in 1993. The maximum amount
of short-term borrowings outstanding at any month end was $212,174,000 in 1994
and $320,338,000 in 1993.
42
45
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) OTHER BORROWINGS
Other borrowings consisted of the following at December 31, 1994 and 1993:
1994 1993
------ -------
(DOLLARS IN THOUSANDS)
UST Corp.
8.5% Senior Notes due in installments from 1992 - 1996.......... $8,000 $12,000
Guaranteed ESOP debt at 84% of the prime rate, as established,
due in installments to 1996.................................. 464 786
UST Capital Corp.
11.505% note to the Small Business Administration due 1995...... 1,500 1,500
------ -------
$9,964 $14,286
====== =======
Payments required under the above obligations were $4,322,000 in 1994 and
will amount to $5,821,000 in 1995 and the balance of $4,143,000 in 1996.
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.
The Company has an employee stock ownership plan ("ESOP") 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 third-party 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.
(9) 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, 1994 and 1993:
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation.......................................... $11,929 $12,120
Nonvested benefit obligation....................................... 314 360
------- -------
Accumulated benefit obligation..................................... 12,243 12,480
Effect of projected future compensation levels..................... 3,048 4,670
------- -------
Projected benefit obligation for service rendered to date............ 15,291 17,150
Plan assets, primarily listed stocks and U.S. bonds.................. 16,811 17,574
------- -------
Excess of plan assets over projected benefit obligation.............. 1,520 424
Unrecognized loss.................................................... 1,482 3,423
Unrecognized prior service asset..................................... (308) (32)
Unrecognized net transition asset.................................... (1,625) (1,895)
------- -------
Prepaid costs included in other assets............................... $ 1,069 $ 1,920
======= =======
43
46
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 8.5% and 5.0%, respectively, for 1994 and 7.0%
and 5.0%, respectively, for 1993. The expected long-term rate of return on
assets used was 9.0% and 9.5%, respectively, for 1994 and 1993.
Net pension cost (income) for 1994, 1993 and 1992 included the following
components:
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
Service cost benefit earned during the period............. $ 1,050 $ 880 $ 866
Interest cost on projected benefit obligation............. 1,265 1,179 1,059
Return on plan assets..................................... 325 (1,232) (939)
Net amortization and deferral............................. (1,789) (463) (1,251)
------- ------- -------
Net pension cost (income)............................... $ 851 $ 364 $ (265)
======= ======= =======
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 1994, 1993 or 1992.
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 new plan was named the
UST Corp. Employee Savings Plan. Under the Savings feature, participating
employees may defer a portion up to 8% of their pretax earnings not to exceed
the Internal Revenue Service annual contribution limits. The Company matches 25%
of each eligible employee's contributions up to 4% of the employee's earnings.
The Company made a matching contribution of $198,000 in 1994, the first year of
the new feature.
The Company also has an ESOP for substantially all employees. Under the
plan, the Company contributes either a fixed amount or a percentage of
compensation of all participants.
The Company has a Restricted Stock Ownership Plan adopted in 1989 for key
employees under which 448,375 shares of common stock have been granted. The
shares vest to the employee over varying schedules. In 1994, 56,701 restricted
shares vested under this plan. At December 31, 1994 there were 87,700 unvested
restricted shares outstanding.
Expenses (income) relating to the plans were as follows:
PROFIT SHARING
YEAR ENDED EMPLOYEE RESTRICTED (INCLUDING
DECEMBER 31, PENSION STOCK OWNERSHIP STOCK SAVINGS FEATURE)
------------------------------ ------- --------------- ---------- ---------------------------
1994........................ $ 851 $ 425 $558 $ 198
1993........................ 364 319 399
1992........................ (265) 425 287
(10) STOCK OPTIONS
The Company has a Stock Compensation Plan adopted in 1992 and amended in
1994, under the terms of which the Company may issue incentive stock options,
nonqualified stock options and shares of restricted stock. At December 31, 1994,
8,479 shares of the Company's common stock remained available for future grants
to officers and key employees. The Company's Stock Compensation Plan provides
that the number of shares of common stock reserved for future grants under the
plan be increased by an amount equal to 1.25 percent of the number of shares
outstanding on the first day of each fiscal year. As a result, as of January 1,
1995, 220,185 additional common shares were reserved for future grants.
44
47
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1990, the stockholders approved a Directors Stock Option Plan under
which each outside director would receive a grant of 5,250 shares. The total
number of shares outstanding at December 31, 1994 were 47,250. All shares to
current outside directors have been granted. The Directors Stock Option Plan
terminates on March 18, 1995, any outstanding options on that date will expire.
The Company has a Directors 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 following table presents the activity for the employee stock option
program under the Stock Compensation Plan for the years ended December 31, 1994,
1993, and 1992:
NUMBER OF SHARES OPTION PRICE
UNDER OPTION PER SHARE TOTAL
---------------- ------------ ------------
Outstanding at December 31, 1994.................. 1,254,914 $5.00-$12.00 $ 10,620,728
1993.................. 656,859 $5.00-$9.00 $ 4,463,412
1992.................. 583,886 $5.00-$9.125 $ 3,596,327
Exercisable at December 31, 1994.................. 721,936 $5.00-$12.00 $ 5,910,636
1993.................. 290,492 $5.00-$8.62 $ 1,770,462
1992.................. 221,592 $5.00-$6.07 $ 1,344,923
Exercised during the year 1994.................. 123,108 $6.07-$8.62 $ 760,209
1993.................. 65,696 $6.07 $ 398,869
1992.................. 19,621 $6.07 $ 119,115
Granted during the year 1994.................. 1,004,500 $9.00-$13.38 $ 10,459,688
1993.................. 300,000 $7.50-$12.00 $ 2,700,000
1992.................. 32,100 $5.00-$9.13 $ 246,214
Cancelled during the year 1994.................. 283,337 $6.07-$13.38 $ 3,542,162
1993.................. 161,331 $6.07-$9.18 $ 1,434,063
1992.................. 26,890 $6.07 $ 163,261
In December 1989, April 1990, April 1991, and December 1994, 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, $6.07, and
$9.75, respectively, in exchange for new options. Outstanding options for
149,331, 513,817, 516,502, and 273,500, respectively, were exchanged under the
program. Options were exchanged on a one-for-one basis at an option price of
$14.29, $10.00, $6.07, and $9.75, 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.
45
48
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES
The income tax provision (benefit) shown on the consolidated statements of
income consisted of the following:
1994 1993 1992
------- -------- -------
(DOLLARS IN THOUSANDS)
Current tax expense (benefit):
Federal............................................ $(6,230) $ (8,302) $(6,513)
State.............................................. 1,147 1,285 2,476
------- -------- -------
(5,083) (7,017) (4,037)
------- -------- -------
Deferred tax expense (benefit):
Federal............................................ 6,588 (4,448) 1,550
State.............................................. 546 (46) (444)
------- -------- -------
7,134 (4,494) 1,106
------- -------- -------
Total...................................... $ 2,051 $(11,511) $(2,931)
======= ======== =======
At December 31, 1994 and 1993, cumulative net deferred income tax benefits
amounting to $11,679,000 and $10,911,000 were included in the consolidated
balance sheets as other assets. Additionally, at December 31, 1994 and 1993
there were tax refund receivables of $2,998,000 and $9,549,000, respectively,
included in other assets.
The components of the net deferred tax asset were as follows:
DECEMBER 31,
------------------------
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
Book provision for loan losses in excess of tax..................... $ 26,175 $ 26,253
Net operating losses(1)............................................. 12,207 1,700
Alternative minimum tax credit...................................... 4,988 6,239
Investment tax credits.............................................. 4,730 3,809
Book writedowns on foreclosed real estate, not deducted for tax..... 3,009
Deferred compensation benefits not deducted for tax................. 1,264 1,187
Tax deductions on leveraged leases deferred for book................ (17,226) (19,185)
Loan mark to market adjustment for tax.............................. (11,228) (7,390)
Securities mark to market adjustment deferred for tax............... (1,779) (2,832)
Tax basis in core deposits less than book........................... (850) (1,115)
Pension expense deducted for tax not book........................... (850) (1,043)
Tax basis in partnership investment less than book.................. (708) (597)
Cumulative tax depreciation in excess of book....................... (675) (781)
Valuation allowance (state)......................................... (365) (538)
Valuation allowance (federal)(1).................................... (6,017)
Other, net.......................................................... 2,013 2,195
-------- --------
Total deferred tax asset.................................. $ 11,679 $ 10,911
======== ========
---------------
<FN>
(1) The Company recorded a cumulative $5.4 million tax benefit net of a $6
million valuation allowance, related to the unrealized loss on securities
available-for-sale under SFAS No. 115. The Company recognized the
unrealized loss as a current deduction for income tax purposes which
contributed to the increase in net operating losses for 1994. In light of
the size of the unrealized loss and its current level of taxable income,
the Company concluded that full recognition of the deferred tax amount was
not appropriate and as such limited the amount of the recorded benefit to
$5.4 million at December 31, 1994.
46
49
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for income taxes differ from the amounts computed by
applying the U.S. statutory Federal tax rate of 34% in 1994 and 1992 and 35% in
1993 to income (loss) before income taxes principally due to:
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------ -------- -------
(DOLLARS IN THOUSANDS)
Tax (benefit) at statutory rate............................... $2,311 $(11,326) $(2,601)
Increases (reductions) from:
Tax-exempt income on investment securities and loans........ (676) (832) (1,082)
State income taxes, net of federal income tax benefit....... 1,118 818 1,340
Low income housing credits.................................. (911) (862) (750)
Other, net.................................................. 209 691 162
------ -------- -------
Tax expense (benefit) recorded................................ $2,051 $(11,511) $(2,931)
====== ======== =======
(12) 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.
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 possible 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.
In 1992 the Company and its two Massachusetts-based banking subsidiaries,
United States Trust Company ("USTC") and USTrust, signed written agreements with
the Federal Reserve Bank of Boston ("FRB-Boston"), Federal Deposit Insurance
Corporation ("FDIC") and the Banking Commissioner of the Commonwealth of
Massachusetts ("Massachusetts Commissioner"). In accordance with the agreements
the Company agreed not to pay any dividends to stockholders, nor take any
dividends from its banking subsidiaries, without prior regulatory approval.
Similarly, the banking subsidiaries agreed to refrain from transferring funds in
the form of dividends to the Company without prior regulatory approval. In 1994,
the Company received a total of $3 million in dividends from USTC. During the
same period $4.9 million was contributed to UST/Conn and $500 thousand was
contributed to USTrust by the Company to supplement their respective equity
capital accounts.
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' investment, less intangible assets, divided by total average
assets, less intangible assets. Based on average total assets at December 31,
1994, the Tier 1 leverage capital ratio was 39.46% for USTC and 7.55% for
USTrust. 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.
Since June 1991, UST/Conn has been operating under a Stipulation and
Agreement with the Banking Commissioner of the State of Connecticut. This
agreement was amended in August 1992, November 1993
47
50
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and July 1994 and requires, among other things, that UST/Conn maintain a Tier 1
leverage capital ratio of 6%. At December 31, 1994 UST/Conn Tier 1 leverage
capital ratio was 6.40%.
Additionally, the Company agreed 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 System. At December 31, 1994,
the Company's Tier 1, Total risk-based capital and Tier 1 leverage ratios were
9.82%, 11.45% and 8.27%, respectively. The Company believes its consolidated
ratios meet the required minimums.
(13) 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 at the time they were granted did not involve more than the
normal risk of collectibility. At December 31, 1994, none of these transactions
were on nonaccrual status, nor did they involve delinquent or restructured
loans. However, at December 31, 1994 loans to directors of the Company or to
their affiliated companies in the amount of approximately $14 million (all to
Director Francis X. Messina and his related interests) 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.
An analysis of loans outstanding in excess of $60,000 to directors and
officers related to the foregoing entities at December 31, 1994 is as follows:
DOLLARS IN THOUSANDS
Balance, December 31, 1993......................... $ 44,497
Additions.......................................... 18,311
Repayments......................................... (13,298)
Other reductions(1)................................ (7,294)
--------
Balance, December 31, 1994......................... $ 42,216
========
---------------
<FN>
(1) Other reductions include repayment of loans to directors and officers who
ceased to be directors and officers of the Company or its subsidiary banks.
(14) COMMITMENTS AND CONTINGENCIES
Commitments for leased premises expire at various dates through 2012. At
December 31, 1994, minimum rental commitments for noncancelable leases are as
follows:
DOLLARS IN THOUSANDS
1995............................................... $ 3,955
1996............................................... 3,654
1997............................................... 3,520
1998............................................... 1,852
1999............................................... 1,088
thereafter......................................... 1,888
--------
Total.................................... $ 15,957
========
Rent expense for the years ended December 1994, 1993 and 1992 was
$4,132,820, $3,932,074 and $4,432,156, respectively.
48
51
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(15) 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 extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of 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,
1994 1993
------------ ------------
(DOLLARS IN THOUSANDS)
Financial instruments whose contract amount represents credit risk:
Commitments to extend credit..................................... $308,000 $268,000
Standby letters of credit and financial guarantees written....... 64,000 63,000
Commercial letters of credit..................................... 2,000 3,000
Foreign exchange................................................. 1,000 1,000
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 $71 million and $31 million were secured by real estate at
December 31, 1994 and December 31, 1993, 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
49
52
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
varies from zero to one hundred percent. Of the total standby and commercial
letters of credit, approximately $15 million and $4 million were secured by real
estate at December 31, 1994 and 1993, 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 enters into offsetting agreements to purchase foreign currency
and, in turn, sells it to its customers. These contracts carry credit risk
because, in the event the customer fails to take delivery of the foreign
currency, the Company is required to resell it to the open market.
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 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 reducing gross unamortized premiums would be
required. See Note (1), Securities Policies.
In October 1994, the Financial Standards Board issued Statement of
Financial Accounting Standards No. 119 (SFAS No. 119), "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments," which
is effective for fiscal years ending after December 15, 1994. SFAS No. 119
requires certain disclosures about derivative financial instruments including
futures, forward swap and option contracts and other financial instruments with
similar characteristics. As of December 31, 1994, the Company had no investments
requiring disclosure under SFAS No. 119.
(16) PARENT COMPANY FINANCIAL INFORMATION
Summarized information relative to the balance sheets at December 31, 1994
and 1993 and statements of income and cash flows for the three years in the
period ended December 31, 1994 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,
-----------------------
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Cash, due from banks and interest-bearing deposits................. $ 2,258 $ 2,269
Securities purchased under agreements to resell.................... 21,000
Securities available-for-sale...................................... 15,957
Investment in banking subsidiaries................................. 124,548 143,719
Investment in nonbanking subsidiaries.............................. 46 46
Premises, furniture and equipment, net............................. 69 72
Other assets....................................................... 3,084 4,578
-------- --------
Total assets............................................... $145,962 $171,684
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT:
Other borrowings................................................... $ 8,464 $ 12,786
Other liabilities.................................................. 4,864 6,079
Stockholders' investment........................................... 132,634 152,819
-------- --------
Total liabilities and stockholders' investment............. $145,962 $171,684
======== ========
50
53
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------ -------- -------
(DOLLARS IN THOUSANDS)
Dividend income............................................... $3,000 $ 5,250
Undistributed equity in net income (loss) of subsidiaries..... 2,492 (24,065) $(4,219)
Other income.................................................. 731 292 902
------ -------- -------
6,223 (18,523) (3,317)
Expenses...................................................... 1,477 1,577 1,404
------ -------- -------
Net income (loss)........................................ $4,746 $(20,100) $(4,721)
====== ======== =======
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
-------- -------- -------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)............................................. $ 4,746 $(20,100) $(4,721)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization.............................. 447 447 447
Undistributed (income) loss of affiliates.................. (2,492) 24,065 4,219
Gain on sale of securities................................. (5) (8)
Decrease (increase) in other assets........................ 536 (338) 837
Increase (decrease) in other liabilities................... 316 1,543 (2,122)
-------- -------- -------
Net cash provided (used) by operating activities...... 3,548 5,617 (1,348)
Cash flows provided (used) by investing activities
Sale of securities............................................ 19,961 26,700 4,791
Purchase of securities........................................ (35,912) (47,750) (4,700)
Net decrease in short-term investments........................ 21,000
Loans repaid by affiliates.................................... 10,450
Equity contributed to affiliates.............................. 5,400 (5,250) (6,261)
-------- -------- -------
Net cash provided (used) by investing activities...... (351) (26,300) 4,280
Cash flows provided (used) by financing activities
Gross repayment of other borrowings........................... (4,000) (4,000) (4,000)
Proceeds from issuance of common stock, net................... 792 23,677 1,652
-------- -------- -------
Net cash provided (used) by financing activities...... (3,208) 19,677 (2,348)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents.......... (11) (1,006) 584
Cash and cash equivalents beginning of year................... 2,269 3,275 2,691
-------- -------- -------
Cash and cash equivalents end of year......................... $ 2,258 $ 2,269 $ 3,275
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................... $ 938 $ 1,415 $ 1,753
======== ======== =======
Income taxes............................................... $ 180
=======
51
54
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash dividends paid to the Company in 1994 by consolidated bank
subsidiaries totaled $3,000,000 and $5,250,000 in 1993. There were no cash
dividends paid to the Company in 1992. No cash dividends were paid to the
Company by other subsidiaries in these years.
(17) FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." SFAS No. 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.
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.
Securities available-for-sale -- For marketable securities fair values are
based on quoted market prices or dealer quotes.
Loans -- For certain homogeneous 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.
52
55
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount and estimated fair values of the Company's financial
instruments at December 31, 1994 and 1993 are as follows:
1994 1993
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Financial instrument assets:
Cash and due from banks................. $ 93,079 $ 93,079 $ 90,198 $ 90,198
Securities.............................. 401,574 401,571 473,909 473,909
Excess funds sold to banks and other
short-term investments............... 10,166 10,166 96,647 96,647
Loans, net.............................. 1,178,201 1,194,092 1,249,912 1,263,456
Financial instrument liabilities:
Deposits
Demand............................... $ 371,716 $ 371,716 $ 373,793 $ 373,793
Savings.............................. 453,784 453,784 491,566 491,566
Money market......................... 271,898 271,898 323,979 323,979
Time................................. 393,408 396,030 451,460 457,075
Short-term borrowings................... 158,989 158,989 226,268 226,268
Other borrowings........................ 9,964 10,267 14,286 15,362
Unrecognized financial instruments:
Commitments to extend credit............ $ 308,000 $ 308,000 $ 268,000 $ 268,000
Standby letters of credit and financial
guarantees written................... 64,000 64,000 63,000 63,000
Commercial letters of credit............ 2,000 2,000 3,000 3,000
(18) OTHER NONINTEREST EXPENSE
The major components of other noninterest expense were:
FOR YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
Legal and consulting...................................... $ 3,553 $ 1,801 $ 1,556
Equipment and furniture................................... 3,476 3,614 3,859
Advertising and promotion................................. 2,307 1,280 944
Amortization of intangibles............................... 1,367 1,367 1,367
Service bureau and other data processing.................. 1,173 1,151 1,298
Provision for losses from securitized loans............... 3,800
Special provisions for litigation......................... (750) 2,100
Other..................................................... 11,196 11,075 10,486
------- ------- -------
Total........................................... $23,072 $19,538 $25,410
======= ======= =======
53
56
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(19) CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR YEAR ENDED DECEMBER 31, 1994 FOR YEAR ENDED DECEMBER 31, 1993
------------------------------------- --------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income.............................. $34,238 $33,471 $32,715 $31,888 $34,013 $35,210 $ 35,410 $35,995
Interest expense............................. 10,287 9,806 10,037 10,083 10,862 11,725 12,229 13,128
Net interest income.......................... 23,951 23,665 22,678 21,805 23,151 23,485 23,181 22,867
Provision for possible loan losses........... 4,500 6,600 6,575 5,450 3,175 8,050 42,650 10,383
Net interest income (loss) after provision
for possible loan losses................... 19,451 17,065 16,103 16,355 19,976 15,435 (19,469) 12,484
Noninterest income........................... 7,241 7,578 7,616 7,899 7,247 8,078 8,857 12,541
Noninterest expense.......................... 24,752 23,140 22,021 22,598 25,149 20,656 27,887 23,818
Income tax expense (benefit)................. 576 447 375 653 540 834 (13,567) (68)
Net income (loss)............................ 1,364 1,056 1,323 1,003 1,534 2,023 (24,932) 1,275
Earnings (loss) per share.................... $ 0.08 $ 0.06 $ 0.07 $ 0.06 $ 0.09 $ 0.12 $ (1.76) $ 0.09
As shown above, the Company has been modestly profitable throughout the
two-year period, except for the second quarter of 1993, due to the high
provision for possible loan losses.
In 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 possible
loan losses was increased by $19.8 million during the second quarter. To achieve
the higher reserve level, the Company recorded a $42.7 million provision for
possible loan losses in the second quarter. Included in that amount was a
special provision of $50 million. This special provision was management's
estimate of the additional losses to be incurred from the strategic change
referred to above and a continued sluggish economic climate.
In 1994 the Company continued with its strategy to reduce the level of
problem credits while maintaining its reserve for loan loss position. Net
chargeoffs during each quarter were almost entirely matched by provisions to the
loan loss reserve.
Noninterest income decreased after the first quarter of 1993 due to
decreases in gains on sale of securities and declines in service charges on the
deposit accounts and asset management fees. Noninterest expense reflects the
high level of expenses associated with foreclosed asset and loan workouts,
particularly in the second and fourth quarters of 1993 due to writedowns of
other real estate owned.
54
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
-- NONE --
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE POLICY COMMITTEE
In 1987, the Board of Directors of the Company created an Executive Policy
Committee which is the primary management forum of the Company for all strategic
and policy decisions. All decisions of the Executive Policy Committee are
subject to the review and approval of the Board of Directors of the Company. The
Executive Policy Committee has been directed by the Board of Directors to make
recommendations to the Board concerning adoption of policies, strategies and
programs concerning the following, among other matters: (a) acquisitions and
dispositions of corporate entities, assets and/or investments; (b) the issuance
of equity and/or debt; (c) engaging in new business activities; (d) the hiring,
termination, training and motivation of senior management; (e) the development
of marketing programs concerning financial services; (f) improvements to
operations, service delivery and implementation of procedures for cost control;
(g) improvements to the financial reporting and financial control systems; (h)
improvements to the business information systems; and (i) improvements
concerning risk management and legal and regulatory compliance programs. As of
March 25, 1995, there were 10 members of the Executive Policy Committee. The
members of the Committee are identified and the background of each Committee
member is set forth below under "Executive Officers".
EXECUTIVE OFFICERS
The names and ages of the executive officers of the Company and each
executive officer's position with the Company and its principal subsidiaries are
listed below. Each such executive officer is elected annually by the Directors
of the Company (or the Directors of the applicable subsidiary of the Company)
and serves until his or her successor is duly chosen and qualified or until his
or her earlier death, removal or disqualification.
POSITIONS AND OFFICES WITH THE COMPANY
(AND/OR WHERE APPROPRIATE,
NAME (AGE) POSITION WITH ONE OF THE COMPANY'S SUBSIDIARIES)
----------------------------------- --------------------------------------------------------
*Neal F. Finnegan (57)............. President and Chief Executive Officer and Director of
the Company and of USTrust
*Walter E. Huskins, Jr. (55)....... Executive Vice President/Administration of the Company,
USTrust and UST Bank/Connecticut
*Domenic Colasacco (46)............ Executive Vice President/Trust and Asset Management of
the Company and Chairman and President of USTC
*Eric R. Fischer (49).............. Executive Vice President, General Counsel and Clerk of
the Company and Executive Vice President, General
Counsel and Secretary of USTrust and USTC
*James K. Hunt (51)................ Executive Vice President, Treasurer, and Chief Financial
Officer of the Company and USTrust
*Linda J. Lerner (50).............. Senior Vice President/Human Resources of the Company,
USTrust and USTC
*Robert T. McAlear (52)............ Executive Vice President/Controlled Loans of the Company
and Vice Chairman of USTrust
*Kathie S. Stevens (44)............ Executive Vice President and Senior Lending Officer of
the Company and of USTrust
*Kenneth L. Sullivan (58).......... Senior Vice President/Operations of the Company and
President, UST Data Services Corp.
*Katharine C. Armstrong (50)....... Senior Vice President/Credit Administration of the
Company and of USTrust
George T. Clarke (48).............. Senior Vice President and Controller of the Company
---------------
<FN>
* Member, Executive Policy Committee
55
58
The following sets forth the principal occupation during the past five
years of each of the executive officers of the Company.
Mr. Finnegan has served as President and Chief Executive Officer of the
Company since April 1993. During the prior five years, Mr. Finnegan was
Executive Vice President in charge of Private Banking at Bankers Trust Company,
New York, New York. From 1986 to 1988, Mr. Finnegan was President and Chief
Operating Officer of Bowery Savings Bank in New York City. From 1982 to 1986 he
was Vice Chairman of Shawmut Corporation in Boston. Mr. Finnegan also serves as
Vice Chairman of the Board of Trustees of Northeastern University. Mr. Finnegan
is also a Director and President of USTrust and a Director and Chairman of the
Executive Committee of USTC.
Mr. Huskins was elected Executive Vice President/Administration of the
Company in August 1993. Mr. Huskins is also responsible for the leasing and
retail banking activities of the Company. Prior to joining the Company, Mr.
Huskins served as President, Sterling Protection Company, Watertown, MA
(security systems) from 1990 to 1993 and as Vice Chairman of Chancellor
Corporation, Boston, MA (leasing) from 1977 to 1989. Mr. Huskins also serves as
a Director of UST/Conn and as Chairman of the Board of UST Leasing Corporation.
Mr. Colasacco was elected Executive Vice President and a Director of the
Company in 1990. In 1993, he was also elected Chairman of the Board and
President of USTC. Prior to that time, he served as an Executive Vice President
of USTC. He also directs the trust and asset management and activities of the
Company and its subsidiaries. Mr. Colasacco has been an officer of the Company
or of one of its subsidiaries since 1974.
Mr. Fischer was elected Executive Vice President, General Counsel and Clerk
of the Company in 1992. Prior to 1992, he served as Senior Vice President,
General Counsel and Assistant Clerk of the Company. Before joining the Company
in 1986, he served as Assistant General Counsel of Bank of Boston Corporation
and its principal subsidiary, The First National Bank of Boston. Mr. Fischer is,
and has been since 1984, a member of the faculty of the Morin Center for Banking
and Financial Law Studies of Boston University School of Law. He also serves as
Executive Vice President, General Counsel and Secretary of USTC and USTrust, and
as Assistant Secretary of UST/Conn.
Mr. Hunt was elected Executive Vice President, Treasurer and Chief
Financial Officer of the Company and of USTrust in July 1994. Prior to joining
the Company, Mr. Hunt served as Executive Vice President at Peoples Bancorp of
Worcester, Inc., Worcester, Massachusetts, from August 1987 through May 1994.
Ms. Lerner has served as Senior Vice President of the Company since she
joined the Company in 1988. She directs the Human Resources activities of the
Company. Prior to her joining the Company, Ms. Lerner served in a similar
capacity for the Provident Institution for Savings in Boston.
Mr. McAlear was elected Executive Vice President/Controlled Loans of the
Company in 1994. He has served as Vice Chairman of USTrust since he joined the
Company in 1990. His primary responsibilities involve the supervision of the
controlled loan and real estate lending and workout functions of USTrust and the
Company. Prior to 1990, Mr. McAlear served as an Executive Vice President in the
lending area of the Bank of New England.
Ms. Stevens was elected Executive Vice President and Senior Lending Officer
of USTrust in 1993. Since joining the Company in 1985 and until 1993, Ms.
Stevens served in the commercial banking function of USTC as Senior Vice
President from 1985 through 1990 and as Executive Vice President from 1990 until
1993.
Mr. Sullivan has served as Senior Vice President/Operations of the Company
since 1994 and President of UST Data Services Corp. since he joined the Company
in 1988 to the present. In those capacities, he has responsibility for the data
processing and information systems of the Company as well as for its operations
activities. Prior to 1988, Mr. Sullivan served as Executive Vice President of
Operations with BayBanks Systems, Inc. in Waltham, Massachusetts.
Ms. Armstrong was named Senior Vice President/Credit Administration of the
Company and USTrust in 1994. She has served in the credit administration and
credit risk control functions of USTrust since she
56
59
joined the Company in 1985. Ms. Armstrong is the Chairman of the Senior Credit
Committee of the Company and USTrust.
Mr. Clarke was elected Senior Vice President and Controller of the Company
in 1994. Prior to 1994 he served as Vice President and Controller of the Company
since 1988. Before joining the Company, Mr. Clarke served as Deputy Comptroller
of The First National Bank of Boston.
There are no arrangements or understandings between any executive officer
and any other person pursuant to which he or she was selected as an executive
officer.
Other than the information provided in the preceding paragraphs of this
Item 10, this item has been omitted since the Company will have filed a
definitive proxy statement within 120 days after December 31, 1994, the close of
its fiscal year. The additional information required by this item is
incorporated by reference to such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
This item has been omitted since the Company will have filed a definitive
proxy statement within 120 days after December 31, 1994, the close of its fiscal
year. The information required by this item is incorporated by reference to such
proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item has been omitted since the Company will have filed a definitive
proxy statement within 120 days after December 31, 1994, the close of its fiscal
year. The information required by this item is incorporated by reference to such
proxy statement.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Executive Officers and
Directors are required by the SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that, during 1994, all such filing requirements applicable to
its executive officers and directors were complied with by such individuals.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item has been omitted since the Company will have filed a definitive
proxy statement within 120 days after December 31, 1994, the close of its fiscal
year. The information required by this item is incorporated by reference to such
proxy statement.
PART IV
ITEM 14. EXHIBITS. FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List the following documents filed as part of this report:
1.All financial statements
UST Corp. and Subsidiaries
See Index to Financial Statements on page 30.
2. Financial statement schedules required to be filed by Item 8 of Form
10-K and by Item 14(d)
None (Information included in Financial Statements).
57
60
3. Exhibits required to be filed by Item 501 of Regulation S-K and by Item
13(c)
(3) Articles: By-Laws
3(a) Articles of Organization of the Company as amended to date.*
3(b) By-laws of the Company as amended to date.*
(4) Instruments defining the rights of security holders, including
indentures:
4(a) Specimen of the Company's Common Stock Certificate. (Exhibit
4.1 to Registrant's Registration Statement No. 2-67787 on
Form S-l.)**
4(b) Description of rights of the holders of the Company's Common
Stock (Appearing on Page 76 of Registrant's Registration
Statement No. 33-11118 on Form S-4).**
4(c) Note Agreement, dated August 8, 1986, between the Company
and holders of the Company's 8.5% Senior Notes Due August 1,
1996. (Exhibit 4(d) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1986.)**
(10) Material Contracts
10(a) Deferred Compensation Program, as amended to June 16, 1992.
(Exhibit to Form 10-K for year ended December 31, 1992)**
10(b) Incentive Stock Option Plan, as amended to May 15, 1990.
(Exhibit to Form 10-K for year ended December 31, 1992)**
10(c) Pension Plan, as amended to January 1, 1990. (Exhibit to
Form 10-K for year ended December 31, 1991)**
10(c)(i) December 20, 1994 Amendment to Pension Plan*
10(d) Employee Stock Ownership Plan, as amended to January 1,
1991. (Exhibit to Form 10-K for year ended December 31,
1991)**
10(d)(i) December 20, 1994 Amendment to Employee Stock
Ownership Plan*
10(e) Employee Savings Plan (formerly known as Profit-Sharing
Plan), as amended to January 1, 1991. (Exhibit to Form 10-K
for year ended December 31, 1991)**
10(e)(i) Amendment, as of January 1, 1994, to Employee
Savings Plan*
10(f) 1992 Stock Compensation Plan. (Registration Statement Nos.
33-54390 and 2-77803)**
10(f)(i) 1992 Stock Compensation Plan as amended and
restated on November 15, 1994 (subject to
stockholder ratification and approval)*
10(g) Dividend Reinvestment Plan, as amended. (Exhibit to
Registration Statement No. 33-38836 on Form S-3.)**
10(h) 1989 Directors Stock Option Plan (Exhibit to Form 10-K for
year ended December 31, 1989)**
10(i) 1995 Stock Option Plan for Non-Employee Directors (subject
to stockholder ratification and approval, and, as to the
specific award to James V. Sidell, subject to receipt of
regulatory clearance)*
10(j) Purchase Agreement, dated as of June 1, 1993, between the
Company and Kidder, Peabody Group, Inc. related to the
private placement of 500,000 shares of UST Corp. Common
Stock. (Exhibit to Form 8-K for quarter ended June 30,
1993)**
10(k) Registration Rights Agreement, dated as of June 1, 1993,
between the Company and Kidder, Peabody Group, Inc. related
to the private placement of 500,000 shares of UST Corp.
Common Stock. (Exhibit to Form 8-K for quarter ended June
30, 1993)**
58
61
10(l) Employment Agreement, dated as of April 20, 1993, between
the Company and Neal F. Finnegan, President and Chief
Executive Officer of the Company. (Exhibit to Form 8-K dated
March 25, 1993)**
10(l)(i) Amendment to Employment Agreement with Neal F.
Finnegan*
10(m) Placing Agreement, dated July 28, 1993, between the Company
and Fox-Pitt Kelton N.V., relating to the placement overseas
of 2,870,000 shares of the Company's Common Stock. (Exhibit
to Form 10-Q for quarter ended September 30, 1993)**
10(n) Transition Agreement, dated as of June 30, 1993, between the
Company and James V. Sidell, former President and Chief
Executive Officer of the Company. (Exhibit to Form 10-Q for
quarter ended September 30, 1993)**
10(o) Separation Agreement dated August 16, 1993, between the
Company and Robert G. Truslow, former President of the
Company's wholly-owned subsidiary, USTrust. (Exhibit to Form
10-Q for quarter ended September 30, 1993)**
10(p) Separation Agreement, dated September 20, 1993, between the
Company and Frank A. Morse, former President of the
Company's wholly-owned subsidiary, UST Bank/Connecticut.
(Exhibit to Form 10-Q for quarter ended September 30,
1993)**
10(q) Separation Agreement, dated April 6, 1994, between the
Company and Theodore M. Shediac, former Chairman of the
Company's wholly-owned subsidiary, USTrust.*
10(r) Retirement Agreement, dated September 27, 1994, between the
Company and Paul M. Siskind, former Chairman of the Board of
the Company*
10(s) Separation Agreement, dated March 31, 1994, between the
Company and William C. Brooks, former Chief Financial
Officer and Treasurer of the Company*
10(t) Resignation Agreement, dated as of February 1, 1995, and
effective February 28, 1995, between the Company and James
M. Breiner, former Director of the Company and Chairman of
the Board of Directors of the Company's wholly-owned
subsidiary, UST Bank/Connecticut.*
10(u) Employment Agreement as of July 11, 1990, between USTrust
and Robert T. McAlear, effective August 31, 1990.*
10(v) Executive Employment Agreements with certain members of
the Company's Executive Policy Committee, effective
October 24, 1994:
10(v)(i) Employment Agreement between UST Corp. and Walter
E. Huskins, Executive Vice-President of the
Company*
10(v)(ii) Employment Agreement between UST Corp. and James
K. Hunt, Executive Vice President, Chief
Financial Officer and Treasurer of the Company*
10(v)(iii) Employment Agreement between UST Corp. and Eric
R. Fischer, Executive Vice President, General
Counsel and Clerk of the Company*
10(v)(iv) Employment Agreement between UST Corp. and Linda
J. Lerner, Senior Vice President/Human Resources
of the Company*
10(v)(v) Employment Agreement between UST Corp. and
Kenneth L. Sullivan, President, UST Data Services
Corp., a wholly-owned subsidiary of the Company*
10(v)(vi) Employment Agreement between UST Corp. and
Katharine C. Armstrong, Senior Vice
President/Credit Administration of the Company*
10(w) Severance Pay Plan, effective January 1, 1995*
59
62
10(x) Senior Officer Severance Pay Plan, effective January 1,
1995*
10(y) Asset Management Employment Agreement by and among
Employee/Principals of the Asset Management Division of the
United States Trust Company and United States Trust Company
and UST Corp., effective as of January 1, 1995:
10(y)(i) Employment Agreement among UST Corp, USTC and
Domenic Colasacco, President of USTC, a wholly
owned subsidiary of the Company*
10(y)(ii) Employment Agreement among UST Corp., USTC and
Robert A. Lincoln, Senior Vice President, Senior
Portfolio Manager of USTC*
10(y)(iii) Employment Agreement among UST Corp., USTC and
Stephen K. Moody, Senior Vice President, Senior
Portfolio Manager of USTC*
10(y)(iv) Employment Agreement among UST Corp., USTC and
Lucia B. Santini, Senior Vice
President/Administrator of USTC*
10(y)(v) Employment Agreement among UST Corp., USTC and
Robert B. Zevin, Senior Vice President, Economist
and Senior Portfolio Manager of USTC*
10(z) Asset Management Unifying Agreement by and among
Employee/Principals of the Asset Management Division of the
United States Trust Company and United States Trust Company
and UST Corp., effective as of January 1, 1995*
(11) Statement re: computation of per share earnings (See Note 1 to the
Notes to Consolidated Financial Statements.)*
(21) Subsidiaries of the Registrant*
(23) Consent of Arthur Andersen LLP.*
(27) Article 9 Summary Financial Information for 12 months ended
December 31, 1994
---------------
* Filed herewith
** Filed as part of a previous Commission filing and incorporated herein by
reference.
(b) Reports on Form 8-K
A Report on Form 8-K was filed by the Company during the fourth quarter of
1994 on October 3, 1994 (Retirement and related resignation of Paul M. Siskind
as Chairman of the Board and as a Director of the Company).
(c) Exhibits being filed
See Exhibit Index
(d) Financial Statement Schedules included in Financial Statements.
60
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UST CORP.
By s/ NEAL F. FINNEGAN By s/ JAMES K. HUNT
-------------------------------------------- --------------------------------------------
Neal F. Finnegan James K. Hunt
President and Executive Vice President and Treasurer
Chief Executive Officer (Principal Financial Officer and
(Principal Executive Officer) Principal Accounting Officer)
Date: March 21, 1995 Date: March 21, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By s/ DOMENIC COLASACCO By s/ FRANCIS X. MESSINA
-------------------------------------------- --------------------------------------------
Domenic Colasacco, Director and Francis X. Messina, Director
Executive Vice President Date: March 21, 1995
Date: March 21, 1995
By s/ ROBERT L. CULVER By s/ GERALD M. RIDGE
-------------------------------------------- --------------------------------------------
Robert L. Culver, Director Gerald M. Ridge, Director
Date: March 21, 1995 Date: March 21, 1995
By s/ NEAL F. FINNEGAN By s/ SAMUEL B. SHELDON
-------------------------------------------- --------------------------------------------
Neal F. Finnegan, Director, Samuel B. Sheldon, Director
President and Chief Executive Officer Date: March 21, 1995
Date: March 21, 1995
By s/ WALTER A. GULESERIAN By s/ JAMES V. SIDELL
-------------------------------------------- --------------------------------------------
Walter A. Guleserian, Director James V. Sidell, Director
Date: March 21, 1995 Date: March 21, 1995
By s/ WALLACE M. HASELTON By s/ PAUL D. SLATER
-------------------------------------------- --------------------------------------------
Wallace M. Haselton, Director Paul D. Slater, Director
Date: March 21, 1995 Date: March 21, 1995
By s/ BRIAN W. HOTAREK By s/ WILLIAM SCHWARTZ
-------------------------------------------- --------------------------------------------
Brian W. Hotarek, Director William Schwartz, Director
Date: March 21, 1995 Date: March 21, 1995
By s/ MICHAEL J. VERROCHI
--------------------------------------------
Michael J. Verrochi, Director
Date: March 21, 1995
61