<PAGE>
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 JUNE 30, 1995
---------------------------------------------
Commission file number 0-8709
-------------------------------------------------
U. S. TRUST CORPORATION
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(Exact name of registrant as specified in its charter)
New York 13-2927955
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
114 West 47th Street, New York, New York 10036
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(Address of principal executive offices) (Zip Code)
(212) 852-1000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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.
9,660,664 shares, Common Stock $1 par value, as of July 31, 1995
Page 1 of 30 Pages
<PAGE>
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 #
---------------------------- ------
Consolidated Statement of Income:
For the Three Month Periods Ended June 30, 1995 and 1994 3
For the Six Month Periods Ended June 30, 1995 and 1994 4
Consolidated Statement of Condition as of June 30,
1995 and December 31, 1994 5
Consolidated Statement of Changes in Stockholders' Equity
for the Six Month Periods Ended June 30, 1995 and 1994 6
Consolidated Statement of Cash Flows for the Six
Month Periods Ended June 30, 1995 and 1994 7
Notes to the Consolidated Financial Statements 8
Consolidated Net Interest Income and Average Balances:
For the Three Month Periods Ended June 30, 1995 and 1994 11
For the Six Month Periods Ended June 30, 1995 and 1994 12
In the opinion of management, all adjustments necessary for a
fair presentation of 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 Consolidated Financial Statements
and/or Management's Discussion and Analysis of Financial Condition and
Results of Operations, are of a normal recurring nature.
-2-
<PAGE>
<TABLE>
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Amounts)
(UNAUDITED)
For the Three Month Periods Ended June 30,
-----------------------------------------------------
Better (Worse)
-----------------------
1995 1994 $ %
----------- --------- --------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 27,277 $ 22,556 $ 4,721 20.9 %
Securities:
Taxable 10,449 19,980 (9,531) (47.7)
Exempt from Federal Income Taxes 1,085 1,291 (206) (16.0)
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 8,877 518 8,359 -
Deposits with Banks 284 711 (427) (60.1)
----------- --------- ---------
Total Interest Income 47,972 45,056 2,916 6.5
----------- --------- ---------
INTEREST EXPENSE
Deposits 18,755 10,232 (8,523) (83.3)
Federal Funds Purchased, Securities Sold
Under Agreements to Repurchase and
Other Borrowings 2,897 7,203 4,306 59.8
Long Term Debt 1,168 1,273 105 8.2
----------- --------- ---------
Total Interest Expense 22,820 18,708 (4,112) (22.0)
----------- --------- ---------
NET INTEREST INCOME 25,152 26,348 (1,196) (4.5)
Provision for Credit Losses 400 500 100 20.0
----------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 24,752 25,848 (1,096) (4.2)
----------- --------- ---------
FEES AND OTHER INCOME
Fiduciary and Other Fees 77,162 73,231 3,931 5.4
Securities Gains (Losses), Net (1,030) 3 (1,033) -
Other 2,332 2,199 133 6.0
----------- --------- ---------
Total Fees and Other Income 78,464 75,433 3,031 4.0
----------- --------- ---------
Total Operating Income Net of Interest
Expense and Provision for Credit Losses 103,216 101,281 1,935 1.9
----------- --------- ---------
OPERATING EXPENSES
Salaries 35,266 33,542 (1,724) (5.1)
Employee Benefits and Incentive
Compensation 19,839 17,196 (2,643) (15.4)
----------- --------- ---------
Total Salaries and Benefits 55,105 50,738 (4,367) (8.6)
Net Occupancy 10,285 9,355 (930) (9.9)
Equipment 4,865 4,500 (365) (8.1)
Other 24,016 17,736 (6,280) (35.4)
----------- --------- ---------
Total Operating Expenses 94,271 82,329 (11,942) (14.5)
----------- --------- ---------
Income Before Income Tax Expense 8,945 18,952 (10,007) (52.8)
Income Tax Expense 3,578 8,054 4,476 55.6
----------- --------- ---------
Net Income $ 5,367 $ 10,898 $ (5,531) (50.8)
=========== ========= ========= =======
Net Income Per Share $ 0.52 $ 1.10 $ (0.58) (52.7)%
=========== ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
<TABLE>
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Amounts)
(UNAUDITED)
For the Six Month Periods Ended June 30,
-----------------------------------------------------
Better (Worse)
-----------------------
1995 1994 $ %
--------- --------- --------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 54,575 $ 42,716 $ 11,859 27.8 %
Securities:
Taxable 26,824 34,230 (7,406) (21.6)
Exempt from Federal Income Taxes 2,212 2,619 (407) (15.5)
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 13,974 5,526 8,448 152.9
Deposits with Banks 1,252 1,293 (41) (3.2)
--------- --------- ---------
Total Interest Income 98,837 86,384 12,453 14.4
--------- --------- ---------
INTEREST EXPENSE
Deposits 36,117 19,633 (16,484) (84.0)
Federal Funds Purchased, Securities Sold
Under Agreements to Repurchase and
Other Borrowings 6,532 9,810 3,278 33.4
Long Term Debt 2,368 2,563 195 7.6
--------- --------- ---------
Total Interest Expense 45,017 32,006 (13,011) (40.7)
--------- --------- ---------
NET INTEREST INCOME 53,820 54,378 (558) (1.0)
Provision for Credit Losses 800 1,000 200 20.0
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 53,020 53,378 (358) (0.7)
--------- --------- ---------
FEES AND OTHER INCOME
Fiduciary and Other Fees 150,665 146,152 4,513 3.1
Securities Gains (Losses), Net (844) 2,034 (2,878) -
Other 4,773 4,523 250 5.5
--------- --------- ---------
Total Fees and Other Income 154,594 152,709 1,885 1.2
--------- --------- ---------
Total Operating Income Net of Interest
Expense and Provision for Credit Losses 207,614 206,087 1,527 0.7
--------- --------- ---------
OPERATING EXPENSES
Salaries 69,614 66,277 (3,337) (5.0)
Employee Benefits and Incentive
Compensation 41,281 36,763 (4,518) (12.3)
--------- --------- ---------
Total Salaries and Benefits 110,895 103,040 (7,855) (7.6)
Net Occupancy 20,790 19,133 (1,657) (8.7)
Equipment 9,588 8,747 (841) (9.6)
Other 43,016 34,180 (8,836) (25.9)
--------- --------- ---------
Total Operating Expenses 184,289 165,100 (19,189) (11.6)
--------- --------- ---------
Income Before Income Tax Expense 23,325 40,987 (17,662) (43.1)
Income Tax Expense 9,330 17,419 8,089 46.4
--------- --------- ---------
Net Income $ 13,995 $ 23,568 $ (9,573) (40.6)
========= ========= ========= =======
Net Income Per Share $ 1.37 $ 2.38 $ (1.01) (42.4)%
========= ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
<TABLE>
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
(Dollars In Thousands)
(UNAUDITED)
June 30, December 31,
ASSETS 1995 1994
-------------- -------------
<S> <C> <C>
Cash and Due from Banks $ 229,135 $ 164,610
Interest Bearing Deposits with Banks 2,050 21,524
Securities:
Available for Sale 636,431 1,033,526
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 595,000 120,000
Loans 1,668,687 1,626,898
Less: Allowance for Credit Losses 15,871 14,699
------------ ------------
Net Loans 1,652,816 1,612,199
Premises and Equipment 109,492 109,346
Other Assets 164,141 162,006
------------ ------------
Total Assets $ 3,389,065 $ 3,223,211
============ ============
LIABILITIES
Deposits:
Non-Interest Bearing $ 1,196,663 $ 1,031,538
Interest Bearing 1,526,177 1,408,833
------------ ------------
Total Deposits 2,722,840 2,440,371
Federal Funds Purchased, Securities Sold Under
Agreements to Repurchase and Other Borrowings 210,524 350,515
Accounts Payable and Accrued Liabilities 148,817 148,078
Long Term Debt 57,187 60,924
------------ ------------
Total Liabilities 3,139,368 2,999,888
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $1.00 Par Value; 40,000,000 Shares
Authorized; 11,763,830 Shares Issued in 1995
and 11,581,373 Shares Issued in 1994 11,764 11,581
Capital Surplus 79,422 72,605
Retained Earnings 255,350 244,639
Treasury Stock at Cost (2,127,137 Shares in 1995
and 2,129,448 Shares in 1994) (86,301) (86,139)
Loan to ESOP (13,434) (16,171)
Unrealized Gain (Loss), Net of Taxes, on
Securities Available for Sale 2,896 (3,192)
------------ ------------
Total Stockholders' Equity 249,697 223,323
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,389,065 $ 3,223,211
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
<TABLE>
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Per Share Amounts)
(UNAUDITED)
For the Six Month Periods
Ended June 30,
-----------------------------
1995 1994
--------- ---------
<S> <C> <C>
COMMON STOCK
Balance, January 1 $ 11,581 $ 11,436
Issuance of Shares Under Employee Benefit Plans 183 56
--------- ---------
Balance, June 30 $ 11,764 $ 11,492
========= =========
CAPITAL SURPLUS
Balance, January 1 $ 72,605 $ 67,898
Employee Benefit Plans 6,817 1,278
--------- ---------
Balance, June 30 $ 79,422 $ 69,176
========= =========
RETAINED EARNINGS
Balance, January 1 $ 244,639 $ 242,112
Net Income 13,995 23,568
Cash Dividends Declared ($0.50 and $1.00 Per Share) (4,850) (9,369)
Tax Benefit on Stock Based Awards 1,566 155
--------- ---------
Balance, June 30 $ 255,350 $ 256,466
========= =========
TREASURY STOCK
Balance, January 1 $ (86,139) $ (82,857)
Purchases - (4,729)
Issuance (Tender) of Shares Under Employee
Benefit Plans, Net (162) 1,791
--------- ---------
Balance, June 30 $ (86,301) $ (85,795)
========= =========
LOAN TO ESOP
Balance, January 1 $ (16,171) $ (18,697)
Principal Payment by ESOP 2,737 2,526
--------- ---------
Balance, June 30 $ (13,434) $ (16,171)
========= =========
UNREALIZED GAIN (LOSS), NET OF TAXES, ON
SECURITIES AVAILABLE FOR SALE
Balance, January 1 $ (3,192) $ 8,695
Net Change in Fair Value, After Taxes 6,088 (13,445)
--------- ---------
Balance, June 30 $ 2,896 $ (4,750)
========= =========
TOTAL STOCKHOLDERS' EQUITY $ 249,697 $ 230,418
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
<TABLE>
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(UNAUDITED)
For Six Month Periods
Ended June 30,
-------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 13,995 $ 23,568
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses 800 1,000
Depreciation and Amortization of Premises and
Equipment and Other Assets 8,102 7,171
Net Amortization/(Accretion) of Premium/Discount
on Securities:
Available for Sale (4,383) 1,925
Held to Maturity - 950
Net Change in Accrued Interest, Commissions and
Other Receivables 4,434 141,113
Net Change in Accounts Payable and Other Liabilities 6,281 (8,868)
Other, Net 3,779 (1,656)
---------- ----------
Net Cash Provided by Operating Activities 33,008 165,203
---------- ----------
Cash Flows From Investing Activities:
Net Change in Interest Bearing Deposits with Banks 19,474 (514)
Purchases of Securities:
Available for Sale (895,602) (784,488)
Held to Maturity - (392,545)
Proceeds From Sales of Securities:
Available for Sale 622,388 43,957
Proceeds From Maturities, Calls and Mandatory
Redemptions of Securities:
Available for Sale 685,116 334,098
Held to Maturity - 28,569
Net Change in Federal Funds Sold and Securities
Purchased Under Agreements to Resell (475,000) 232,000
Net Change in Loans (41,826) (216,976)
Expenditures for Premises and Equipment,
Net of Retirements (6,780) (5,167)
Principal Payment by ESOP 2,737 2,526
Other, Net (14,411) (14,058)
---------- ----------
Net Cash (Used) by Investing Activities (103,904) (772,598)
---------- ----------
Cash Flows From Financing Activities:
Net Change in Non-Interest Bearing Deposits 165,125 16,508
Net Change in Money Market and Other Savings Deposits 81,563 (43,624)
Net Change in Time Deposits 35,781 14,543
Net Change in Federal Funds Purchased, Securities Sold
Under Agreements to Repurchase and Other Borrowings (139,991) 749,409
Repayments of Long Term Debt (3,737) (2,526)
Issuance of Common Stock 6,224 1,910
Purchases of Treasury Stock - (4,729)
Dividends Paid (9,544) (9,089)
---------- ----------
Net Cash Provided by Financing Activities 135,421 722,402
---------- ----------
Net Change in Cash and Cash Equivalents 64,525 115,007
Cash and Cash Equivalents at January 1 164,610 179,117
---------- ----------
Cash and Cash Equivalents at June 30 $ 229,135 $ 294,124
========== ==========
Income Taxes Paid $ 4,175 $ 17,020
Interest Expense Paid 44,908 32,618
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
U. S. TRUST CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Pending Disposition and Merger Transaction
------------------------------------------
The Corporation and The Chase Manhattan Corporation ("Chase")
announced on November 18, 1994 that they have entered into an
agreement under which Chase will purchase the Corporation's
institutional custody, mutual funds servicing and unit trust
businesses and certain of the Corporation's back office
functions for $363.5 million in Chase common stock (the
"Transaction"). At a special meeting of shareholders held on
March 22, 1995, the shareholders approved the Transaction.
Approval has also been received from the Federal Reserve Board,
the New York State Banking Department and the Office of the
Comptroller of the Currency. Applications for approvals from
other bank regulatory agencies and a favorable ruling from the
Internal Revenue Service regarding the Transactions tax-free
status are still pending. The Transaction is expected to be
consummated in the third quarter of 1995.
In connection with the Transaction, the Corporation anticipates
total exit costs of approximately $110 million (after-tax). In
the second quarter of 1995, the Corporation incurred
$4.4 million (after-tax) of expense. Since the announcement of
the Transaction, the Corporation has incurred a total of
$33.3 million of such exit costs. The remaining charges will
be recorded as incurred, and no later than the closing date of
the Transaction. See "Pending Disposition and Merger
Transaction" in the Management Discussion and Analysis of
Financial Condition and Results of Operations.
On April 25, 1995, the Corporation announced the decision by
the Board of Directors to defer declaration of the
Corporation's regular second quarter dividend in view of the
pending completion of the Transaction. It is anticipated that
subsequent to the Transaction and subject to its operating
results and regulatory capital requirements, the Corporation's
successor will establish an initial annual dividend of
approximately $1.00 per share. It is also expected that
further dividends will be declared in the second half of 1995.
-8-
<PAGE>
U. S. TRUST CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisition
-----------
On April 28, 1995, the Corporation purchased the individual
account business of J. & W. Seligman & Co. Inc., 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 may pay up to an
additional $11 million in cash for the business acquired
(approximately $800 million in assets under management) subject
to certain business retention and other conditions.
3. Adoption of New Accounting Standards
------------------------------------
As of January 1, 1995, the Corporation adopted Statement of
Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," ("FAS 114"), and Statement
of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures," ("FAS 118"), an amendment of FAS 114. FAS 114
requires that impaired loans be measured based on 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. FAS 118 amends
the disclosure requirements of FAS 114 to require information
about the recorded investment in certain impaired loans and
amends the income recognition criteria of FAS 114. In
accordance with FAS 114, loans previously classified as
in-substance foreclosures but for which the Corporation has not
taken possession of the collateral have been reclassified as
loans. The adoption of FAS 114 and FAS 118 had no impact on
the financial condition or results of operations of the
Corporation.
As of June 30, 1995, the carrying amount of impaired loans, as
defined in FAS 114, was approximately $8.7 million. The
average balance of impaired loans for the second quarter of
1995 was approximately $8.8 million. Interest income, which is
recognized on a cash basis, related to impaired loans for the
second quarter of 1995 was negligible.
-9-
<PAGE>
U. S. TRUST CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. Adoption of New Accounting Standards (Cont'd.)
------------------------------------
The Corporation's income recognition policy for impaired loans
is consistent with the existing income recognition policy for
nonperforming loans discussed in "Notes to the Consolidated
Financial Statements No. 2 (e)" of the Corporation's 1994
Annual Report to Shareholders.
4. Pledged Assets
--------------
Financial instruments carried at $245,651,000 on June 30, 1995
and $303,304,000 on December 31, 1994 were pledged to secure
public deposits, as collateral for borrowings, to qualify
for fiduciary powers and for other purposes.
5. 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.
-10-
<PAGE>
<TABLE>
U.S. TRUST CORPORATION
CONSOLIDATED NET INTEREST INCOME AND AVERAGE BALANCES
(Dollars in Thousands; Interest and Average Rates on a Taxable Equivalent Basis)
(UNAUDITED)
For the Three Month Periods Ended June 30,
---------------------------------------------------------------------------------
1995 1994
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Bearing
Deposits with Banks $ 19,111 $ 284 5.96 % $ 71,958 $ 711 3.96 %
---------- -------- ---------- --------
Securities (1):
U.S. Government
Obligations 357,121 4,727 5.29 796,933 8,800 4.42
Federal Agency
Obligations 227,451 4,178 7.35 693,389 10,261 5.92
State and Municipal
Obligations 71,010 1,735 9.77 82,486 2,063 10.00
Collateralized
Mortgage
Obligations (2) 53,396 873 6.54 84,714 860 4.06
Other Securities 54,945 836 6.09 48,071 502 4.18
---------- -------- ---------- --------
Total Securities 763,923 12,349 6.47 1,705,593 22,486 5.27
---------- -------- ---------- --------
Loans (3) 1,351,856 27,277 8.09 1,290,805 22,564 7.01
---------- -------- ---------- --------
Federal Funds Sold and
Securities Purchased
Under Agreements to
Resell 586,709 8,877 6.07 53,819 518 3.86
---------- -------- ---------- --------
Total Interest Earning
Assets 2,721,599 48,787 7.19 3,122,175 46,279 5.94
---------- -------- ---------- --------
Allowance for Credit
Losses (15,904) (13,901)
Cash and Due from Banks 242,316 300,309
Other Assets 471,533 469,417
---------- ----------
Total Assets $3,419,544 $3,878,000
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing
Deposits $1,454,421 $ 18,755 5.17 $1,313,401 10,232 3.12
Federal Funds Purchased,
Securities Sold Under
Agreements to Re-
purchase and Other
Borrowings 198,444 2,897 5.86 723,721 7,203 3.99
Long Term Debt 57,483 1,168 8.13 62,574 1,273 8.14
---------- -------- ---------- --------
Total Sources on Which
Interest is Paid 1,710,348 22,820 5.35 2,099,696 18,708 3.57
---------- -------- ---------- --------
Total Non-Interest
Bearing Deposits 1,307,251 1,392,144
Other Liabilities 149,041 145,946
Stockholders' Equity (3) 252,904 240,214
---------- ----------
Total Liabilities and
Stockholders' Equity $3,419,544 $3,878,000
========== ==========
Net Interest Income $ 25,967 $ 27,571
======== ========
Net Yield on Interest
Earning Assets 3.82 3.53
===== =====
Interest Spread 1.84 2.37
===== =====
</TABLE>
(1) Includes securities classified as available for sale and held to
maturity. The average balance and average rate for securities
available for sale have been calculated using their amortized cost.
(2) Primarily comprised of variable rate collateralized mortgage
obligations.
(3) Loans and stockholders' equity include the Loan to ESOP, which had
an average balance of $13,434,000 in 1995 and $16,171,000 in 1994.
(4) 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 as follows:
<TABLE>
<S> <C> <C>
Total Securities $ 815 $ 1,215
Total Loans $ - $ 8
</TABLE>
-11-
<PAGE>
<TABLE>
U.S. TRUST CORPORATION
CONSOLIDATED NET INTEREST INCOME AND AVERAGE BALANCES
(Dollars in Thousands; Interest and Average Rates on a Taxable Equivalent Basis)
(UNAUDITED)
For the Six Month Periods Ended June 30,
-------------------------------------------------------------------------------
1995 1994
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Bearing
Deposits with Banks $ 40,914 $ 1,252 6.17 % $ 71,696 $ 1,293 3.64 %
---------- -------- ---------- --------
Securities (1):
U.S. Government
Obligations 567,825 15,546 5.48 684,688 14,751 4.31
Federal Agency
Obligations 231,877 8,470 7.31 614,124 17,262 5.62
State and Municipal
Obligations 72,315 3,540 9.79 82,443 4,191 10.17
Collateralized
Mortgage
Obligations (2) 55,073 1,778 6.46 94,169 1,812 3.85
Other Securities 52,364 1,516 5.79 65,891 1,188 3.61
---------- -------- ---------- --------
Total Securities 979,454 30,850 6.30 1,541,315 39,204 5.09
---------- -------- ---------- --------
Loans (3) 1,363,368 54,575 8.07 1,256,757 42,732 6.86
---------- -------- ---------- --------
Federal Funds Sold and
Securities Purchased
Under Agreements to
Resell 473,404 13,974 5.95 353,354 5,526 3.15
---------- -------- ---------- --------
Total Interest Earning
Assets 2,857,140 100,651 7.09 3,223,122 88,755 5.53
---------- -------- ---------- --------
Allowance for Credit
Losses (15,566) (13,765)
Cash and Due from Banks 259,802 327,238
Other Assets 458,462 461,136
---------- ----------
Total Assets $3,559,838 $3,997,731
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing
Deposits $1,447,379 36,117 5.03 $1,327,917 19,633 2.98
Federal Funds Purchased,
Securities Sold Under
Agreements to Re-
purchase and Other
Borrowings 228,936 6,532 5.75 532,442 9,810 3.72
Long Term Debt 58,302 2,368 8.12 63,007 2,563 8.14
---------- -------- ---------- --------
Total Sources on Which
Interest is Paid 1,734,617 45,017 5.23 1,923,366 32,006 3.35
---------- -------- ---------- --------
Total Non-Interest
Bearing Deposits 1,430,673 1,654,677
Other Liabilities 148,000 177,571
Stockholders' Equity (3) 246,548 242,117
---------- ----------
Total Liabilities and
Stockholders' Equity $3,559,838 $3,997,731
========== ==========
Net Interest Income $ 55,634 $ 56,749
======== ========
Net Yield on Interest
Earning Assets 3.91 3.53
===== =====
Interest Spread 1.86 2.18
===== =====
</TABLE>
(1) Includes securities classified as available for sale and held to
maturity. The average balance and average rate for securities
available for sale have been calculated using their amortized cost.
(2) Primarily comprised of variable rate collateralized mortgage
obligations.
(3) Loans and stockholders' equity include the Loan to ESOP, which had an
average balance of $13,902,000 in 1995 and $16,603,000 in 1994.
(4) 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 as follows:
<TABLE>
<S> <C> <C>
Total Securities $ 1,814 $ 2,355
Total Loans $ - $ 16
</TABLE>
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Pending Disposition and Merger Transaction
------------------------------------------
On November 18, 1994, the Corporation announced that it had
entered into an agreement with The Chase Manhattan Corporation
("Chase") under which Chase will acquire the Corporation's
institutional custody, mutual funds servicing and unit trust businesses
(the "Processing Business") and certain of the Corporation's back
office functions (collectively the "Chase Acquired Business"). See
"Notes to the Consolidated Financial Statements No. 1".
At a Special Meeting of Stockholders held March 22, 1995,
U.S. Trust shareholders approved the disposition of the Chase Acquired
Business to Chase. Approval has also been received from the Federal
Reserve Board, the New York State Banking Department and the Office of
the Comptroller of the Currency. Applications for approvals from other
bank regulatory agencies and a favorable ruling from the Internal
Revenue Service regarding the Transaction's tax-free status are still
pending. The Transaction is expected to close in the third quarter of
1995.
The Transaction will consist of the following two simultaneous
steps. First, the Corporation will spin off to its shareholders the
assets not included in the Chase Acquired Business by establishing a new
corporation ("New USTC") to hold such assets and distributing its shares
to shareholders of the Corporation on a one-for-one basis (the
"Disposition"). Second, the Corporation, which will then include only
the assets and liabilities of the Chase Acquired Business, will be
merged into Chase (the "Merger") and the shareholders of the Corporation
will receive shares of Chase common stock, based upon an exchange
formula set forth in the agreement, on a pro-rata basis. The exchange
formula stipulates that the exchange ratio will be calculated by
dividing the purchase price of $363.5 million by the average of the
daily average of the high and low sales prices of Chase common stock for
the ten trading days immediately before the closing date. The exchange
formula also establishes a floor market value for Chase common stock of
$31 per share. Therefore, the maximum number of Chase common shares
that will be issued in this Transaction is 11,725,806 shares even if the
market value of Chase common stock should fall below $31 per share. As
of August 10, 1995, the closing price of Chase common stock, as reported
in The Wall Street Journal, was $52.125 per share.
As part of the agreement, Chase will provide securities
processing, custodial, data processing and other services to New USTC
under the five year term of a servicing agreement at an annual base fee
of $10 million. The servicing agreement may be extended an additional
two to five years beyond its initial term.
-13-
<PAGE>
Pending Disposition and Merger Transaction (Cont'd.)
------------------------------------------
The Corporation expects to incur exit costs of up to
$110 million (after-tax) associated with various downsizing costs and
other expenses related to the Transaction. In the second quarter of
1995, the Corporation incurred $7.4 million ($4.4 million after-tax) of
such charges. Since the announcement of the Transaction, the
Corporation has incurred a total of $33.3 million (after-tax) of exit
costs.
Pro forma statements have been prepared to present the
estimated effects of the pending Disposition and Merger transaction.
The pro forma condensed statement of condition as of June 30, 1995,
pro forma condensed statement of income for the year ended December 31,
1994, the three and six month periods ended June 30, 1995 and the pro
forma condensed statement of average balances for the six month period
ended June 30, 1995 are filed herewith as Exhibit 99.
Results of Operations:
---------------------
Net income for the second quarter ended June 30, 1995
amounted to $5.4 million, down from the $10.9 million earned in the
second quarter of 1994. Fully diluted net income per share for the
quarter totaled $0.52, versus $1.10 in the second quarter of 1994. For
the six month period ended June 30, 1995, net income amounted to $14.0
million, a decrease of $9.6 million from the $23.6 million earned in the
first half of 1994. Fully diluted net income per share was $1.37 for
the 1995 six month period, compared to $2.38 in the 1994 period.
Excluding the impact of the exit costs, net income would have been
$9.8 million and $19.3 million and $0.95 and $1.88 per share for the
three and six month periods ended June 30, 1995, respectively.
The Corporation's return on average stockholders' equity for
the first six month period of 1995 was 12.13%, compared to 21.07% for
the corresponding 1994 period. Excluding the impact of the exit costs,
the Corporation's return on average stockholders' equity would have been
16.63% for the first six month period of 1995.
<TABLE>
Fee Revenue
-----------
Three Month Periods Six Month Periods
Ended June 30, % Ended June 30, %
------------------- Better --------------------- Better
(In Thousands) 1995 1994 (Worse) 1995 1994 (Worse)
------- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Core Businesses $52,694 $47,715 10.4 % $101,139 $ 95,215 6.2 %
Processing Business 24,468 25,516 (4.1) 49,526 50,937 (2.8)
------- ------- -------- --------
Total $77,162 $73,231 5.4 $150,665 $146,152 3.1
======= ======= ==== ======== ======== ====
</TABLE>
-14-
<PAGE>
Fee Revenue (Cont'd.)
-----------
Fiduciary and other fees ("fee revenue") increased $3.9 million
to $77.1 million in the second quarter of 1995. For the six month
period of 1995, fee revenue increased $4.5 million to $150.7 million.
Fee revenue related to the Processing Business decreased $1.0 million to
$24.5 million from $25.5 million in the second quarter of 1994. For the
first six months of 1995 Processing Business fee revenue declined by
$1.4 million to $49.5 million. Fee revenue for the Corporation's asset
management, private banking, special fiduciary and corporate trust
businesses (the "Core Businesses") increased by $5.0 million to $52.7
million and $5.9 million to $101.1 million in the second quarter and six
months ended June 30, 1995, respectively. The increase in Core
Businesses' fee revenue is attributable to net new business and higher
first quarter asset values. Asset management fees are typically
determined based on the prior quarter's asset values.
<TABLE>
June 30, March 31, June 30,
(In Billions) 1995 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Assets Under Management:
Core Businesses $ 29.2 $ 27.0 $ 25.2
Processing Business 2.2 1.9 2.3
Special Fiduciary 12.0 12.2 3.9
------- ------- -------
Total 43.4 41.1 31.4
------- ------- -------
Assets Under Administration:
Core Businesses 187.3 180.3 162.8
Processing Business 221.3 231.0 203.0
------- ------- -------
Total 408.6 411.3 365.8
------- ------- -------
Total Assets Under Management
and Administration $ 452.0 $ 452.4 $ 397.2
======= ======= =======
</TABLE>
Total assets under management increased 5.6% to $43.4 billion
at June 30, 1995, from $41.1 billion at March 31, 1995, and 38.2% from
$31.4 billion at June 30, 1994. Special Fiduciary assets under
management includes approximately $5.9 billion of the remaining GM-E
stock (contributed by General Motors Corporation to its defined benefit
plan during the first quarter of 1995 and managed by the Corporation's
special fiduciary services group until the stock is distributed into the
market) reflecting a recent secondary offering of $1.7 billion. Core
Businesses assets under management includes approximately $800 million
of assets related to the Seligman acquisition in the second quarter of
1995. Core Businesses assets under management, excluding assets related
to the Seligman acquisition, increased by 5.2% from March 31, 1995, and
12.7% from June 30, 1994.
-15-
<PAGE>
Fee Revenue (Cont'd.)
-----------
Assets under administration of the Processing Business has
declined approximately 4.2% primarily due to the loss of an
institutional services client.
Net Interest Income (Taxable Equivalent Basis)
----------------------------------------------
<TABLE>
Three Month Periods Six Month Periods
Ended June 30, % Ended June 30, %
------------------- Better -------------------- Better
(In Thousands) 1995 1994 (Worse) 1995 1994 (Worse)
------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest Income $47,972 $45,056 6.5 % $ 98,837 $86,384 14.4 %
Taxable Equivalent
Adjustment 815 1,223 (33.4) 1,814 2,371 (23.5)
------- ------- -------- -------
Total Interest Income 48,787 46,279 5.4 100,651 88,755 13.4
Interest Expense 22,820 18,708 (22.0) 45,017 32,006 (40.7)
------- ------- -------- -------
Net Interest Income $25,967 $27,571 (5.8) $ 55,634 $56,749 (2.0)
======= ======= ==== ======== ======= ====
</TABLE>
Net interest income, on a taxable equivalent basis, was
$1.6 million lower in the second quarter of 1995, compared to the second
quarter of 1994. For the six months ended June 30, net interest income,
on a taxable equivalent basis, was $1.1 million lower in 1995 than the
comparable 1994 period. The decline in net interest income was
significantly impacted by two concurrent events.
First, the Corporation's net interest income is dependent upon
the average volume of non-interest bearing deposits ("investable
balances") and the general interest rate environment. The total volume
of the Processing Business's investable balances is generally inversely
related to the level of interest rates. Thus, in periods of increasing
interest rates, the volume of investable balances derived from the
Processing Business typically declines. While the change in the volume
of the Processing Business' investable balances from the second quarter
of 1994 to the second quarter of 1995 was negligible, investable
balances attributable to the Processing Business declined $127 million
(17.9%) for the six month period.
Second, in anticipation of the Chase Transaction, the
Corporation has reduced the overall size of the balance sheet, (the
average volume of securities for the quarter and six month period ended
June 30, 1995 are $942 million and $562 million lower than the
corresponding periods of 1994) and shortened the maturity structure of
the securities portfolio.
-16-
<PAGE>
Net Gains (Losses) on Securities
--------------------------------
Net securities losses in the second quarter of 1995 were
approximately $1.0 million versus a nominal gain in the second quarter
of 1994. The second quarter loss, included as part of total exit costs,
resulted from the Corporation's liquidation of a portion of its
securities portfolio in anticipation of the Chase Transaction. For the
six month period, net securities losses were $844,000, compared with net
securities gains of $2.0 million in the 1994 period.
Total Revenues
--------------
Revenues of the Core Businesses and the Processing Business
are allocated in accordance with the allocation methodologies utilized
by the Corporation's internal management reporting system. The amount
of net interest income allocated to the respective businesses is based
upon the average investable deposit balances supplied by such businesses
multiplied by an appropriate, internally-generated, interest rate. The
interest rate is based upon the rates earned by the Corporation's long-
and short-term securities for the relevant period. Fee revenue is
allocated directly to the businesses performing the service from which
the revenue is derived.
Total revenues, defined as taxable equivalent net interest
income after the provision for credit losses, fee income and other
income, for the Core Businesses and the Processing Business for the
quarters and six month periods ended June 30, 1995 and June 30, 1994
were as follows:
<TABLE>
Three Month Periods Six Month Periods
Ended June 30, % Ended June 30, %
-------------------- Better -------------------- Better
(In Thousands) 1995* 1994 (Worse) 1995* 1994 (Worse)
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Core Businesses $ 71,016 $ 67,646 5.0 % $137,547 $132,244 4.0 %
Processing Business 34,045 34,858 (2.3) 72,911 76,214 (4.3)
-------- -------- -------- --------
Total Revenues $105,061 $102,504 2.5 % $210,458 $208,458 1.0 %
======== ======== ==== ======== ======== ====
</TABLE>
* In 1995, Total revenues exclude approximately $1.0 million of
securities losses incurred in anticipation of the Chase Transaction.
-17-
<PAGE>
Operating Expenses
------------------
<TABLE>
Three Month Periods Six Month Periods
Ended June 30, % Ended June 30, %
------------------- Better --------------------- Better
(In Thousands) 1995 1994 (Worse) 1995 1994 (Worse)
------- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries $35,266 $33,542 (5.1)% $ 69,614 $ 66,277 (5.0)%
Employee Benefits and
Incentive Compensation 19,839 17,196 (15.4) 41,281 36,763 (12.3)
------- ------- -------- --------
Total Salaries and Benefits 55,105 50,738 (8.6) 110,895 103,040 (7.6)
Net Occupancy 10,285 9,355 (9.9) 20,790 19,133 (8.7)
Equipment 4,865 4,500 (8.1) 9,588 8,747 (9.6)
Other 24,016 17,736 (35.4) 43,016 34,180 (25.9)
------- ------- -------- --------
Total Operating Expenses $94,271 $82,329 (14.5) $184,289 $165,100 (11.6)
======= ======= ==== ======== ======== ====
</TABLE>
Non-interest operating expenses in the second quarter of 1995
increased $11.9 million to $94.3 million from the $82.3 million reported
in the second quarter of 1994. Non-interest operating expenses for the
second quarter of 1995 include $2.9 million of salaries and employee
benefit expenses and $3.5 million of other operating expenses, primarily
professional fees, incurred in connection with the Chase Transaction
(aggregating $6.4 million of exit costs). Excluding the $6.4 million of
exit costs, 1995 second quarter operating expenses were 6.7% higher than
the 1994 quarter. Additionally, in the second quarter of 1994 operating
expenses were reduced by $2.1 million primarily as a result of the
favorable impact of terminating certain lease commitments.
For the six months ended June 30, 1995, non-interest operating
expenses amounted to $184.3 million, $19.2 million higher than the
$165.1 million incurred in the 1994 period. Non-interest operating
expenses associated with the Chase Transaction were $7.9 million,
including $4.0 million of salaries and employee benefit expenses and
$3.9 million of other operating expenses (primarily professional fees)
during the six month period. Excluding the $7.9 million of exit costs,
the 1995 first half operating expenses were 6.9% higher than the 1994
period. Additionally, in the 1994 six month period, operating expenses
were reduced by $3.7 million primarily as a result of the favorable
impact of terminating certain lease commitments.
Operating expenses applicable to the Core Businesses and the
Processing Business for the quarters and six month periods ended June
30, 1995 and 1994 were as follows.
-18-
<PAGE>
Operating Expenses (Cont'd.)
------------------
<TABLE>
Three Month Periods Six Month Periods
Ended June 30, % Ended June 30, %
------------------- Better --------------------- Better
(In Thousands) 1995 1994 (Worse) 1995 1994 (Worse)
------- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Core Businesses:
Salaries and Benefits $30,288 $28,922 (4.7)% $ 61,679 $ 58,950 (4.6)%
Net Occupancy 5,223 4,870 (7.2) 10,595 9,773 (8.4)
Other 13,366 12,844 (4.1) 25,964 24,975 (4.0)
------- ------- ------ -------- -------- ------
Subtotal 48,877 46,636 (4.8) 98,238 93,698 (4.8)
------- ------- ------ -------- -------- ------
Processing Business:
Salaries and Benefits 17,456 17,361 (0.5) 36,204 36,176 (0.1)
Net Occupancy 2,674 2,550 (4.9) 5,377 5,229 (2.8)
Other 7,366 7,508 (1.9) 15,023 14,139 (6.3)
------- ------- ------ -------- -------- ------
Subtotal 27,496 27,419 (0.3) 56,604 55,544 (1.9)
------- ------- ------ -------- -------- ------
Corporate Overhead 17,898 8,274 - 29,447 15,858 (85.7)
------- ------- ------ -------- -------- ------
Total Operating Expenses $94,271 $82,329 (14.5)% $184,289 $165,100 (11.6)%
======= ======= ====== ======== ======== ======
</TABLE>
Included in Corporate Overhead for the three month period ended
June 30, 1995 is $6.4 million of exit costs attributable to the Chase
Transaction. For the six month period ended June 30, 1995, $7.9 million
of such exit costs is included in Corporate Overhead. Additionally,
Corporate Overhead for the three month and six month periods ended June
30, 1994 included $2.1 million and $3.7 million, respectively, of
expense reduction primarily due to the termination of certain lease
commitments.
Operating expenses associated with the Core Businesses and
Processing Business are determined by the Corporation's internal
management accounting information system. The Corporation's management
accounting practices and policies have been developed and implemented
with the objective of reflecting the economics of the respective
businesses. Direct costs are those expenses that can be directly
attributable to a specific business activity. Direct expenses include
actual salaries and benefits of the employees of the business, net
occupancy costs based upon actual space utilized and furniture and
equipment specifically employed by the business.
Methodologies have been developed to capture and allocate
expenses that are not directly incurred by the businesses but for which
there is a direct relationship between the level of business activity
and the amount of cost incurred. The guidelines employ volume or
percentage allocation bases or the activity of other expense or balance
sheet accounts. Indirect costs include computer services, securities
clearing and bank operations services transfer charges which are
allocated on the basis of volume statistics, and systems man-month
charges.
-19-
<PAGE>
Operating Expenses (Cont'd.)
------------------
Corporate overhead consists of unallocated costs not
specifically attributable to the respective businesses, including
financial, legal and other general purpose corporate expenses.
Income Taxes
------------
The Corporation's effective tax rate for both the second
quarter and first half of 1995 was 40.0%. The effective tax rate for
the second quarter and first half of 1994 was 42.5%. The decline in the
effective tax rate is due to a reduction in the state and local income
taxes which reflects the growth of the Corporation's national
operations, and as a result, a greater dispersion of the Corporation's
earnings.
Capital
-------
The Corporation has maintained its strong capital position
throughout the first six months of 1995. The ratio of tier 1 capital
at June 30, 1995 to period end risk-adjusted assets was 13.08%, compared
to 13.82% at June 30, 1994. The ratio of total capital at June 30, 1995
to period end risk-adjusted assets was 14.32%. At June 30, 1994 this
ratio was 15.13%. The leverage ratio amounted to 6.80% and 5.89% at
June 30, 1995 and 1994, respectively.
United States Trust Company of New York (the "Trust Company")
has also maintained its strong capital position. At June 30, 1995, the
Trust Company's tier 1 capital ratio was 12.04% compared to 13.08% at
June 30, 1994. The Trust Company's leverage ratio was 6.42% and 5.50%
at June 30, 1995 and 1994, respectively.
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 manage the size and composition of the
balance sheet so as to maximize net interest income, while complying
with bank regulatory agency capital standards.
-20-
<PAGE>
Asset/Liability Management (Cont'd.)
--------------------------
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 net yield earned on pools of fixed rate
residential real estate mortgage loans. The following table provides
details, as of June 30, 1995, 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.
<TABLE>
Maturing
-----------------------
Within 1 1 to 5
(Dollars In Thousands) Year Years Total
-------- -------- --------
<S> <C> <C> <C>
Fixed Pay Swaps $ 31,625 $291,000 $322,625
Average Rate Paid 7.8585% 6.8721% 6.9688%
Average Rate Received* 6.1352% 6.1570% 6.1549%
</TABLE>
* 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.
In anticipation of the pending elimination of the Processing
Business' non-interest bearing deposits as a long-term funding source,
the Corporation sold over $800 million of U.S. Government Treasury and
Agency securities in the fourth quarter of 1994, and shortened the
maturity structure of the securities portfolio. The Corporation will
retain most, if not all, of its fixed rate loan portfolio. As a
result, the Corporation's use of swaps as an asset/liability management
tool has increased as a greater proportion of the Corporation's fixed
rate assets will be funded with short-term interest bearing liabilities.
The impact of the Corporation's hedging activities upon net
interest income is detailed in the following table.
<TABLE>
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
(Taxable Equivalent Basis; -------------------- ---------------------
Dollars In Thousands) 1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Interest Income:
As Reported $ 25,967 $ 27,571 $ 55,634 $ 56,749
Excluding Hedging Activities $ 26,521 $ 28,373 $ 56,483 $ 58,669
Net Yield on Interest Earning Assets:
As Reported 3.82% 3.53% 3.91% 3.53%
Excluding Hedging Activities 3.91% 3.65% 3.99% 3.67%
</TABLE>
The preceding table presents the impact of the Corporation's
hedging activities on net interest income. The difference between the
results "As Reported" and "Excluding Hedging Activities" reflects the
cost of utilizing swaps.
-21-
<PAGE>
Securities Available for Sale
-----------------------------
During the first six months of 1995, the Corporation purchased
approximately $896 million of securities available for sale, primarily
short-term U.S. Government Treasury securities.
The Corporation's portfolio of securities available for sale is
mainly comprised of U.S. Treasury fixed rate obligations (37%),
Government National Mortgage Association ("GNMA") 15-year fixed rate
mortgage-backed securities (32%), obligations of states and
municipalities (11%) and variable rate collateralized mortgage
obligations ("CMOs") (8%). The GNMAs are backed by the full faith and
credit of the United States Government, while the CMOs are
collateralized by GNMAs.
The market value of securities available for sale exceeded
their amortized cost by $5.5 million at June 30, 1995. At June 30,
1994, the amortized cost of securities available for sale exceeded their
market value by $8.9 million. The increase in market value reflects the
reduction of the Corporation's holdings of fixed rate U.S. Government
Treasury obligations and GNMAs (see Asset/Liability Management) which
during 1994, had a reduced market value due to the rising interest rate
environment.
Prepayment Risk
---------------
At June 30, 1995, the Corporation held approximately
$256 million (carrying amount) of GNMA and CMO securities ("mortgage
securities"), compared to approximately $750 million of mortgage
securities held at June 30, 1994. While these mortgage securities, as
well as the Corporation's residential real estate mortgage loans are
subject to prepayment risk, management believes that these are
appropriate investments for the Corporation.
Liquidity
---------
Historically, the Corporation has maintained strong liquidity
at both the parent and the subsidiary level. While the Disposition and
Merger will have a significant effect on capital resources and the
overall asset and liability structure, specifically the elimination of
non-interest bearing deposits as a long-term funding source (see
"Asset/Liability Management" section for further information), the
Corporation believes that New USTC will maintain sufficient liquidity at
the parent and each of its active subsidiaries.
In connection with the Disposition and Merger, the Trust
Company will redeem its outstanding 8.5% Capital Notes Due 2001. The
funds required to redeem the Capital Notes ($10.8 million) will be
obtained through normal business operations.
-22-
<PAGE>
Liquidity (Cont'd.)
---------
The Corporation also will satisfy and discharge the
$30 million balance of its 8% Notes due 1996. The funding for such
satisfaction and discharge will be provided by cash on hand and
dividends from subsidiaries.
An additional source of liquidity is a $35 million unsecured
credit facility with a major financial institution and a final maturity
in 1998. At June 30, 1995, the Corporation had no borrowings
outstanding under this revolving credit arrangement.
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. Accordingly, gap analysis cannot be used to
predict the Corporation's interest sensitivity position after the
Disposition and Merger. Certain actions that the Corporation has taken
in response to the Transaction have been described in the "Liquidity"
section.
The following table provides the components of the
Corporation's interest rate sensitivity gaps at June 30, 1995. To
reflect anticipated payments, certain asset and liability categories are
included in the table based on estimated rather than contractual
maturity or repricing dates.
-23-
<PAGE>
<TABLE>
Interest Rate Sensitivity (Cont'd.)
-------------------------
0 - 3 4 - 6 7 - 12 1 - 5 Over
(In Thousands) Months Months Months Years 5 Years Total
---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
-----------------------
Interest Bearing Deposits
with Banks $ 2,050 $ - $ - $ - $ - $ 2,050
Securities Available for Sale 452,515 26,966 23,593 84,052 49,305 636,431
Federal Funds Sold and
Securities Purchased
Under Agreements to Resell 595,000 - - - - 595,000
Loans, Net of Allowance
for Credit Losses 1,013,323 37,707 70,237 341,855 189,694 1,652,816
---------- ----------- ---------- ---------- ---------- ----------
Total Interest Earning Assets 2,062,888 64,673 93,830 425,907 238,999 2,886,297
---------- ----------- ---------- ---------- ---------- ----------
Interest Bearing Liabilities
----------------------------
Interest Bearing Deposits 1,489,332 10,490 19,261 7,094 - 1,526,177
Federal Funds Purchased,
Securities Sold Under
Agreements to Repurchase
and Other Borrowings 210,524 - - - - 210,524
Long Term Debt 40,753 - 1,679 9,716 5,039 57,187
---------- ----------- ---------- ---------- ---------- ----------
Total Interest Bearing Liabilities 1,740,609 10,490 20,940 16,810 5,039 1,793,888
---------- ----------- ---------- ---------- ---------- ----------
Asset/(Liability) Interest
Sensitivity Gap 322,279 54,183 72,890 409,097 233,960 1,092,409
---------- ----------- ---------- ---------- ---------- ----------
Interest Rate Swaps 320,500 (1,125) (28,375) (291,000) - -
---------- ----------- ---------- ---------- ---------- ----------
Interest Rate Sensitivity Gap 642,779 53,058 44,515 118,097 233,960 (1,092,409)
---------- ----------- ---------- ---------- ---------- ----------
Net Non Interest Earning Assets/
(Bearing Liabilities) and
Stockholders' Equity (717,306) (46,917) (41,874) (121,979) (164,333) (1,092,409)
---------- ----------- ---------- ---------- ---------- ----------
Maturity/Repricing Gap (74,527) 6,141 2,641 (3,882) 69,627 -
---------- ---------- --------- ---------- ---------- ----------
Cumulative Gap $ (74,527) $ (68,386) $ (65,745) $ (69,627) $ - $ -
========== =========== ========== =========== ========== ==========
</TABLE>
-24-
<PAGE>
Interest Rate Sensitivity (Cont'd.)
-------------------------
As set forth in the preceding table, as of June 30, 1995, the
Corporation had more liabilities repricing or maturing than assets
(liability sensitive) in the 0-3 month category, reflecting the impact
of the Disposition and Merger on the classification of the Processing
Business non-interest bearing deposits. Following the Disposition and
Merger, New USTC will not have access to non-interest bearing deposits
derived from the Processing Business; the Corporation has taken actions
to rebalance its asset/liability mix through the sale of long-term
securities in the fourth quarter of 1994 and the second quarter of 1995
and investing the proceeds in short-term investments. In addition, the
Corporation has increased the notional amount of swaps outstanding from
approximately $131 million at June 30, 1994 to approximately
$323 million at June 30, 1995. In general, when an enterprise is
liability sensitive, its net interest income will improve in a declining
interest rate environment and will decline in a rising interest rate
environment. Conversely, an asset sensitive enterprise will realize a
benefit in net interest income if rates are rising and will have lower
net interest income in a declining rate environment.
In managing its interest sensitivity gaps, the Corporation
takes into account the nature of its business operations. The
Corporation invests in fixed rate U.S. Treasury securities, fixed rate
GNMA mortgage-backed securities and fixed rate residential real estate
mortgage loans. Historically, these investments have been funded by a
portion of the non-interest bearing deposits of the Processing Business
and, to a lesser degree, fixed rate long term debt and stockholders'
equity. To the extent that long-term fixed rate assets exceed long-term
funding sources, the Corporation has obtained interest rate swaps to
mitigate its interest rate exposure. Investments in short-term and
variable rate instruments, which are largely indexed to LIBOR, and
investments in variable rate loans that are indexed to the prime rate
are funded by money market deposits mainly derived from private banking
clients and other short-term interest bearing liabilities.
Asset Quality
-------------
The Corporation's loan portfolio is comprised primarily of
loans to private banking customers. Average loans increased
approximately $64 million, or 5.0%, to $1.34 billion in the second
quarter of 1995, from $1.27 billion in the second quarter of 1994. The
increases in average loans is entirely due to an increase in residential
real estate mortgages. Residential real estate mortgages accounted for
approximately 65% of total average loans for the quarter ended June 30,
1995.
An analysis of the allowance for credit losses follows.
-25-
<PAGE>
Asset Quality (Cont'd.)
-------------
<TABLE>
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
----------------------- -----------------------
(In Thousands) 1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, Beginning of Period $15,491 $13,648 $14,699 $13,393
------- ------- ------- -------
Provision Charged to Income 400 500 800 1,000
------- ------- ------- -------
Recoveries:
Private Banking 1,360 123 2,014 293
Other 101 88 114 141
------- ------- ------- -------
1,461 211 2,128 434
------- ------- ------- -------
Charge-offs:
Private Banking (461) (192) (736) (660)
Other (1,020) (150) (1,020) (150)
------- ------- ------- -------
(1,481) (342) (1,756) (810)
------- ------- ------- -------
Net (Charge-Offs) Recoveries (20) (131) 372 (376)
------- ------- ------- -------
Balance, End of Period $15,871 $14,017 $15,871 $14,017
======= ======= ======= =======
</TABLE>
As a percentage of average loans, annualized net loan charge-offs were
one basis point for the second quarter of 1995, compared to four basis
points for the second quarter of 1994. For the first half of 1995,
annualized net loan recoveries as a percentage of average loans were six
basis points, versus annualized net loan charge-offs of six basis points
for the 1994 period.
The allowance for credit losses at June 30, 1995, was $15.9
million, or 1.19% of average loans outstanding for the quarter. This
compares with $14.7 million, or 1.05% of average loans outstanding for
the quarter ended December 31, 1994, and $14.0 million, or 1.10% of
average loans outstanding for the quarter ended June 30, 1994.
The allowance for credit losses as a percentage of
nonperforming loans was 183.04% at June 30, 1995, compared to 230.72% at
December 31, 1994, and 239.48% at June 30, 1994. The ratio of
nonperforming assets to average loans and real estate owned for the
quarter was 1.40% at June 30, 1995, compared to 1.32% at December 31,
1994 and 1.34% at June 30, 1994.
-26-
<PAGE>
Asset Quality (Cont'd.)
-------------
Nonperforming assets, which include non-accrual loans and real
estate acquired in debt restructurings, are as follows:
<TABLE>
June 30, December 31, June 30,
(In Millions) 1995 1994 1994
-------- ------------ --------
<S> <C> <C> <C>
Non-accrual loans $ 8.6 $ 6.4 $ 5.8
Real estate acquired in
restructurings 10.3 12.3 11.4
----- ----- -----
Total Nonperforming Assets $18.9 $18.7 $17.2
===== ===== =====
</TABLE>
Accounting Standards Not Yet 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") issued in March 1995,
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. FAS 121 is
effective for fiscal years beginning after December 15, 1995. The
Corporation is currently evaluating the impact of the adoption of FAS
121 on the financial condition and results of operations of the
Corporation.
-27-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Shareholders of the registrant was
held May 23, 1995.
(b) Not applicable
(c) (i) Election of eight directors of the Corporation,
to hold office for a term of three years, and, in each
case, until their successors have been elected and
qualified.
Term Expires in 1998:
Samuel C. Butler Philip L. Smith
Affirmative Votes 8,392,772 Affirmative Votes 8,523,351
Negative Votes 246,890 Negative Votes 116,311
Abstentions/No Vote - Abstentions/No Vote -
Paul W. Douglas Frederick B. Taylor
Affirmative Votes 8,522,605 Affirmative Votes 8,520,613
Negative Votes 117,057 Negative Votes 119,049
Abstentions/No Vote - Abstentions/No Vote -
Orson D. Munn Carroll L. Wainwright, Jr.
Affirmative Votes 8,503,291 Affirmative Votes 8,385,854
Negative Votes 136,371 Negative Votes 253,808
Abstentions/No Vote - Abstentions/No Vote -
H. Marshall Schwarz Ruth A. Wooden
Affirmative Votes 8,509,502 Affirmative Votes 8,513,712
Negative Votes 130,160 Negative Votes 125,950
Abstentions/No Vote - Abstentions/No Vote -
(c) (ii) Ratification of Appointment of Coopers & Lybrand
L.L.P. as independent auditors for the Corporation and its
consolidated subsidiaries for the year 1995.
Affirmative Votes 8,504,578
Negative Votes 97,135
Abstentions/No Vote 37,949
(d) Not applicable
-28-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) EXHIBITS:
11 - Statement re Computation of Net Income Per Share.
99 - Pro Forma Condensed Financial Statements as of
June 30, 1995.
(b) REPORTS ON FORM 8-K:
None
-29-
<PAGE>
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: August 14, 1995 Richard E. Brinkmann
---------------- ------------------------------
Richard E. Brinkmann
Senior Vice President
and Comptroller
(Principal Accounting Officer)
-30-
<PAGE>
<PAGE>
<TABLE>
U.S. TRUST CORPORATION
EXHIBIT 11 - COMPUTATION OF NET INCOME PER SHARE
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
---------------------------- ----------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER SHARE:
Net Income $ 5,367,000 $10,898,000 $13,995,000 $23,567,525
Plus Dividend Equivalent on
Deferred Long-Term Performance
Plan Awards (After-Tax) 90,821 70,609 181,643 139,365
----------- ----------- ----------- -----------
Adjusted Net Income $ 5,457,821 $10,968,609 $14,176,643 $23,706,890
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 9,614,706 9,369,922 9,559,831 9,372,290
Add average shares issuable
under stock option and
variable stock award plans 765,187 583,957 775,309 587,171
----------- ----------- ----------- -----------
Total Common and Common
Equivalent Shares 10,379,893 9,953,879 10,335,140 9,959,461
=========== =========== =========== ===========
Primary Net Income Per Share $ 0.53 $ 1.10 $ 1.37 $ 2.38
FULLY DILUTED NET INCOME PER SHARE:
Net Income $ 5,367,000 $10,898,000 $13,995,000 $23,567,525
Plus Dividend Equivalent on
Deferred Long-Term Performance
Plan Awards (After-Tax) 90,821 70,609 181,643 139,365
----------- ----------- ----------- -----------
Adjusted Net Income $ 5,457,821 $10,968,609 $14,176,643 $23,706,890
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 9,614,706 9,369,922 9,559,831 9,372,290
Add maximum dilutive impact
of average shares issuable
under stock option and
variable stock award plans* 791,775 600,717 819,608 602,535
----------- ----------- ----------- -----------
Total Dilutive Shares 10,406,481 9,970,639 10,379,439 9,974,825
=========== =========== =========== ===========
Fully Diluted Net Income Per Share $ 0.52 $ 1.10 $ 1.37 $ 2.38
</TABLE>
* 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.
-1-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000225971
<NAME> DIANNE TIONGSON
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 229135
<INT-BEARING-DEPOSITS> 2050
<FED-FUNDS-SOLD> 595000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 636431
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1668687
<ALLOWANCE> 15871
<TOTAL-ASSETS> 3389065
<DEPOSITS> 2722840
<SHORT-TERM> 210524
<LIABILITIES-OTHER> 148817
<LONG-TERM> 57187
<COMMON> 11764
0
0
<OTHER-SE> 237933
<TOTAL-LIABILITIES-AND-EQUITY> 3389065
<INTEREST-LOAN> 54575
<INTEREST-INVEST> 29036
<INTEREST-OTHER> 15226
<INTEREST-TOTAL> 98837
<INTEREST-DEPOSIT> 36117
<INTEREST-EXPENSE> 45017
<INTEREST-INCOME-NET> 53820
<LOAN-LOSSES> 800
<SECURITIES-GAINS> (844)
<EXPENSE-OTHER> 4773
<INCOME-PRETAX> 23325
<INCOME-PRE-EXTRAORDINARY> 23325
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13995
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 3.91
<LOANS-NON> 8671
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14699
<CHARGE-OFFS> 1756
<RECOVERIES> 2128
<ALLOWANCE-CLOSE> 15871
<ALLOWANCE-DOMESTIC> 15871
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 15871
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
Exhibit 99 - Pro Forma Condensed Financial Statements
The following unaudited pro forma condensed statement of
condition as of June 30, 1995, unaudited pro forma condensed
statements of income for the year ended December 31, 1994, the three
and six month periods ended June 30, 1995, and unaudited pro forma
condensed statement of average balances for the six month period ended
June 30, 1995 (collectively, the "Pro Forma Statements"), were
prepared to present the estimated effects of the pending Disposition
and Merger transaction with The Chase Manhattan Corporation, the
related restructuring transactions and the effect of the Services
Agreement as if such transactions had occurred for statement of
condition purposes as of June 30, 1995 and for statement of income
purposes as of January 1, 1994.
The "Disposition Adjustments" column in each of the Pro Forma
Statements includes the reduction in assets and liabilities and the
elimination from operations of the revenue and expenses related to the
merger of the Chase Acquired Business.
The "Other Adjustments" column in each of the Pro Forma
Statements includes the following:
the balance sheet impact of the nonrecurring adjustments as set
forth in footnote (k) of the Notes to Pro Forma Condensed
Financial Statements, and
the ongoing impact on the Corporation's results of operations
arising from the nonrecurring adjustments and the Services
Agreement including the nonrecurring adjustments that have been
incurred during the fourth quarter of 1994 and the first six
months of 1995.
All of the pro forma adjustments are based upon available
information and upon certain assumptions that the Corporation believes
are appropriate and include only "exit costs" as defined in Emerging
Issues Task Force Issue 94-3 ("EITF 94-3") that are directly related
to the transaction. The information is not intended to be indicative
of the Corporation's actual results had the transactions occurred as
of the dates indicated above nor do they purport to indicate results
which may be attained in the future.
The Pro Forma Statements and accompanying notes should be read in
conjunction with the historical financial statements and other
financial information relating to the Corporation. For financial
reporting purposes, New USTC will be a "successor registrant" to the
Corporation and, as a result, the historical information set forth in
the Pro Forma Statements is the historical information of the
Corporation.
The Distribution will be accounted for by New USTC as if the
Corporation had continued in existence, with the carrying amounts of
the assets and liabilities being distributed being accounted for in
accordance with generally accepted accounting principles at their
historical values.
-1-
<PAGE>
<TABLE>
PRO FORMA CONDENSED STATEMENT OF CONDITION
June 30, 1995
(Dollars In Thousands)
(UNAUDITED)
Corporation
Disposition Before Other Other Corporation
Historical Adjustments(a) Adjustments Adjustments Pro Forma
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $ 231,185 $ (97,921) $ 133,264 $(34,320)(b) $ 98,944
Securities and Short-Term Investments 1,231,431 (515,340) 716,091 - 716,091
Net Loans, After Allowance for
Credit Losses 1,652,816 (232,317) 1,420,499 - 1,420,499
Other Assets 273,633 (47,509) 226,124 42,337 (c) 268,461
---------- --------- ---------- -------- ----------
Total Assets $3,389,065 $(893,087) $2,495,978 $ 8,017 $2,503,995
========== ========= ========== ======== ==========
LIABILITIES
Deposits $2,722,840 $(680,893) $2,041,947 $ - $2,041,947
Short-Term Borrowings 210,524 (200,000) 10,524 41,412 (d) 51,936
Accounts Payable and
Accrued Liabilities 148,817 (12,194) 136,623 79,628 (e) 216,251
Long-Term Debt 57,187 - 57,187 (40,753)(f) 16,434
---------- --------- ---------- -------- ----------
Total Liabilities 3,139,368 (893,087) 2,246,281 80,287 2,326,568
---------- --------- ---------- -------- ----------
STOCKHOLDERS' EQUITY
Common Stock - $1.00 Par Value 11,764 - 11,764 (2,054)(g) 9,710
Capital Surplus 79,422 - 79,422 (79,422)(h)
Retained Earnings 255,350 - 255,350 (77,095)(i) 178,255
Treasury Stock at Cost (86,301) - (86,301) 86,301 (j)
Loan to ESOP (13,434) - (13,434) - (13,434)
Unrealized Gain (Loss), Net of Taxes,
on Securities Available for Sale 2,896 - 2,896 - 2,896
---------- --------- ------------ -------- ----------
Total Stockholders' Equity 249,697 - 249,697 (72,270) 177,427
---------- --------- ---------- -------- ----------
Total Liabilities and
Stockholders' Equity $3,389,065 $(893,087) $2,495,978 $ 8,017 $2,503,995
========== ========= ========== ======== ==========
CAPITAL RATIOS
As a Percentage of Risk-Adjusted
Period End Total Assets:
Tier 1 Capital 13.08% 9.33%
Total Capital 14.32 10.46
Tier 1 Leverage 6.80 5.12
</TABLE>
-2-
<PAGE>
<TABLE>
PRO FORMA CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1994
(Dollars In Thousands, Except Per Share Amounts)
(UNAUDITED)
Reversal of
Back Office Corporation
Disposition & Corporate Before Other Other Corporation
Historical Adjustments(l) Staff (m) Adjustments Adjustments Pro Forma(k)
----------- -------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 108,112 $ (42,133) $ - $ 65,979 $ - $ 65,979
Provision for Credit Losses 2,000 - - 2,000 - 2,000
---------- --------- -------- -------- -------- --------
Net Interest Income After
Provision for Credit Losses 106,112 (42,133) - 63,979 - 63,979
Fees 295,565 (102,704) - 192,861 - 192,861
Securities Gains (Losses), net (42,118) - - (42,118) 44,172 (k) 2,054
Other Income 16,748 (5,447) - 11,301 (1,966)(n) 9,335
---------- --------- -------- -------- -------- --------
Total Revenue 376,307 (150,284) - 226,023 42,206 268,229
---------- --------- -------- -------- -------- --------
Operating Expenses
Salaries and Benefits 207,483 (72,798) 24,691 159,376 (31,696)(o) 127,680
Net Occupancy 40,030 (10,616) 4,659 34,073 (4,763)(o) 29,310
Other 94,422 (30,190) 17,236 81,468 (18,537)(o,k) 62,931
---------- --------- -------- -------- -------- --------
Total Operating Expenses 341,935 (113,604) 46,586 274,917 (54,996) 219,921
---------- --------- -------- -------- -------- --------
Income Before Income Tax
Expense 34,372 (36,680) (46,586) (48,894) 97,202 48,308
Income Tax Expense
(Benefit) (p) 13,405 (16,506) (20,964) (24,065) 43,291 19,226
---------- --------- -------- -------- -------- --------
Net Income $ 20,967 $ (20,174) $(25,622) $(24,829) $ 53,911 $ 29,082
========== ========= ======== ======== ======== ========
Net Income Per Share: (q)
Fully Diluted $ 2.12 $ 2.83
========= ==========
Average Shares Outstanding:
Fully Diluted 10,019,592 10,400,000
========== ==========
</TABLE>
-3-
<PAGE>
<TABLE>
PRO FORMA CONDENSED STATEMENT OF INCOME
Three Months Ended June 30, 1995
(Dollars In Thousands, Except Per Share Amounts)
(UNAUDITED)
Reversal of
Back Office Corporation
Disposition & Corporate Before Other Other Corporation
Historical Adjustments(l) Staff(m) Adjustments Adjustments Pro Forma(k,t)
---------- ------------- ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 25,152 $ (7,873) $ - $ 17,279 $ - $ 17,279
Provision for Credit Losses 400 - - 400 - 400
---------- --------- -------- -------- -------- --------
Net Interest Income After
Provision for Credit Losses 24,752 (7,873) - 16,879 - 16,879
Fees 77,162 (24,468) - 52,694 - 52,694
Other Income 1,302 (1,704) - (402) 1,691 (n,k) 1,289
--------- --------- -------- -------- -------- --------
Total Revenue 103,216 (34,045) - 69,171 1,691 70,862
---------- --------- -------- -------- -------- --------
Operating Expenses
Salaries and Benefits 55,105 (17,456) 5,425 43,074 (10,829)(o,k) 32,245
Net Occupancy 10,285 (2,674) 958 8,569 (717)(o) 7,852
Other 28,881 (7,366) 4,150 25,665 (9,018)(o,k) 16,647
---------- --------- -------- -------- -------- --------
Total Operating Expenses 94,271 (27,496) 10,533 77,308 (20,564) 98,220
---------- --------- -------- -------- -------- --------
Income Before Income Tax
Expense 8,945 (6,549) (10,533) (8,137) 22,255 14,118
Income Tax Expense
(Benefit) (p) 3,578 (2,947) (4,739) (4,108) 9,727 5,619
---------- --------- -------- -------- -------- --------
Net Income $ 5,367 (3,602) (5,794) $ (4,029) $ 12,528 $ 8,499
========== ========= ======== ======== ======== ========
Net Income Per Share: (q)
Fully Diluted $ 0.52 $ 0.83
========= ==========
Average Shares Outstanding:
Fully Diluted 10,406,481 10,600,000
========== ==========
</TABLE>
-4-
<PAGE>
<TABLE>
PRO FORMA CONDENSED STATEMENT OF INCOME
Six Months Ended June 30, 1995
(Dollars In Thousands, Except Per Share Amounts)
(UNAUDITED)
Reversal of
Back Office Corporation
Disposition & Corporate Before Other Other Corporation
Historical Adjustments(l) Staff(m) Adjustments Adjustments Pro Forma(k,t)
---------- ------------- ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 53,820 $ (20,179) $ - $ 33,641 $ - $ 33,641
Provision for Credit Losses 800 - - 800 - 800
---------- --------- -------- -------- -------- --------
Net Interest Income After
Provision for Credit Losses 53,020 (20,179) - 32,841 - 32,841
Fees 150,665 (49,526) - 101,139 - 101,139
Other Income 3,929 (3,206) - 723 2,345 (n,k) 3,068
--------- --------- -------- -------- -------- --------
Total Revenue 207,614 (72,911) - 134,703 2,345 137,048
---------- --------- -------- -------- -------- --------
Operating Expenses
Salaries and Benefits 110,895 (36,204) 11,473 86,164 (20,239)(o,k) 65,925
Net Occupancy 20,790 (5,377) 1,998 17,411 (1,763)(o) 15,648
Other 52,604 (15,023) 8,834 46,415 (14,246)(o,k) 32,169
---------- --------- -------- -------- -------- --------
Total Operating Expenses 184,289 (56,604) 22,305 149,990 (36,248) 113,742
---------- --------- -------- -------- -------- --------
Income Before Income Tax
Expense 23,325 (16,307) (22,305) (15,287) 38,593 23,306
Income Tax Expense
(Benefit) (p) 9,330 (7,338) (10,036) (8,044) 17,320 9,276
---------- --------- -------- -------- -------- --------
Net Income $ 13,995 (8,969) (12,269) $ (7,243) $ 21,273 $ 14,030
========== ========= ======== ======== ======== ========
Net Income Per Share: (q)
Fully Diluted $ 1.37 $ 1.37
========= ==========
Average Shares Outstanding:
Fully Diluted 10,379,439 10,600,000
========== ==========
</TABLE>
-5-
<PAGE>
<TABLE>
PRO FORMA CONDENSED STATEMENT OF AVERAGE BALANCES
For the Six Months Ended June 30 1995
(In Thousands)
(UNAUDITED)
Disposition Other Corporation
Historical Adjustments Adjustments(s) Pro Forma
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $ 300,716 $ (120,945) $ (32,020) $ 147,751
Securities and Short-Term
Investments 1,452,858 (710,000) - 742,858
Net Loans, After Allowance for
Credit Losses 1,333,900 - - 1,333,900
Other Assets 458,462 (180,263)(r) 35,089 313,288
---------- ----------- ---------- ----------
Total Assets $3,545,936 $(1,011,208) 3,069 $2,537,797
---------- ----------- ---------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits $2,878,052 $ (976,208) $ - $1,901,844
Short-Term Borrowings 228,936 - 41,412 270,348
Accounts Payable and
Accrued Liabilities 148,000 (35,000) 78,128 191,128
Long-Term Debt 58,302 (40,753) 17,549
---------- ----------- ---------- ----------
Total Liabilities $3,313,290 $(1,011,208) 78,787 $2,380,869
---------- ----------- ---------- ----------
Stockholders' Equity 232,646 - (75,718) 156,928
---------- ----------- ---------- ----------
Total Liabilities and
Stockholders' Equity $3,545,936 $(1,011,208) 3,069 $2,537,797
========== =========== ========== ==========
</TABLE>
-6-
<PAGE>
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(a) Disposition Adjustments (Pro Forma Condensed Statement of
Condition) -- The Disposition Adjustments presented in the Pro Forma
Condensed Statement of Condition reflect the disposition of the Chase
Acquired Business. The Pro Forma Condensed Statement of Average
Balances presents the Corporation's daily average balance sheet for
the six month periods ended June 30, 1995 adjusted for the pending
Disposition and Merger and Other Adjustments.
During the six month period ended June 30, 1995, the Chase
Acquired Business generated average non-interest bearing deposits of
approximately $976 million. Investable Balances, defined as total
average non-interest bearing deposits less average cash items in the
process of collection and average overdrafts, were approximately $710
million during the six month period ended June 30, 1995.
(b) Cash and Cash Equivalents -- The $34.3 million adjustment is
comprised of the estimated payments of investment banking, legal,
accounting, consulting and printing professional fees ($3,400,000 --
determined based upon actual invoices and estimates supplied by the
various vendors), the estimated amount of payments necessary to cash-
out holders of outstanding stock options ($31,748,000), estimated
costs associated with the redemption of long-term debt and other
miscellaneous payments ($1,800,000) and the estimated amount of cash
to be received from the exercise of certain incentive stock options
($2,628,000).
(c) Other Assets -- The $42.3 million increase in Other Assets
reflects (i) certain tax benefits resulting from the Disposition
Adjustments and the Other Adjustments ($58,378,000) and (ii) the
write-off of the net book value of premises and equipment and computer
software ($14,041,000) related to the termination of various leases
and (iii) the write-off of aged receivables ($2,000,000).
(d) Short-Term Borrowings -- The $41.4 million increase in
short-term borrowings reflects the borrowings required to replace
accrued interest and long-term debt (see notes (e) and (f)).
(e) Accounts Payable and Accrued Liabilities -- The $79.6 million
increase in accounts payable and accrued liabilities includes
estimated severance costs ($32,664,000), the estimated present value
(discounted at 8%) of the cost of terminating leases at discontinued
locations an the estimated cost of terminating computer hardware
leases, software licenses and contracts ($38,402,000), the
estimated cost of terminating certain incentive compensation plans
($5,731,000), a settlement and other reserve for Processing Business
contingencies ($3,500,000) and an amount to record the reversal in
accrued interest payable related to the redemption and satisfaction
and discharge of certain issues of long-term debt ($659,000).
-7-
<PAGE>
(f) Long-Term Debt -- The $40.8 million reduction in long-term
debt reflects the redemption of the Trust Company's 8.5% Capital Notes
Due 2001 and the satisfaction and discharge of the Corporation's 8%
Notes Due 1996. The cost of redeeming and defeasing this long-term
debt is insignificant to the Corporation's pro forma results of
operations.
(g) Common Stock -- The $2.1 million decrease in the
Corporation's Common Stock reflects the retirement of treasury stock
($2,127,000) offset by the aggregate par value amount of the shares to
be issued pursuant to the exercise of incentive stock options.
(h) Capital Surplus -- The $79.4 million adjustment reflects the
retirement of treasury stock ($81,977,000) offset, in part, by the
amount of cash proceeds in excess of the par value received in
connection with the expected exercise of incentive stock options
($2,555,000).
(i) Retained Earnings -- The $77.1 million adjustment reflects
the after-tax impact of the nonrecurring adjustments presented in note
(k) below ($74,898,000) and the amount by which the book value of
treasury stock retired exceeds capital surplus ($2,197,000).
(j) Treasury Stock at Cost -- The adjustment of $86.3 million
reflects the retirement of treasury stock.
(k) The objective of the pro forma financial statements is to
provide information concerning the impact of the transaction by
showing how it might have affected historical financial statements if
the transaction had been consummated as of an earlier date.
Accordingly, the analysis begins with the historical financial
statements of the Corporation, deletes the Processing Business and
reflects other pro forma adjustments, as permitted, to present the
pro forma results of the surviving entity.
Therefore, the Pro Forma Statements of Income for the three and
six month periods ended June 30, 1995 and for the year ended December
31, 1994, report net income which does not include material
nonrecurring charges and credits and related tax effects, as presented
below, which result directly from the Disposition and Merger.
Corporation Pro Forma net income is computed assuming the
transaction was consummated at the beginning of the period presented
and includes adjustments which give effect to events that are directly
attributable to the transaction and that are expected to have a
continuing impact on the Corporation. The Disposition and Merger is
expected to occur during the third quarter of 1995.
The adjustments are related to severance and other termination
related costs associated with the elimination of approximately 150
positions, the cost of the disposition of certain facilities, premises
and equipment and the termination and modification of certain leases
and third party services agreements. The staff reductions are tied to
specific expense reduction initiatives including optimizing corporate
support staff following the transfer of certain back office functions
to Chase.
-8-
<PAGE>
Changes related to the announced charges are related principally
to changes in Corporate facility plans since the Disposition and
Merger announcement and revised estimates of occupancy-related costs,
severance expense and equipment disposals associated with the
transaction.
<TABLE>
(Millions)
----------
<S> <C>
Severance and other termination related costs $ 38.4
Disposition of facilities, premises and
equipment and termination of leases 52.4
Other 42.5
------
133.3
Applicable tax benefits 58.4
------
Total $ 74.9
======
</TABLE>
In addition to the costs enumerated in the preceding table, the
Corporation has already incurred (since the announcement of the
transaction) and reflected in it historical statements of income for
the year ended December 31, 1994 and the six months ended June 30,
1995, the following charges.
<TABLE>
Three Six Twelve
Months Months Months Cumulative
Ended Ended Ended Restruct-
June 30, June 30, Dec. 31, uring To
1995 1995 1994 Date
(Millions) ------- ------- ------- ----------
<S> <C> <C> <C> <C>
Portfolio Balancing $ 1.0 $ 1.0 $44.2 $ 45.2
Severance and Other Termination
Related Costs 2.9 4.0 - 4.0
Disposition of Facilities,
Premises and Equipment and
Termination of Leases - - - -
Other 3.5 3.9 6.0 9.9
------- ------- ------- ----------
7.4 8.9 50.2 59.1
Tax benefit 3.0 3.6 22.2 25.8
------- ------- ------- ----------
Total $ 4.4 $ 5.3 $28.0 $ 33.3
======= ======= ======= ==========
</TABLE>
These charges are eliminated in the Other Adjustments columns so
that the Corporation Pro Forma results excludes the one-time
nonrecurring effect of these charges.
Of the total $108.2 million of restructuring charges on an
after-tax basis, $74.9 million is expected to be accrued or paid by
the closing date of the transaction, and $33.3 million has already
been incurred in the fourth quarter of 1994 or the first six months of
1995.
-9-
<PAGE>
In conjunction with the announcement of the Distribution and the
Merger, the Corporation disclosed that it may incur up to $110 million
of restructuring charges on an after-tax basis in connection with the
Distribution and the Merger. The difference between the $108.2
million and the estimated $110 million represents charges that do not
presently meet the definition of "exit costs" as defined by EITF 94-3.
While the amounts set forth above represent the Corporation's
best estimate of the restructuring costs that will be incurred, the
ultimate level of such charges will not be precisely determinable
until the Closing Date.
The cost of terminating computer hardware leases takes into
consideration the estimated residual value of the equipment when it is
returned to the lessor. Such residual values could be severely
impacted and the cost of terminating the leases increased if the
manufacturer releases upgraded versions of the equipment prior to the
lease termination date.
The payout for stock options is based upon various assumptions,
including the Determined Value (as defined under "Effect of
Transactions on UST Employees and UST Benefit Plans - Retained Plans"
in the Proxy Statement/Prospectus dated February 9, 1995, relating to
the Special Meeting of the Corporation's Stockholders held on
March 22, 1995 and filed with the Securities and Exchange Commission
on February 28, 1995) of the shares of the Corporation's common stock,
the number of stock options that are outstanding as of the Closing
Date and the average exercise price of such outstanding options. As a
result, the actual amount of the cash payment to be made in respect of
stock options will not be determinable until the Closing Date.
In a similar manner, the other exit costs listed above are
subject to change based upon events and circumstances that will not be
finalized until the consummation of the transaction.
Pursuant to the Post Closing Covenants Agreement, the Corporation
has agreed to maintain a minimum net worth for four years following
the Distribution. See "The Distribution -- Terms of the Post Closing
Covenants Agreement -- Minimum Net Worth" included in the Proxy
Statement/Prospectus dated February 9, 1995, relating to the Special
Meeting of the Corporation's Stockholders held on March 22, 1995 and
filed with the Securities and Exchange Commission on February 28,
1995). The Corporation believes that New USTC's initial annual
dividend will be $1.00 per share. See "Special Factors -- Dividends
and Dividend Policy" included in the Proxy Statement/Prospectus dated
February 9, 1995, relating to the Special Meeting of the Corporation's
Stockholders held on March 22, 1995 and filed with the Securities and
Exchange Commission on February 28, 1995).
-10-
<PAGE>
(l) Disposition Adjustments (Pro Forma Condensed Statements of
Income) -- The Disposition Adjustments reflect the disposition of the
Chase Acquired Business pursuant to the Disposition and Merger. The
Disposition Adjustments include the revenues and expenses of the Chase
Acquired Business as allocated in accordance with the methodologies
utilized by the Corporation's internal management reporting system.
The amount of net interest income is based upon the average Investable
Balances multiplied by an internally calculated interest rate. The
rate is based upon the rates earned by the Corporation's long- and
short-term securities. The blended rates were 5.43% and 5.73% for the
three and six month periods ended June 30, 1995, respectively, and
5.43% for the year ended December 31, 1994.
Fees and Other Income represent amounts earned by the Chase
Acquired Business. In addition, fees earned by the Corporation's
asset management business from customers of the Chase Acquired
Business are included in Fees and Other Income, which fees are
expected to be earned by Chase following the Disposition and Merger.
Expenses reflect direct costs incurred and allocations of other costs
in accordance with the Corporation's internal management reporting
system.
(m) Back Office and Corporate Staff -- The $46.6 million of back
office and corporate staff charges for the year ended December 31,
1994, and $10.5 million and $22.3 million for the three and six month
periods ended June 30, 1995, respectively, are derived from the
Corporation's internal management accounting system and represent the
amounts allocated to the Chase Acquired Business for services
provided. Back office support costs include securities processing and
custody, check clearance and computer services processing and support
services while the corporate staff cost allocations include financial,
personnel, legal and general services support functions. Such back
office support and corporate staff costs have been added to the
expenses of the Corporation Before Other Adjustments because such
costs were not eliminated in connection with the disposition of the
Chase Acquired Business. The estimated downsizing of the corporate
staff and the impact of the Services Agreement are reflected in the
Other Adjustments.
(n) Other Income -- The $2.0 million for the year ended December
31, 1994 and approximately $660,000 and $1.3 million of the total $1.7
million and $2.3 million for the three and six month periods ended
June 30, 1995, respectively, reflect the elimination of certain
revenues generated from computer processing activities conducted for
third parties which will no longer be provided following the
Disposition and Merger.
-11-
<PAGE>
(o) Salaries and Benefits, Net Occupancy and Other Expenses --
Reflects the reduction of personnel (including $2.9 million and $4.0
million of severance charges incurred in the three and six month
periods ended June 30, 1995, respectively), net occupancy costs and
other expenses, as indicated, resulting from the Disposition and
Merger, the downsizing of the Corporation's corporate staff and the
Services Agreement.
(p) Income Taxes -- Income taxes reflected in the Pro Forma
Statements of Income are recorded at the statutory Federal tax rate of
35%, adjusted for the impact of state and local taxes and
nondeductible items. The resulting effective tax rate for the
Corporation was approximately 40% for both periods presented.
Taxes have been calculated on the "Other Adjustments" in the Pro
Forma Statement of Condition at the statutory Federal tax rate of 35%,
adjusted for state and local taxes and nondeductible items. The
resulting effective tax benefit was approximately 45%. The
Corporation anticipates realizing these tax benefits in the periods in
which the adjustments are reported in the Corporation's tax returns.
(q) Pro Forma Net Income Per Share -- Net income per share has
been calculated on a basis consistent with the Corporation's past
practices and was determined by dividing "Net Income -- Corporation
Pro Forma" by the estimated fully diluted average shares outstanding
for each period. For the three and six month periods ended June 30,
1995, estimated fully diluted average shares outstanding include the
actual average shares outstanding, the assumed exercise of stock
options and the dilutive effects of approximately 900,000 phantom
shares granted under the Corporation's variable stock award plans.
For the year ended December 31, 1994, estimated fully diluted average
shares outstanding include the actual average shares outstanding, the
assumed exercise of stock options and the dilutive effects of
approximately 800,000 phantom shares. For both periods, dividends
paid on phantom shares have been added back to net income on an after-
tax basis. For both periods, the primary and fully diluted net income
per share amounts are the same.
(r) For the purposes of determining the Pro Forma Condensed
Statement of Average Balances, the Chase Acquired Business average
overdrafts are included in Other Assets.
(s) For the purposes of determining the Pro Forma Condensed
Statement of Average Balances, all Other Adjustments are assumed to
have occurred as of January 1, 1995.
(t) The following table summarizes the pro forma effects of the
Disposition and Merger on net income and net income per share for the
six month periods ended June 30, 1995 and June 30, 1994. The
methodologies employed in preparing the pro forma results for the six
month period ended June 30, 1994 were consistent with the 1995
period.
-12-
<PAGE>
<TABLE>
June 30,
---------------------------
1995 1994
(In Thousands, Except Per Share Amounts) -------- --------
<S> <C> <C>
Net Income $13,995 $23,568
Net Effect of Disposition and Merger
and Restructuring Charges 35 (9,189)
-------- --------
Pro Forma Net Income $14,030 $14,379
======== ========
Per Common Share:
Net Income $ 1.37 $ 2.38
Net Effect of Disposition and Merger - (0.98)
-------- --------
Pro Forma Net Income $ 1.37 $ 1.40
======== ========
</TABLE>
Net income for the first half of 1994, includes $2.0 million of
net securities gains from the sale of U.S. Government Treasury
obligations. Net securities losses were approximately $844,000 for
the first half of 1995. Net income for the first half of 1994 also
includes a $3.7 million reduction in operating expense primarily due
to the termination of certain lease commitments. Considering both of
these items, normalized pro forma net income and net income per share
for the first six months of 1994 was $11.0 million and $1.10 per
share, respectively.
-13-
<PAGE>
