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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, 1993 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. /X/
The number of shares of common stock held by nonaffiliates of the
registrant as of March 7, 1994 was 14,490,902 for an aggregate market value of
$175,702,187.
At March 7, 1994, there were issued and outstanding 17,329,633 shares of
common stock, par value $0.625 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 1994 Annual Meeting
are incorporated by reference in Items 10, 11, 12 and 13 of Part III.
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FORM 10-K
TABLE OF CONTENTS
PART I
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PAGE
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Item 1 Business................................................................... 1
Item 2 Properties................................................................. 9
Item 3 Legal Proceedings.......................................................... 9
Item 4 Submission of Matters to a Vote of Security Holders........................ 9
PART II
Item 5 Market for the Registrant's Common Stock and Related Security Holder 10
Matters....................................................................
Item 6 Selected Financial Data.................................................... 11
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition at December 31, 1993................................... 12
Results of Operations...................................................... 17
Item 8 Financial Statements and Supplementary Material............................ 31
Item 9 Disagreements on Accounting and Financial Disclosure....................... 57
PART III
Item 10 Directors and Executive Officers of the Company............................ 57
Item 11 Executive Compensation..................................................... 59
Item 12 Security Ownership of Certain Beneficial Owners and Management............. 59
Item 13 Certain Relationships and Related Transactions............................. 59
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 60
Signatures................................................................. 62
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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 also
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,
directly or indirectly, all of the outstanding stock of three active nonbanking
subsidiaries, all Massachusetts corporations: UST Leasing Corporation, UST Data
Services Corp. and UST Capital Corp.
Through its banking and nonbanking subsidiaries, the Company provides a
broad range of financial services, principally to individuals and small-and
medium-sized companies in New England. 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, 1993, the Company's total
assets were approximately $2.0 billion and USTrust, the lead bank, had over $1.9
billion or 93% 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 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
The Company reported a loss of $20.1 million, or $1.31 per share, for 1993,
resulting primarily from a loan loss provision of $42.7 million in the second
quarter and writedowns of certain nonperforming assets. In addition, the Company
incurred net losses in each of the two preceding recent fiscal years. See Note
19 to Consolidated Financial Statements of the Company.
Proposed New Standards on Safety and Soundness -- Asset Quality
Proposed regulations covering standards for safety and soundness at banks
and bank holding companies have been put forth by the Company's primary federal
banking regulators as required by Section 132 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). Included in the proposal are
standards (1) dealing with the maximum amount of classified assets an
institution may have and (2) defining a minimum earnings amount. Failure to meet
these standards would require the filing of a compliance action plan with and
acceptable to the Company's supervisory agencies. If the proposed regulations
were to be adopted in their present form, the Company would not have been in
compliance with the first standard at December 31, 1993. The federal banking
regulators have not publicly indicated at this time when passage of final
regulations in this area will occur or whether final regulations will be
substantially similar to those proposed.
At December 31, 1993, the Company had approximately $49.3 million in
nonaccrual loans, $.5 million in accruing loans 90 days or more past due, $41.5
million in restructured loans, $19.5 million in other real estate
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owned and $12 million in Special Mention loans 30 to 89 days past due and
accruing. In addition, the Company had approximately $185 million of accruing
commercial and real estate loans which, while current, have nonetheless been
classified as Special Mention or 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. The Substandard classification,
however, does not necessarily imply ultimate loss for each individual asset so
classified. Special Mention assets, 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.
The risk ratings assigned to these loans were an important factor in the
Company's analysis of the adequacy of its reserve for loan losses. The
above-described, proposed regulations, if implemented in their current form,
however, may require the Company to reduce significantly the level of these
loans. Among the responses available to the Company, in this event, is a further
acceleration of the Company's strategy to handle problem credits expeditiously.
It is not possible to predict the future effects on the Company's financial
condition or results of operations of actions which may be taken by the Company
in response to final regulations in this area.
Management of the Company has identified the reduction of the aggregate
amount of non-performing and classified assets as a high priority. Management
will continue to assess its alternatives with a view to implementing the most
effective means of achieving such reduction.
Potential Regulatory Sanctions
Certain apparent and inadvertent violations of the insider lending
provisions (and related lending limit provisions) of Regulation O of the FRB
related to extensions of credit by USTrust to Director Francis X. Messina have
led the FDIC to require that corrective action be taken and to advise USTrust
orally that the FDIC may consider the imposition of civil money penalties with
respect to such matters. No FDIC representative has suggested to USTrust or the
Company that there was any willful or intentional misconduct on the part of
USTrust, Director Messina or USTrust's other institution-affiliated parties in
connection with these matters.
To address these issues, USTrust and Director Messina have undertaken a
program to reduce the aggregate balance of Mr. Messina's outstanding loans from
USTrust and to improve the collateral support for the remaining outstanding loan
balance. The elements of this program have been communicated to and reviewed by
the FDIC. In furtherance of the program, since late 1993, the outstanding
principal of the aggregate loans to Director Messina and his related interests
has been reduced by more than $11 million from approximately $30 million to less
than $19 million, and such loans are now below all applicable lending limits. To
date, the Company has incurred no losses with respect to any of these loans,
although they are characterized as "Substandard" in the Company's internal risk
rating profile, and all such loans are current as to both principal and
interest.
There has been no further action taken by any bank regulatory agency to
date. The FDIC has the authority to levy civil money penalties of various
amounts for violations of law or regulations, orders and written conditions and
agreements, which, depending upon the nature and severity of the violations, may
be, in situations where conduct has been egregious, as high as $1 million per
day for the period during which such violation continues. In connection with the
apparent violations described above, the FDIC has the authority to impose
penalties on any of USTrust, its Board of Directors, officers of the Bank,
Director Messina personally, "institution-affiliated parties" of USTrust or any
combination thereof.
While it is not possible to predict with certainty the probability of
penalties being assessed, the person or persons upon whom any penalty would be
assessed or the amounts of any such penalties, were they to be assessed,
management of the Company believes that it is unlikely that this matter will
have a material adverse effect on the Company's financial condition or results
of operations. Consequently, no provision in respect of penalties has been made
in the Company's Consolidated Financial Statements. See Note 15 to Consolidated
Financial Statements of the Company.
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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. In mid-1992 and
1993, UST/Conn agreed to two addenda to its 1991 stipulation and agreement with
the Connecticut 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 (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 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 I leverage capital ratios
at or in excess of 6%. Each of the Company's subsidiary banks is currently in
compliance with its respective capital requirements. As provided in the
Regulatory Agreements, the Company, USTrust and UST/Conn have instituted plans
to reduce levels of nonperforming assets and have developed 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. 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" below. For a discussion of related-party
transactions, see Note 14 to Consolidated Financial Statements.
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 and other specialized lending
services. USTrust also provides merchant credit card services. USTC provides
deposit services and other banking services, but focuses its activities on money
management 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, 1993, the combined lending
limit to a single borrower of the subsidiary banks was approximately $28
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 late 1993, the Company introduced a Choice Checking retail
account product which combines a relatively modest fee structure with ancillary
travel, insurance and other "lifestyle" benefits. 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. In 1993, the
Company introduced an Affordable Mortgage Program designed to provide certain
customers who may not qualify for traditional mortgage financing with an
alternate means of financing or refinancing a residence. The Company's banking
subsidiaries, which currently have an aggregate of 34 banking offices, maintain
an automated teller machine system which through membership in the NYCE, Cirrus
and Yankee 24 ATM networks provides the Company's customers with access to their
accounts at locations throughout the United States. 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.
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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, profit-sharing
and other employee benefit trusts. At December 31, 1993, the total assets under
management of USTC were approximately $3.3 billion.
INVESTMENTS
The subsidiary banks maintain securities portfolios consisting primarily of
U.S. Government Agency, corporate and municipal securities. USTrust's investment
portfolio also includes certain other equity investments as allowed within
limits prescribed by Massachusetts law. The Treasury Division of the Company
provides investment portfolio advisory services to its affiliated banks.
PRINCIPAL NONBANKING SUBSIDIARIES
UST Leasing Corporation, organized in 1987 and a subsidiary of USTrust
provides a broad range of equipment leasing services to major corporations
headquartered throughout the United States. In 1994, UST Leasing Corporation
intends to develop a line of leasing products designed to meet the needs of the
Company's small business customers and other business entities with similar
needs.
UST Data Services Corp., organized in 1981 and a subsidiary of USTrust
provides a full range of electronic data processing services to the Company and
its affiliates.
UST Capital Corp., organized in 1961, was acquired by the Company in 1969,
is a subsidiary of USTC and is a licensed Small Business Investment Company. It
specializes in equity and long-term 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 during
the past few years. During the past several years, acquisitions of small-and
medium-sized banks and bank holding companies by the largest New England bank
holding companies and the closing by regulators of a number of banks and bank
holding companies in Eastern Massachusetts and Connecticut has resulted in fewer
but financially stronger competitors in the local markets served by the
Company's banking subsidiaries.
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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 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
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 Bank Holding Company Act
of 1956, as amended in 1970 (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 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. 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 examinations 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 a Connecticut subsidiary bank, or is
inconsistent with sound banking principles or the provisions of Chapter 658 (the
banking statute) of the Connecticut General Statutes.
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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, acceptance of 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. They were further increased for the first
half of 1993 and decreased in the second half of 1993 pursuant to regulations
issued under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA").
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.
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. See "Recent Developments -- Potential
Regulatory Sanctions."
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 capital order or 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 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.
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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 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".
New 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
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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. See "Recent Developments -- Proposed New
Standards on Safety and Soundness -- Asset Quality."
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 "satisfactory." 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 not yet determined whether it will continue
to examine USTC for CRA compliance.
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.
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 interstate branching and
expansion of bank powers. It is impossible to predict whether any of the
proposals will be adopted and the impact of such adoption on the business of the
Company or its subsidiaries.
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.
The Company's primary loan market, the New England region, continues to
experience an uneven and slow recovery. 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. At
year-end 1993, the Company's exposure to credit risk for which the primary
source of repayment is real estate collateral included $499 million of loans.
Recent economic studies have concluded that the region's economy
8
<PAGE> 11
will remain sluggish for at least the balance of this year. While there have
been pockets of growth, they have been rather anemic, and the forecast is for
small increases in the overall job market with some industries increasing
modestly and others not at all. Real estate prices and activity have both
improved somewhat from extremely depressed levels. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" below.
GENERAL
No significant portion of the 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, 1993, the Company and its subsidiaries employed
approximately 870 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 approximately 99% of the 89,014 square feet in
the building and the remaining space is leased as offices to a variety of
tenants.
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 19,160 square feet of space at 25-55 Court
Street, Boston which is used primarily to house staff 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 two branch offices
in Huntington and Shelton, Connecticut. The remaining branch offices of the
Company occupy leased premises.
The 1994 annual leasehold commitment for all premises leased by the
Company's subsidiaries totals approximately $4,031,000.
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, other than as noted in item 1 above under
"Recent Developments -- Potential Regulatory Sanctions" 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
--None--
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
<TABLE>
The common stock of the Company is traded over the counter and its price is
quoted in the NASDAQ National Market System. During the period January 1, 1992,
to December 31, 1993, the range of bid prices was as follows:
<CAPTION>
1993 1992
-------------------------- --------------------------
LOWEST BID HIGHEST BID LOWEST BID HIGHEST BID
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
1st quarter................................... 8 3/4 12 1/2 6 5/8 10 3/8
2nd quarter................................... 7 3/8 9 1/2 8 10 1/4
3rd quarter................................... 7 1/2 10 7/8 8 1/4 9 1/2
4th quarter................................... 10 1/4 12 7 1/2 10 1/2
</TABLE>
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 2,091 at
January 31, 1994.
There were no dividends declared during 1993 and 1992.
Future dividends, including any extra cash dividends, will depend upon the
earnings of the Company and its subsidiaries, their need for funds, their
financial condition and other factors, including applicable government
regulations and regulatory consent. See "Recent Developments -- Bank Regulatory
Agreements and Orders" in Part I, Item 1. and the discussion of capital in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 16 of this Form 10-K.
In connection with the $20 million senior debt private placement
transaction of August 1986 (see Note 9 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 $7 million. The Company
does not expect that these provisions will adversely affect its ability to pay
future dividends which it deems appropriate.
10
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
UST CORP. AND SUBSIDIARIES
SUMMARY OF SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
($ IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Earnings Data:
Interest income........... $ 140,628 $ 157,024 $ 221,493 $ 272,949 $ 260,909
Interest expense.......... 47,944 68,970 134,640 181,850 163,880
Net interest income....... 92,684 88,054 86,853 91,099 97,029
Provision for loan
losses................. 64,258 41,893 53,712 43,663 9,775
Net interest income after
provision for loan
losses................. 28,426 46,161 33,141 47,436 87,254
Noninterest income........ 36,723 42,359 43,636 25,575 25,702
Noninterest expense....... 97,510 96,172 89,322 72,812 69,824
Income (loss) before
income taxes........... (32,361) (7,652) (12,545) 199 43,132
Applicable income taxes
(benefit).............. (12,261) (2,931) (4,598) (1,667) 14,791
Net income (loss)......... (20,100) (4,721) (7,947) 1,866 28,341
Per share data(2):
Net income (loss)......... (1.31) (.34) (.58) .14 2.10
Cash dividends declared -- -- .15 .60 .58
Weighted average common
shares outstanding........ 15,362,251 13,984,190 13,793,617 13,564,369 13,490,218
Consolidated Average
Balances:
Total assets.............. 2,042,567 2,270,874 2,696,992 2,864,771 2,422,921
Loans..................... 1,402,200 1,546,452 1,754,213 1,842,720 1,888,017
Deposits.................. 1,635,178 1,826,738 2,172,984 2,081,321 1,669,348
Funds borrowed(3)......... 244,775 268,519 350,367 560,936 539,349
Stockholders'
investment............. 143,149 147,440 150,193 159,559 149,940
Consolidated Ratios:
Net income (loss) to
average total assets... (.98)% (.21)% (.30)% .07% 1.17%
Net income (loss) to
average stockholders'
investment............. (14.04) (3.20) (5.29) 1.17 18.90
Average stockholders'
investment to average
total
assets................. 7.01 6.49 5.57 5.57 6.19
Net charge-offs to average
loans.................. 3.70 2.71 2.26 1.43 .47
Reserve for loan losses to
period end loans....... 4.74 3.41 3.04 1.93 1.01
Average earning assets to
average total assets... 91.41 89.58 89.83 90.16 90.55
Dividend Payout Ratio..... Not Meaningful 428.57 27.57
</TABLE>
- ---------------
(1) This information should be read in connection with Management's Discussion
and Analysis of Financial Condition and Results of Operations on pages 12 to
30 of this Form 10-K with particular reference to Credit Quality and Reserve
for Loan Loss.
(2) The Company declared a 5% stock dividend to holders of record on September
30, 1991. All share and per share data have been adjusted to reflect this
transaction.
(3) Includes federal funds purchased, repurchase agreements, short-term and
other borrowings.
11
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AT DECEMBER 31, 1993
INTRODUCTION
The Company's primary loan market, the New England region, continues to
experience an uneven and slow recovery from the weak economic environment of
1990 to 1993. Recent economic studies have concluded that the region's economy
will remain sluggish for at least the balance of 1994. This climate has
contributed to the decline in commercial and residential real estate values,
although there is recent evidence that these values are stabilizing. Generally,
real estate prices and activity have both improved from extremely depressed
levels. Specifically, in the Commonwealth of Massachusetts, home sales and home
construction are both rising due to the prevailing low mortgage rates. The harsh
economic environment over the last few years has adversely affected both the net
worth of certain borrowing customers of the Company's subsidiary banks and the
Company's collateral position with respect to certain loans. Massachusetts has
seen both an exodus and failure of a number of businesses and unemployment
continues to remain high although somewhat lower than experienced during the
1990 to 1993 period. While there have been pockets of growth, they have been
sluggish, and the forecast is for small increases in the overall job market with
some industries increasing modestly and others not at all.
The foregoing factors continued to influence the Company's financial
results for 1993, particularly in the areas of provision for loan losses and
expenses related to foreclosed asset and workout expense, and are likely to
continue to influence such results.
This discussion should be read in conjunction with the financial
statements, notes, and tables included elsewhere in this Form 10-K. Certain
previous year numbers have been reclassified to conform with the 1993
presentation.
ASSETS
Total assets of $2.04 billion at December 31, 1993 have declined slightly
from $2.18 billion at December 31, 1992. This was primarily caused by weak loan
demand in the Company's market area consistent with the sluggish local economy
and a reduction due to the chargeoffs of certain credits. As illustrated in the
table on page 24, almost all categories of loans decreased. See also "Credit
Quality and Reserve for Loan Loss" below.
Presently, the Company does not plan a significant increase in assets.
Therefore, any increase in loans outstanding would likely be funded by the sale
of securities available-for-sale.
Securities at $473.9 million remained essentially unchanged from December
31, 1992. In 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), issued by the Financial Accounting Standards
Board. This Standard deals with the classification of all debt securities and
equity securities that have a ready market. According to SFAS 115, these
securities must be classified as either held-to-maturity, available-for-sale, or
trading and are reported at either amortized cost or fair value, depending upon
the classification. At December 31, 1993, all securities in the Company's
portfolio were classified as available-for-sale. This change in accounting
method resulted in an increase of $3.3 million to stockholders' equity,
representing the after-tax effect of the unrealized gain on securities
available-for-sale at December 31, 1993.
LIQUIDITY AND FUNDING
Liquidity is defined as a company's ability to fulfill its existing and
anticipated financial obligations. It is provided either through the maturity or
sale of an entity's assets, such as loans and securities, liability sources such
as increased deposits and purchased or borrowed funds, or access to the capital
markets.
At December 31, 1993, liquidity, which includes excess cash, excess funds
sold and unpledged securities totaled approximately $310 million or 15% of year
end assets, a $35 million increase from 1992.
12
<PAGE> 15
The funds needed to support the Company's loan and securities portfolios
are provided primarily by UST Corp.'s retail deposits which are relatively low
cost and account for 73% of total deposits. The Company's deposits have
decreased $151 million, or 8.4% during 1993, in the present low interest rate
environment. Generally, high-yielding certificates of deposit which matured were
not renewed at the prevailing rates, as investors are utilizing mutual funds and
other non-bank vehicles to obtain higher returns. Short-term borrowings have
been increased $24 million, or 12%, to maintain needed liquidity.
As shown in the Consolidated Statements of Cash Flow, cash and cash
equivalents decreased by approximately $26.3 million during 1993. This decrease
primarily reflected the use of $107.2 million for financing activities, offset
in part by $56.8 million in net cash provided by operations and $24.1 million
provided by investments. Net cash used for financing activities was primarily
the result of decreases in deposits offset in part by sales of common stock (see
below). Cash provided by operations resulted largely from net interest income
from loans (before provision for loan losses) and securities. This was reduced
by $16 million due to writedowns of other real estate owned and the net
difference of noninterest expense over noninterest income. Net cash provided by
investing activities was due principally to the net decreases in loans through
repayment and other real estate owned through sales, which offset an increase in
short-term investments.
Other borrowings decreased $4.3 million in 1993. On July 30, 1993 the
parent company, UST Corp., paid the second annual installment of $4 million on
its 8.5% senior notes.
On June 2, 1993, the Company sold 500 thousand shares of its unregistered
common stock in a private placement for cash proceeds of $3,750,000.
Substantially all of the net proceeds of that placement were used to repay
principal on the 8.5% senior notes. On August 12, 1993, the Company sold 2.87
million shares of its common stock in a European offering. These shares were
placed with more than sixty institutional investors, and the offering was made
under Regulation S of the United States Securities and Exchange Commission. Net
proceeds of this placement were approximately $21 million after expenses.
Substantially all of the net proceeds continue to be held in the general funds
of the Company to be used for general corporate purposes. At December 31, 1993,
the parent company had cash and liquid investments totaling approximately $23.3
million.
Separately, during the last half of 1993, USTC received approval from the
appropriate regulators to dividend $5.25 million to the Company. Of that total,
$1.7 million was contributed by the Company as capital to its Connecticut
banking subsidiary, UST Bank/Connecticut ("UST/Conn"), and $3.55 million was
contributed by the Company as capital to its lead bank, USTrust.
INTEREST RATE RISK
Volatility in interest rates requires the Company to manage interest rate
risk. Interest rate risk arises from mismatches between the repricing or
maturity characteristics of assets and the liabilities which fund them.
Management monitors and adjusts the difference between interest-sensitive assets
and interest-sensitive liabilities ("GAP" position) within various time frames.
An institution with more assets repricing than liabilities within a given time
frame is considered asset sensitive ("positive GAP") and in time frames with
more liabilities repricing than assets it is liability sensitive ("negative
GAP"). Over a positive GAP time frame an institution will generally benefit from
rising interest rates and over a negative GAP time frame will generally benefit
from falling rates. With 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 manages its interest rate GAP primarily
by lengthening or shortening the maturity structure of the Company's portfolio
of securities.
The following table summarizes the Company's GAP position at December 31,
1993. Approximately eighty percent of the loans are included in the 0-30 day
category as they reprice in response to changes in the interest rate
environment. Securities and Demand Deposits are categorized according to their
expected lives. They are evaluated in conjunction with the Company's
asset/liability management strategy and may be sold in response to changes in
interest rates, repayment risk, loan growth and similar factors. The reserve for
loan losses is included in the "Over 1 Year" category of loans. At December 31,
1993, the one-year cumulative GAP position was slightly positive at $68 million,
or approximately 3.3% of total assets.
13
<PAGE> 16
INTEREST SENSITIVITY PERIODS
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIODS
-------------------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- ------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Loans................................ $ 975 $ 25 $ 80 $ 175 $1,255
Short-term investments............... 96 1 97
Securities........................... 8 21 86 359 474
Other assets......................... 1 5 212 218
--------- ---------- ----------- ----------- ------
Total assets............... 1,079 47 172 746 2,044
Interest-bearing deposits............ 698 85 193 291 1,267
Borrowed funds....................... 225 4 11 240
Demand deposits...................... 23 351 374
Other liabilities and stockholders' 2 161 163
equity.............................
--------- ---------- ----------- ----------- ------
Total liabilities and $ 948 $ 85 $ 197 $ 814 $2,044
equity...................
--------- ---------- ----------- ----------- ------
------
GAP for period....................... $ 131 $(38) $ (25) $ (68)
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
Cumulative GAP....................... $ 93 $ 68 $ 0
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
CREDIT QUALITY AND RESERVE FOR LOAN LOSS
The Company maintains a reserve for loan losses to reduce the carrying
value of its loans to an amount estimated to be collectible. Adequacy of the
reserve for loan losses is determined using 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.
Toward the end of the second quarter of 1993, a strategy was adopted which
recognized that many troubled credit situations will need to be handled in an
expeditious manner (including the possibility of bulk sales) in order to reduce
the management and staff involvement and, in some cases, carrying costs of these
workouts. This would allow the Company's resources to be redirected toward new
business. It would increase the up-front cost of the workouts, however. As a
result, the reserve for 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 loan losses in the second quarter. Included in that
amount was a special provision of $30 million. This special provision was
management's estimate of the additional losses to be incurred from the strategic
change referred to above, the continued sluggish economic climate and losses
occurring during the remainder of 1993 on these and other credits as a result of
recent events or new facts. The provision for the year ended December 31, 1993
totaled $64.3 million. Net chargeoffs in 1993 were $51.8 million compared with
$41.9 million in 1992. At December 31, 1993, the reserve for loan losses was
$62.5 million and equaled 4.74% of loans outstanding, 127% of nonaccrual loans
and 56% of total nonperforming assets.
14
<PAGE> 17
<TABLE>
The following table measures the Company's performance regarding key
indications of asset quality:
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans............................... $ 49.3 $ 86.6 $ 89.4
Accruing loans 90 day or more past due......... .5 1.1 8.6
Other real estate and automobiles owned
(including in-substance foreclosure)........ 19.5 43.2 51.5
Restructured loans............................. 41.5 44.9 36.3
------------ ------------ ------------
Total nonperforming assets............. $110.8 $175.8 $185.8
------------ ------------ ------------
------------ ------------ ------------
Reserve for loan losses.......................... $ 62.5 $ 50.1 $ 50.1
Net chargeoffs................................... $ 51.8 $ 41.9 $ 39.6
Ratios:
Reserve to nonaccrual loans.................... 127.0% 57.9% 56.0%
Reserve to total of nonaccrual loans, accruing
loans 90 days or more past due and
restructured loans.......................... 68.5% 37.8% 37.3%
Reserve to period-end loans.................... 4.7% 3.4% 3.0%
Nonaccrual loans to period-end loans........... 3.7% 5.9% 5.4%
Nonaccrual and accruing loans over 90 days past
due to period-end loans..................... 3.8% 6.0% 5.9%
Restructured loans to period-end loans......... 3.1% 3.1% 2.2%
Nonperforming assets to period-end loans, OREO,
and automobiles owned....................... 8.3% 11.6% 10.9%
Nonperforming assets to total assets........... 5.4% 8.1% 7.9%
Net chargeoffs to average loans................ 3.7% 2.7% 2.3%
</TABLE>
As a result of the Company's strategy adopted in the second quarter of 1993
to resolve troubled credits more aggressively, net chargeoffs increased as noted
above, for 1993 compared with 1992. These chargeoffs and decline in other real
estate owned through sales, contributed to a $65 million or 37% decrease in
nonperforming assets in 1993.
Adverse economic conditions in the future could result in further
deterioration of the Company's loan portfolio and the value of its OREO
portfolio. The effect of this would likely include increases in delinquencies,
nonperforming assets, restructured loans, and OREO writedowns which individually
or collectively could have a material negative effect on future earnings. These
factors affect the Company's income statement negatively through reduced
interest income, increased provisions for loan losses, and higher costs to
collect loans and maintain repossessed collateral.
In addition to loans on nonaccrual, loans over 90 days and accruing,
troubled debt restructurings, other real estate owned and Special Mention
accruing loans 30 to 89 days past due, the Company has approximately $185
million of loans which, while current, have nonetheless been classified as
Special Mention or Substandard in the Company's internal risk rating profile.
See information following the table titled "Nonaccrual, Restructured and Past
Due Loans with Percentages of Loan Categories" on page 27 of this Form 10-K. The
risk ratings assigned to these loans were an important factor in the Company's
analysis of the adequacy of its reserve for loan losses. Proposed regulations if
implemented in their current form, however, may require the Company to reduce
significantly the level of these loans. See "Proposed New Standards on Safety
and Soundness -- Asset Quality" in Part I, Item 1 of this Form 10-K. Among the
responses available to the Company, in this event, is a further acceleration of
the Company's strategy to handle problem credits expeditiously. It is not
possible to predict the future effects on the Company's financial condition or
results of operations of actions which may be taken by the Company in response
to final regulations in this area.
15
<PAGE> 18
Management of the Company has identified the reduction of the aggregate
amount of non-performing and classified assets as a high priority. Management
will continue to assess its alternatives with a view to implementing the most
effective means of achieving such reduction.
Decisions regarding loan loss provisions and the reserve may be influenced
by the views of the regulators having jurisdiction over the Company and its
subsidiaries.
CAPITAL
There are three capital requirements which bank and bank holding companies
must meet. Two requirements take into consideration risk inherent in
investments, loans and other assets for both on-balance and off-balance sheet
items on a weighted basis ("risk-based assets"). Under these requirements, the
Company must meet minimum Tier 1 and Total risk-based capital ratios (capital as
defined in the regulations divided by risk-based assets) of 4% and 8%,
respectively. Tier 1 capital is essentially shareholders' equity, net of
intangible assets and Tier 2 capital is the allowable portion of the loan loss
reserve (as defined) and discounted subordinated debt. Total capital is the
combination of Tier 1 and Tier 2. The Company's risk-based assets were $1.64
billion at December 31, 1993 and $1.81 billion at December 31, 1992.
The third requirement is a leverage capital ratio, defined as Tier 1
capital divided by total average assets, net of intangibles. It requires a
minimum of 3% for the highest rated institutions and higher percentages for
others.
<TABLE>
At December 31, 1993 and 1992, the Company's ratios and the regulatory
minimum requirements were:
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------- -------- ------- --------
<S> <C> <C> <C> <C>
Tier 1 capital:
Actual......................................... $141.7 8.68% $134.7 7.44%
Minimum required*.............................. 65.3 4.00 72.4 4.00
Total (Tier 1 and Tier 2) capital:
Actual......................................... 164.5 10.35 162.1 8.95
Minimum required*.............................. 130.6 8.00 144.9 8.00
Tier 1 leverage capital:*........................ 141.7 7.06 134.7 6.21
- ---------------
<FN>
* See discussion below concerning capital requirements for the Company and its
banking subsidiaries resulting from regulatory agreements.
</TABLE>
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 Commissioner of Banks in the Commonwealth of
Massachusetts. In accordance with these agreements, the banks agreed to, among
other things, maintain a Tier 1 leverage capital ratio at or in excess of 6% by
February 1993. At December 31, 1993 the Tier 1 leverage capital ratios based on
average assets were 6.49% for USTrust and 23.75% for USTC.
Since June 1991, UST/Conn has been operating under a Stipulation and
Agreement with the Commissioner of Banks for the State of Connecticut. This
agreement was amended in August 1992 and November 1993 and requires UST/Conn to
maintain a 6% Tier 1 leverage capital ratio. UST/Conn Tier 1 leverage capital
ratio based on average assets at December 31, 1993 was 6.21%.
At December 31, 1993, the Company had a Tier 1 leverage capital ratio of
7.06% compared to 6.21% at December 31, 1992.
Additionally, per these agreements, the Company has agreed not to pay any
dividends to stockholders, nor take any dividends from its banking subsidiaries,
without prior regulatory approval. Similarly, the banking subsidiaries have
agreed to refrain from transferring funds in the form of dividends to the
Company without prior regulatory approval. As previously mentioned in this Form
10-K regulatory approval was obtained for dividends totaling $5.25 million from
USTC and these dividends were then contributed by the Company to its other
banking subsidiaries.
16
<PAGE> 19
In February 1994, the FDIC and Massachusetts commissioner terminated and
lifted the consent agreement and order with USTC. Despite the terminations of
its Regulatory Agreement, USTC has agreed to continue to request regulatory
consent prior to the payment of dividends.
RESULTS OF OPERATIONS
COMPARISON OF 1993 WITH 1992
The $64.3 million provision for loan losses coupled with a $3.1 million
increase in foreclosed asset and workout expenses when compared with those of
1992 are the primary reasons the Company reported a $20.1 million loss, or $1.31
per share, for 1993.
Positive factors in 1993 included a $21 million reduction in the costs to
fund lending operations. The decreased cost outpaced the decrease in the yield
on assets. As previously mentioned, nonperforming assets were reduced from
$175.8 million at December 31, 1992 to $110.8 at December 31, 1993, a decrease
of 37%. These factors were the principal reasons that net interest income
increased in 1993.
The Company's net interest income on a fully taxable equivalent basis was
$4.2 million higher in 1993 compared with 1992. This compares with a $4.6
million increase on a reporting basis. The difference is due to the decline in
tax-free income from 1992 to 1993. The Company's interest rate spread and margin
also showed considerable improvement. See "Net Interest Income Analysis" below.
<TABLE>
A comparative analysis for return on average assets and return on average
stockholder's equity is shown below:
Return on Average Assets -- Component Analysis
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1993 1992
------ ------
<S> <C> <C>
Net interest income.............................................. 4.54% 3.88%
Provision for loan losses........................................ (3.15) (1.85)
----- -----
Net interest income after provision for loan losses 1.39 2.03
Noninterest income............................................... 1.80 1.87
Noninterest expense.............................................. (4.77) (4.24)
----- -----
Loss before income tax........................................... (1.58) (.34)
Income tax benefit............................................... (.56) (.13)
----- -----
Loss before change in accounting method.......................... (1.02) (.21)
Cumulative effect of change in method of accounting for income
taxes.......................................................... .04
----- -----
Net loss............................................... (.98)% (.21)%
----- -----
----- -----
</TABLE>
17
<PAGE> 20
Return on Average Equity -- Component Analysis
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1993 1992
------ ------
<S> <C> <C>
Net interest income.............................................. 64.75% 59.72%
Provision for loan losses........................................ (44.89) (28.41)
------ ------
Net interest income after provision for loan losses.............. 19.86 31.31
Noninterest income............................................... 25.65 28.73
Noninterest expense.............................................. (68.12) (65.23)
------ ------
Loss before income tax........................................... (22.61) (5.19)
Income tax benefit............................................... (8.04) (1.99)
------ ------
Loss before change in accounting method.......................... (14.57) (3.20)
Cumulative effect of change in method of accounting for income
taxes.......................................................... .53
------ ------
Net loss............................................... (14.04)% (3.20)%
------ ------
------ ------
</TABLE>
Core Earnings
The Company defines core earnings as pretax income before loan loss
provision, foreclosed asset and workout expense, securities gains, and other
nonrecurring income and expense items. Management believes that core earnings
are a useful measure of a bank's ability to withstand the adverse effects of
nonperforming assets. The following table reflects the Company's core earnings
components on a comparative basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ----- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Pretax income (loss).................................... $(32.4) $ (7.7) $(12.5) $ .2 $43.1
Add back:
Loan loss provision................................... 64.3 41.9 53.7 43.7 9.8
Foreclosed asset and workout expense.................. 23.4 20.3 14.5 3.7
Securities gains...................................... (4.2) (13.5) (10.5) (3.0) (1.7)
Other nonrecurring (income)/expense items, net (1.0) 5.3 (1.9) 1.2 2.8
------ ------ ------ ----- -----
Core earnings................................. $ 50.1 $ 46.3 $ 43.3 $45.8 $54.0
------ ------ ------ ----- -----
------ ------ ------ ----- -----
</TABLE>
Net Interest Income Analysis
Substantial decreases continue to occur in the cost of the Company's
interest-bearing liabilities while average noninterest-bearing funds volume has
increased significantly since 1992. Specifically, the cost of interest-bearing
funds declined to 3.13% in 1993 compared with 3.92% for 1992. The decreased cost
has outpaced the decrease in the yield on assets. Noninterest-bearing funds
averaged $274 million for 1992 and in 1993 averaged $335 million. This is due
primarily to higher balances needed to offset costs associated with maintaining
corporate demand deposit accounts. Due to these conditions and the decline in
nonperforming assets (and the interest-related costs associated with these
assets), the interest rate spread and margin (as these terms are defined on page
22) both increased significantly during 1993. The spread in 1993 was 4.47%
compared with 3.88% for 1992. The margin was 5.03% in 1993 compared with 4.41%
in 1992. These factors caused an increase of $4.2 million in net interest income
on a taxable equivalent basis for 1993 compared with 1992.
Current spreads are at historically high rates and, therefore, probably
will not continue at these levels into the future.
The following table attributes changes in interest income, interest expense
and the related net interest income for the year ended December 31, 1993 when
compared with 1992, either to changes in average
18
<PAGE> 21
balances or to the changes in average rates on interest-bearing assets and
liabilities. In this table, changes attributable to both rate and volume are
allocated on a weighted basis.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM YEAR
ENDED DECEMBER 31, 1992
----------------------------------
AMOUNT DUE TO
CHANGES IN
YEAR ENDED TOTAL ---------------------
DECEMBER 31, 1993 CHANGE VOLUME RATE
----------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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)
Nontaxable*.......................... 819 (208) (368) 160
Interest on trading account 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 35% and includes
applicable State taxes net of Federal benefit. The tax equivalent adjustment
on loans was approximately $900 thousand and on nontaxable securities was
approximately $200 thousand.
</TABLE>
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
continued their positive trend due to new business and appreciation of existing
clients' asset portfolios. This resulted in a $3.3 million increase in asset
management fees, partly offsetting the decrease in securities gains noted above.
Corporate services income increased $985 thousand, or 13%, in 1993. This was due
to changes in the fee system and the continued expansion of the product base.
Other noninterest income decreased $466 thousand in 1993 and the following
are the more significant reasons: Leasing fee income declined $251 thousand as
the Company continued to minimize its activity in this area until taxable income
increases sufficiently. Real estate appraisal fees decreased $207 thousand 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 $350 thousand 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 $161 thousand for the quarter ended
March 31, 1992. All other miscellaneous noninterest income declined $197
thousand.
Noninterest Expense
Noninterest expense of $97.5 million remained essentially flat in 1993
compared with 1992. Increases in foreclosed asset and workout expense amounted
to $3.1 million. Increases in writedowns to fair value minus estimated costs to
sell foreclosed real estate properties totaled $1.7 million while other
foreclosed asset and workout expenses increased $1.4 million. Writedown costs
decreased $1.6 million in the fourth quarter of 1993 compared with the same
period in 1992. However, as previously discussed under "Credit Quality and
Reserve
19
<PAGE> 22
for Loan Loss," this trend may not continue. Other noninterest expense decreased
$5.9 million in 1993. In 1992, the Company added $3.8 million to a reserve for
losses arising from securitized loans. 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.
Income Taxes
The Company had a tax benefit of $11.5 million in 1993 compared with $2.9
million in 1992. The variations in income taxes are attributable to the level
and composition of pretax income or loss.
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
financial statements of this Form 10-K for a discussion of this matter.
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, 1993 and 1992 are
disclosed in Note 18 of the 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, 1993 was $1.93 billion and $1.89 billion, respectively. The
estimated fair value of Financial Instrument assets and liabilities of the
Company as of December 31, 1992 was $2.03 billion and $2.02 billion,
respectively. In the opinion of management, the excess in the valuation of
Financial Instrument assets and liabilities over their carrying values for 1993
and 1992 is attributed primarily to the continued decline in interest rates.
COMPARISON OF 1992 WITH 1991
Net Interest Income Analysis
The following table attributes changes in interest income, interest expense
and the related net interest income for the year ended December 31, 1992 when
compared with the year ended December 31, 1991, either to changes in average
balances or to the changes in average rates on interest-bearing assets and
liabilities. In this table, changes attributable to both rate and volume are
allocated on a weighted basis.
20
<PAGE> 23
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM YEAR
ENDED
DECEMBER 31, 1991
--------------------------------
AMOUNT DUE TO
CHANGES IN
YEAR ENDED TOTAL --------------------
DECEMBER 31, 1992 CHANGE VOLUME RATE
----------------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans*................... $ 123,747 $(54,536) $(22,906) $(31,630)
Interest and dividends on securities:
Taxable.................................... 32,905 2,752 4,953 (2,201)
Nontaxable*................................ 1,027 (302) (419) 117
Interest on trading account and other......... 898 (12,809) (10,263) (2,546)
----------------- -------- -------- --------
Total interest income*................ 158,577 (64,895) (28,635) (36,260)
----------------- -------- -------- --------
Interest expense:
Interest on deposits.......................... 59,444 (55,318) (20,419) (34,899)
Interest on short-term borrowings............. 7,757 (10,165) (3,681) (6,484)
Interest on other borrowings.................. 1,769 (187) (179) (8)
----------------- -------- -------- --------
Total interest expense................ 68,970 (65,670) (24,279) (41,391)
----------------- -------- -------- --------
Net interest income........................... $ 89,607 $ 775 $ (4,356) $ 5,131
----------------- -------- -------- --------
----------------- -------- -------- --------
- ---------------
<FN>
* Fully taxable equivalent at the Federal corporate tax rate of 34% and includes
applicable state taxes net of Federal tax benefit. The tax equivalent
adjustment on loans was approximately $1.2 million and on nontaxable
investment securities was approximately $.3 million.
</TABLE>
Noninterest Income
Total noninterest income decreased by $1.3 million in 1992 from 1991. Asset
management fees increased $3.5 million in 1992 compared with 1991. Assets under
management increased, including appreciation of existing assets, to nearly $3
billion from approximately $2.5 billion in the previous year. Net gains on
securities were $13.5 million in 1992 compared with $10.5 million in 1991.
Corporate services income increased $391 thousand, or 6%, in 1992. This was due
to the expansion of the product base, growth in the number of clients, and
increases in fees charged. A gain on the sale of real estate during 1991
accounted for $3 million of noninterest income. Lease residual income declined
$2.6 million due to a reduction in the number of leases maturing.
Other noninterest income decreased $2.7 million in 1992 and the following
are the more significant reasons. Loan servicing fees decreased $575 thousand as
a servicing contract with the Resolution Trust Corporation ended during 1992.
Leasing fee income declined $680 thousand as the Company made a decision to
minimize its activity in this area until taxable income increases sufficiently.
Other fee income which the Company generates, including fees on acceptances and
retail banking fees, declined $673 thousand as a result of a drop in the
interest rates of the acceptances and a decrease in the levels of both
acceptances and deposits.
Noninterest Expense
Total noninterest expense in 1992 increased to $96.2 million from $89.3
million in 1991. Foreclosed asset and workout expense rose $5.8 million,
primarily due to writedowns to fair value minus estimated costs to sell
foreclosed real estate properties. These writedowns totaled $14.4 million, an
increase of $5.4 million over 1991. Increases in the amortization of core
deposit intangibles of $450 thousand, legal fees of $262 thousand, plus
additions to the reserves for litigation of $1.8 million, were partially offset
by decreases in controllable expenses such as postage and telephone expense of
$293 thousand.
FDIC deposit assessment expense declined in 1992 due to the aforementioned
reduction in deposits. In 1992, the FDIC voted to restructure the assessment
system. This restructuring, which would be based on the
21
<PAGE> 24
strength of a bank and the amount of capital it has, could lead to higher
assessments in the future, if the Company fails to maintain its capital ratios.
In December 1992, the Company adopted Statement of Position 92-3 ("SOP
92-3"), issued by the American Institute of Certified Public Accountants. This
statement concluded 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. For 1992, the pretax charge to income resulting from
implementation of SOP 92-3 was $750 thousand and is included in the writedown
expense of $14.4 million noted above.
AVERAGE BALANCES, INTEREST RATES AND INTEREST RATE DIFFERENTIAL
<TABLE>
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 (in thousands).
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1993 1992 1991
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks................. $ 100,755 $ 109,305 $ 102,173
Interest-bearing
deposits.............. 49,305 $ 3,208 6.5%
Securities(1)
Taxable............... 431,242 $ 28,696 6.7% 449,121 $ 32,905 7.3% 381,516 30,153 7.9
Non-taxable(2)........ 11,175 819 7.3 17,413 1,027 5.9 25,437 1,329 5.2
---------- -------- ---------- -------- ---------- --------
Total securities...... 442,417 29,515 6.7 466,534 33,932 7.3 406,953 31,482 7.7
Trading account......... 2,967 192 6.5 72,873 4,870 6.7
Excess Funds sold....... 22,460 703 3.1 18,254 706 3.9 95,721 5,629 5.9
Loans(2)(3)............. 1,402,200 111,586 8.0 1,546,452 123,747 8.0 1,797,823 178,283 9.9
Reserve for loan
losses................ (63,134) (51,298) (43,866)
---------- ---------- ----------
Net loans............... 1,339,066 1,495,154 1,753,957
Other assets............ 137,869 178,660 216,010
---------- -------- ---------- -------- ---------- --------
Total assets/interest
income.............. $2,042,567 $141,804 6.9% $2,270,874 $158,577 7.0% $2,696,992 $223,472 8.3%
---------- -------- ---------- -------- ---------- --------
---------- -------- ---------- -------- ---------- --------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Non interest-bearing
demand................ $ 346,980 $ 333,319 $ 296,258
---------- ---------- ----------
Interest-bearing demand
(NOW accounts)........ 144,255 $ 2,693 1.9% 134,274 $ 3,505 2.6% 127,050 $ 5,872 4.6%
Savings:
Money market.......... 346,314 8,429 2.4 429,963 13,986 3.3 483,228 25,448 5.3
Other................. 320,357 9,338 2.9 322,259 11,238 3.5 331,526 17,943 5.4
Time(4)............... 477,272 19,840 4.2 606,923 30,715 5.1 934,922 65,499 7.0
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits............ 1,288,198 40,300 3.1 1,493,419 59,444 4.0 1,876,726 114,762 6.1
---------- ---------- ----------
Total deposits........ 1,635,178 1,826,738 2,172,984
Short-term borrowings... 227,944 6,239 2.7 247,185 7,757 3.1 326,580 17,922 5.5
Other borrowings........ 16,831 1,405 8.3 21,334 1,769 8.3 23,787 1,956 8.2
Other liabilities....... 19,465 28,177 23,448
Stockholders'
investment............ 143,149 147,440 150,193
---------- -------- ---------- -------- ---------- --------
Total liabilities and
stockholders'
investment/interest
expense............. $2,042,567 $ 47,944 2.3% $2,270,874 $ 68,970 3.0% $2,696,992 $134,640 5.0%
---------- -------- ---------- -------- ---------- --------
---------- -------- ---------- -------- ---------- --------
Earning
assets -- interest
income................ $1,867,077 $141,804 7.6% $2,034,207 $158,577 7.8% $2,422,675 $223,472 9.2%
Interest-bearing
liabilities -- interest
expense............... $1,532,973 $ 47,944 3.1 $1,761,938 $ 68,970 3.9 $2,227,093 134,640 6.0
-------- -------- --------
Net interest
spread(5)............. 4.5 3.9 3.2
Net interest
margin(6)............. $ 93,860 5.0% $ 89,607 4.4% $ 88,832 3.7%
-------- -------- --------
-------- -------- --------
- ---------------
<FN>
(1) For the purpose of this analysis, in 1993, securities include only
securities available-for-sale. For 1992 and 1991, securities include both
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 pre-tax yields comparable to taxable
loans and investments, a tax equivalent adjustment is utilized. The
adjustment is based on a 35% Federal income tax rate (34% in 1992 and 1991)
and includes applicable state taxes net of Federal tax benefit.
(3) For the purpose of this analysis, nonaccrual loans and loans held for sale
are included in loans. There were no loans held for sale in 1993 or 1992. In
1991, loans held for sale had an average balance of $43.6 million with
corresponding income of $2.4 million.
(4) Includes $25.3 million of deposits in 1991 in a foreign office established
in 1988 which now has been closed.
(5) Net interest spread is the excess of the interest rate on average earning
assets over the interest rate on average interest-bearing liabilities.
(6) Net interest margin is the excess of the interest earned over interest
expense divided by average earning assets.
</TABLE>
22
<PAGE> 25
SECURITIES
The Company has a policy of purchasing primarily securities 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 free
nature, the Company has 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 1993 includes only
securities available-for-sale. Data presented for 1992 and 1991 includes both
the investment portfolio and securities held for sale. In 1993 securities
available-for-sale were $473.9 million. In 1992 and 1991, securities held for
sale were $468.6 million and $425.8 million, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1992 1991
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities..................................... $263,435 $307,014 $265,624
U.S. Treasury securities and securities of other U.S.
Government agencies and corporations......................... 129,703 74,225 12,412
Obligations of states and political subdivisions(1)............ 3,887 5,181 9,060
Other securities............................................... 76,884 90,345 158,005
-------- -------- --------
Total................................................ $473,909 $476,765 $445,101
-------- -------- --------
-------- -------- --------
</TABLE>
- ---------------
(1) Non-Taxable
<TABLE>
The following table presents securities available for sale with their
maturities at December 31, 1993, and the approximate weighted tax equivalent
yields (at the statutory Federal tax rate of 35%). Mortgage-backed securities
are shown at their final maturity but are expected to have shorter average
lives. All yields presented in this table have been computed using the amortized
cost of the securities.
<CAPTION>
SECURITIES MATURING IN
--------------------------------------------------------------------------------------------
ONE YEAR 10 YRS. EQUITY
OR LESS 1 YR. THRU 5 5 YRS. THRU 10 OR MORE SECURITIES TOTAL
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities...... $43,005 8.05% $220,430 7.24% $263,435 7.37%
U.S. Treasury
securities and
securities of
other U.S.
Government
agencies and
corporations.... $2,111 3.06% $103,100 5.02% 24,492 5.48 129,703 5.08
Obligations of
states and
political
subdivisions.... 116 8.96 766 9.59 724 7.58 2,281 9.21 3,887 8.97
Other
securities...... 26 5.44 73,713 7.07 173 6.07 30 5.50 $2,942 7.21% 76,884 7.08
-------- -------- -------- -------- -------- --------
Total
securities... $2,253 3.40% $177,579 5.87% $68,394 7.10% $222,741 7.26% $2,942 7.21% $473,909 6.70%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
At December 31, 1993 the Company owned the following corporate notes, whose
aggregate fair value was in excess of 10% of stockholders' investment:
<TABLE>
<CAPTION>
AGGREGATE
MARKET
VALUE
----------
($ IN
THOUSANDS)
<S> <C>
Ford Motor Credit Corp............................................................ $ 20,108
General Motors Acceptance Corp.................................................... 21,146
Sears, Roebuck Medium Term Notes.................................................. 21,653
</TABLE>
These securities are unsecured corporate notes of investment grade. They
carry the normal credit risk associated with such instruments.
23
<PAGE> 26
All securities carry interest rate risk. Additionally, mortgage-backed
securities carry prepayment risk. (See Footnote 1, Summary of Significant
Accounting Policies on page 37 of this Form 10-K for a discussion of prepayment
risk).
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
The following table presents the composition of the loan portfolio by type
of loan.
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS)
----------------
<S> <C> <C> <C> <C> <C>
Commercial:
Commercial and financial(1)........ $ 762,758 $ 867,433 $ 873,437 $1,008,030 $1,013,097
Real estate:
Construction....................... 35,295 50,427 71,264 107,600 136,055
Developer, investor and land(1).... 315,700 359,666 462,133 491,819 503,452
Consumer:
Residential mortgage loans......... 84,846 56,364 51,395 43,275 42,786
Home equity loans.................. 63,188 67,010 67,179 67,709 65,190
Indirect automobile installment.... 31,848 42,786 83,039 104,861 51,180
Other consumer..................... 23,944 26,914 40,026 45,474 32,773
---------- ---------- ---------- ---------- ----------
Total loans................ 1,317,579 1,470,600 1,648,473 1,868,768 1,844,533
Less:
Reserve for loan losses............ 62,547 50,126 50,100 36,008 18,717
---------- ---------- ---------- ---------- ----------
$1,255,032 $1,420,474 $1,598,373 $1,832,760 $1,825,816
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
- ---------------
<FN>
(1) Certain loans for which the principal source of repayment is not real estate
collateral dependent have been reclassified as commercial and financial for
1992, consistent with the 1993 presentation. Information for the prior
years is not readily available.
</TABLE>
Indirect automobile installment loans represent loans purchased without
recourse from automobile dealers. Automobile loans made directly to consumers
are not a significant portion of the business and are included in the other
consumer loan category.
In 1989, a total of $80 million of indirect automobile installment loans
was segregated for sale and not included in the above table. Unfavorable market
conditions in 1990 and the assumption of longer-term deposits in connection with
the Home Owners purchase and assumption transaction (See Note 2 on page 39 of
this Form 10-K) resulted in a decision by the Company not to sell those loans
and, consequently, they were reclassified to indirect automobile loans in that
year.
As a result of the Home Owners transaction, the Company had $513.6 million
of loans held for sale at December 31, 1990, and, therefore, not included in the
above table. All of these loans were put back to the Resolution Trust
Corporation in 1991.
24
<PAGE> 27
LOAN MATURITY DISTRIBUTION
<TABLE>
The following table reflects the maturity and interest sensitivity of
commercial and financial, and real estate loans, at December 31, 1993.
<CAPTION>
AFTER
1 YEAR
1 YEAR THROUGH AFTER
OR LESS 5 YEARS 5 YEARS TOTAL
-------- -------- -------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and financial...................... $481,670 $232,967 $ 48,121 $ 762,758
Real estate:
Construction................................ 17,366 15,460 2,469 35,295
Developer, investor and land................ 137,694 152,643 25,363 315,700
-------- -------- -------- ----------
$636,730 $401,070 $ 75,953 $1,113,753
-------- -------- -------- ----------
-------- -------- -------- ----------
Interest sensitivity of above loans:
With predetermined interest rates........... $127,759 $141,546 $ 36,618 $ 305,923
With floating interest rates................ 508,971 259,524 39,335 807,830
-------- -------- -------- ----------
$636,730 $401,070 $ 75,953 $1,113,753
-------- -------- -------- ----------
-------- -------- -------- ----------
</TABLE>
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 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.
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. 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 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 the Loan Review Department management and Senior
Credit Committee whose membership includes the most senior executive officers in
the Company and the most senior lending officers in each subsidiary bank and
major lending 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 in depth monthly and actively monitors the large credit
exposures. Also in 1992 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 reports to the Company's Board. 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.
25
<PAGE> 28
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 and most nonaccrual and other troubled loans are now
largely handled by this group or in the Commercial Real Estate Department.
In 1993, under the direction of new management, staffing was increased in
both the Loan Review and the Credit Risk Control Departments. Furthermore, a
number of systems changes were initiated to improve control over credit
administration, and smaller commercial loans were transferred to the Installment
Lending Department where they can be more efficiently monitored. As a result,
the commercial loan officers' workload has been reduced.
26
<PAGE> 29
NONACCRUAL, PAST DUE, RESTRUCTURED LOANS, OTHER AUTOMOBILES OWNED AND OTHER REAL
ESTATE OWNED.
<TABLE>
The following table sets forth by loan category nonaccrual, past due,
restructured loans, other automobiles and other real estate owned. To avoid
double counting, each category excludes loans classified in the preceding
category. Also included in the table are loans more than 90 days past due and
still accruing.
NONACCRUAL, RESTRUCTURED AND PAST DUE LOANS WITH PERCENTAGES OF LOAN CATEGORIES
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------------ ------------------ ------------------ ------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
RELATED RELATED RELATED RELATED RELATED
LOAN LOAN LOAN LOAN LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ --------- ------ --------- ------ --------- ------ ---------- ------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nonaccruals:(1)
Commercial:
Commercial and financial... $25,703 3.37% $ 51,768 5.97% $ 42,221 4.83% $15,724 1.56% $5,452 .54%
Real estate:
Construction............... 1,025 2.90% 16,558 32.84 12,830 18.00 13,570 12.61 2,336 1.72
Developer investor
& land................... 19,210 6.08 15,256 4.24 27,726 6.00 34,413 7.00 2,948 .59
Consumer:
Residential mortgage
loans.................... 2,558 3.01 986 1.75 2,807 5.46 2,039 4.71 389 .91
Home equity loans(2)....... 190 .30 1,240 1.85 2,625 3.91 1,147 1.69
Indirect automobile
installment................ 40 .13 271 .63 945 1.14 1,402 1.34 1,916 3.74
Other consumer............. 540 2.26 550 2.04 246 .61 1,085 2.39 437 1.33
------- ---- -------- ---- -------- ---- ------- ---- ------- ----
Total nonaccrual.......... $49,266 3.74% $ 86,629 5.89% $ 89,400 5.42% $69,380 3.71% $13,478 .73%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Other real estate and
automobiles owned (3)..... $19,468 $ 43,154 $ 51,511 $30,524 $ 8,511
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Other loans 90 days or
more past due and accruing:
Commercial:
Commercial and financial... $ % $ 158 .02% $ 2,206 .25% $ 6,217 .62% $ 6,865 .68%
Real estate:
Construction............... 2,681 2.49 1,433 1.05
Developer investor & land.. 2,043 .44 13,990 2.84 11,360 2.26
Consumer:
Residential mortgage loans... 2,811 5.47 1,950 4.51 511 1.19
Indirect automobile
installment... 26 .08 71 .17 1,175 1.41 847 .81 3,049 5.96
Other consumer... 531 2.22 862 3.20 319 .80 865 1.90 1,139 3.48
------- -------- -------- ------- -------
$ 557 .04% $ 1,091 .07% $ 8,554 .52% $26,550 1.42% $24,357 1.32%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Restructured loans(1 & 4).... $41,477 3.15% $ 44,899 3.05% $ 36,311 2.20% $4,108 .22%
------- -------- -------- -------
------- -------- -------- -------
- ---------------
<FN>
(1) The amount of interest on December 31, 1993 nonaccrual and restructured
loans that would have been recorded had the loans been paying in accordance
with their original terms during the year ended December 31, 1993 was
approximately $9,743,000. The amount of interest income on these loans
included in net income in 1993 was approximately $3,496,000.
(2) Information on home equity loans is available for 1990 through 1993 only.
Prior to 1990, these loans are classified with other consumer loans.
(3) Other real estate owned 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. Prior to 1992, other real estate owned
was recorded at the lower of recorded investment in the loan or fair value.
Automobiles owned 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.
(4) 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.
</TABLE>
27
<PAGE> 30
In addition to the amounts in the above table, accruing loans 30 to 89 days
past due and rated Special Mention in the Company's internal risk rating profile
amounted to $12 million at December 31, 1993. Also at December 31, 1993 there
were approximately $185 million of accruing commercial and real estate loans
which, while current, have nonetheless been classified as Special Mention or
Substandard an increase from approximately $130 million at the end of 1992.
There were no loans classified "Doubtful" in either year which were not
disclosed in the above table. Approximately 84 percent of these loans were in
the Substandard category. Under the Company's definition, Substandard assets are
characterized by the distinct possibility that some loss will be sustained if
the credit deficiencies are not corrected. The Substandard classification,
however, does not necessarily imply ultimate loss for each individual asset so
classified. Special Mention assets, as defined by the Company, have potential
weaknesses that deserve management's close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for
the assets. The Company uses the internal risk rating profile along with a
number of other factors in determining the adequacy of its reserve for loan
loss. See Credit Quality and Reserve for Loan Losses on page 14 of this Form
10-K for a further discussion.
ALLOCATION OF LOAN LOSS RESERVE
The Company charges off loans or portions of loans when they are considered
uncollectible. Therefore, no portion of the Reserve for Loan Losses is
restricted to any loan or group of loans, and the entire Reserve is available to
absorb all probable losses inherent in the portfolio. However, for internal
analytical purposes the Company allocates its Reserve in conjunction with its
risk rating profile. Since conditions within the profile are subject to change,
the allocation presented below should not be interpreted as an indication that
chargeoffs in 1994 will occur in these amounts or proportions, or that the
allocation indicates future trends.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amount of loan loss reserve:
Allocated to Commercial and
Real Estate............. $ 50,411 $ 35,344 $ 35,420 $ 25,661 $ 16,209
Allocated to consumer(1)... 5,470 4,762 5,324 7,954 2,508
Unallocated(2)............. 6,666 10,020 9,356 2,393
---------- ---------- ---------- ---------- ----------
Total loan loss
reserve.......... $ 62,547 $ 50,126 $ 50,100 $ 36,008 $ 18,717
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Commercial and Real
Estate.................. $1,113,753 $1,277,526 $1,406,834 $1,607,449 $1,652,604
% of total loans........... 84.6% 86.9% 85.3% 86.0% 89.6%
Total consumer loans....... $ 203,826 $ 193,074 $ 241,639 $ 261,319 $ 191,929
% of total loans........... 15.4% 13.1% 14.7% 14.0% 10.4%
Total all loans.... $1,317,579 $1,470,600 $1,648,473 $1,868,768 $1,844,533
</TABLE>
- ---------------
(1) Consumer loans include indirect automobile installment loans, residential
mortgages and home equity lines of credit, credit cards, and check credit
loans.
(2) Prior to 1990 the Company assigned all of the Reserve in its analysis and,
therefore, did not utilize an unallocated portion.
28
<PAGE> 31
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserve for loan losses at
beginning of period............ $ 50,126 $ 50,100 $ 36,008 $ 18,717 $ 17,897
---------- ---------- ---------- ---------- ----------
Loans charged off:
Commercial:
Commercial and financial
loans..................... 29,067 24,012 17,613 19,845 5,545
Real estate:
Construction loans.......... 1,705 924 2,242 220
Developer, investor and
land...................... 21,774 10,788 10,366 1,978
Consumer:
Residential mortgage
loans..................... 418 1,250 2,839 469
Home equity loans(1)........ 370 673
Indirect automobile
installment............... 1,981 2,181 5,366 3,035 3,449
Other consumer.............. 280 3,386 2,890 2,287 998
---------- ---------- ---------- ---------- ----------
Total chargeoffs....... 55,595 43,214 41,316 27,614 10,212
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial:
Commercial and financial
loans..................... 1,628 688 735 735 606
Real estate:
Construction loans.......... 24 9
Developer, investor and
land...................... 928 56
Consumer:
Residential mortgage
loans..................... 11 36 78
Home equity loans(1)........ 101 66
Indirect automobile
installment............... 1,046 219 564 285 125
Other consumer.............. 20 329 263 222 526
---------- ---------- ---------- ---------- ----------
Total recoveries....... 3,758 1,347 1,696 1,242 1,257
---------- ---------- ---------- ---------- ----------
Net chargeoffs................... 51,837 41,867 39,620 26,372 8,955
Provision charged to
operations..................... 64,258 41,893 53,712 43,663 9,775
---------- ---------- ---------- ---------- ----------
Reserve for loan losses at end of
period(2)...................... $ 62,547 $ 50,126 $ 50,100 $ 36,008 $ 18,717
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average loans.......... $1,402,200 $1,546,452 $1,754,213 $1,842,720 $1,888,017
Ratio of net chargeoffs to
average loans.................. 3.70% 2.71% 2.26% 1.43% .47%
</TABLE>
- ---------------
(1) This information is available separately for 1993 and 1992 only. Prior to
1992 the information is included in the other consumer category.
(2) Refer to the discussion of the factors used in determining the reserve for
loan losses in Management's Discussion of Financial Condition and Results of
Operations on page 14 of this Form 10-K.
29
<PAGE> 32
DEPOSITS
The following table sets forth the remaining maturities of certificates of
deposit in the amount of $100 thousand or more at December 31, 1993, in
thousands:
<TABLE>
<S> <C>
Less than three months............................................. $56,068
Three to six months................................................ 8,108
Six to twelve months............................................... 3,753
Over twelve months................................................. 4,982
-------
Total.................................................... $72,911
-------
-------
</TABLE>
SHORT-TERM BORROWINGS
The Company's short-term borrowings consist primarily of federal funds
purchased and securities sold under agreements to repurchase. These instruments
are generally overnight funds.
The following information relates to federal funds purchased and securities
sold under agreements to repurchase which represents more than thirty percent of
stockholders' equity:
<TABLE>
<CAPTION>
AT DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------
WEIGHTED MAXIMUM WEIGHTED
AVERAGE AMOUNT AVERAGE AVERAGE
INTEREST AT ANY AMOUNT INTEREST
BALANCE RATE MONTH END OUTSTANDING RATE
-------- --------- ----------- ------------ ---------
($ IN THOUSANDS) ($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal funds purchased:
1993........................... $ 35,913 3.25% $ 80,126 $ 42,965 3.14%
1992........................... 48,984 3.13 78,519 61,607 3.58
1991........................... 80,802 3.88 217,000 159,169 5.79
Securities sold under agreements
to repurchase:
1993........................... $158,618 2.31% $ 221,549 $167,696 2.55%
1992........................... 132,167 2.34 228,282 174,383 2.93
1991........................... 94,514 4.10 226,025 44,513 5.10
</TABLE>
30
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
Report of Independent Public Accountants.............................................. 32
Consolidated Balance Sheets -- December 31, 1993 and 1992............................. 33
Consolidated Statements of Income for the years ended December 31, 1993, 1992 and
1991................................................................................ 34
Consolidated Statements of Changes in Stockholders' Investment for the years ended
December 31, 1993, 1992 and 1991.................................................... 35
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and
1991................................................................................ 36
Notes to Consolidated Financial Statements............................................ 37
</TABLE>
31
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of UST Corp.:
We have audited the accompanying consolidated balance sheets of UST Corp.
(a Massachusetts corporation) and Subsidiaries as of December 31, 1993 and 1992,
and the related consolidated statements of income, changes in stockholders'
investment and cash flows for each of the three years in the period ended
December 31, 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of UST Corp.
and Subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and investments by
adopting Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" and Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
January 1, 1993 and December 31, 1993, respectively.
Arthur Andersen & Co.
Boston, Massachusetts
January 31, 1994
32
<PAGE> 35
<TABLE>
UST CORP. AND SUBSIDIARIES
BALANCE SHEETS
ASSETS
<CAPTION>
DECEMBER 31,
-------------------------
1993 1992
---------- ----------
($ IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Cash, due from banks and interest-bearing deposits (Note 3)................... $ 90,198 $ 116,529
Excess funds sold to banks and other short-term investments................... 96,647 1,341
Securities (Notes 1 and 4):
Investment portfolio (Market value: $8,163)................................. 8,122
Securities available-for-sale:
Mortgage-backed securities (Market value: $314,434 in 1992)............... 263,435 307,014
U.S. Treasury, corporate notes, and other (Market value: $161,313 in
1992).................................................................... 210,474 161,629
---------- ----------
Total securities available-for-sale....................................... 473,909 468,643
---------- ----------
Total securities..................................................... 473,909 476,765
Loans (Notes 5, 14, and 16):
Loans -- net of unearned discount of $7,026 in 1993 and $9,094 in 1992...... 1,317,579 1,470,600
Reserve for loan losses..................................................... (62,547) (50,126)
---------- ----------
1,255,032 1,420,474
Premises, furniture and equipment, net (Note 6)............................... 32,661 35,055
Goodwill...................................................................... 2,192 2,315
Other real estate owned (Note 7).............................................. 19,468 43,154
Other assets (Notes 2, 10, and 12)............................................ 74,159 82,428
---------- ----------
Total Assets......................................................... $2,044,266 $2,178,061
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Demand:
Noninterest bearing....................................................... $ 373,793 $ 422,056
Interest bearing.......................................................... 170,642 148,639
Savings:
Money market.............................................................. 323,979 385,305
Other..................................................................... 320,924 323,746
Time:
Certificates of deposit over $100,000..................................... 72,911 84,822
Other..................................................................... 378,549 427,363
---------- ----------
Total deposits....................................................... 1,640,798 1,791,931
Short-term borrowings (Note 8)................................................ 226,268 202,051
Other borrowings (Note 9)..................................................... 14,286 18,607
Other liabilities............................................................. 10,095 21,592
Commitments and contingencies (Notes 15 and 16)
Stockholders' investment (Notes 1, 4, 9, 11, and 13):
Preferred stock $1 par value; Authorized -- 4,000,000 shares;
Outstanding -- None
Common stock $.625 par value; Authorized -- 30,000,000 shares;
Outstanding -- 17,304,795 and 14,036,842 shares in 1993 and 1992,
respectively.............................................................. 10,815 8,773
Additional paid-in capital.................................................. 69,694 47,694
Retained earnings........................................................... 68,437 88,537
Unrealized gain on securities available for sale, net tax................... 3,335
Unrealized loss on marketable equity securities............................. (17)
Deferred compensation, net.................................................. 538 (1,107)
---------- ----------
Total stockholders' investment.............................................. 152,819 143,880
---------- ----------
Total Liabilities and Stockholders' Investment....................... $2,044,266 $2,178,061
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 36
<TABLE>
UST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
($ IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans......................................... $110,673 $122,522 $174,344
Interest and dividends on securities:
Taxable.......................................................... 28,635 32,859 30,093
Nontaxable....................................................... 265 467 665
Dividends........................................................ 352 278 299
Trading account and other.......................................... 703 898 16,092
-------- -------- --------
Total interest income....................................... 140,628 157,024 221,493
-------- -------- --------
Interest expense:
Interest on deposits............................................... 40,300 59,444 114,762
Interest on short-term borrowings.................................. 6,239 7,757 17,922
Interest on other borrowings....................................... 1,405 1,769 1,956
-------- -------- --------
Total interest expense...................................... 47,944 68,970 134,640
-------- -------- --------
Net interest income................................................ 92,684 88,054 86,853
Provision for loan losses (Note 5)................................... 64,258 41,893 53,712
-------- -------- --------
28,426 46,161 33,141
-------- -------- --------
Noninterest income:
Asset management fees.............................................. 15,798 12,526 9,070
Service charges on deposit accounts................................ 5,356 5,852 5,725
Gain on sale of securities, net (Note 4)........................... 4,403 13,724 10,560
Writedown of equity securities..................................... (181) (44) (7,118)
Trading account profits (losses)................................... (132) 7,014
Gain on sale of real estate (Note 6)............................... 3,030
Lease residual income.............................................. 1,148 753 3,354
Corporate services income.......................................... 8,365 7,380 6,989
Other.............................................................. 1,834 2,300 5,012
-------- -------- --------
Total noninterest income.................................... 36,723 42,359 43,636
-------- -------- --------
Noninterest expense:
Salary and employee benefits (Note 10)............................. 38,451 35,370 35,221
Net occupancy expense.............................................. 7,419 7,384 8,060
Credit card processing expense..................................... 3,815 3,416 3,350
Deposit insurance assessment....................................... 4,931 4,320 5,065
Foreclosed asset and workout expense (Note 7)...................... 23,356 20,272 14,516
Other.............................................................. 19,538 25,410 23,110
-------- -------- --------
Total noninterest expense................................... 97,510 96,172 89,322
-------- -------- --------
Loss before income taxes............................................. (32,361) (7,652) (12,545)
Income tax benefit (Note 12)....................................... (11,511) (2,931) (4,598)
-------- -------- --------
Net loss before change in accounting method.......................... (20,850) (4,721) (7,947)
Cumulative effect of change in method of accounting for income taxes
(Note 1)........................................................... (750)
-------- -------- --------
Net loss.................................................... $(20,100) $ (4,721) $ (7,947)
======== ======== ========
Per share data:
Net loss........................................................... $ (1.31) $ (.34) $ (.58)
Cash dividends declared............................................ $ .15
Weighted average number of common shares (Note 11)................... 15,362,251 13,984,190 13,793,617
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 37
<TABLE>
UST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
<CAPTION>
COMMON STOCK CAPITAL IN
------------------ EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS OTHER
------ ------- ----------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990.............. 12,908 $ 8,067 $40,094 $ 107,847 $(7,929)
Net loss.............................. (7,947)
Cash dividends declared --
($.15 per share)................... (2,091)
Stock dividend declared -- (5%)....... 661 413 4,138 (4,551)
Restricted stock vesting (Note 11).... 22 14 348
Dividend reinvestment plan
issuances.......................... 312 195 1,546
Change in unrealized loss on equity
securities......................... 7,779
Deferred compensation ESOP (Note 9)... (1,429)
------ ------- ------- --------- -------
Balance, December 31, 1991.............. 13,903 $ 8,689 $46,126 $ 93,258 $(1,579)
Net loss.............................. (4,721)
Stock option exercises and restricted
stock vesting (Note 11)............ 134 84 1,568
Change in unrealized loss on equity
securities (Note 4)................ 133
Changed in deferred compensation
(Note 9)........................... 322
------ ------- ------- --------- -------
Balance, December 31, 1992.............. 14,037 $ 8,773 $47,694 $ 88,537 $(1,124)
Net loss.............................. (20,100)
Common stock sales (Note 13).......... 3,155 1,972 21,271
Stock option exercises and restricted
stock vesting (Note 11)............ 113 70 729
Cumulative effect of change in method
of accounting for investment
securities, net of tax (Note 1).... 3,335
Change in unrealized loss on equity
securities (Note 4)................ 17
Change in deferred compensation (Notes
9, 10, and 11)..................... 1,645
------ ------- ------- --------- -------
Balance, December 31, 1993.............. 17,305 $10,815 $69,694 $ 68,437 $ 3,873
====== ======= ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 38
<TABLE>
UST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1992 1991
--------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (20,100) $ (4,721) $ (7,947)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting method.............. (750)
Provision for loan losses..................................... 64,258 41,893 53,712
Depreciation and amortization................................. 5,029 5,031 5,694
Amortization of gain on sale/leaseback........................ (384) (384) (807)
Amortization of security premiums, net........................ 1,344 1,856 961
Trading account sales......................................... 209,917 486,878
Trading account purchases..................................... (173,260) (491,865)
Gain on sale of securities, net............................... (4,403) (13,724) (10,560)
Writedown of equity securities................................ 181 44 7,118
Trading account (profits) losses.............................. 132 (7,014)
Loss on sale of other real estate owned, net.................. 1,120 2,338 1,554
Writedowns of other real estate owned......................... 16,244 10,783 7,496
Deferred income tax benefit (expense)......................... (4,494) 1,106 (9,911)
Increase (decrease) in accruals and other, net................ (1,241) 17,367 (3,425)
--------- --------- ---------
Net cash provided by operating activities................ 56,804 98,378 31,884
Cash flows provided by investing activities:
Sales and maturities of investment securities................... 5,584 4,889 491,707
Purchase of investment securities............................... (1,063) (334) (573,792)
Proceeds from securities held for sale.......................... 321,517 371,663
Purchases of securities held for sale........................... (312,866) (402,647)
Net (increase) decrease in short-term investments............... (95,306) 577 2,082
Net loans paid.................................................. 87,939 117,439 156,490
Loans put back to the RTC (Note 2).............................. 513,572
Sale of other real estate owned................................. 19,567 13,800 995
Sale of building, net........................................... 7,965
Purchases of premises and equipment............................. (1,268) (1,257) (10,457)
--------- --------- ---------
Net cash provided by investing activities................ 24,104 104,130 588,562
Cash flows used by financing activities:
Net (decrease) increase in nontime deposits..................... (90,408) 3,195 27,663
Net payments on certificates of deposit......................... (60,725) (209,726) (469,240)
Net proceeds (payments) on short-term borrowings................ 24,217 20,528 (210,558)
Payments of other borrowings.................................... (4,000) (4,500)
Cash dividends.................................................. (4,131)
Issuance of common stock for cash, net.......................... 23,677 120 1,741
--------- --------- ---------
Net cash used by financing activities.................... (107,239) (190,383) (654,525)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents................ (26,331) 12,125 (34,079)
Cash and cash equivalents at beginning of year.................. 116,529 104,404 138,483
--------- --------- ---------
Cash and cash equivalents at end of year........................ $ 90,198 $ 116,529 $ 104,404
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................... $ 48,959 $ 71,233 $ 141,980
--------- --------- ---------
--------- --------- ---------
Income taxes................................................ $ 1,210 $ 2,495 $ 5,228
--------- --------- ---------
--------- --------- ---------
Noncash transactions:
Transfers from investment to trading account.................... $ 25,170
---------
---------
Transfers from loans to other real estate owned................. $ 39,128 $ 41,751 $ 48,747
--------- --------- ---------
--------- --------- ---------
Transfers to securities held for sale........................... $ 7,103 $ 436,191
--------- ---------
--------- ---------
Financed OREO sales............................................. $ 25,883 $ 23,184 $ 17,715
--------- --------- ---------
--------- --------- ---------
Stock issuance.................................................. $ 365 $ 1,532 $ 362
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 39
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of UST Corp. and Subsidiaries conform
with generally accepted accounting principles and general practice in the
banking industry. The significant policies are summarized below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. The parent company only financial statements
contained in Note 17 reflect investments in Subsidiaries using the equity method
of accounting.
Certain reclassifications have been made to prior year balances to conform
with the current year presentation. Assets owned by others held in a fiduciary
or agency capacity are not included in the consolidated balance sheets.
SECURITIES
On December 31, 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." This statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Under this statement securities are
classified as held-to-maturity, available-for-sale, or trading. Debt securities
which management has the positive intent and ability to hold to maturity are
classified as held-to-maturity, and are carried at cost adjusted for the
amortization of premium or the accretion of discount. At December 31, 1993 the
Company had no securities classified as held-to-maturity.
Debt and equity securities with readily determinable market values that are
bought and held principally for the purpose of selling them in the near term are
classified as trading securities and are carried at fair value, with unrealized
gains and losses included in current earnings. At December 31, 1993 and 1992,
the Company had no securities classified as trading.
Debt and equity securities not classified as either held-to-maturity or
trading are classified as available-for-sale and carried at fair value, with
unrealized after-tax gains and losses reported as a separate component of
stockholders' investment. The cumulative effect of adopting SFAS 115 was
$5,749,000 before reduction for the income tax effect of $2,414,000.
Prior to December 31, 1993, debt securities were designated at the time
they were purchased as either held-for-sale or held to maturity, based on
management intent at the time. Securities which management had the ability and
intent to hold on a long-term basis or until maturity were classified as
investment portfolio. Securities which were to be held for indefinite periods of
time and not intended to be held to maturity or on a long-term basis were
classified as securities held for sale and carried at the lower of aggregate
cost or market value.
Prior to the adoption of FASB 115 trading account securities were valued at
market.
For mortgage-backed securities, the Company recalculates the effective
yield on the investment to reflect the actual prepayment results and anticipated
future payments. The net investment in these securities is adjusted to the
amount that would have existed had the new estimated average life and effective
yield been applied since the acquisition of the securities. Such adjustments are
charged or credited to interest income in the current period.
37
<PAGE> 40
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company determined the securities sold by the specific identification
method. The amount of taxes paid on gains is dependent upon the overall results
of operations of the subsidiary incurring the gain.
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment are stated at cost, less accumulated
depreciation and amortization. The Company provides for depreciation using the
straight-line method by charges to expense in amounts estimated to amortize the
cost over the estimated useful lives of the respective assets as follows:
<TABLE>
<S> <C>
Buildings and building improvements.................... 10-40 years
Furniture and equipment................................ 3-10 years
</TABLE>
Leasehold improvements are amortized over the life of the lease agreements.
LOAN INCOME AND FEES
Certain installment loans and commercial time loans are made on a
discounted basis. The unearned discount applicable to such installment loans is
taken into income monthly by use of the actuarial method. Interest income on
nondiscounted loans is accrued based on the principal amount of loans
outstanding.
Loans are placed on nonaccrual, with the reversal of all accrued interest
receivable, when there is doubt as to the collectibility of interest or
principal or if loans are 90 days or more past due unless they are both well
secured and in the process of collection. In every case, a loan reaching 180
days past due is placed on nonaccrual. Interest received on nonaccrual loans is
applied to principal if collection of principal is doubtful; otherwise, it is
reflected in interest income on a cash basis.
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114 (SFAS No. 114), "Accounting by Creditors for Impairment of a Loan,"
which is to become effective for fiscal years beginning after December 15, 1994.
SFAS No. 114 addresses the accounting by creditors for impairment of certain
loans by requiring that the carrying value of impaired loans, as defined, be
measured based upon the present value of expected future cash flows discounted
at the loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent. Management is currently evaluating the effect that
this new standard will have on the Company's reported consolidated financial
position and results of operations.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is maintained at a level considered adequate by
management to provide for possible losses from loans, leases and commitments to
extend credit. Adequacy of the reserve is determined by management using a
consistent methodology which analyzes the size and risk of the loan portfolio on
a monthly basis. Factors in this analysis include past loan loss experience and
asset quality, as reflected by trends of delinquent, nonaccrual and restructured
loans and the Company's credit risk rating profile. Consideration is also given
to the current and expected economic conditions and, in particular, how such
conditions affect the types of credits in the portfolio and the market area in
general. The reserve is based on estimates, and ultimate losses may vary from
current estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the current period.
OTHER REAL ESTATE OWNED
Other real estate owned includes both actual and in-substance
repossessions. In December 1992 the Company adopted Statement of Position No.
92-3 ("SOP 92-3") issued by the American Institute of Certified Public
Accountants. This SOP states that foreclosed assets are presumed to be held for
sale. Therefore, they should be carried at the lower of cost or fair value,
minus estimated costs to sell. In 1992 the pretax charge to income resulting
from implementation was $750,000.
38
<PAGE> 41
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company provides for income taxes in accordance with the comprehensive
income tax allocation method. This method recognizes the tax effects of all
income and expense transactions in each year's statement of income regardless of
the year in which the transactions are reported for tax purposes.
The Company follows the deferral method of accounting for investment tax
credits. Under the deferral method, the credit is reflected as a reduction of
tax expense ratably over the period during which the asset is depreciated for
financial reporting purposes.
FASB has issued SFAS No. 109 "Accounting for Income Taxes," a modification
of SFAS No. 96, effective January 1, 1993. While the FASB retained the existing
requirement to record deferred taxes for transactions that are reported in
different years for financial reporting and tax purposes, it revised the
computation of deferred taxes so that the amount of deferred taxes on the
balance sheet is adjusted whenever tax rates or other provisions of the income
tax law are changed. This is known as the "liability method" of providing
deferred income taxes. This change in accounting principle increased net income
$750,000 in January 1993, representing the cumulative effect of the new standard
on the balance sheet at the date of adoption.
EARNINGS (LOSS) PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock and common stock equivalents outstanding. Common stock
equivalents consist primarily of dilutive outstanding stock options computed
under the treasury stock method. Loss per share computations do not include
antidilutive common stock equivalents.
GOODWILL
Cost of purchased businesses in excess of net assets acquired includes
amount being amortized over twenty-and forty-year periods. Amortization expense
was $122,500 in 1993, 1992 and 1991.
RETIREMENT BENEFITS
The Company's policy is to fund pension costs accrued.
In December 1990, the FASB issued SFAS No. 106, "Employer's Accounting for
Post Retirement Benefits Other Than Pensions." SFAS No. 106 is effective for
fiscal years beginning after December 15, 1992. This statement did not have any
impact on the Company's financial position or results of operations.
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." SFAS No. 112 is effective for fiscal years beginning
after December 15, 1993. It is not expected that this statement will have any
impact on the Company's financial position or results of operations.
STATEMENT OF CASH FLOWS
For purpose of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and interest-bearing deposits.
(2) HOME OWNERS PURCHASE AND ASSUMPTION
On September 7, 1990, United States Trust Company ("USTC"), the Company's
principal banking subsidiary at the time, assumed approximately $2 billion in
deposits and acquired certain assets and branches located in the greater Boston
area of the former Home Owners Savings Bank F.S.B. ("Home Owners") in a
transaction with the Resolution Trust Corporation ("RTC"), an arm of the Federal
Government. The
39
<PAGE> 42
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company paid the RTC cash of $6.1 million, approximately the amount allocated to
core deposit intangible which is being amortized over seven years. As part of
the approval process, the Company agreed with the Board of Governors of the
Federal Reserve System and the Federal Deposit Insurance Corporation to restore
the Company's and USTC's consolidated capital ratios to the levels at which they
stood prior to the Home Owners transaction. Management developed a plan to
achieve these objectives which included putting the $513.6 million loans held
for sale back to the RTC in 1991 and continuing to reduce assets as the high
rate Home Owners certificates of deposit rolled off. This plan is complete.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
At December 31, 1993 and 1992, cash and due from banks included $42,072,000
and $23,659,000, respectively, to satisfy the reserve requirements of the
Federal Reserve Bank.
(4) SECURITIES
Data presented for 1993 includes only securities available-for-sale. Data
presented for 1992 in this footnote includes both the investment portfolio,
consisting primarily of securities of states and municipalities, and other
equity securities, with an amortized cost of $8,122,000, and securities
held-for-sale, consisting primarily of U.S. Treasuries, mortgage-backed and
auto-backed securities, and corporate notes, with an amortized cost of
$468,643,000.
<TABLE>
The amortized cost and fair values of the Company's securities are as
follows:
<CAPTION>
1993
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
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) $473,909
======== ====== ======= ========
</TABLE>
40
<PAGE> 43
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1992
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET
--------- ---------- ---------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC.......................................... $167,348 $5,176 $172,524
FNMA........................................... 139,666 2,431 $ (187) 141,910
--------- ---------- ---------- --------
Total mortgage-backed securities....... 307,014 7,607 (187) 314,434
US Treasury and Federal agencies................. 74,225 475 (335) 74,365
States and municipalities........................ 5,181 166 (111) 5,236
Foreign governments.............................. 501 501
Corporate debt securities........................ 87,437 1,364 (1,834) 86,967
Marketable equity securities, net of valuation
allowance...................................... 2,407 2,407
--------- ---------- ---------- --------
Total securities....................... $476,765 $9,612 $ (2,467) $483,910
--------- ---------- ---------- --------
--------- ---------- ---------- --------
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1993 and 1992, by contractual maturity, are shown in the table
below. Actual maturities are expected to differ from contractual maturities
because some borrowers have the right to prepay without prepayment penalty.
Mortgage-backed securities are shown at their final maturity but are expected
to have shorter average lives. Equity securities, which have no contractual
maturity, are presented in the aggregate.
<TABLE>
<CAPTION>
1993 1992
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Due after 5 years through 10 years.................. $ 42,187 43,005 $ 55,489 $ 56,434
Due after 10 years.................................. 218,927 220,430 251,525 258,000
--------- --------- --------- ---------
Total mortgage-backed securities............ 261,114 263,435 307,014 314,434
All other debt securities:
Due in 1 year or less............................... 2,255 2,253 3,113 3,141
Due after 1 year through 5 years.................... 174,623 177,579 139,629 139,253
Due after 5 years through 10 years.................. 25,889 25,389 22,242 22,366
Due after 10 years.................................. 2,167 2,311 2,360 2,309
--------- --------- --------- ---------
Total debt securities....................... 466,048 470,967 474,358 481,503
Total marketable equity securities, net of
valuation allowance....................... 2,112 2,942 2,407 2,407
--------- --------- --------- ---------
Total securities............................ $ 468,160 473,909 $ 476,765 $ 483,910
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Gross unamortized premiums and discounts on mortgage-backed securities were
$355,000 and $973,000, respectively, at December 31, 1992.
Proceeds from sales of debt securities held in the investment portfolio,
held-for-sale and trading accounts during 1993 were $162,956,000 and
$514,072,000 during 1992. Gross gains of $3,038,000 for 1993 and $8,315,000 for
1992 and gross losses of $137,000 for 1993 and $939,000 for 1992 were realized
on those sales. Gains on sales of all securities held in the investment
portfolio, held-for-sale and trading accounts were $4,403,000, $13,724,000, and
$10,560,000 for 1993, 1992, and 1991, respectively.
41
<PAGE> 44
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1993, securities carried at $223,156,000 were pledged to
secure public and trust deposits, securities sold under agreements to repurchase
and for other purposes as required by law.
(5) LOANS
The composition of the loan portfolio (net of unearned discount) at
December 31, 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
1993 1992
----------- ----------
($ IN THOUSANDS)
<S> <C> <C>
Commercial:
Commercial and financial loans............................ $ 762,758 $ 867,433
Real estate:
Construction loans..................................... 35,295 50,427
Developer, investor and land........................... 315,700 359,666
Consumer:
Residential mortgage loans................................ 84,846 56,364
Home equity loans......................................... 63,188 67,010
Indirect automobile installment........................... 31,848 42,786
Other consumer loans...................................... 23,944 26,914
---------- ----------
$1,317,579 $1,470,600
Reserve for loan losses................................... (62,547) (50,126)
---------- ----------
$1,255,032 $1,420,474
---------- ----------
---------- ----------
</TABLE>
Nonaccrual loans were $49.3 million and $86.6 million at December 31, 1993
and December 31, 1992, respectively. Accruing restructured loans totaled $41.5
million and $44.9 million at December 31, 1993 and 1992, respectively. Had
nonaccruing and accruing restructured loans been paying in accordance with their
original terms, approximately $6,247,000 and $7,728,000 of additional interest
income would have been recorded in 1993 and 1992, respectively.
Most of the Company's business activity is with customers located within
the states of Massachusetts and Connecticut. At year-end 1993, the Company's
exposure to credit risk principally secured by real estate included $499 million
of loans. See Note 16 for additional discussion of concentration of credit risk.
An analysis of the reserve for loan losses for the years ended December 31,
1993, 1992 and 1991 is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..................... $ 50,126 $ 50,100 $ 36,008
Loans charged off.................................. (55,595) (43,214) (41,316)
Recoveries on loans previously charged off......... 3,758 1,347 1,696
-------- -------- --------
Net chargeoffs..................................... (51,837) (41,867) (39,620)
Provided from operations........................... 64,258 41,893 53,712
-------- -------- --------
Balance at end of period........................... $ 62,547 $ 50,126 $ 50,100
-------- -------- --------
-------- -------- --------
</TABLE>
In June 1993, the Company recorded a special $30 million provision for loan
losses which is included in the above table. See footnote 19 for information
regarding this special provision.
42
<PAGE> 45
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) PREMISES, FURNITURE AND EQUIPMENT
<TABLE>
A summary of the accounts as of December 31, 1993 and 1992 is as follows:
<CAPTION>
1993 1992
------- -------
($ IN THOUSANDS)
<S> <C> <C>
Land........................................................... $ 2,899 $ 2,899
Buildings and leasehold improvements........................... 34,499 34,468
Furniture and equipment........................................ 17,744 19,124
------- -------
55,142 56,491
Less -- Accumulated depreciation and amortization.............. 22,481 21,436
------- -------
$32,661 $35,055
======= =======
</TABLE>
Depreciation and amortization expenses reflected in the consolidated
statements of income were $3,661,558, $3,665,392 and $4,776,896 in 1993, 1992
and 1991, respectively.
On January 3, 1991, the Company sold one of its buildings to a third party
for $8.2 million. A portion of the building, which houses certain staff support
functions of the Company, was leased back from the purchaser. This transaction
resulted in a gain of approximately $5 million of which $3 million was
recognized in 1991 with the difference amortized to income over the life of the
lease.
(7) OTHER REAL ESTATE OWNED
Other real estate owned includes in-substance foreclosures of $8,197,000
and $14,861,000 at December 31, 1993 and 1992, respectively. The balance is
stated net of valuation allowances of $6,553,000 in 1993 and $750,000 in 1992.
In 1993 provisions charged to foreclosed asset and workout expense were
$14,514,000 and chargeoffs were $8,711,000.
The net cost of other real estate owned included in foreclosed asset and
workout expense in the income statement was $21,256,000, $18,276,000 and
$12,621,000 in 1993, 1992 and 1991, respectively. These costs include reductions
in fair value, net gain or loss on sales and cost of maintaining and operating
the properties.
(8) SHORT-TERM BORROWINGS
<TABLE>
Short-term borrowings consisted of the following at December 31, 1993 and
1992:
<CAPTION>
1993 1992
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Federal funds purchased...................................... $ 35,913 $ 48,984
Securities sold under agreements to repurchase............... 158,618 132,167
Treasury tax and loan note account........................... 30,751 19,998
Other........................................................ 986 902
-------- --------
$226,268 $202,051
======== ========
</TABLE>
The average outstanding short-term borrowings were $227,944,000 in 1993 and
$247,185,000 in 1992. The approximate weighted average interest rates were 2.7%
in 1993 and 3.1% in 1992. The maximum amount of short-term borrowings
outstanding at any month end was $320,338,000 in 1993 and $300,489,000 in 1992.
43
<PAGE> 46
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) OTHER BORROWINGS
Other borrowings consisted of the following at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
------- -------
($ IN THOUSANDS)
<S> <C> <C>
UST Corp.
8.5% Senior Notes due in installments from 1992-1996................. $12,000 $16,000
Guaranteed ESOP debt at 84% of the prime rate, as established, due in
installments to 1996.............................................. 786 1,107
UST Capital Corp.
11.505% note to SBA due 1995......................................... 1,500 1,500
------- -------
$14,286 $18,607
------- -------
------- -------
</TABLE>
During 1986, the Company issued $20,000,000 of 8.5% subordinated notes to
an insurance company. The debt is payable in annual installments of $4 million
from 1992 through 1996. Under the terms of the agreement, the Company may not
make dividend payments in excess of 60% of cumulative net earnings since
December 31, 1985 plus $7 million.
Payments required under the above obligations were $4,321,000 in 1993 and
will amount to $4,321,000 in 1994, $5,822,000 in 1995, and the balance of
$4,143,000 in 1996.
The Company has an employee stock ownership plan which covers substantially
all of its employees. The plan is administered by a committee designated by the
Board of Directors and is maintained in a separate trust established for that
purpose. The trustee obtained financing to purchase shares of UST Corp. common
stock and UST Corp. has guaranteed this debt. The purchased shares are allocated
to the participants on a pro-rata basis, over the period in which they are
earned.
(10) EMPLOYEE BENEFIT PLANS
The Company has a noncontributory retirement plan covering all employees
who meet specified age and employment requirements. The plan provides pension
benefits that are based on the employee's compensation during the highest
consecutive five of the last ten years before retirement. The following summary
sets forth the plan's funded status and amounts included in the Company's
consolidated balance sheets as of December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
------- -------
($ IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................................ $12,120 $ 9,115
Nonvested benefit obligation............................................. 360 382
------- -------
Accumulated benefit obligation........................................... 12,480 9,497
Effect of projected future compensation levels........................... 4,670 3,762
------- -------
Projected benefit obligation for service rendered to date.................. 17,150 13,259
Plan assets, primarily listed stocks and U.S. bonds........................ 17,574 16,766
------- -------
Projected benefit obligation less than plan assets......................... 424 3,507
Unrecognized loss.......................................................... 3,423 361
Unrecognized prior service asset........................................... (32) 531
Unrecognized net asset being recognized over 15 years...................... (1,895) (2,166)
------- -------
Prepaid costs included in other assets..................................... $ 1,920 $ 2,233
------- -------
------- -------
</TABLE>
44
<PAGE> 47
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
Net pension cost (income) for 1993 and 1992 included the following
components:
<CAPTION>
1993 1992
------- -------
($ IN THOUSANDS)
<S> <C> <C>
Service cost benefit earned during the period...................... $ 880 $ 866
Interest cost on projected benefit obligation...................... 1,179 1,059
Return on plan assets.............................................. (1,232) (939)
Net amortization and deferral...................................... (463) (1,251)
------- -------
Net pension cost (income)................................ $ 364 $ (265)
======= =======
</TABLE>
The weighted-average discount rate and rate of increase of future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 7.0% and 5.0%, respectively, for 1993 and 8.5%
and 6%, respectively, for 1992. The expected long-term rate of return on assets
used was 9.5% and 12%, respectively, for 1993 and 1992.
The Company has a qualified profit-sharing plan covering substantially all
employees. Under the plan, up to six percent of net income before income taxes,
as defined, may be contributed to the profit-sharing trust. The Company did not
make a contribution to the profit-sharing trust in 1993, 1992 or 1991.
In January 1994, the Company added an Employee's Savings feature to the
existing Profit-Sharing Plan that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. The revised plan was renamed
the UST Corp. Employee Savings Plan. Under the Savings Plan, participating
employees may defer a portion up to 4% of their pretax earnings not to exceed
the Internal Revenue Service annual contribution limits. The Company matches 25%
of each employee's contributions up to 4% of the employee's earnings. Since the
Savings Plan started in 1994, the Company did not make a contribution in 1993.
The Company also has an employee stock ownership plan for substantially all
salaried employees. Under the plan, the Company shall contribute either a fixed
amount or a percentage of compensation of all participants as determined by the
Board of Directors.
The Company has a restricted stock ownership plan for key employees under
which 389,375 shares of common stock have been granted. The shares vest to the
employee from the first to the seventh year after the date of grant. The
unvested shares granted are excluded from outstanding shares and included in the
calculation of earnings per share, if dilutive, in periods of profit.
Expenses (income) relating to the plans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED EMPLOYEE RESTRICTED
DECEMBER 31, PENSION STOCK OWNERSHIP STOCK
------------ ------- --------------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C>
1993.................................................. $ 364 $ 319 $399
1992.................................................. (265) 425 287
1991.................................................. (628) 600 178
</TABLE>
(11) STOCK OPTIONS
At December 31, 1993, 479,759 shares of the Company's common stock were
reserved for future grants to officers and key employees. Under the Company's
incentive stock option plan, options may be granted at prices not less than the
fair market value of the Company's common stock at the date of grant.
In May 1990, the stockholders approved a director's stock option plan under
which each outside director would receive a grant of 5,250 shares. The total
number of shares issuable under this plan is 63,000. All shares
45
<PAGE> 48
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to current outside directors have been granted. Each option is exercisable to
the extent of 20% after one year from the date of grant and an additional 20%
each succeeding year. In addition, the Company has a Director's Deferred
Compensation Program under which up to 250,000 shares of the Company's common
stock may be granted to Directors of the Company or its banking subsidiaries who
choose to receive their Director's fees or stipend in shares of the Company in
lieu of cash. The shares vest when the person ceases to be a Director.
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICE
UNDER OPTION PER SHARE TOTAL
---------------- ------------- ----------
<C> <S> <C> <C> <C>
Outstanding at December 31, 1993....................... 656,859 $5.00-$9.00 $4,463,412
1992....................... 583,886 $5.00-$9.125 $3,596,327
1991....................... 593,047 $6.07 $3,600,600
Exercisable at December 31, 1993....................... 290,492 $5.00-$8.62 $1,770,462
1992....................... 221,592 $5.00-$6.07 $1,344,923
1991....................... 101,411 $6.07 $ 615,700
Exercised during the year 1993....................... 65,696 $6.07 $ 398,869
1992....................... 19,621 $6.07 $ 119,115
1991....................... -- -- --
</TABLE>
In 1993, 24,233 restricted shares vested under the Company's restricted
stock ownership plan.
In December 1989, April 1990, and April 1991, the Board of Directors
authorized an option substitution program permitting employees to surrender
options with an option price of more than $14.29, $10.00, and $6.07,
respectively, in exchange for new options. Outstanding options for 149,331,
513,817, and 516,502, respectively, were exchanged under the program. Options
were exchanged on a one-for-one basis at an option price of $14.29, $10.00, and
$6.07, respectively, per share, the fair market value of the Company's common
stock on the date of authorization. The new options vest ratably over a
five-year period.
(12) INCOME TAXES
The income tax benefit shown on the consolidated statements of income
consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
-------- ------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense (benefit):
Federal........................................... $ (8,302) $(6,513) $ 3,671
State............................................. 1,285 2,476 1,642
-------- ------- --------
(7,017) (4,037) 5,313
-------- ------- --------
Deferred tax expense (benefit):
Federal........................................... (4,448) 1,550 (10,006)
State............................................. (46) (444) 95
-------- ------- --------
(4,494) 1,106 (9,911)
-------- ------- --------
Total..................................... $(11,511) $(2,931) $ (4,598)
-------- ------- --------
-------- ------- --------
</TABLE>
46
<PAGE> 49
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax provisions (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1992 1991
------- ------ -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Provision for loan losses for tax purposes less than book
provision.................................................... $(5,250) $ (9) $(5,993)
Investment tax credit.......................................... (2,602)
Net operating losses........................................... (1,700)
Tax deductions associated with leverage leases deferred for
book......................................................... (1,316) (65) 3,359
Alternative minimum tax credit................................. (1,284) (1,741)
Book writedowns or OREO, not deductible for tax................ (507) (460) (1,943)
Depreciation for books in excess of tax........................ (185) (506) (283)
Deferred compensation benefits (expenses) not recognized for
tax.......................................................... (115) 518 (58)
Loss on adjustment of loan basis to market value for tax....... 7,390
Nondeductible accruals......................................... 782 (761) (270)
Security recoveries (writedowns) recognized for book, not for
tax.......................................................... 354 2,000 (2,172)
Gains (losses) relating to securitization program recognized
for book not for tax......................................... 300 (364)
Other losses (gains) deferred for book, not for tax............ 162 (716)
Other, net..................................................... (61) (73) 270
------- ------ -------
$(4,494) $1,106 $(9,911)
------- ------ -------
------- ------ -------
</TABLE>
At December 31, 1993 and 1992, cumulative deferred income tax benefits
amounting to $10,911,000 and $6,177,000 were included in the balance sheet as
other assets. Additionally, at December 31, 1993 and December 31, 1992 there
were tax refund receivables of $9,549,000 and $7,400,000, respectively, included
in other assets (in thousands):
The components of the net deferred tax asset at December 31, 1993 were as
follows:
<TABLE>
<S> <C>
Book provision for loan losses in excess of tax........................... $ 26,253
Alternative minimum tax credit............................................ 6,239
Investment tax credits.................................................... 3,809
Book writedowns on foreclosed real estate, not deducted for tax........... 3,009
Net operating losses...................................................... 1,700
Deferred compensation benefits not deducted for tax....................... 1,187
Tax deductions on leveraged leases deferred for book...................... (19,185)
Loan mark to market adjustment for tax.................................... (7,390)
Securities mark to market adjustment deferred for tax..................... (2,832)
Tax basis in core deposits less than book................................. (1,115)
Pension expense deducted for tax not book................................. (1,043)
Cumulative tax depreciation in excess of book............................. (781)
Tax basis in partnership investment less than book........................ (597)
Valuation allowance (state)............................................... (538)
Other..................................................................... 2,195
--------
Total deferred tax asset........................................ $ 10,911
--------
--------
</TABLE>
47
<PAGE> 50
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The provisions for income taxes differ from the amounts computed by
applying the U.S. statutory Federal tax rate of 35% in 1993 and 34% in prior
years to income (loss) before income taxes, principally due to:
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
-------- ------- -------
($ IN THOUSANDS)
--------------------------------
<S> <C> <C> <C>
Tax benefit at statutory rate................................ $(11,326) $(2,601) $(4,265)
Increases (reductions) from:
Tax-exempt income on investment securities and loans....... (832) (1,082) (1,273)
State income taxes, net of Federal income tax benefit...... 818 1,340 1,147
Low income housing credits................................. (862) (750) (252)
Other, net................................................. 691 162 45
-------- ------- -------
Tax benefit recorded......................................... $(11,511) $(2,931) $(4,598)
======== ======= =======
</TABLE>
(13) CAPITAL AND REGULATORY AGREEMENTS
On June 2, 1993 the Company sold 500,000 shares of its unregistered common
stock in a private placement for a cash price of $3,750,000. Substantially all
of the net proceeds of that placement were used to repay principal on the
Company's long-term debt. On August 12, 1993, the Company sold 2.87 million
shares of its common stock in a European offering. These shares were placed with
more than sixty institutional investors and the offering was made under
Regulation S of the United States Securities and Exchange Commission. Net
proceeds of this placement were approximately $21 million after expenses.
The Company and its banking subsidiaries' ability to pay dividends is
subject to certain limitations imposed by statutes of the Commonwealth of
Massachusetts and the State of Connecticut, and limitations imposed by bank and
bank holding company regulators. Massachusetts statutes restrict the amount of
dividends payable by banks to be the balance of their undivided profits, net of
any amount transferred to capital in excess of par value. In the case of
Connecticut law, the limit is undivided profits plus reserve for loan losses. In
any event, it is not likely that bank and bank holding company regulators would
allow an institution to dividend any amounts which would reduce that
institution's capital to below the minimum capital requirement in effect at that
time.
The Company and its two Massachusetts-based banking subsidiaries, United
States Trust Company ("USTC") and USTrust, have signed written agreements with
the FRB, FDIC and the Banking Commissioner of the Commonwealth of Massachusetts
("Massachusetts Commissioner"). In accordance with the agreements the Company
has agreed not to pay any dividends to stockholders, nor take any dividends from
its banking subsidiaries, without prior regulatory approval. Similarly, the
banking subsidiaries have agreed to refrain from transferring funds in the form
of dividends to the Company without prior regulatory approval. In 1993, the
Company and USTC received approval from the appropriate regulators such that
USTC was allowed to transfer $5,250,000 in dividends to the Company. These
proceeds were then contributed as equity to USTrust and the Company's
Connecticut banking subsidiary, UST Bank/Connecticut ("UST/Conn"). The banks
also agreed to, among other matters, maintain a Tier 1 leverage capital ratio at
or in excess of 6% beginning in February 1993. Tier 1 leverage capital ratio is
defined by the Company's Federal regulators to be essentially stockholders'
equity, less intangible assets, divided by total average assets, less intangible
assets. In February 1994, the FDIC and the Massachusetts Commissioner terminated
and lifted the Consent Agreement and Order with USTC. Despite the termination of
its Regulatory Agreement, USTC has agreed to continue to request regulatory
consent prior to the payment of dividends.
UST/Conn is under a Stipulation and Agreement with the Banking Commissioner
of the State of Connecticut. In accordance with the agreement, the bank, among
other matters, must maintain a Tier 1 leverage capital ratio of 6%. Based on
average total assets, at December 31, 1993, the Tier 1 leverage capital
48
<PAGE> 51
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ratio was 23.75% for United States Trust Company, 6.49% for USTrust, and 6.21%
for UST Bank/Connecticut.
Additionally, the Company agreed to maintain its capital at levels
consistent with the FRB's Capital Adequacy Guidelines. At December 31, 1993,
based on period-end assets the Company's consolidated Tier 1 leverage capital
ratio was 6.96% compared with 6.21% at December 31, 1992. Based on average total
assets, this ratio was 7.06% at December 31, 1993.
(14) RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company's banking subsidiaries have
granted loans to certain of the Company's directors and executive officers. All
such transactions are made on substantially the same terms as those prevailing
at the same time for individuals not affiliated with the Company and its
subsidiaries and do not involve more than the normal risk of collectibility. At
December 31, 1993, none of these transactions were on nonaccrual status, nor did
they involve delinquent or restructured loans. However, at December 31, 1993
loans to a Director of the Company or to his affiliated companies in the amount
of approximately $25 million were characterized as Substandard, in the Company's
internal risk rating profile. Under the Company's definition, Substandard assets
are characterized by the distinct possibility that some loss will be sustained
if the credit deficiencies are not corrected. However, the Substandard
classification does not imply ultimate loss for each individual asset so
classified. Subsequent to December 31, 1993, $6.4 million of these loans were
repaid. See Footnote 15 hereunder.
<TABLE>
An analysis of loans outstanding in excess of $60,000 to directors and
officers related to the foregoing entities at December 31, 1993 is as follows:
<CAPTION>
($ IN THOUSANDS)
----------------
<S> <C>
Balance, December 31, 1992........................... $ 62,284
Additions............................................ 945
Repayments........................................... (12,796)
Other reductions..................................... (5,936)
--------
Balance, December 31, 1993........................... $ 44,497
========
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
<TABLE>
Lease commitments for certain premises expire at various dates through
2012. At December 31, 1993, minimum rental commitments for noncancelable leases
are as follows:
<CAPTION>
($ IN THOUSANDS)
----------------
<S> <C>
1994................................................. $ 4,031
1995................................................. 3,955
1996................................................. 3,654
1997................................................. 3,520
1998................................................. 1,852
thereafter........................................... 2,976
--------
Total...................................... $ 19,988
========
</TABLE>
Rent expense for the years ended December 1993, 1992 and 1991 was
$3,932,074, $4,432,156 and $4,179,740, respectively.
In the ordinary course of business, the Company and its subsidiaries become
defendants in a variety of judicial and administrative proceedings. In the
opinion of management there is no proceeding pending, or to
49
<PAGE> 52
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the knowledge of management threatened, which in the event of an adverse
decision, would be likely to result in a material adverse change in the
financial condition or results of operations of the Company and its
subsidiaries.
POTENTIAL REGULATORY SANCTIONS
Certain apparent and inadvertent violations of the insider lending
provisions (and related lending limit provisions) of Regulation O of the FRB
related to extensions of credit by USTrust to Director Francis X. Messina have
led the FDIC to require that corrective action be taken and to advise USTrust
orally that the FDIC may consider the imposition of civil money penalties with
respect to such matters. No FDIC representative has suggested to USTrust or the
Company that there was any willful or intentional misconduct on the part of
USTrust, Director Messina or USTrust's other institution-affiliated parties in
connection with these matters. See Note 14 to Consolidated Financial Statements.
To address these issues, USTrust and Director Messina have undertaken a
program to reduce the aggregate balance of Mr. Messina's outstanding loans from
USTrust and to improve the collateral support for the remaining outstanding loan
balance. The elements of this program have been communicated to and reviewed by
the FDIC. In furtherance of the program since late 1993, the outstanding
principal of the aggregate loans to Director Messina and his related interests
has been reduced by more than $11 million from approximately $30 million to less
than $19 million, and such loans are now below all applicable lending limits. To
date, the Company has incurred no losses with respect to any of these loans,
although they are characterized as "Substandard" in the Company's internal risk
rating profile, and all such loans are current as to both principal and
interest.
There has been no further action taken by any bank regulatory agency to
date. The FDIC has the authority to levy civil money penalties of various
amounts for violations of law or regulations, orders and written conditions and
agreements, which, depending upon the nature and severity of the violations, may
be, in situations where conduct has been egregious, as high as $1 million per
day for the period during which such violation continues. In connection with the
apparent violations described above, the FDIC has the authority to impose
penalties on any of USTrust, its Board of Directors, officers of the Bank,
Director Messina personally, "institution-affiliated parties" of USTrust or any
combination thereof.
While it is not possible to predict with certainty the probability of
penalties being assessed, the person or persons upon whom any penalty would be
assessed or the amounts of any such penalties, were they to be assessed,
management of the Company believes that it is unlikely that this matter will
have a material adverse effect on its financial condition or results of
operations. Consequently, no provision in respect of penalties has been made in
the Company's Consolidated Financial Statements.
(16) FINANCIAL INSTRUMENTS WITH ON-AND OFF-BALANCE-SHEET RISK
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extent credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, credit risk in excess of the amount contained in the balance
sheet. The contract or notional amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument or commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
50
<PAGE> 53
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The Company generally requires collateral or other security to support
financial instruments with
credit risk.
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
-----------------------------
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
($ IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amount represents credit risk:
Commitments to extend credit..................................... $268,000 $258,000
Standby letters of credit and financial guarantees written....... 63,000 71,000
Commercial letters of credit..................................... 3,000 5,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract during its
term. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being fully drawn upon and, in fact, have a maturity
of less than one year, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Of the total commitments to extend credit,
approximately $31 million and $33 million were secured by real estate at
December 31, 1993 and 1992, respectively.
The amount of collateral obtained is based on management's evaluation of
the credit risk. Collateral held on commitments and loans varies but may include
cash, accounts receivable, inventory, property, plant and equipment.
Standby and commercial letters of credit and financial guarantees written
are conditional commitments issued by the Company to guarantee the performance
of, or payment by, a customer to a third party. Those guarantees are primarily
issued to support private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. The Company holds various collateral to support
these commitments including (but not limited to) cash, accounts receivables,
inventory, property plant and equipment. The extent of collateral held for those
commitments varies from zero to one hundred percent. Of the total standby and
commercial letters of credit, approximately $4 million and $13 million were
secured by real estate at December 31, 1993 and 1992, respectively.
The Company's primary loan market is the New England region. Most of the
loans outstanding are from eastern Massachusetts and a substantial portion of
these loans are various types of real estate loans; still others have real
estate as additional collateral. Over 90% of the Company's outstanding
commercial and real estate loans are collateralized.
The Company's securities portfolio consists largely of mortgage-backed
securities. These securities carry prepayment risk due to the fact that
prevailing interest rates could continue to decline. Under such circumstances an
unusually high percentage of homeowners may choose to refinance their first
mortgages to take advantage of these lower rates with the result that, under the
Company's accounting policy, adjustments
reducing gross unamortized premiums would be required. See Note (1), Securities
and Trading Account Policies.
51
<PAGE> 54
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) PARENT COMPANY FINANCIAL INFORMATION
Summarized information relative to the balance sheets at December 31, 1993
and 1992 and statements of income and cash flows for the three years in the
period ended December 31, 1993 of UST Corp. are presented as follows. All
dividend income in the periods shown below are from banking subsidiaries:
<TABLE>
BALANCE SHEETS -- PARENT COMPANY ONLY
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Assets:
Investment in banking subsidiaries................................... $143,719 $159,305
Investment in nonbanking subsidiaries................................ 46 45
Excess funds and other investments................................... 21,050
Premises, furniture and equipment, net............................... 72 75
Other assets......................................................... 6,797 7,465
-------- --------
Total assets................................................. $171,684 $166,890
======== ========
Liabilities and Stockholders' Investment:
Borrowings........................................................... $ 12,786 $ 17,107
Other liabilities.................................................... 6,079 5,903
Stockholders' investment............................................. 152,819 143,880
-------- --------
Total liabilities and stockholders' investment............... $171,684 $166,890
======== ========
</TABLE>
<TABLE>
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
-------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Dividend income.............................................. $ 5,250 $ 2,250
Undistributed equity in net loss of subsidiaries............. (24,065) $(4,219) (9,880)
Other income................................................. 292 902 857
-------- ------- -------
(18,523) (3,317) (6,773)
Expenses..................................................... 1,577 1,404 1,174
-------- ------- -------
Net loss................................................ $(20,100) $(4,721) $(7,947)
======== ======= =======
</TABLE>
52
<PAGE> 55
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
-------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(20,100) $(4,721) $(7,947)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization........................... 447 447 125
Amortization of gain on sale............................ (488)
Undistributed losses of affiliates...................... 24,065 4,219 9,880
Gain on sale of securities.............................. (8) (581)
(Increase) decrease in other assets..................... (338) 837 (2,309)
Increase (decrease) in other liabilities................ 1,543 (2,122) 979
-------- ------- -------
Net cash provided (used) by operating activities... 5,617 (1,348) (341)
Cash flows provided (used) by investing activities:
Sale of investment securities.............................. 26,700 4,791 1,349
Purchase of investment securities.......................... (47,750) (4,700)
Loans repaid by affiliates................................. 10,450 2,300
Equity contributed to affiliates........................... (5,250) (6,261) (884)
-------- ------- -------
Net cash provided (used) by investing activities... (26,300) 4,280 2,765
Cash flows provided (used) by financing activities:
Repayment of borrowings.................................... (4,000) (4,000)
Proceeds from issuance of common stock, net................ 23,677 1,652 2,103
Dividends paid............................................. (4,131)
-------- ------- -------
Net cash provided (used) by financing activities... 19,677 (2,348) (2,028)
Net increase (decrease) in cash and cash equivalents....... (1,006) 584 396
Cash and cash equivalents beginning of year................ 3,275 2,691 2,295
-------- ------- -------
-------- ------- -------
Cash and cash equivalents end of year...................... $ 2,269 $ 3,275 $ 2,691
-------- ------- -------
-------- ------- -------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 1,415 $ 1,753 $ 1,740
-------- ------- -------
-------- ------- -------
Income taxes............................................ $ 180 $ 921
------- -------
------- -------
</TABLE>
Cash dividends paid to the Company in 1993 by bank subsidiaries totaled
$5,250,000. There were no cash dividends paid to the Company in 1992. In 1991
the amount was $2,250,000. No cash dividends were paid to the Company by other
subsidiaries in these years.
(18) FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." SFAS No. 107 is effective for fiscal years
ending after December 15, 1992. SFAS 107 requires disclosure of the fair market
value of financial instruments, whether assets, liabilities or off-balance sheet
commitments, if practicable. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments. Fair value
estimates which were derived from discounted cash flows or
53
<PAGE> 56
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
INVESTMENT PORTFOLIO AND SECURITIES HELD FOR SALE
For marketable securities fair values are based on quoted market prices or
dealer quotes. Nonmarketable investment securities are valued at cost.
LOANS
For certain homogenous categories of loans, such as residential mortgages
and home equity loans, fair value is estimated based on broker quotes on sales
of similar loans. The fair value of fixed rate loans was estimated by
discounting anticipated future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of performing variable rate loans is the
same as the book value at the reporting date because the loans reprice when the
market changes.
DEPOSIT LIABILITIES
The fair value of noncertificate deposit accounts is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated by discounting the anticipated future cash payments using
the rates currently offered for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS
For these short-term instruments the carrying amount is a reasonable
estimate of fair value.
OTHER BORROWINGS
The fair value of other borrowings were determined by discounting the
anticipated future cash payments by using the rates currently available to the
Company for debt with similar terms and remaining maturities.
COMMITMENTS TO EXTEND CREDIT/SELL LOANS
The great majority of commitments, standby letters of credit and commercial
letters of credit are short term in nature and therefore have been valued at
their carrying amount.
VALUES NOT DETERMINED
SFAS No. 107 excludes certain assets from its disclosure requirements
including real estate included in banking premises and equipment, and the
intangible value inherent in the Company's deposit relationships (i.e., core
deposits). Accordingly, the aggregate fair value amounts presented below do not
represent the underlying value of the Company.
54
<PAGE> 57
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The carrying amount and estimated fair values of the Company's financial
instruments at December 31, 1993 and 1992 are as follows:
<CAPTION>
1993 1992
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial instrument assets:
Cash and due from banks....................... $ 90,198 $ 90,198 $ 116,529 $ 116,529
Securities.................................... 473,909 473,909 476,765 483,910
Excess funds sold to banks and other
short-term investments..................... 96,647 96,647 1,341 1,341
Loans, net.................................... 1,255,032 1,268,576 1,420,474 1,433,192
Financial instrument liabilities:
Deposits
Demand..................................... $ 373,793 $ 373,793 $ 422,056 $ 422,056
Savings.................................... 491,566 491,566 472,385 472,385
Money market............................... 323,979 323,979 385,305 385,305
Time....................................... 451,460 457,075 512,185 517,378
Short-term borrowings...................... 226,268 226,268 202,051 202,051
Other borrowings........................... 14,286 15,362 18,607 19,359
Unrecognized financial instruments:
Commitments to extend credit.................. $ 268,000 $ 268,000 $ 258,000 $ 258,000
Standby letters of credit and financial
guarantees written......................... 63,000 63,000 71,000 71,000
Commercial letters of credit.................. 3,000 3,000 5,000 5,000
</TABLE>
(19) CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR YEAR ENDED FOR YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992
-------------------------------------- -------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- -------- ------- ------- ------- ------- -------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............................... $34,013 $35,210 $ 35,410 $35,995 $35,836 $39,645 $41,172 $40,371
Interest expense.............................. 10,862 11,725 12,229 13,128 13,887 16,051 18,568 20,464
Net interest income........................... 23,151 23,485 23,181 22,867 21,949 23,594 22,604 19,907
Provision for loan losses..................... 3,175 8,050 42,650 10,383 13,450 14,722 5,695 8,026
Net interest income (loss) after provision for
loan losses................................. 19,976 15,435 (19,469) 12,484 8,499 8,872 16,909 11,881
Noninterest income............................ 7,247 8,078 8,857 12,541 7,894 18,076 8,334 8,055
Noninterest expense........................... 25,149 20,656 27,887 23,818 26,749 25,405 24,476 19,542
Income tax expense (benefit).................. 540 834 (13,567) (68) (4,231) 1,166 248 (114)
Net income (loss)............................. 1,534 2,023 (24,932) 1,275 (6,125) 377 519 508
Earnings (loss) per share..................... $ .09 $ .12 $ (1.76) $ .09 $ (.44) $ .03 $ .04 $ .04
</TABLE>
As shown above, the Company recorded high provisions for loan losses in the
second quarter of 1993 and third and fourth quarters of 1992. Provisions for
loan loss are recorded as necessary in order to maintain an adequate reserve for
loan loss based upon the Company's methodology for quantifying the risk inherent
in the loan portfolio.
Toward the end of the second quarter of 1993, management changed its
strategy regarding troubled credit situations. While the change would result in
the handling of these situations in an expeditious manner, it was
55
<PAGE> 58
UST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized that the up-front costs of these workouts would increase. As a
result, the reserve for loan losses was increased by $19.8 million during the
second quarter. To achieve the higher reserve level, the Company recorded a
$42.7 million provision for loan losses in the second quarter. Included in that
amount was a special provision of $30 million. This special provision was
management's estimate of the additional losses to be incurred from the strategic
change referred to above and the continued sluggish economic climate and losses
occurring during the remainder of 1993 on these and other credits.
An increase in nonaccruals in the third quarter of 1992 was a major factor
in the increased provisions for the last two quarters of 1992. In the third
quarter of 1992, the Company achieved gains on sale of securities of $10.8
million, which was a significant factor in the results for that quarter.
Noninterest income decreased after the first quarter of 1993 due primarily to a
decrease in gains on sale of securities. Noninterest expense increased or
decreased over the quarters presented due primarily to increases or decreases in
the writedowns to fair value of foreclosed real estate properties.
56
<PAGE> 59
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
-- NONE --
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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 controls systems; (h)
improvements to the business information systems; and (i) improvements
concerning risk management and legal and regulatory compliance programs. As of
March 25, 1994, there were 11 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 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.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH THE COMPANY
(AND/OR WHERE APPROPRIATE, POSITION WITH ONE OF THE COMPANY'S
NAME (AGE) SUBSIDIARIES)
- --------------------------------- -------------------------------------------------------------
<S> <C>
*Neal F. Finnegan (56)........... President and Chief Executive Officer and Director of the
Company
William Schwartz (61)........... Chairman of the Company and Vice Chairman of the Board of
Directors of the Company
Paul M. Siskind (79)............ Chairman of the Board of Directors of the Company
*Walter E. Huskins, Jr. (54)..... Executive Vice President/Administration of the Company
*Domenic Colasacco (45).......... Executive Vice President of the Company and Chairman and
President of USTC
*Eric R. Fischer (48)............ Executive Vice President, General Counsel and Clerk of the
Company and Executive Vice President, General Counsel and
Secretary of USTrust and USTC
*William C. Brooks (57).......... Senior Vice President, Treasurer, and Chief Financial Officer
of the Company
*Linda J. Lerner (49)............ Senior Vice President/Human Resources of the Company
*Theodore M. Shediac (54)........ Chairman of the Board, USTrust
*Kathie S. Stevens (43).......... Executive Vice President and Senior Lending Officer, USTrust
*Kenneth L. Sullivan (57)........ President, UST Data Services Corp.
*Robert T. McAlear (51).......... Vice Chairman, USTrust
*Katherine C. Armstrong (48)..... Senior Vice President/Credit Administration of the Company
George T. Clarke (47)........... Vice President and Controller of the Company
P. Clarke Dwyer (62)............ Senior Vice President/Loan Review of the Company
</TABLE>
- ---------------
* Member, Executive Policy Committee
57
<PAGE> 60
The following sets forth the principal occupation during the past five
years of each of the executive of 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. Schwartz has served as Chairman of the Company since April 1993. Mr.
Schwartz has been Vice Chairman of the Board of Directors of the Company since
1981. Mr. Schwartz is Vice President/Academic Affairs at Yeshiva University and
is of counsel to the New York law firm of Cadwalader, Wickersham & Taft. Mr.
Schwartz formerly served as Dean of Boston University School of Law.
Mr. Siskind has served as Chairman of the Board of the Company since 1967.
He was Chief Operating Officer of the Company from 1976 through 1984 and General
Counsel of the Company in 1984 and 1985. From 1966 through 1976, Mr. Siskind
served as Dean of Boston University School of Law.
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. 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 asset management and investment 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
Law Studies of Boston University School of Law. He also serves as Executive Vice
President, General Counsel and Secretary of USTC and USTrust, as a Director and
Clerk of UST Leasing Corporation, as Clerk of UST Data Services Corp. and UST
Capital Corp. and as Assistant Secretary of UST Bank/Connecticut.
Mr. Brooks has been a Senior Vice President of the Company since 1984 and
Treasurer since 1980. He is Chairman of the Asset and Liability Management
Committee of the Company. In addition. he serves as a Director of UST Data
Services Corp. and as a Director and Treasurer of UST Leasing Corporation. Mr.
Brooks has been an officer of the Company since 1967.
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. Shediac was elected Chairman of the Board of USTrust in 1993. Prior to
that time, he served as President of USTrust. His primary responsibilities
involve of the retail banking operations of the Company's banking subsidiaries.
Mr. Shediac has been an officer of the Company or its subsidiaries since 1980.
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.
58
<PAGE> 61
Mr. Sullivan has served as President of UST Data Services Corp. since he
joined the Company in 1988. In that capacity, 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, MA.
Mr. McAlear 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. Armstrong was named Senior Vice President/Credit Administration of
USTrust in February 1994. She has served in the credit administration and credit
risk control functions of USTrust since she joined the Company in 1985. Ms.
Armstrong is the Chairman of the Senior Credit Committee of the Company and
USTrust.
Mr. Clarke has served as Vice President and Controller of the Company since
1988. Prior to joining the Company, Mr. Clarke was Deputy Comptroller of The
First National Bank of Boston.
Mr. Dwyer was elected Senior Vice President/Chief Loan Review Officer of
the Company in August 1993. Prior to joining the Company, Mr. Dwyer served as
Senior Vice President/Loan Workout at First New Hampshire Bank, Manchester, NH,
from 1990 through mid-1993. Prior to 1990, Mr. Dwyer was Senior Vice President
of Corporate Credit Review at Shawmut Bank, N.A. in Boston, MA.
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 paragraph, this item
has been omitted since the Company will have filed a definitive proxy statement
within 120 days after December 31, 1993, 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, 1993, 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, 1993, 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 1993, 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, 1993, the close of its fiscal
year. The information required by this item is incorporated by reference to such
proxy statement.
59
<PAGE> 62
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 31.
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).
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-1.)**
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)**
l0(c) Pension Plan, as amended to January 1, 1990. (Exhibit to Form
10-K for year ended December 31, 1991)**
10(d) Employee Stock Ownership Plan, as amended to January 1, 1991.
(Exhibit to Form 10-K for year ended December 31, 1991)**
10(e) Profit-Sharing Plan, as amended to January 1, 1991. (Exhibit
to Form 10-K for year ended December 31, 1991)**
10(f) Stock Compensation Plan, (Registration Statement Nos. 33-54390
and 2-77803)**
10(g) Dividend Reinvestment Plan, as amended. (Exhibit to
Registration Statement No. 33-38836 on Form S-3.)**
10(h) Directors Stock Option Plan (Exhibit to Form 10-K for year
ended December 31, 1989)**
10(i) 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)**
60
<PAGE> 63
10(j) 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)**
10(k) 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(1) 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(m) 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(n) 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(o) Separation Agreement dated September 20, 1993 between the
Company 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)**
(11) Statement re: computation of per share earnings (See Note 1 to
Financial Statements.)*
(21) Subsidiaries of the Registrant*
(23) Consent of Arthur Andersen & Co.*
- ---------------
* Filed herewith
** Filed as part of a previous Commission filing and incorporated herein by
reference.
(b) Reports on Form 8-K
Reports on Form 8-K or Form 8-K/A were filed by the Company on March 25,
1993 (UST Corp. Press Release naming new Chief Executive Officer); April 21,
1993 (Holding Company Director Falcone renounces claim against USTrust and
USTC); July 16, 1993 (UST Corp. Press Release announcing loan loss provision and
second quarter loss); and March 18, 1994 (filing of the Company's financial
statements as of December 31, 1993).
(c) Exhibits being filed
See Exhibit Index
(d) Financial Statement Schedules included in Financial Statements.
61
<PAGE> 64
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.
<TABLE>
<S> <C>
By s/ NEAL F. FINNEGAN By s/ WILLIAM C. BROOKS
- --------------------------------------------- ---------------------------------------------
Neal F. Finnegan William C. Brooks,
President and Senior Vice President and Treasurer
Chief Executive Officer (Principal Financial Officer and
(Principal Executive Officer) Principal Accounting Officer)
Date March 15, 1994 Date March 15, 1994
------------------------------------------- ---------------------------------------------
</TABLE>
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.
<TABLE>
<S> <C>
s/ JAMES M. BREINER s/ WALLACE M. HASELTON
- --------------------------------------------- ---------------------------------------------
James M. Breiner, Director Wallace M. Haselton, Director
Date March 15, 1994 Date March 15, 1994
s/ DOMENIC COLASACCO s/ FRANCIS X. MESSINA
- --------------------------------------------- ---------------------------------------------
Domenic Colasacco, Director and Francis X. Messina, Director
Executive Vice President
Date March 15, 1994 Date March 15, 1994
s/ ROBERT L. CULVER s/ GERALD M. RIDGE
- --------------------------------------------- ---------------------------------------------
Robert L. Culver, Director Gerald M. Ridge, Director
Date March 15, 1994 Date March 15, 1994
s/ LOUIS T. FALCONE
- --------------------------------------------- ---------------------------------------------
Louis T. Falcone, Director William Schwartz, Director
Chairman of the Company and
Vice Chairman of the Board
Date March 15, 1994 Date March 15, 1994
s/ NEAL F. FINNEGAN s/ SAMUEL B. SHELDON
- --------------------------------------------- ---------------------------------------------
Neal F. Finnegan, Director, Samuel B. Sheldon, Director
President and Chief Executive Officer
Date March 15, 1994 Date March 15, 1994
</TABLE>
62
<PAGE> 65
<TABLE>
<S> <C>
s/ WALTER A. GULESERIAN s/ JAMES V. SIDELL
- --------------------------------------------- ---------------------------------------------
Walter A. Guleserian, Director James V. Sidell, Director
Date March 15, 1994 Date March 15, 1994
s/ PAUL M. SISKIND s/ PAUL D. SLATER
- --------------------------------------------- ---------------------------------------------
Paul M. Siskind, Director and Paul D. Slater, Director
Chairman of the Board
Date March 15, 1994 Date March 15, 1994
s/ MICHAEL J. VERROCHI
- ---------------------------------------------
Michael J. Verrochi, Director
Date March 15, 1994
</TABLE>
63
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF UST CORP.(*)
USTRUST
UNITED STATES TRUST COMPANY
UST BANK/CONNECTICUT
UST LEASING CORPORATION(**)
UST DATA SERVICES CORP.(**)
UST CAPITAL CORP.(***)
(*) Other than UST Bank/Connecticut which is a Connecticut trust company, each
of the above subsidiaries of UST Corp. is a Massachusetts Corporation or
trust company and each of the above entities does business only under its
corporate name. The foregoing list does not include the names of inactive
subsidiaries or the names of subsidiaries of banking entities which
subsidiaries have been organized to hold foreclosed property, other assets
held in satisfaction of debts previously contracted by the applicable
banking entity or other leeway investments.
(**) Wholly-owned by USTrust
(***) Wholly-owned by United States Trust Company
64
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this Form 10-K of our report dated January 31, 1994. It should be noted that we
have not audited any financial statements of the Company subsequent to December
31, 1993 or performed any audit procedures subsequent to the date of our report.
Arthur Andersen & Co.
Boston, Massachusetts
March 23, 1994
65
