<PAGE> 1
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FORM 10-Q/A AMENDMENT #1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1994 COMMISSION FILE #0-9623
------------------------
UST CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2436093
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
</TABLE>
40 COURT STREET,
BOSTON, MASSACHUSETTS 02108
(Address of principal executive offices)
(617) 726-7000
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. At April 30, 1994,
there were issued and outstanding 17,359,905 shares of common stock, par value
$0.625 per share.
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This first amendment on Form 10-Q/A has changes to pages 6, 8, 9, 14,
and 15. Pages 6, 8, 9 have been changed for typographical errors, page 14 was
inadvertently omitted due to a transmission problem in the original filing of
Form 10-Q on May 16, 1994, and page 15 was changed to reflect today's date of
May 18, 1994.
<PAGE> 2
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AT MARCH 31, 1994
INTRODUCTION
The Company's primary loan market, the New England region, continues to
experience an uneven and slow recovery from the weak economic environment of
1990 to 1993. This climate has contributed to the decline in commercial and
residential real estate values, although there is recent evidence that these
values are stabilizing. Generally, real estate prices and activity have both
improved from extremely depressed levels. Specifically, in the Commonwealth of
Massachusetts, home sales and home construction are both rising due to the
prevailing low mortgage rates, although this growth may slow as a result of the
recent increase in rates by the Federal Reserve Board. The harsh economic
environment over the last few years has adversely affected both the net worth of
certain borrowing customers of the Company's subsidiary banks and the Company's
collateral position with respect to certain loans. Massachusetts has seen both
an exodus and failure of a number of businesses and unemployment continues to
remain high although somewhat lower than experienced during the 1990 to 1993
period. While there have been pockets of growth, they have been sluggish, and
the forecast is for small increases in the overall job market with some
industries increasing modestly and others not at all.
The foregoing factors continued to influence the Company's financial
results for the first quarter of 1994, particularly in the areas of provision
for loan losses and expenses related to foreclosed asset and workout expense,
and may continue to influence future results.
The recent rapid rise in interest rates is likely to have a positive impact
on interest margins; however, securities holdings have and will depreciate in
value. The unrealized loss on securities available-for-sale will be reported as
a reduction in shareholders' equity. Moreover, the recent rise in interest rates
could adversely affect the cash flow on some real estate loans.
Management of the Company has identified the reduction of the aggregate
amount of nonperforming and classified assets as a high priority. Management is
assessing its alternatives with a view to implementing the most effective means
of achieving such a reduction, which could include a further acceleration of the
Company's strategy to handle problem credits expeditiously (including the
possibility of bulk sales). The specific alternatives selected by management
could be affected by the adoption of proposed regulations covering standards for
safety and soundness at banks and bank holding companies, which, if adopted in
their present form, would in effect require the Company to reduce its current
level of "classified assets" (as defined in those regulations). At March 31,
1994 the Company's "classified assets" under the proposed regulations would have
been approximately $238 million, while the maximum amount permitted at that date
under the proposed regulations would have been $207 million. Management believes
that the steps that may be taken to achieve this objective could have a material
adverse effect on the Company's results of operations over the short term, but
does not anticipate a material adverse effect on a long-term basis.
This discussion should be read in conjunction with the financial
statements, notes, and tables included in the Company's Form 10-K for 1993.
Certain previous year numbers have been reclassified to conform with the 1994
presentation.
ASSETS
Total assets at March 31, 1994 were $2.0 billion which is essentially
unchanged from December 31, 1993. The Company's loan portfolio decreased by 4%,
or $51 million, at March 31, 1994. The decrease is primarily due to the
continued weak demand in the Company's market area consistent with the economic
conditions noted above, along with repayments as noted in the Statement of Cash
Flows and increased competition for the small to middle market customers.
Another factor in the reduction of the portfolio was the chargeoffs of certain
credits. See "Credit Quality and Reserve for Loan Loss" on pages 7-8 of this
Form 10-Q.
5
<PAGE> 3
Securities available-for-sale totaled $528 million at March 31, 1994,
compared with $474 million at December 31, 1993, an increase of 11%. This
increase is due primarily to the addition of short-term U.S. Treasury
securities. At March 31, 1994, securities available-for-sale consisted primarily
of mortgage-backed securities, U.S. Treasury and Agency securities, and
corporate notes.
On December 31, 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), issued by the Financial Accounting Standards
Board. This Standard deals with the classification of all debt securities and
equity securities that have a ready market. According to SFAS 115, these
securities must be classified as either held-to-maturity, available-for-sale, or
trading and are reported at either amortized cost or fair value, depending upon
the classification. At both March 31, 1994 and December 31, 1993, all securities
in the Company's portfolio were classified as available-for-sale. The
application of SFAS 115 resulted in a decrease of $8.1 million to stockholders'
equity, between December 31, 1993 and March 31, 1994, representing the change
from an unrealized gain in the portfolio of $3.3 million after tax at December
31, 1993 to an unrealized loss of $4.8 million after tax at March 31, 1994. The
decline reflects the rapid increase in interest rates in the first quarter of
1994 and corresponding decline in market prices for bonds. The increase in rates
continued subsequent to quarter end, with the effect that stockholder equity was
reduced an additional $6.1 million, relating to unrealized losses.
LIQUIDITY AND FUNDING
Liquidity is defined as a Company's ability to fulfill its existing and
anticipated financial obligations. It is provided either through the maturity or
sale of an entity's assets, such as loans and securities, liability sources such
as increased deposits and purchased or borrowed funds, or access to the capital
markets.
At March 31, 1994, liquidity, which includes excess cash, excess funds sold
and unpledged securities, totaled approximately $315 million, or 16% of
quarter-end assets, virtually unchanged from December 31, 1993.
The funds needed to support the Company's loan and securities portfolios
are provided primarily by UST Corp.'s retail deposits, which are relatively low
cost and account for 75% of total deposits. Total deposits decreased $91.9
million, or 5.6%, since December 31, 1993. Approximately 42% of the decline
occurred in savings and time deposits as the average yield has fallen from 2.91%
for the fourth quarter of 1993 to 2.71% for the first quarter of 1994, although
the rate of decline slowed late in the first quarter of 1994. Generally,
investors are increasingly utilizing mutual funds and other nonbank vehicles to
obtain higher rates of return. Demand deposits declined $53.3 million due
primarily to seasonal fluctuations.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents increased by approximately $21.3 million during the three-month
period ended March 31, 1994. Cash provided by operations resulted largely from
net interest income from loans and securities, the net difference of noninterest
expense over noninterest income, and an increase in accruals primarily related
to payables for securities purchases. Net cash provided by investing activities
was due principally to the net decreases in short-term investments and loans
through repayment which was partially reduced by the excess of securities
purchases over proceeds from securities. Net cash used for financing activities
was primarily the result of the aforementioned decreases in both nontime
deposits and certificates of deposit.
At March 31, 1994, the parent company had $4.1 million in cash and $20.0
million in U.S. Treasury securities available-for-sale. This balance is due
primarily to the sale of $2.87 million shares of the Company's common stock to
more than sixty institutional investors in a European offering made under
Regulation S of the United States Securities and Exchange Commission on August
12, 1993. Subsequent to March 31, 1994 these securities were sold and the
proceeds invested in interest-bearing deposits.
Separately, during the first quarter of 1994, United States Trust Company,
a subsidiary bank, received approval from the appropriate regulators to dividend
$1.0 million to the Company. That total, plus an additional $1.0 million from
the parent company, was contributed as capital to the Company's Connecticut
banking subsidiary, UST Bank/Connecticut ("UST/Conn").
6
<PAGE> 4
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. Within GAP limits established by the Board of Directors, the
Company seeks to balance the objective of insulating the net interest margin
from rate exposure with that of taking advantage of anticipated changes in rates
in order to enhance income. The Company's policy is to limit its one-year
cumulative GAP position to 2.5 times equity or approximately 18% of total
assets. The Company manages its interest rate GAP by lengthening or shortening
the maturity structure of the Company's securities portfolio. Currently the
Company's interest rate GAP is positioned so that interest margins will benefit
somewhat from a rise in short-term interest rates.
The following table summarizes the Company's GAP position at March 31,
1994. Seventy percent of the loans are included in 0-30 days as they reprice in
response to changes in the interest rate environment. Securities and Demand
Deposits are categorized according to their expected lives. They are evaluated
in conjunction with the Company's asset/liability management strategy and
securities may be sold in response to changes in interest rates, prepayment
risk, loan growth and similar factors. The reserve for loan losses is included
in the "Over 1 Year" category of loans. At March 31, 1994, the one-year
cumulative GAP position was slightly positive at $20 million, or approximately
1.0% of total assets.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIODS
-----------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C>
Loans................................. $ 893 $ 28 $ 88 $ 218 $1,227
Short-term investments................ 52 52
Securities............................ 18 69 441 528
Other assets.......................... 10 1 10 182 203
--------- ---------- ----------- ----------- ------
Total assets.......................... 955 47 167 841 2,010
Interest-bearing deposits............. 692 86 153 298 1,229
Borrowed funds........................ 212 6 8 226
Demand deposits....................... 320 320
Other liabilities and stockholders'
equity.............................. 235 235
--------- ---------- ----------- ----------- ------
Total liabilities and equity.......... $ 904 $ 86 $ 159 $ 861 $2,010
--------- ---------- ----------- ----------- ------
------
GAP for period........................ $ 51 $(39) $ 8 $ (20)
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
Cumulative GAP........................ $ 51 $ 12 $ 20 $ 0
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
As a percent of total assets.......... 2.54% .60% 1.00%
--------- ---------- -----------
--------- ---------- -----------
</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 an established, systematic
methodology which analyzes the size and risk of the loan portfolio on a monthly
basis. Factors in this analysis include past loan loss experience and asset
quality, as reflected by trends of delinquent, nonaccrual and restructured loans
and the Company's credit risk rating profile. The Company's credit risk rating
profile uses categories of risk based on those currently used by its primary
regulators while accuracy of the ratings is monitored by an ongoing evaluation
by the Company's Loan Review Department. Consideration is also given to the
current and expected economic conditions and in particular how such conditions
affect the types of credits in the portfolio and the market area in general.
7
<PAGE> 5
<TABLE>
The following table measures the Company's performance regarding some key
indicators of asset quality:
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1994 1993 1993
--------- ------------ ---------
($ IN MILLIONS)
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans................................ $48.6 $ 49.3 $ 85.2
Accruing loans 90 days or more past due......... 1.3 .5 .6
Other real estate owned (OREO).................. 16.2 19.5 36.2
Restructured loans.............................. 25.8 41.5 25.4
----- ------ ------
Total nonperforming assets................. $91.9 $110.8 $147.4
----- ------ ------
----- ------ ------
Reserve for loan losses.............................. $60.9 $ 62.5 $ 55.1
Net chargeoffs....................................... $ 7.1 $ 51.8** $ 5.4
OREO Reserve......................................... $ 6.6 $ 6.6 $ 2.3
Ratios:
Reserve to nonaccrual loans..................... 125.2% 127.0% 64.6%
Reserve to total of nonaccrual loans and
accruing loans 90 days or more past due....... 121.9% 125.5% 64.2%
Reserve to total of nonaccrual loans, accruing
loans 90 days or more past due and
restructured loans............................ 80.5% 68.5% 49.5%
Reserve to period-end loans..................... 4.7% 4.7% 3.8%
Nonaccrual loans to period-end loans............ 3.8% 3.7% 5.9%
Nonaccrual and accruing loans over 90 days past
due to period-end loans....................... 3.9% 3.8% 6.0%
Nonperforming assets to period-end loans, OREO,
and automobiles owned......................... 7.1% 8.3% 10.0%
Nonperforming assets to total assets............ 4.6% 5.4% 7.3%
Net chargeoffs to average loans................. 2.2%* 3.7%** 1.5%*
OREO Reserve to OREO............................ 28.9% 25.2% 5.9%
<FN>
- - ---------------
* Quarter annualized
** Full year 1993
</TABLE>
Toward the end of the second quarter of 1993, a strategy was adopted which
recognized that many troubled credit situations would need to be handled in an
expeditious manner (including the possibility of bulk sales) in order to reduce
the management and staff involvement and, in some cases, carrying costs of these
workouts. This would allow the Company's resources to be redirected toward new
business. It would increase the up-front cost of the workouts, however.
As a result of the Company's continued implementation of this strategy, net
chargeoffs increased as noted above, for the first quarter of March 31, 1994
compared to the same period in 1993. These chargeoffs and the decline in
restructured loans, in turn, resulted in a further decrease in nonperforming
assets. Nonperforming assets have declined $18.9 million, or 17%, since December
31, 1993 to $91.9 million. Nonperforming assets have declined $55.5 million due
to paydowns and chargeoffs, or 38% from the first quarter of 1993. The lower
level of nonperforming assets, and related decline in substandard loans,
resulted in a loan loss provision of $5.4 million for the first quarter of 1994
compared with $10.4 million for the same period in 1993.
Adverse economic conditions in the future could result in further
deterioration of the Company's loan portfolio and the value of its OREO
portfolio. The effect of this would likely include increases in delinquencies,
nonperforming assets, restructured loans, and OREO writedowns which individually
or collectively could have a material negative effect on future earnings. These
factors affect the Company's income statement negatively through reduced
interest income, increased provisions for loan losses, and higher costs to
collect loans and maintain repossessed collateral.
8
<PAGE> 6
CAPITAL AND REGULATORY AGREEMENTS
There are three capital requirements which bank and bank holding companies
must meet. Two requirements take into consideration risk inherent in
investments, loans and other assets for both on-balance and off-balance sheet
items on a weighted basis ("risk-based assets"). Under these requirements, the
Company must meet minimum Tier 1 and Total risk-based capital ratios (capital as
defined in the regulations divided by risk-based assets) of 4% and 8%,
respectively. Tier 1 capital is essentially shareholders' equity, net of
intangible assets and Tier 2 capital is the allowable portion of the loan loss
reserve (as defined) and discounted subordinated debt. Total capital is the
combination of Tier 1 and Tier 2. The Company's risk-based assets were $1.59
billion at March 31, 1994 and $1.64 billion at December 31, 1993.
The third requirement is a leverage capital ratio, defined as Tier 1
capital divided by total average assets, net of intangibles. It requires a
minimum of 3% for the highest rated institutions and higher percentages for
others.
<TABLE>
At March 31, 1994 and December 31, 1993, the Company's ratios and the
regulatory minimum requirements applicable to the Company were:
<CAPTION>
MARCH 31, 1994 DECEMBER 31, 1993
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
($ IN MILLIONS)
Tier 1 capital:
Actual........................................... $143.2 9.00% $141.7 8.68%
Minimum required*................................ $ 63.6 4.00% $ 65.3 4.00%
Total (Tier 1 and Tier 2) capital:
Actual........................................... $165.5 10.69% $164.5 10.35%
Minimum required*................................ $124.0 8.00% $130.6 8.00%
Tier 1 leverage capital:*............................. $143.2 7.29% $141.7 7.06%
<FN>
- - ---------------
Capital ratios have been calculated excluding the impact of SFAS 115 and
the recording of the unrealized gain/loss on securities available-for-sale per
current regulatory instructions.
The Company understands that a modification to current regulations for
regulatory capital calculations, is under consideration which would disallow the
lesser of the amount of deferred tax assets that are dependent upon future
taxable income exceeding one year or 10% of Tier 1 capital. If adopted, Tier 1,
Total capital, and Tier 1 leverage capital ratios at March 31, 1994 would be
8.91%, 10.59%, and 7.21%, respectively.
The Company further understands that a new proposal by the FDIC would
reduce capital by the unrealized loss resulting from SFAS 115. This proposal has
not been put forth by the Federal Reserve Board, the Holding Company's primary
regulator. However, if adopted, Tier 1, total capital and Tier 1, leverage
capital ratios at March 31, 1994 would be 8.70%, 10.38%, 7.04%, respectively.
* See discussion below concerning capital requirements for the Company's banking
subsidiaries resulting from regulatory agreements.
</TABLE>
In February 1992, the Company's two Massachusetts-based banking
subsidiaries, United States Trust Company ("USTC") and USTrust, each entered
into a Consent Agreement and Order with the Federal Deposit Insurance
Corporation ("FDIC") and the Commissioner of Banks in the Commonwealth of
Massachusetts ("Massachusetts Commissioner"). In accordance with these
agreements, the banks agreed to, among other things, maintain a Tier 1 leverage
capital ratio at or in excess of 6% by February 1993. At March 31, 1994 the Tier
1 leverage capital ratio of USTrust was 6.72% and was 27.69% for USTC. This
compares with 6.49 and 23.75%, respectively, at December 31, 1993. In February
1994 the FDIC and the Massachusetts Commissioner terminated and lifted the
Consent Agreement and Order with USTC.
Since June 1991, the Company's Connecticut-based banking subsidiary, UST
Bank/Connecticut ("UST/Conn") has been operating under a Stipulation and
Agreement with the Commissioner of Banks for the State of Connecticut. This
agreement was amended in August 1992 and November 1993 and requires
9
<PAGE> 7
UST/Conn to maintain a 6% Tier 1 leverage capital ratio. UST/Conn Tier 1
leverage capital ratio at March 31, 1994 was 6.44% compared with 6.21% at
December 31, 1993. Subsequent to the close of the quarter, regulators for
UST/Conn required that a portion of its deferred tax asset not be included in
capital calculations. This had the effect of causing UST/Conn to be below the 6%
requirement, which was rectified promptly with the declaration of a dividend
subject to regulatory approval to UST/Conn by the Company.
Effective August 3, 1992, UST Corp. entered into a written agreement with
the Federal Reserve Bank of Boston and the Massachusetts Commissioner which
requires the Company to maintain Tier 1, Total risk-based and Tier 1 leverage
capital ratios which conform to the Capital Adequacy Guidelines of the Board of
Governors of the Federal Reserve Board, and which take into account the current
and future capital requirements of the subsidiary banks, without specifying a
numeric minimum for the Tier 1 leverage capital ratio. The Company believes its
ratios meet the required minimums.
Additionally, per these agreements, the Company has agreed not to pay any
dividends to stockholders, nor take any dividends from its banking subsidiaries,
without prior regulatory approval. Similarly, the banking subsidiaries have
agreed to refrain from transferring funds in the form of dividends to the
Company without prior regulatory approval.
Except as noted above, the Company and each of its subsidiary banks is
currently in compliance with its respective capital requirements under these
regulatory agreements. The Company and each of its subsidiary banks is also in
satisfactory compliance with the other terms of the respective regulatory
agreements, except with respect to the issues related to Director Francis X.
Messina described under Item 1 -- Recent Developments -- Potential Regulatory
Sanctions, in the Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1993. As discussed in Part II, Item 1 below, the Company believes
it is unlikely that the matter will have a material adverse effect on the
Company's financial condition or results of operations.
Even though in February 1994, the FDIC and Massachusetts Commissioner
terminated and lifted the Consent Agreement and Order with USTC, USTC has agreed
to continue to request regulatory consent prior to the payment of dividends.
RESULTS OF OPERATIONS
COMPARISON OF 1994 WITH 1993
The Company reported net income of $1.0 million, or $.06 per share, in the
first quarter of 1994 compared with net income of $1.3 million, or $.09 per
share, for the same period in 1993. The results for the first three months of
1993 include a one-time tax benefit of $750 thousand resulting from the
implementation of SFAS No. 109, "Accounting for Income Taxes" in January 1993.
The results for the first quarter of 1994 reflect declines in net interest
income and noninterest income from the first quarter of 1993, which were more
than offset by a lower loan loss provision and decreases in foreclosed asset and
workout expense.
The Company's net interest income on a fully taxable equivalent basis was
$22 million in the first quarter of 1994 compared with $23.4 million in the
fourth quarter of 1993 and $23.1 million for the same period in 1993. The
Company's interest rate spread and margin declined from the fourth quarter of
1993, and was slightly less than the first quarter of 1993. This trend is the
result of a decline in the volume of loans and the continuing low rate
environment, causing a decrease in loan income. See "Net Interest Income
Analysis" below. Although rising interest rates may improve the Company's
interest rate spread and margin, and while the Company is positioned to benefit
from a rising rate environment, a continued decline in the volume of higher
yielding interest earning assets may not allow net interest income to stabilize.
10
<PAGE> 8
<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>
QUARTER ENDED
MARCH 31,
-------------------
1994 1993
------ ------
<S> <C> <C>
Net interest income................................... 4.43% 4.32%
Provision for loan losses............................. (1.11) (1.96)
----- -----
Net interest income after provision for loan losses... 3.32 2.36
Noninterest income.................................... 1.60 2.37
Noninterest expense................................... (4.59) (4.50)
----- -----
Income before income tax.............................. .33 .23
Income tax provision.................................. .13 .13
----- -----
Income before change in accounting method............. .20 .10
Cumulative effect of change in method of accounting
for income taxes.................................... .14
----- -----
Net income............................................ .20% .24%
----- -----
----- -----
</TABLE>
<TABLE>
RETURN ON AVERAGE EQUITY -- COMPONENT ANALYSIS
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------------
1994 1993
------ ------
<S> <C> <C>
Net interest income................................... 57.28% 62.87%
Provision for loan losses............................. (14.32) (28.55)
------ ------
Net interest income after provision for loan losses... 42.96 34.32
Noninterest income.................................... 20.75 34.48
Noninterest expense................................... (59.36) (65.49)
------ ------
Income before income tax.............................. 4.35 3.31
Income tax provision.................................. 1.72 1.87
------ ------
Income before change in accounting method............. 2.63 1.44
Cumulative effect of change in method of accounting
for income taxes.................................... 2.06
------ ------
Net income............................................ 2.63% 3.50%
------ ------
------ ------
</TABLE>
NET INTEREST INCOME ANALYSIS
Decreases continue to occur in the cost of the Company's interest-bearing
liabilities, although the rate of decline slowed late in the first quarter of
1994. Specifically, the cost of interest-bearing funds declined to 2.75% for the
first quarter of 1994 compared with 2.93% for the fourth quarter of 1993 and
3.25% for the first quarter of 1993. Although average interest-bearing deposits
have decreased $89 million from the first quarter of 1993, average loans
outstanding have declined $139 million. This decrease in loans was the primary
reason net interest income declined $1.1 million on a fully taxable basis. Due
to this, the interest rate spread and margin both decreased when compared with
the fourth quarter of 1993 and the first quarter of 1993. The spread in the
first quarter of 1994 was 4.25% compared with 4.44% for the fourth quarter of
1993 and 4.30% for the first quarter of 1993. The margin was 4.80% in the first
quarter of 1994 compared with 5.03% in the fourth quarter of 1993 and 4.82% in
the first quarter of 1993. See "Financial Condition" above for a discussion
regarding loan and deposit decreases.
11
<PAGE> 9
The following tables attribute changes in interest income, interest expense
and the related net interest income for the quarter ended March 31, 1994 when
compared with the quarter ended March 31, 1993, either to changes in average
balances or to changes in average rates on interest-bearing assets and
liabilities. In this table, changes attributable to both rate and volume are
allocated on a weighted basis.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM
QUARTER ENDED MARCH 31, 1993
-----------------------------
AMOUNTS DUE TO
QUARTER CHANGES IN
MARCH 31, TOTAL ------------------
1994 CHANGE VOLUME RATE
--------- ------- ------- -------
<S> <C> <C> <C> <C>
($ IN THOUSANDS)
Interest income:
Interest and fees on loans*.................. $24,721 $(3,552) $(2,656) $ (896 )
Interest and dividends on securities:
Taxable................................. 6,731 (1,096 ) (169 ) (927 )
Nontaxable*............................. 114 (42 ) (42 )
Income on overnight funds and
deposits.............................. 562 540 540
--------- ------- ------- -------
Total interest income*............. 32,128 (4,150 ) (2,327 ) (1,823 )
--------- ------- ------- -------
Interest expense:
Interest on deposits......................... 8,453 (2,476 ) (696 ) (1,780 )
Interest on short-term borrowings............ 1,327 (485 ) (376 ) (109 )
Interest on other borrowings................. 302 (84 ) (90 ) 6
--------- ------- ------- -------
Total interest expense............. 10,082 (3,045 ) (1,162 ) (1,883 )
--------- ------- ------- -------
Net interest income*.............................. $22,046 $(1,105) $(1,165) $ 60
--------- ------- ------- -------
--------- ------- ------- -------
<FN>
- - ---------------
* Fully taxable equivalent at the Federal income tax rate of 35% and includes
applicable state taxes net of Federal benefit.
</TABLE>
NONINTEREST INCOME
Total noninterest income decreased $4.6 million in the first quarter of
1994 compared with the same period in 1993. The decrease was primarily due to a
decline in securities gains from $3.5 million to $23 thousand in 1994. Sales of
securities decreased in the first quarter of 1994 compared with the first
quarter of 1993. The larger amount of sales in 1993 was in response to a $166
million, or 9%, decrease in total deposits. Asset management fees were $4.3
million in the quarter, down slightly from the same period in 1993. This was due
to a decline in the value of the assets under management, as a result of the
negative returns in the stock and bond markets during the first quarter of 1994.
Other noninterest income decreased $694 thousand in the first quarter of
1994 compared with the same period in 1993, and the following are the more
significant reasons: Lease income decreased $388 thousand due to a decline in
residuals on completed leases. Income from home equity loans purchased from the
Resolution Trust Corporation at a substantial discount in late 1991 decreased
$212 thousand compared with the same period in 1993. All other miscellaneous
noninterest income declined $94 thousand.
NONINTEREST EXPENSE
Total noninterest expense for the first quarter of 1994 decreased to $22.6
million from $23.8 million for the same period in 1993. Foreclosed asset and
workout expense declined $3.2 million to $2.6 million in the quarter due to
decreases in writedowns to fair value minus estimated costs to sell foreclosed
real estate properties. As previously discussed under "Credit Quality and
Reserve for Loan Loss," local economic or market conditions may prevent this
reduction from continuing. Personnel-related costs increased $926 thousand due
to additional staffing and merit increases. Net occupancy expense in the first
quarter of 1994 includes a writedown of $300 thousand to market value on one of
the Company's branch buildings which is being offered for sale. Other
noninterest expense increased $789 thousand in the first quarter comparison.
This was due in large part to an increase of $510 thousand in fees paid for
consulting services on a number of planning and operational improvement
initiatives and for consulting services by former Company executives.
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Appraisal fees increased $266 thousand as the Company ordered new appraisals on
a large number of collateral based loans. These increases were partially offset
by a reduction in the Company's provision for litigation in 1994, due to the
resolution of certain litigation in 1993. No provisions were made during the
first quarter of 1994, while during the first quarter 1993, the provision
totaled $150 thousand.
INCOME TAXES
The Company had a tax provision of $653 thousand in the first quarter of
1994. This compares with a provision from operations of $681 million in the
first quarter of 1993. The variations in operating income taxes are attributable
to the level and composition of pretax income or loss.
In February 1992 the Financial Accounting Standards Board (FASB) issued a
new standard, SFAS No. 109 "Accounting for Income Taxes," a modification of SFAS
No. 96, which changes the accounting for deferred income tax to the "liability
method." The Company adopted SFAS No. 109 on January 1, 1993. This change
increased net income $750 thousand in January 1993. This represented the
cumulative effect of the new standard on the balance sheet.
As of March 31, 1994, the Company had recorded deferred tax assets of
approximately $10.5 million. Of that amount, approximately $3 million may be
recovered against taxable income in carryback periods, and the remainder is
expected to be realized against future taxable income. Management believes that
it is more likely than not that the Company will realize the benefit of these
deferred tax assets.
RECENT ACCOUNTING DEVELOPMENTS
FASB has issued Statement No. 112, "Employers' Accounting for
Postemployment Benefits," which requires accrual of a liability for all types of
benefits paid to former or inactive employees after employment but before
retirement. The Company has determined that this FASB statement will have no
material effect on its financial statements. Adoption of the statement is
required for fiscal years beginning after December 15, 1993.
FASB has issued Statement No. 114, "Accounting by Creditors for Impairment
of a Loan," which requires that all creditors value all loans for which it is
probable that the creditor will be unable to collect all amounts due according
to the terms of the loan agreement at the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. This statement would apply for
fiscal years beginning after December 15, 1994. The effect on the Company's
results of operations has not yet been determined.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of operations, the Company and its subsidiaries have
become defendants in a variety of judicial and administrative proceedings. In
the opinion of management, however, there is no proceeding pending, or to the
knowledge of management threatened, which 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. With
respect to the potential regulatory penalties referred to under Item 1 - Recent
Development -- Potential Regulatory Sanctions of the Company's Annual Report on
Form 10-K for its fiscal year ended December 31, 1993, 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.
For the quarter ended March 31, 1994, Items 2-4 of Part II are either
inapplicable or would elicit a response of "NONE" and therefore no reference
thereto has been made herein.
ITEM 5. 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 which was joined in by the FDIC. 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 which contained terms similar to those
imposed on USTrust.
The Regulatory Agreements require that the Company and the Subsidiary Banks
refrain from paying dividends without prior regulatory consent and the Company
has not paid a cash dividend to its stockholders since July 1991. Despite the
termination of its Regulatory Agreement, USTC has agreed to continue to request
regulatory consent prior to the payment of dividends. The Regulatory Agreements
further require USTrust and UST/Conn to maintain Tier 1 leverage capital ratios
at or in excess of 6%. Except as noted in Management's discussion, each of the
Company's Subsidiary Banks is currently in compliance with its respective
capital requirements. The Company and each of its subsidiary banks is also in
satisfactory compliance with the other terms of the respective Regulatory
Agreements except with respect to the issues related to Director Francis X.
Messina discussed in Item 1 - Recent Developments -- Potential Regulatory
Sanctions, in the Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1993. As 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 intercompany transactions and
allocation of tax payments among subsidiaries and the Company. USTrust and
UST/Conn have also revised and expanded their investment and funds management
policies as required by the Regulatory Agreements. Moreover, the Company has
agreed to give the FRB-Boston and the Massachusetts Commissioner prior notice of
certain significant expenditures and certain increases in management
compensation. The Company has filed (and will continue to file) with the
regulatory agencies a broad range of periodic reports and plans, including
without limitation, updated strategic, profit and management plans.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS -- NONE.
(b) REPORTS ON FORM 8-K. -- The Company filed a Current Report on Form
8-K/A (containing the Company's financial statements as of December 31,
1993) with the Commission on March 18, 1994. The foregoing Current
Report on Form 8-K/A restated, corrected and amended a Current Report
on Form 8-K filed with the Commission on March 15, 1994.
UST CORP.
<TABLE>
<S> <C>
NEAL F. FINNEGAN
Date May 18, 1994 By:..........................................
NEAL F. FINNEGAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WILLIAM C. BROOKS
Date May 18, 1994 By:..........................................
WILLIAM C. BROOKS
TREASURER AND CHIEF FINANCIAL OFFICER
GEORGE T. CLARKE
Date May 18, 1994 By:..........................................
GEORGE T. CLARKE
CONTROLLER
</TABLE>
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