-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KIN9GJfbGRkQE1H/82tStQkyUQb+Y77d5WP7XZctp6pCS24mtYJ/LZ+7x/XfAz9b DuZbYj9E9kJqVd+CW3gDAA== 0000950123-96-002336.txt : 19960515 0000950123-96-002336.hdr.sgml : 19960515 ACCESSION NUMBER: 0000950123-96-002336 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S TRUST CORP /NY CENTRAL INDEX KEY: 0000936301 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20469 FILM NUMBER: 96564231 BUSINESS ADDRESS: STREET 1: 114 WEST 47TH ST CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2128521000 MAIL ADDRESS: STREET 1: 114 WEST 47TH STREET CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: NEW USTC HOLDINGS CORP DATE OF NAME CHANGE: 19950126 10-Q 1 FORM 10-Q FOR QUARTERLY PERIOD ENDED 3/31/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly Period Ended: MARCH 31, 1996 Commission file number: 0-20469 U.S. TRUST CORPORATION (Exact name of registrant as specified in its charter) New York 13-3818952 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 114 West 47th Street, New York, New York 10036 (Address of principal executive offices) (Zip Code) (212) 852-1000 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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 issuer's classes of common stock, as of the latest practicable date. 9,778,128 shares, Common Stock $1 par value, as of April 30, 1996 Page 1 of 21 Pages 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements An index of the financial statements included in this Form 10-Q filing follows. All page numbers refer to pages within this Form 10-Q. Title of Financial Statement Page # - ---------------------------- ------ Condensed Consolidated Statement of Income for the Three-Month Periods Ended March 31, 1996 and 1995 3 Condensed Consolidated Statement of Condition as of March 31, 1996 and December 31, 1995 4 Condensed Consolidated Statement of Changes in Stockholders' Equity for the Three-Month Periods Ended March 31, 1996 and 1995 5 Condensed Consolidated Statement of Cash Flows for the Three-Month Periods Ended March 31, 1996 and 1995 6 Notes to the Condensed Consolidated Financial Statements 7 Condensed Consolidated Net Interest Revenue and Average Balances for the Three-Month Periods Ended March 31, 1996 and 1995 18 In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been made. Such adjustments, except for the items mentioned in the Notes to the Condensed Consolidated Financial Statements and/or Management's Discussion and Analysis of Financial Condition and Results of Operations, are of a normal recurring nature. -2- 3 U. S. TRUST CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (In Thousands, Except Per Share Amounts) (UNAUDITED)
For the Three Month Periods Ended March 31, ------------------------------------------------------------------ Better (Worse) --------------------------- 1996 1995 $ % --------- --------- --------- -------- Fee Revenue Core $ 57,999 $ 49,823 $ 8,176 16.4% Processing -- 25,059 (25,059) -- --------- --------- --------- ----- 57,999 74,882 (16,883) (22.5) Net Interest Revenue 19,216 28,268 (9,052) (32.0) Other Income -- 663 (663) -- Securities Gains, Net 208 186 22 11.8 --------- --------- --------- ----- Total Revenue Net of Interest Expense and Provision for Credit Losses 77,423 103,999 (26,576) (25.6) --------- --------- --------- ----- OPERATING EXPENSES Salaries 21,903 34,286 12,383 36.1 Employee Benefits and Performance Compensation 12,285 20,359 8,074 39.7 --------- --------- --------- ----- Total Salaries and Benefits 34,188 54,645 20,457 37.4 Net Occupancy 8,239 10,505 2,266 21.6 Other 18,449 23,021 4,572 19.9 Restructuring -- 1,448 1,448 -- --------- --------- --------- ----- Total Operating Expenses 60,876 89,619 28,743 32.1 --------- --------- --------- ----- Income Before Income Taxes 16,547 14,380 2,167 15.1 Income Taxes 6,950 5,752 (1,198) (20.8) --------- --------- --------- ----- Net Income $ 9,597 $ 8,628 $ 969 11.2% ========= ========= ========= ===== Net Income Per Share $ 0.92 $ 0.85 $ 0.07 8.2% ========= ========= ========= =====
The accompanying notes are an integral part of these financial statements. -3- 4 U.S. TRUST CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CONDITION (Dollars In Thousands) (UNAUDITED)
March 31, December 31, ASSETS 1996 1995 ----------- ----------- Cash and Due from Banks $ 52,161 $ 96,785 Interest Earning Securities 820,611 764,900 Loans 1,441,017 1,459,695 Less: Allowance for Credit Losses 16,160 16,086 ----------- ----------- Net Loans 1,424,857 1,443,609 Other Assets 260,175 267,925 ----------- ----------- Total Assets $ 2,557,804 $ 2,573,219 =========== =========== LIABILITIES Deposits: Non-Interest Bearing $ 401,420 $ 489,827 Interest Bearing 1,626,312 1,503,430 ----------- ----------- Total Deposits 2,027,732 1,993,257 Short-Term Credit Facilities 102,285 134,815 Accounts Payable and Accrued Liabilities 210,917 233,870 Long-Term Debt 26,468 29,434 ----------- ----------- Total Liabilities 2,367,402 2,391,376 ----------- ----------- STOCKHOLDERS' EQUITY Common Stock, $1.00 Par Value; 40,000,000 Shares Authorized; 9,778,128 Shares Issued in 1996 and 9,739,144 Shares Issued in 1995 9,778 9,739 Capital Surplus 1,070 125 Retained Earnings 190,997 183,804 Loan to ESOP (10,468) (13,434) Unrealized Gain (Loss), Net of Taxes, on Securities (975) 1,609 ----------- ----------- Total Stockholders' Equity 190,402 181,843 ----------- ----------- Total Liabilities and Stockholders' Equity $ 2,557,804 $ 2,573,219 =========== ===========
The accompanying notes are an integral part of these financial statements. -4- 5 U.S. TRUST CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands, Except Per Share Amounts) (UNAUDITED)
For the Three Month Periods Ended March 31, ---------------------------------- 1996 1995 --------- --------- COMMON STOCK Balance, January 1 $ 9,739 $ 11,581 Issuance of Shares Under Employee Benefit Plans 39 122 --------- --------- Balance, March 31 $ 9,778 $ 11,703 ========= ========= CAPITAL SURPLUS Balance, January 1 $ 125 $ 72,605 Employee Benefit Plans 945 4,644 --------- --------- Balance, March 31 $ 1,070 $ 77,249 ========= ========= RETAINED EARNINGS Balance, January 1 $ 183,804 $ 244,639 Net Income 9,597 8,628 Cash Dividend Declared ($0.25 Per Share in 1996 and $0.50 Per Share in 1995) (2,435) (4,792) Tax Benefit on Stock Based Awards 31 935 --------- --------- Balance, March 31 $ 190,997 $ 249,410 ========= ========= TREASURY STOCK Balance, January 1 $ -- $ (86,139) Purchases -- -- Issuance (Tender) of Shares Under Employee Benefit Plans, Net -- 152 --------- --------- Balance, March 31 $ -- $ (85,987) ========= ========= LOAN TO ESOP Balance, January 1 $ (13,434) $ (16,171) Principal Payment by ESOP 2,966 2,737 --------- --------- Balance, March 31 $ (10,468) $ (13,434) ========= ========= UNREALIZED GAIN (LOSS), NET OF TAXES, ON SECURITIES Balance, January 1 $ 1,609 $ (3,192) Net Change in Fair Value, After Taxes (2,584) 3,701 --------- --------- Balance, March 31 $ (975) $ 509 ========= ========= TOTAL STOCKHOLDERS' EQUITY $ 190,402 $ 239,450 ========= =========
The accompanying notes are an integral part of these financial statements. -5- 6 U.S. TRUST CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) (UNAUDITED)
For Three Month Periods Ended March 31, ----------------------------------- 1996 1995 --------- --------- Net Cash Provided by Operating Activities $ 906 $ 23,036 --------- --------- Cash Flows From Investing Activities: Interest Earning Securities: Purchases (368,616) (547,094) Sales 18,756 232,881 Maturities, Calls and Mandatory Redemptions 289,719 357,436 Net Change in Loans 18,678 168,894 Other, Net (1,595) (9,623) --------- --------- Net Cash Provided by (Used in) Investing Activities (43,058) 202,494 --------- --------- Cash Flows From Financing Activities: Net Change in Non-Interest Bearing Deposits (88,407) 52,409 Net Change in Interest Bearing Deposits 122,882 (15,885) Net Change in Short-Term Credit Facilities (32,530) (248,645) Other, Net (4,417) (2,561) --------- --------- Net Cash (Used in) Financing Activities (2,472) (214,682) --------- --------- Net Change in Cash and Cash Equivalents (44,624) 10,848 Cash and Cash Equivalents at January 1 96,785 164,610 --------- --------- Cash and Cash Equivalents at March 31 $ 52,161 $ 175,458 ========= ========= Income Taxes Paid $ 146 $ 27,551 Interest Expense Paid 20,859 23,039
The accompanying notes are an integral part of these financial statements. -6- 7 U. S. TRUST CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Disposition and Merger Transaction On November 18, 1994, the former U.S. Trust Corporation ("UST") and The Chase Manhattan Corporation ("Chase") entered into an agreement under which Chase acquired UST's institutional custody, mutual funds servicing and unit trust businesses (the "Processing Business") and certain back office operations (collectively, the "Chase Acquired Business") for $363.5 million in Chase common stock. The transaction with Chase was consummated through two almost simultaneous steps. On September 1, 1995, UST spun-off to its shareholders shares of common stock of a newly-formed entity which assumed the name U.S. Trust Corporation (the "Corporation" or "Parent") on a share-for-share basis (the "Disposition"). The Corporation and its subsidiaries acquired the assets and operations of UST's asset management, private banking, special fiduciary and corporate trust businesses (the "Core Businesses"). On September 2, 1995, UST, which then included only the assets and liabilities of the Chase Acquired Business, merged into Chase (the "Merger") and UST shareholders received 0.68 shares of Chase common stock for each share of UST. The number of shares of Chase common stock received by UST shareholders was based upon an exchange ratio calculated by dividing the purchase price of $363.5 million by the average of the daily average of the high and low prices of Chase common stock for the ten trading days immediately before the closing date. Based on the exchange formula, Chase issued 6,619,758 of its shares to UST's shareholders on a pro rata basis. In connection with the Disposition and Merger, Chase agreed to provide securities processing, custodial, data processing and other services to the Corporation for a five-year term (the "Services Agreement") at an annual base fee of $10 million. The Services Agreement may be extended an additional two to five years beyond its initial term. 2. Acquisition On April 28, 1995, UST purchased the individual account business of J. & W. Seligman & Co. Inc., (approximately $800 million in assets under management) and acquired J. & W. Seligman Trust Company ("Seligman") for approximately $9 million in cash, in a transaction that was accounted for as a purchase. J. & W. Seligman & Co. Inc. is a privately held investment manager and advisor located in New York City. Under the terms of the agreement, the Corporation was required to make a second payment based upon certain business retention and other conditions one year after the acquisition date. On April 28, 1996, the Corporation made a preliminary second payment of $7.2 million. Any final payment required, based on business retained and certain other conditions, is due in June 1996. -7- 8 U. S. TRUST CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 3. Net Interest Revenue Net Interest Revenue for financial reporting purposes includes interest income net of interest expense and the provision for credit losses. The following is a detailed analysis of the composition of net interest revenue: Three-Month Periods March 31, --------------------- % Better (In Thousands) 1996 1995 (Worse) ------- ------- ------- Interest Income: Loans $27,448 $27,298 0.5 % Securities: Taxable 7,976 16,375 (51.3) Tax Exempt 716 1,127 (36.5) Short-Term Investments 3,263 5,097 (36.0) Deposits with Banks 690 968 (28.7) ------- ------- ----- Total Interest Income 40,093 50,865 (21.2) ------- ------- ----- Interest Expense: Deposits 19,301 17,362 (11.2) Short-Term Credit Facilities 829 3,635 77.2 Long-Term Debt 497 1,200 58.6 ------- ------- ----- Total Interest Expense 20,627 22,197 7.1 ------- ------- ----- Net Interest Income 19,466 28,668 (32.1) Provision for Credit Losses 250 400 37.5 ------- ------- ----- Net Interest Revenue $19,216 $28,268 (32.0)% ======= ======= ===== 4. Adoption of New Accounting Standards As of January 1 1996, the Corporation adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("FAS 121"). FAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. FAS 121 requires review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment exists if the sum of the undiscounted expected future cash flows is less than the carrying amount of the asset. Impairment is measured as the amount by which the carrying amount exceeds the fair value of the asset. No adjustments to the carrying amount of long-lived assets were required as a result of adopting FAS 121. 5. Pledged Assets Financial instruments carried at $82,556,000 on March 31, 1996 and $66,258,000 on December 31, 1995 were pledged to secure public deposits, as collateral for borrowings, to qualify for fiduciary powers and for other purposes. -8- 9 U. S. TRUST CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 6. Contingencies There are various pending and threatened actions and claims against the Corporation and its subsidiaries in which the Corporation has denied liability and which it will vigorously contest. Management, after consultation with counsel, is of the opinion that the ultimate resolution of such matters is unlikely to have any future material effect on the Corporation's financial position or results of operations. 7. Reclassifications Certain prior period amounts have been reclassified to conform with the current presentation. -9- 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview On November 18, 1994, UST entered into an agreement under which Chase acquired UST's Processing Business. This transaction was consummated on September 2, 1995. See "Notes to the Consolidated Financial Statements No. 1" for details. Generally Accepted Accounting Principles ("GAAP") and the financial reporting guidance promulgated by the Securities and Exchange Commission ("SEC") consider the Corporation the continuing reporting entity. That is, the financial statements of the Corporation presented herein include the Processing Business results for the first quarter of 1995. As a result, the comparability of the Corporation's financial results for the first quarter of 1995 to the current financial and operating structure of the Corporation is strained, at best. The transaction had the impact of reducing the Corporation's fee revenue base by 34% and average interest earning assets by 39% based on December 31, 1994 data. However, the Services Agreement and the downsizing of the staff structure, which occurred at the same time, have enabled the Corporation to more efficiently support its Core Businesses. As a result, the following discussion and analysis compares the first quarter results with the fourth quarter of 1995, the first full three month period subsequent to the sale of the Processing Business. In addition, where appropriate, relevant information pertaining to the Processing Business is provided for the first quarter of 1995. Results of Operations Net income for the first quarter ended March 31, 1996 amounted to $9.6 million, or $0.92 per share. In the first quarter of 1995, net income was $8.6 million, or $0.85 per share. For the fourth quarter of 1995, the first full quarter following the Disposition and Merger, the Corporation earned $9.1 million, or $0.89 per share. The Corporation's return on average stockholders' equity for the first quarter of 1996 was 20.8%, compared to 15.5% for the first quarter of 1995 and 20.5% for the fourth quarter of 1995. Fee Revenue
March vs. March vs. Three-Month Periods Ended Dec. March ----------------------------------------- % % March 31, Dec. 31, March 31, Better Better (In Thousands) 1996 1995 1995 (Worse) (Worse) ------- ------- ------- -------- -------- Investment Management $52,717 $49,765 $44,220 5.9 % 19.2 % Corporate Trust 5,282 6,822 5,603 (22.6) (5.7) ------- ------- ------- -------- -------- Total Core Businesses 57,999 56,587 49,823 2.5 16.4 Processing Business -- -- 25,059 -- -- ------- ------- ------- -------- -------- Total Fee Revenue $57,999 $56,587 $74,882 2.5 % (22.5)% ======= ======= ======= ======== ======== Market Related Fees $44,607 $43,163 $35,546 3.3 % 25.5 % Transaction Related Fees 13,392 13,424 14,277 (0.2) (6.2) ------- ------- ------- -------- -------- Total Core Businesses $57,999 $56,587 $49,823 2.5 % 16.4 % ======= ======= ======= ======== ========
-10- 11 For the first quarter of 1996, fee revenue increased approximately $8.2 million to $58.0 million from $49.8 million in the first quarter of 1995. Market-related fee revenue increased by $9.1 million from $35.5 million in the first quarter of 1995 to $44.6 million in the first quarter of 1996. Market-related fee revenue is based primarily on the market value of the assets in clients' investment management accounts. Most market-related fee revenue is determined on a declining incremental scale so that as the value of a client's portfolio grows in size, the Corporation earns a smaller percentage on the increasing value. Therefore, market value or other incremental changes in a portfolio's size do not necessarily have a proportionate impact on the level of market-related fee revenue. Market-related fee revenue, which for the most part is based on the prior quarter's asset values, reflects the overall strong equity and bond markets during the fourth quarter of 1995, in addition to new business and acquisitions. The decline in Corporate Trust fee revenue is principally due to a lower level of revenue related to bond immobilization services.
March 31, Dec. 31, March 31, (In Billions) 1996 1995 1995 ----------- ---------- ----------- Assets Under Management: Investment Management $ 34.4 $ 33.5 $ 27.0 Special Fiduciary 14.8 13.9 12.2 ----------- ---------- ----------- Total 49.2 47.4 39.2 Processing Business -- -- 1.9 ----------- ---------- ----------- Total Assets Under Management 49.2 47.4 41.1 ----------- ---------- ----------- Assets Under Administration: Personal Custody and Other 14.1 13.3 8.8 Corporate and Municipal Trusteeships and Agency Relationships at Par Value 197.2 190.5 171.5 ----------- ---------- ----------- Total 211.3 203.8 180.3 Processing Business -- -- 231.0 ----------- ---------- ----------- Total Assets Under Administration 211.3 203.8 411.3 ----------- ---------- ----------- Total Assets Under Management and Administration $ 260.5 $ 251.2 $ 452.4 =========== ========== ===========
Investment management assets, increased 27.5% to $34.4 billion at March 31, 1996, from $27.0 billion at March 31, 1995, and 3.0% from $33.5 billion at December 31, 1995. The following is the composition of assets under management: March 31, December 31, 1996 1995 ------------ ---------- Equity 49% 47% Fixed Income 37 40 Short-Term and Other 14 13 ------------ ---------- 100% 100% ============ ========== Approximately $4.0 billion of assets under management are invested in the Corporation's Excelsior Funds at March 31, 1996. At December 31, 1995 and March 31, 1995, total assets under management invested in the Excelsior Funds were $3.7 billion and $3.3 billion, respectively. -11- 12 Net Interest Revenue
March vs. March vs. Three-Month Periods Ended Dec. March --------------------------------------------- % % (In Thousands) March 31, Dec. 31, March 31, Better Better 1996 1995 1995 (Worse) (Worse) -------- ------- ------- ------- ------ Interest Income $40,093 $38,508 $50,865 4.1% (21.2)% Interest Expense 20,627 20,801 22,197 0.8 7.1 ------- ------- ------- ---- ---- Net Interest Income 19,466 17,707 28,668 9.9 (32.1) Provision for Credit Losses 250 400 400 37.5 37.5 ------- ------- ------- ---- ---- Net Interest Revenue $19,216 $17,307 $28,268 11.0% (32.0)% ======= ======= ======= ==== ====
Net interest revenue was significantly impacted by the following events: First, in anticipation of the Disposition and Merger, the Corporation reduced the overall size of the balance sheet, (the average volume of interest earning assets for the quarter ended March 31, 1996 is $681 million lower than the corresponding quarter of 1995) and shortened the maturity structure of the securities portfolio. Second, the quarter ended March 31, 1995, includes non-interest bearing deposits generated by the Processing Business. The 11.0% increase in net interest revenue at March 31, 1996 from the fourth quarter of 1995 is a result of the 18 basis point improvement in the interest spread from 2.14% to 2.32%. Operating Expenses
March vs. March vs. Three-Month Periods Ended Dec. March ------------------------------------------- % % (In Thousands) March 31, Dec. 31, March 31, Better Better 1996 1995 1995 (Worse) (Worse) ------- ------- ------- ------- ------- Salaries $21,903 $22,082 $34,286 0.8 % 36.1% Employee Benefits and Performance Compensation 12,285 12,642 20,359 2.8 39.7 ------- ------- ------- ---- ---- Total Salaries and Benefits 34,188 34,724 54,645 1.5 37.4 Net Occupancy 8,239 7,445 10,505 (10.7) 21.6 Other 18,449 15,713 23,021 (17.4) 19.9 Restructuring -- -- 1,448 -- -- ------- ------- ------- ---- ---- Total Operating Expense $60,876 $57,882 $89,619 (5.2)% 32.1% ======= ======= ======= ==== ====
Operating expenses amounted to $60.9 million in the first quarter of 1996, compared to $57.9 million in the fourth quarter of 1995 and $88.2 million (excluding $1.5 million of Restructuring charges) in the first quarter of 1995. -12- 13 The decrease in operating expenses from the first quarter of 1995 to the first quarter of 1996 reflects the impact of the Disposition and Merger. The increase in net occupancy for the first quarter of 1996 versus the fourth quarter of 1995 is principally related to rent escalation's under various leases. Income Taxes The Corporation's effective tax rate for the first quarter of 1996 was 42.0%, compared to an effective tax rate of 40.0% for the first quarter of 1995. The lower 1995 effective tax rate is primarily due to the annualized impact of the restructuring charges incurred in connection with the Disposition and Merger. Capital and Liquidity The Corporation's ratio of Tier 1 Capital at March 31, 1996 to period end risk-adjusted assets (as defined by the Federal Reserve Board) was 11.2%. The ratio of Total Capital at March 31, 1996 to period end risk-adjusted assets was 12.5%. The Tier 1 Leverage (Tier 1 Capital as of the period end divided by quarterly (3 month) total average assets) was 5.6%. The Corporation's capital ratios have been negatively impacted in 1996 as a result of the change, effective April 1, 1995, in the Federal Reserve Board's (the "Federal Reserve") method of determining Tier 1 Capital. Specifically, the Federal Reserve now limits the amount of deferred tax assets that qualify for Tier 1 Capital to the lower of 10% of Tier 1 Capital or the Corporation's projected earnings for the next year. However, if the Corporation has the ability to recover deferred tax assets from income taxes paid in prior years, the amount of the "carry back" capability, as defined, qualifies as Tier 1 Capital. Because the Corporation is a new tax payer, as of September 1, 1995, its tax carry back capability is limited to earnings that have been generated since the Disposition and Merger. Accordingly, a substantial amount of its deferred tax assets are subject to the aforementioned limitations. As the Corporation generates taxable income, the impact of the Federal Reserve's regulation on deferred tax assets will be mitigated. The Corporation requires access to funds sufficient to pay dividends to common shareholders, interest and principal to debt holders and for other corporate purposes. The Corporation paid a quarterly dividend of $0.25 per share in the first quarter of 1996 and expects, subject to approval of the Board of Directors, to pay quarterly dividends of $0.25 per share for the remainder of 1996. In addition, at March 31, 1996, the banking subsidiaries can declare, in the aggregate, approximately $18.4 million without prior regulatory approval. The Corporation has a $25.0 million unsecured revolving credit facility with a major financial institution maturing in 1998. At March 31, 1996, $20.0 million was outstanding under this facility. Asset/Liability Management The principal functions of asset and liability management are: to provide for adequate liquidity; to manage interest rate exposure by maintaining a prudent relationship between interest rate sensitive assets and liabilities; and to structure the size and composition of the balance sheet in order to maximize net interest revenue, while complying with bank regulatory agency capital standards. -13- 14 Although the balance sheet is significantly smaller subsequent to the Disposition and Merger, the Corporation's asset mix is still principally liquid and low-risk. Approximately 38% of average total assets consist of cash and due from banks, short-term financial instruments and readily marketable securities. The securities portfolio is concentrated in investments in U.S. Government Treasury securities. The loan portfolio is the largest component of average total assets. Average loans for the first quarter of 1996 were $1.38 billion compared to $1.36 billion for both the first and fourth quarters of 1995. See the "Asset Quality" section of Management's Discussion and Analysis for further information on the composition of the Corporation's loan portfolio. Interest Rate Sensitivity Interest rate risk arises from differences in the timing of repricing assets and liabilities. One measure of interest rate risk is the difference in asset and liability repricing on a cumulative basis within a specified time frame. Gap analysis has inherent limitations as an analytical tool because it only measures the Corporation's exposure at a single point in time. Exposure to interest rates is constantly changing as a result of the Corporation's ongoing business and its management initiatives. The following table provides the components of the Corporation's interest rate sensitivity gaps at March 31, 1996. To reflect anticipated payments, certain asset and liability categories are included in the table based on estimated rather than contractual maturity or repricing dates. As of March 31, 1996, the Corporation had more liabilities repricing or maturing than assets (liability sensitive) in the 0-3 month category. In general, when an enterprise is liability sensitive, its net interest revenue will improve in a declining interest rate environment and will decline in a rising interest rate environment.
0 - 3 4 - 6 7 - 12 1 - 5 Over (In Thousands) Months Months Months Years 5 Years Total ----------- ----------- ----------- ----------- ----------- ----------- INTEREST EARNING ASSETS: Interest Earning Securities $ 374,615 $ 120,264 $ 69,401 $ 192,702 $ 63,629 $ 820,611 Loans, Net of Allowance for Credit Losses 626,790 37,757 73,014 415,758 271,538 1,424,857 ----------- ----------- ----------- ----------- ----------- ----------- Total Interest Earning Assets 1,001,405 158,021 142,415 608,460 335,167 2,245,468 ----------- ----------- ----------- ----------- ----------- ----------- INTEREST BEARING LIABILITIES: Interest Bearing Deposits (1,556,672) (21,349) (42,237) (6,054) -- (1,626,312) Short-Term Credit Facilities (102,285) -- -- -- -- (102,285) Long-Term Debt -- -- -- (24,468) (2,000) (26,468) ----------- ----------- ----------- ----------- ----------- ----------- Total Interest Bearing Liabilities (1,658,957) (21,349) (42,237) (30,522) (2,000) (1,755,065) ----------- ----------- ----------- ----------- ----------- ----------- Asset/(Liability) Sensitivity Gap (657,552) 136,672 100,178 577,938 333,167 490,403 Interest Rate Swaps 461,000* (750) (22,250) (288,000) (150,000) -- ----------- ----------- ----------- ----------- ----------- ----------- Interest Rate Sensitivity Gap (196,552) 135,922 77,928 289,938 183,167 490,403 Net Non-Interest Earning Assets/ (Bearing Liabilities) and Stockholders' Equity (69,452) -- -- (217,538) (203,413) (490,403) ----------- ----------- ----------- ----------- ----------- ----------- Maturity/Repricing Gap (266,004) 135,922 77,928 72,400 (20,246) -- ----------- ----------- ----------- ----------- ----------- ----------- Cumulative Gap $ (266,004) $ (130,082) $ (52,154) $ 20,246 $ -- $ -- =========== =========== =========== =========== =========== ===========
* Includes $461,750,000 of total outstanding notional principal of Swaps less $750,000 of Swaps maturing or amortizing within three months. -14- 15 In managing its interest rate sensitivity gaps, the Corporation takes into account the nature of its business operations. The Corporation invests in fixed rate U.S. Treasury securities and fixed rate residential real estate mortgage loans and fixed and variable rate mortgage backed securities. While it is anticipated that the portion of fixed rate loans will remain constant, changes in the level and direction of interest rates will cause prepayments of existing loans and origination of new fixed rate loans and their average life and duration to vary. Consequently, the proportion of fixed rate loans and their average life and duration may vary from period to period. As part of its overall asset and liability management process, the Corporation uses interest rate swaps ("Swaps") as hedges. Swaps are used to hedge the long-term fixed interest rate exposure from residential real estate mortgage loans. The following table provides details, as of March 31, 1996, of the notional amounts of Swaps by maturity and the related average interest rates paid and received. The Corporation is a fixed rate payor on all of its Swaps. The Corporation's use of Swaps as an asset/liability management tool has increased since a greater proportion of the Corporation's fixed rate interest earning assets will be funded with short-term interest bearing liabilities. Prior to the Disposition and Merger, the Processing Business' non-interest bearing deposits had provided a long-term funding source.
Maturing ----------------------------------------- Within 1 1 to 5 Over 5 (Dollars In Thousands) Year Years Years Total --------- --------- --------- --------- Fixed Pay Swaps $ 23,000 $288,750 $ 150,000 $461,750 Average Rate Paid 6.9749% 6.7645% 6.1942% 6.5897% Average Rate Received* 5.4254% 5.4467% 5.3707% 5.4209%
* Represents the average variable rate that will be received by the Corporation based upon the rate in effect at the latest variable rate reset date of each Swap. The impact of the Corporation's hedging activities upon net interest revenue for the quarters ended March 31, 1996 and 1995, are detailed in the following table. Three-Month Periods Ended March 31, ------------------------------------ (Dollars In Thousands) 1996 1995 ---------------- ---------------- Net Interest Revenue: As Reported $ 19,216 $ 28,268 Excluding Hedging Activities $ 20,243 $ 28,564 Net Yield on Interest Earning Assets: As Reported 3.48% 3.99% Excluding Hedging Activities 3.67% 4.06% The difference between results "As Reported" and "Excluding Hedging Activities" in each year reflects the cost of utilizing swaps to hedge interest rate risk. -15- 16 Securities During the first quarter of 1996, the Corporation purchased approximately $369 million (principally U.S. Government agency and Treasury securities) and sold approximately $19 million of U.S. Treasury securities) of securities classified as available for sale. Approximately 55% of the Corporation's portfolio of securities is comprised of U.S. Treasury fixed rate obligations. The remaining portfolio is primarily comprised of securities of government sponsored agencies and corporations, variable rate collateralized mortgage obligations ("CMOs") and obligations of states and municipalities. CMOs are primarily collateralized by Government National Mortgage Association securities ("GNMAs"). GNMAs are backed by the full faith and credit of the U.S. Government. The amortized cost of securities exceeded their market value by $1.7 million at March 31, 1996. At March 31, 1995, the amortized cost of securities exceeded their market value by $1.1 million. Asset Quality The Corporation's loan portfolio is primarily comprised of credit extensions to private banking customers. Average loans remained relatively stable with a moderate increase from $1.36 billion in the first quarter of 1995 to $1.38 billion in the first quarter of 1996. Residential real estate mortgages comprised approximately 69% of total loans at March 31, 1996. An analysis of the allowance for credit losses follows: Three-Month Periods Ended March 31, ---------------------------- (In Thousands) 1996 1995 ------------ ------------ Balance, Beginning of Period $ 16,086 $ 14,699 Provision Charged to Income 250 400 Recoveries 208 667 Charge-offs (384) (275) ------------ ------------ Net (Charge-Offs) Recoveries (176) 392 ------------ ------------ Balance, End of Period $ 16,160 $ 15,491 ============ ============ The provision for credit losses reflects the addition to the provision charged to income that management deems appropriate to maintain the allowance at a level adequate when related to the risk of loss inherent in the credit portfolio. In assessing adequacy, management relies on its ongoing review of specific credits, past experience, the present credit portfolio composition and general economic and financial considerations. As a percentage of average loans, annualized net loan charge-offs were five basis points for the first quarter of 1996, compared to annualized net loan recoveries of 12 basis points for the first quarter of 1995. The allowance for credit losses at March 31, 1996, was 1.17% of average loans for the quarter. This compares with 1.14% of average loans for the quarter ended March 31, 1995. The allowance for credit losses as a percentage of nonperforming loans was 129.16% at March 31, 1996, compared to 270.7% at March 31, 1995. The ratio of nonperforming assets to average loans and real estate owned for the quarter was 1.6% at March 31, 1996, compared to 1.3% at March 31, 1995. -16- 17 Nonperforming assets, which include non-accrual loans and real estate acquired in restructurings, are as follows: March 31, Dec. 31, March 31, (In Millions) 1996 1995 1995 ----- ----- ----- Non-accrual loans $12.5 $13.3 $ 5.7 Real estate acquired in restructurings 9.2 9.6 11.7 ----- ----- ----- Total Nonperforming Assets $21.7 $22.9 $17.4 ===== ===== ===== The $4.3 million increase in nonperforming assets from March 31, 1995 to March 31, 1996 is due primarily to the reclassification of one credit facility to non-accrual status. Real estate acquired in debt restructurings is net of a reserve of $978,000 at March 31, 1996 and December 31, 1995 and $478,000 at March 31, 1995. Accounting Standards Not Yet Adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("FAS 123"), issued in October 1995, establishes financial accounting and reporting standards for stock-based compensation plans. FAS 123 allows companies either to continue to account for stock-based employee compensation plans under existing accounting standards or to adopt a fair value based method of accounting as defined in FAS 123. The Corporation intends to continue accounting for its employee stock compensation plans under its current method and will adopt the disclosure requirement of FAS 123 in its 1996 Form 10-K. -17- 18 U.S. TRUST CORPORATION CONDENSED CONSOLIDATED NET INTEREST REVENUE AND AVERAGE BALANCES (Dollars in Thousands; Interest and Average Rates on a Taxable Equivalent Basis) (UNAUDITED)
For the Three Month Periods Ended March 31, -------------------------------------------------------------------------------- 1996 1995 ------------------------------------- ------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ---------- ---------- ---- ---------- ---------- ---- ASSETS Interest Earning Securities (1) (2) $ 919,598 $ 13,263 5.78% $1,619,178 $ 24,566 6.09% Loans (3) 1,393,185 27,448 7.92 1,375,010 27,298 8.05 ---------- ---------- ---- ---------- ---------- ---- Total Interest Earning Assets 2,312,783 40,711 7.07 2,994,188 51,864 6.99 ---------- ---------- ---- ---------- ---------- ---- Allowance for Credit Losses (16,263) (15,225) Cash and Due from Banks 97,680 277,482 Other Assets 297,443 445,244 ---------- ---------- Total Assets $2,691,643 $3,701,689 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Deposits $1,649,046 19,301 4.71 $1,440,258 17,362 4.89 Short-Term Credit Facilities 71,147 829 4.69 259,768 3,635 5.68 Long-Term Debt 27,478 497 7.27 59,130 1,200 8.12 ---------- ---------- ---- ---------- ---------- ---- Total Sources on Which Interest is Paid 1,747,671 20,627 4.75 1,759,156 22,197 5.11 ---------- ---------- ---- ---------- ---------- ---- Total Non-Interest Bearing Deposits 506,789 1,555,465 Other Liabilities 240,395 146,947 Stockholders' Equity (3) 196,788 240,121 ---------- ---------- Total Liabilities and Stockholders' Equity $2,691,643 $3,701,689 ========== ========== Net Interest Revenue - Tax Equivalent Basis 20,084 29,667 Loan Loss Provision (250) (400) Tax Equivalent Adjustment (618) (999) ---------- --------- Net Interest Revenue $ 19,216 $ 28,268 ========== ========= Net Yield on Interest Earning Assets 3.48% 3.99% ==== ==== Interest Spread 2.32% 1.88% ==== ====
(1) The average balance and average rate for securities available for sale have been calculated using their amortized cost. (2) Yields on obligations of states and political subdivisions are stated on a fully taxable basis, employing the statutory federal tax rate adjusted for the effect of state and local taxes, resulting in an effective tax rate of 47%. The amounts of the tax equivalent adjustments to net interest income are related to securities. (3) Loans and Stockholders' Equity include the Loan to ESOP, which had an average balance of $11,478,000 in 1996 and $14,376,000 in 1995. -18- 19 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders of the Corporation was held April 23, 1996. (b) Not required. (c)(i) Election of six directors to hold office for a term expiring in 1999, and, in each case, until their successors have been elected and qualified. Eleanor Baum John Hoyt Stookey For 8,751,462 For 8,749,717 Withhold Authority 75,836 Withhold Authority 77,581 Philippe de Montebello Frederick B. Taylor For 8,751,913 For 8,751,246 Withhold Authority 75,385 Withhold Authority 76,052 Peter L. Malkin Robert N. Wilson For 8,619,319 For 8,753,796 Withhold Authority 207,907 Withhold Authority 73,502 (ii) Ratification of appointment of Coopers & Lybrand LLP as independent auditors for the Corporation and its consolidated subsidiaries for the year 1996. For 8,722,083 Against 39,285 Abstain 66,327 (d) Not applicable. -19- 20 Item 6. Exhibits and Reports on Form 10-Q (a) EXHIBITS: 2.1 - Agreement and Plan of Merger dated as of November 18, 1994 (as amended, supplemented or otherwise modified from time to time) between The Chase Manhattan Corporation ("Chase") and the former U.S. Trust Corporation ("UST"), filed as Appendix A to Exhibit 99.1 ("Exhibit 99.1") to UST's Annual Report on Form 10-K (File No. 0-8709) for the fiscal year ended December 31, 1994. (1)(2) 2.2 - Form of Agreement and Plan of Distribution among UST, the former United States Trust Company of New York ("USTNY"), the Corporation and New U.S. Trust Company of New York (the "Trust Company"), filed as Appendix B to Exhibit 99.1. (1)(2) 2.3 - Form of Contribution and Assumption Agreement between USTNY and the Trust Company, filed as Appendix C to Exhibit 99.1. (1)(2) 2.4 - Form of Post Closing Covenants Agreement among Chase, UST, USTNY, the Corporation and the Trust Company, filed as Appendix D to Exhibit 99.1. (1) 2.5 - Tax Allocation Agreement dated as of September 1, 1995 among UST, the Corporation and Chase, filed as Exhibit 2.5 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. (1) 2.6 - Services Agreement between USTNY and the Trust Company, dated September 1, 1995, filed as Exhibit 2.6 to Amendment No. 1, dated December 27, 1995 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. (1) 3.1 - Restated Certificate of Incorporation of the Corporation, filed as Exhibit 4(b) to the Corporation's Registration Statement on Form S-8 (Registration No. 33-62371). (1) 3.2 - By-Laws of the Corporation, filed as Appendix II to the Corporation's Registration Statement on Form 10 dated February 9, 1995. (1) 4 - Note: The exhibits filed herewith do not include the instruments with respect to long-term debt of the Corporation and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation agrees, pursuant to Item 601 (b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the Securities and Exchange Commission upon request. 11 - Statement re Computation of Net Income Per Share. 27 - Financial Data Schedule. (1) Incorporated herein by reference. (2) The copy of this document being incorporated by reference herein does not include the exhibits and schedules thereto which are identified as being omitted in the table of contents of this document. The Corporation undertakes to furnish any such omitted exhibits and schedules to the Commission upon its request. (b) REPORTS ON FORM 8-K: None. -20- 21 SIGNATURE Pursuant to the requirements 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. U. S. Trust Corporation ----------------------- (Registrant) Date: May 14, 1996 By: Richard E. Brinkmann -------------------- Richard E. Brinkmann Senior Vice President and Comptroller (Principal Accounting Officer) -21- 22 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- Ex. 11 Statement re Computation of Net Income Per Share Ex. 27 Financial Data Schedule EX-11 2 STATEMENT RE COMPUTATION OF NET INCOME PER SHARE 1 U.S. TRUST CORPORATION EXHIBIT 11 - COMPUTATION OF NET INCOME PER SHARE
Three Month Periods Ended March 31, --------------------------------------- 1996 1995 ----------- ----------- PRIMARY NET INCOME PER SHARE: Net Income $ 9,597,000 $ 8,628,000 Plus Dividend Equivalent on Deferred Employee Benefit Plan Awards (After-Tax) 101,250 90,821 ----------- ----------- Adjusted Net Income $ 9,698,250 $ 8,718,821 =========== =========== Weighted average number of common shares outstanding 9,753,789 9,504,347 Add average shares issuable under stock option and variable stock award plans 765,488 775,881 ----------- ----------- Total Common and Common Equivalent Shares 10,519,277 10,280,228 =========== =========== Primary Net Income Per Share $ 0.92 $ 0.85 =========== =========== FULLY DILUTED NET INCOME PER SHARE: Net Income $ 9,597,000 $ 8,628,000 Plus Dividend Equivalent on Deferred Employee Benefit Plan Awards (After-Tax) 101,250 90,821 ----------- ----------- Adjusted Net Income $ 9,698,250 $ 8,718,821 =========== =========== Weighted average number of common shares outstanding 9,753,789 9,504,347 Add maximum dilutive impact of average shares issuable under stock option and variable stock award plans* 809,008 800,396 ----------- ----------- Total Dilutive Shares 10,562,797 10,304,743 =========== =========== Fully Diluted Net Income Per Share $ 0.92 $ 0.85 =========== ===========
* Assumes issuance of the maximum number of shares calculated as follows: Stock option plans - computed using the higher of the average market price or period-end market price of the Corporation's common stock. Variable stock award plans - computed assuming the issuance of performance stock awards that have been awarded but not yet vested. EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1996 MAR-31-1996 52,161 6,531 0 0 814,080 0 0 1,441,017 16,160 2,557,804 2,027,732 102,285 210,917 26,468 0 0 9,778 180,624 2,557,804 27,448 8,692 3,953 40,093 19,301 20,627 19,466 250 208 60,876 16,547 9,597 0 0 9,597 0.92 0.92 3.48 12,512 0 0 0 16,086 384 208 16,160 16,160 0 16,160
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