BOSTON - When Neal F. Finnegan became president and chief executive officer of UST Corp. in March, good news was hard to find there.
Though most of its Boston competitors had rebounded to financial health, UST Corp. was just beginning to come to grips with a heap of bad real estate loans.
Its longtime CEO, Jack Sidell, had just been pushed out after a nasty and well-publicized confrontation with his board. And regulators were stepping up their scrutiny of the bank, limiting what UST could do.
Despite the gloom, Mr. Finnegan, an affable 54-year-old with New England banking roots, saw the bright spots in the $2.1 billion-asset institution. Chief among them: a small-business lending franchise that reaps a fat 5% margin on the loans it makes.
That business, he maintains, has been largely immune to the real estate lending woes that have caused UST to hemorrhage for the past two years.
High Hopes
Once those problems are dealt with, he said, 98-year-old UST will once again be the premier bank for Boston's small-business community.
"This company has very strong earnings power," Mr. Finnegan said in an interview.
Analysts agree that UST has the potential to reign among the top niche players in the banking industry. In addition to the small-business franchise, UST boasts a profitable asset management division with a flair for socially responsible investing. The unit currently has $3.4 billion under management.
"UST has historically had a very unique business mix," said Thomas Theurkauf, an analyst at Keefe, Bruyette & Woods Inc. "They offer the full range of services that their larger bank competitors offer, but they do it in a much more personalized manner."
Of course, analysts warn that it could be some time before the value of UST's core franchises can really come through.
Big Problems
At the end of the third quarter, UST was still grappling with $93.4 million worth of nonperformers, including nonaccrual loans, loans 90-days past due and accruing, and other real estate owned. These problem assets represented 6.68% of UST's loans and other real estate owned outstanding.
But observes say Mr. Finnegan is well equipped to restore health to UST. A self-described turnaround artist, he has already brought two thrifts back from financial ruin: Massachusetts' Worcester Bancorp in the early 1980's and New York's Bowery Savings Bank late in the decade.
He has also had a 23-year, two-stint career at Shawmut National Corp., so he is well connected in that city's business community - an important quality for a small-business banker.
Getting Back on Track
"I'm very impressed with his grasp of the situation at UST," said Gerard Cassidy, an analyst at Hancock Institutional Equity Services in Portland, Maine. "Certainly, the bank has a few skeletons in its closet. But Neal is working his way through them."
Mr. Finnegan has moved aggressively to deal with UST's problems. Upon arriving at UST in the second quarter, he wasted no time in making a hefty loan-loss provision to put UST back on track. More chargeoffs and provisions will be necessary for the next several quarters to get the stage for future profitability.
Mr. Finnegan is also carefully tending to UST's small-business lending and investment management businesses, seeking to keep their value intact as competition escalates.
"Neal is a natural for that job," Mr. Theurkauf said. "He is a known quantity in Boston. He is not coming in cold."
Indeed, the Massachusetts native seems most animated when talking about UST's small-business franchise. Except for the four years he spent running private banking for Bankers Trust Co. in New York immediately prior to joining UST, Mr. Finnegan has spent the bulk of his career concentrating on that segment of the market.
Little wonder he likes to boast that UST has a banking relationship with roughly 10% of all small businesses in the Boston area. At UST, small businesses are those with annual sales ranging from $5 million to $50 million.
"It's always been a challenge to make money on smaller credits," Mr. Finnegan said. "This company has figured out some of the ways to do that."
One way: charge a premium above the prime lending rate. It is expensive to service smaller credits. Mr. Finnegan maintains, and UST passes that cost on to its borrowers.
In return for the higher prices, UST's customers - who borrow an average of $450,000 - receive top-notch service that the competition cannot duplicate.
UST is big enough to offer its borrowers services such as cash management and trade finance, as many so-called community banks cannot. But it is small enough to allow Mr. Finnegan to visit the bank's borrowers himself, he said.
|A Higher Sense of Comfort'
"When you have a $2 billion bank, one of the advantages is that you can give the client the attention of your senior management," Mr. Finnegan said. "That gives them a higher sense of comfort."
According to Mr. Finnegan, it is one of the factors that will help keep UST competitive as its big New England neighbors - Shawmut National Corp., Bank of Boston Corp., and Fleet Financial Group - beef up their efforts in the small-business market. As Mr. Finnegan put it, small-business lending "is some-what in vogue right now."
For UST, the increasing popularity of the segment is a double-edged sword.
"The good news is that it's helping investors understand our strong position in the marketplace," Mr. Finnegan said. "The bad news is that I don't need more competition."
Indeed, Mr. Finnegan said he has already seen some of the newer players in the market attempt to buy share through lower pricing. While that strategy may work today - as the spread between the cost of funds and the rates borrowers pay is fairly wide - it is giving Mr. Finnegan cause for concern about the future of the business.
But observes say that UST can weather that storm. The company may lose some interest income, but it will continue to make money from the cash management and other feebased services it offers its clients.
"I'm assuming [UST] will have to do some price cutting," Keefe Bruyette's Mr. Theurkauf said. "But it will still be a very profitable enterprise for them."
