<PAGE>
New USTC Holdings Corporation meets the conditions set forth in the
General Instruction H(1)(a) and (b) of Form 10-Q and is therefore
filing this form with the reduced disclosure format.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended JUNE 30, 1995
--------------------------------------------
Commission file number 0-20469
-------------------------------------------------
NEW USTC HOLDINGS CORPORATION
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3818952
-----------------------------------------------------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
114 West 47th Street, New York, New York 10036
-----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 852-1000
-----------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
-----------------------------------------------------------------------
(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.
100 shares, Common Stock $1 par value, as of July 31, 1995
Page 1 of 8 Pages
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
--------------------
All page numbers refer to pages within this Form 10-Q.
Title of Financial Statement Page #
---------------------------- ------
Statement of Condition as of June 30, 1995 3
Note to the Statement of Condition 4
In the opinion of management, all adjustments necessary for a
fair presentation of financial position for the interim period have
been made.
-2-
<PAGE>
<TABLE>
NEW USTC HOLDINGS CORPORATION
STATEMENT OF CONDITION
(UNAUDITED)
June 30,
1995
---------
<S> <C>
ASSETS
Cash and Due from Banks $ 100
---------
Total Assets $ 100
=========
LIABILITIES AND STOCKHOLDER'S EQUITY
Common Stock, $1.00 Par Value; 100 Shares
Authorized; 100 Shares Issued and Outstanding 100
---------
Total Liabilities and Stockholder's Equity $ 100
=========
</TABLE>
The accompanying note is an integral part of the statement of
condition.
-3-
<PAGE>
NEW USTC HOLDINGS CORPORATION
NOTE TO THE STATEMENT OF CONDITION
1. Basis of Organization
---------------------
On November 18, 1994, U.S. Trust Corporation (the
"Corporation") entered into an Agreement and Plan of
Merger (the "Merger Agreement") with The Chase Manhattan
Corporation ("Chase") under which Chase will purchase 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") for $363.5
million in Chase common stock (the "transaction"). At a
Special Meeting of Stockholders held March 22, 1995, U.S.
Trust shareholders approved the sale of the Chase Acquired
Business to Chase. On July 24, 1995, approval was also
received from the Federal Reserve Board. Applications for
approvals from other bank regulatory agencies and a favorable
ruling from the Internal Revenue Service regarding its tax-
free status are still pending. The transaction is expected to
close in the third quarter of 1995.
New USTC Holdings Corporation (the "Company") was organized in
New York in January 1995 and is a wholly owned subsidiary of
the Corporation. The Company will become a bank holding
company at the time the transaction is consummated. The
transaction will consist of the following two near-
simultaneous steps. First, the Corporation will distribute to
its shareholders shares of common stock of the Company on a
one-for-one basis (the "Disposition"). The assets of the
Company will include the Corporation's asset management,
private banking, special fiduciary and corporate trust
businesses. Second, the Corporation, which will then consist
solely of the assets and liabilities of the Chase Acquired
Business, will be merged into Chase in accordance with the
terms of the Merger Agreement and the shareholders of the
Corporation will receive shares of Chase common stock, based
upon an exchange formula set forth in the Merger Agreement, on
a pro-rata basis.
The Company has not begun operations and will not begin
operations until the Disposition. For financial reporting
purposes, the Company is a "successor registrant" to the
Corporation, and as a result, the Corporation's Quarterly
Report on Form 10-Q for the period ended June 30, 1995 filed
with the Securities and Exchange Commission on August 14, 1995
is deemed to be the historical financial information of the
Company.
-4-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 5. Other Information
-----------------
In connection with Registration Statements to be filed by the
Company under the Securities Act of 1933, the following financial
statements of the Corporation are being filed herewith:
Consolidated Statements of Condition
December 31, 1994 and 1993 21*
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1993, and 1992 20*
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1994, 1993, and 1992 22*
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1993, and 1992 23*
Notes to Consolidated Financial Statements 24-42*
Report of Independent Accountants 42*
* Page numbers refer to the corresponding page numbers in the Financial
Section of the Annual Report to Shareholders of the Corporation, filed
as Exhibit 99 to this report.
-5-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) EXHIBITS:
2.1 - Agreement and Plan of Merger dated as of November 18, 1994
(as amended, supplemented or otherwise modified from time to
time) between The Chase Manhattan Corporation ("Chase") and
the Corporation, filed as Exhibit 2.1 to the Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 ("Form 10-K") and included in the Form
10-K as Appendix A to the Proxy Statement/Prospectus dated
February 9, 1995, filed as Exhibit 99.1 to the Form 10-K
("Exhibit 99.1"). (1) (2)
2.2 - Form of Agreement and Plan of Distribution among the
Corporation, United States Trust Company of New York (the
"Trust Company"), the Company and New U.S. Trust Company of
New York ("New U.S. Trust"), filed as Exhibit 2.2 to the
Form 10-K and included in the Form 10-K as Appendix B to
Exhibit 99.1 (1) (2)
2.3 - Form of Contribution and Assumption Agreement between the
Trust Company and New U.S. Trust, filed as Exhibit 2.3 to
the Form 10-K and included in the Form 10-K as Appendix C to
Exhibit 99.1. (1) (2)
2.4 - Form of Post Closing Covenants Agreement among Chase, the
Corporation, the Trust Company, the Company and New U.S.
Trust, filed as Exhibit 2.4 to the Form 10-K and included in
the Form 10-K as Appendix D to Exhibit 99.1. (1)
2.5 - Form of Tax Allocation Agreement among the Corporation, the
Company and Chase, filed as Exhibit 2.5 to the Form 10-K and
included in the Form 10-K as Appendix E to Exhibit 99.1. (1)
2.6 - Services Agreement Term Sheet, filed as Exhibit 7 to the
Corporation's Current Report on Form 8-K bearing cover date
of November 18, 1994. (1)
3.1 - Certificate of Incorporation of the Company, filed as
Appendix I to the Company's Registration Statement on
Form 10 dated February 9, 1995 ("Form 10"). (1)
----------------
(1) Incorporated herein by reference.
(2) The copy of this document being incorporated by reference herein
does not include the exhibits and schedules thereto which are
identified as being omitted in the table of contents of this
document. The Corporation undertakes to furnish any such omitted
exhibits and schedules to the Commission upon its request.
-6-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K (Continued)
--------------------------------
(a) EXHIBITS:
3.2 - By-Laws of the Company, filed as Appendix II to the
Form 10. (1)
99 - 1994 Annual Report to Shareholders of U.S. Trust
Corporation.
(b) REPORTS ON FORM 8-K:
None
----------------
(1) Incorporated herein by reference.
-7-
<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.
NEW USTC HOLDINGS CORPORATION
------------------------------
(Registrant)
Date: August 14, 1995 Richard E. Brinkmann
------------------ ------------------------------
Richard E. Brinkmann
Senior Vice President
and Comptroller
(Principal Accounting Officer)
-8-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000936301
<NAME> DIANNE TIONGSON
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 100
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 100
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
<COMMON> 100
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 100
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
SELECTED FINANCIAL DATA
Years Ended December 31,
(Dollars in Millions, ------------------------------------------------------
Except Per Share Amounts)* 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiduciary and Other Fees....................................... $295.6 $264.1 $235.8 $204.9 $184.2
Net Interest Income............................................ 108.1 116.2 108.9 96.1 89.4
Provision for Credit Losses.................................... (2.0) (4.0) (6.0) (6.0) (8.4)
Securities Gains (Losses), Net................................. (42.1) 3.0 2.8 1.6 -
Other Income................................................... 16.7 8.9 6.9 7.1 13.0
------ ------ ------ ------ ------
Total Operating Income Net of Interest Expense
and Provision for Credit Losses.............................. 376.3 388.2 348.4 303.7 278.2
Total Operating Expenses....................................... 341.9 315.5 289.5 254.9 259.7
------ ------ ------ ------ ------
Income From Operations Before Income Taxes and
Cumulative Effect of Accounting Changes...................... 34.4 72.7 58.9 48.8 18.5
Income Taxes................................................... 13.4 30.4 22.4 17.4 6.8
------ ------ ------ ------ ------
Income From Operations Before Cumulative Effect
of Accounting Changes........................................ 21.0 42.3 36.5 31.4 11.7
Cumulative Effect of Changes in Accounting for
Postretirement Benefits and Income Taxes..................... - - (7.8) - -
------ ------ ------ ------ ------
Net Income..................................................... $ 21.0 $ 42.3 $ 28.8 $ 31.4 $ 11.7
====== ====== ====== ====== ======
-------------------------------------------------------------------------------------------------------------------------
Net Income Per Share:
Primary:
Income From Operations Before Cumulative Effect
of Accounting Changes.................................... $ 2.12 $ 4.26 $ 3.76 $ 3.32 $ 1.24
Cumulative Effect of Changes in Accounting for
Postretirement Benefits and Income Taxes................. - - (0.80) - -
------ ------ ------ ------ ------
Net Income................................................. $ 2.12 $ 4.26 $ 2.96 $ 3.32 $ 1.24
====== ====== ====== ====== ======
Fully Diluted:
Income From Operations Before Cumulative Effect
of Accounting Changes.................................... $ 2.09 $ 4.25 $ 3.74 $ 3.27 $ 1.23
Cumulative Effect of Changes in Accounting for
Postretirement Benefits and Income Taxes................. - - (0.80) - -
------ ------ ------ ------ ------
Net Income................................................. $ 2.09 $ 4.25 $ 2.94 $ 3.27 $ 1.23
====== ====== ====== ====== ======
Cash Dividends Declared Per Share.............................. $ 2.00 $ 1.88 $ 1.72 $ 1.60 $ 1.60
Dividends Per Share as a Percentage of:
Fully Diluted Income From Operations Before Cumulative
Effect of Accounting Changes Per Share..................... 95.69% 44.24% 45.99% 48.93% 130.08%
Fully Diluted Net Income Per Share........................... 95.69 44.24 58.50 48.93 130.08
-------------------------------------------------------------------------------------------------------------------------
At December 31:
Total Assets................................................. $3,223 $3,186 $2,951 $2,917 $2,778
Total Deposits............................................... 2,440 2,487 2,355 2,108 2,040
Long Term Debt............................................... 61 65 65 69 71
Stockholders' Equity......................................... 223 229 197 182 166
-------------------------------------------------------------------------------------------------------------------------
As a Percentage of Average Stockholders' Equity:
Income From Operations Before Cumulative Effect
of Accounting Changes...................................... 9.24% 20.47% 18.64% 18.05% 6.75%
Net Income................................................... 9.24 20.47 15.28 18.05 6.75
As a Percentage of Average Total Assets:
Income From Operations Before Cumulative Effect
of Accounting Changes...................................... 0.53 1.11 1.05 1.09 0.46
Net Income................................................... 0.53 1.11 0.83 1.09 0.46
As a Percentage of Risk-Adjusted Period End Total Assets:
Tier 1 Capital............................................... 13.52 14.08 13.71 10.81 9.90
Total Capital................................................ 14.79 15.47 15.16 12.03 11.22
Tier 1 Leverage................................................ 5.68 5.60 5.78 6.68 6.72
Average Stockholders' Equity as a Percentage of
Average Total Assets......................................... 5.69 5.43 5.43 6.04 6.77
-------------------------------------------------------------------------------------------------------------------------
* Columns may not tally due to roundings.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
FINANCIAL REVIEW
Overview
The Financial Review should be read in conjunction with the Consolidated
Financial Statements. The financial information presented in the
Financial Review has been prepared on a basis consistent with the
policies set forth in the Consolidated Financial Statements. U.S. Trust
Corporation ("the Corporation or Parent") is a financial services company
that provides fee-based asset management, fiduciary and securities
services to affluent individuals and institutions. The Corporation also
provides private banking services for its clients.
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 "Pending Disposition and Merger
Transaction" in this Financial Review and "Notes to the Consolidated
Financial Statements No. 1" for details.
The following discussion of the Corporation's results of operations
and financial condition for each of the years ended December 31, 1994,
1993 and 1992 sets forth, where appropriate, relevant information
pertaining to the Chase Acquired Business or the Processing Business and
the Corporation's asset management, private banking, special fiduciary
and corporate trust businesses (the "Core Businesses").
The Corporation adopted, as of December 31, 1993, Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," ("FAS 115"). See "Notes to
the Consolidated Financial Statements No. 5" for a discussion of the
impact of the adoption of FAS 115. The Corporation also adopted, as of
December 31, 1993, Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits," ("FAS 112") which
did not have a significant impact on the results of operations or
financial condition of the Corporation.
In 1992, the Corporation adopted, retroactive to January 1, 1992,
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," ("FAS 106")
and Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," ("FAS 109"). As a result of adopting these two accounting
standards, a one-time, non-cash net after tax charge of $7.8 million was
incurred. The following discussion of the Corporation's earnings
excludes the impact of this one-time net charge. For further discussion
of FAS 106 and FAS 109, see "Notes to the Consolidated Financial
Statements Nos. 10 and 17."
<PAGE>
U.S. TRUST CORPORATION
Significant Events and Developments
o The Corporation earned $21.0 million in 1994, compared to $42.3
million in 1993, a decrease of 50.4%. Fully diluted net income per
share was $2.09 compared to $4.25 in 1993. The Corporation has
incurred charges of $27.9 million (after taxes) in the fourth
quarter of 1994 associated with the pending transaction with Chase.
Excluding the $27.9 million of charges, 1994 net income would have
been $48.9 million, or $4.83 on a fully diluted per share basis.
o The return on average stockholders' equity was 9.24% compared to
20.47% for 1993. The Corporation's return on average
stockholders' equity would have been 21.27% if the aforementioned
$27.9 million of charges are excluded.
o The Corporation's Tier 1 Capital ratio, based on period end risk-
adjusted assets was 13.52% at December 31, 1994, compared to
14.08% at December 31, 1993.
Pending Disposition and Merger Transaction
The Corporation and Chase have entered into an agreement 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 operations (collectively the
"Chase Acquired Business") for $363.5 million in Chase common stock. The
transaction, which is subject to bank regulatory approvals, U.S. Trust
shareholder approval and a favorable ruling from the Internal Revenue
Service regarding its tax-free status, is expected to be consummated
during the second quarter of 1995.
Structurally, the transaction will consist of the following two
general 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 the 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.
<PAGE>
U.S. TRUST CORPORATION
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 the 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.
The Processing Business accounted for approximately 35.9% of the
Corporation's total revenues, on a taxable equivalent basis, and
approximately 33.1% of profit contribution (defined as taxable equivalent
operating income excluding corporate overhead and income taxes) for the
year ended December 31, 1994, compared to 38.4% of total revenue and
37.3% of profit contribution in 1993, and 39.9% of total revenue and
43.9% of profit contribution in 1992. Total revenue and profit
contribution for the 1994 period exclude the gain realized from the sale
of Financial Technologies International L.P. and the losses on the sales
of securities related to the pending sale of the Processing Business (see
"Securities Transactions and Other Income" in this Financial Review for
additional information). The reduction in the Processing Business's
contribution to total revenue and profit contribution primarily reflects
a reduction in the amount of net interest income credited to the
Processing Business as a result of the decline in non-interest-bearing
sources of funds ("investable balances"). For the year ended
December 31, 1994, average investable balances were $1.2 billion, a
decline of $187 million from the comparable 1993 period. Substantially
all of the reduction in the average balance of investable balances was
attributable to the unit investment trust business ("UIT"). The level of
UIT investable balances is impacted by the volume of bonds held by trusts
that are called and refunded, which typically declines in periods of
rising interest rates. See "Net Interest Income" in this Financial
Review for further discussion of investable balances.
The Corporation expects to incur charges of up to $110 million
(after-tax) associated with various downsizing costs and other expenses
related to the transaction. The Corporation has charged $50.2 million
($27.9 million after tax) of securities losses and professional fees
related to the transaction in the fourth quarter 1994 operating results.
See "Notes to the Consolidated Financial Statements No. 1" for additional
information.
<PAGE>
U.S. TRUST CORPORATION
Fee Revenue
<TABLE>
Years Ended December 31,
------------------------------------------------
% Change
-------------
(Dollars In Thousands) 1994 1993 1992 94-93 93-92
-------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Fiduciary and Other Fees:
Core Businesses:
Asset Management $171,220 $152,362 $131,188 12.4 % 16.1%
Corporate Trust and Agency 21,641 18,775 16,916 15.3 11.0
-------- -------- --------
Total Core Businesses 192,861 171,137 148,104 12.7 15.6
-------- -------- --------
Processing Business:
Funds Services 75,527 68,196 63,412 10.7 7.5
Institutional Asset Services 27,177 24,742 24,308 9.8 1.8
-------- -------- --------
Total Processing Business 102,704 92,938 87,720 10.5 5.9
-------- -------- --------
Total Fiduciary and Other Fees $295,565 $264,075 $235,824 11.9 % 12.0%
-------- -------- -------- ---- ----
Total Fee Revenue as a Percent of Taxable
Equivalent Operating Income, Net of Interest
Expense and Provision for Credit Losses 69.5%* 67.0% 66.1%
======== ======== ========
---------------
* The 1994 ratio was calculated by adding to Operating Income, Net of Interest Expense
and Provision for Credit Losses the $44.2 million of security losses related to the
Disposition and Merger.
</TABLE>
Fiduciary and other fees ("Fee Revenue") are the largest component of
both the Core Businesses and Processing Business revenues. Fee-based
services provide a relatively stable core source of revenues that are
less subject to change in periods of interest rate volatility as compared
to net interest income. The credit loss experience from fee-based
activities has been and continues to be negligible.
Fee Revenue is based typically on the market value or par value of
assets under management and administration, the volume of securities
transactions, income collection transactions and other services rendered.
Most Asset Management Fee Revenue is determined on an incremental
scale so that as the value of a client's portfolio grows in size, the
Corporation receives a smaller percentage of the increasing value as fee
income. Therefore, market value or other incremental changes in a
portfolio's size do not necessarily have a proportionate impact on the
level of Fee Revenue.
<PAGE>
U.S. TRUST CORPORATION
In 1994, $144.3 million of Asset Management Fee Revenue was related
to the market value of assets held in clients' accounts, compared with
$133.8 million and $119.8 million, respectively, for the years ended
December 31, 1993 and 1992. The remaining Fee Revenue, principally
derived from corporate trust and agency fees, was related to transaction
-based services.
The following table provides details of assets under management and
administration for the last six years. Unless otherwise noted, asset
values are measured at their estimated fair value.
<TABLE>
Compound
December 31, Growth
--------------------------------------------------- Rate
(Dollars In Billions) 1994 1993 1992 1991 1990 1989 89-94
------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Core Businesses:
Assets Under Management* $ 33.0 $ 32.2 $ 26.5 $ 21.9 $ 18.1 $ 18.0 12.91%
Personal Custody 8.2 7.9 6.0 6.8 6.1 4.7 11.79
Corporate and Municipal
Trusteeships and Agency
Relationships** 159.6 152.2 134.6 121.5 109.6 102.3 9.30
------ ------ ------ ------ ------ ------
Total Assets Under Management
and Administration for the
Core Businesses 200.8 192.3 167.1 150.2 133.8 125.0 9.94
------ ------ ------ ------ ------ ------
Processing Business:
Custody and Other Non-Managed
Assets:
Institutional Services 120.4 97.6 92.9 81.8 81.6 68.0 12.11
Funds Services*** 103.0 103.3 91.8 84.3 62.4 54.3 13.66
------ ------ ------ ------ ------ ------
Total Assets Under Management
and Administration for the
Processing Business 223.4 200.9 184.7 166.1 144.0 122.3 12.81
------ ------ ------ ------ ------ ------
Total Assets Under Management
and Administration $424.2 $393.2 $351.8 $316.3 $277.8 $247.3 11.40%
====== ====== ====== ====== ====== ====== =====
---------------
* Includes funds under management for clients of the Processing Business of approximately
$1.9 billion, $1.9 billion, $1.7 billion, $1.6 billion, $1.0 billion, and $0.9 billion at
December 31, 1994, 1993, 1992, 1991, 1990 and 1989, respectively.
** Includes corporate trust and agency and bond immobilization assets presented at par value.
*** Includes UIT assets presented at par value and mutual fund custody assets presented at fair
market value.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
Assets Under Management
Asset Management Fee Revenue is derived mainly from investment management
and related services to individuals and institutions. These services
include investment portfolio management, estate and tax planning and
personal custody. Asset Management Fee Revenue is based primarily on the
market value of the assets in clients' accounts. In general, Fee Revenue
is influenced by a variety of factors, including growth or decline of
stock and bond market levels, fee increases, revenue from new services,
outflow of assets due to terminating trusts, disbursements, gifts, etc.,
acquisitions, and new business. The increase in Asset Management Fee
Revenue during 1994 and 1993 is related to higher market values, new
business and acquisitions. Assets under management as of December 31,
1994 increased by 2.4% from the December 31, 1993 level.
Asset Management Fee Revenue in 1994 includes a full year of revenue
from U.S. Trust Company of the Pacific Northwest ("Pacific Northwest" -
formerly Capital Trust Company, a trust and investment management firm
acquired on July 7, 1993). Asset Management Fee Revenue in 1993 includes
six months of Fee Revenue from Pacific Northwest and a full year of Fee
Revenue from Campbell, Cowperthwait & Co., Inc. ("Campbell" - an
investment advisory company acquired in December 1992) and a full year of
Fee Revenue from Delafield, Harvey, Tabell ("Delafield" - an investment
advisory company acquired in April 1992). Asset Management Fee Revenue
in 1992 includes one month of Fee Revenue from Campbell and nine months
of Fee Revenue from Delafield. Fee Revenue from Pacific Northwest in
1994 and Fee Revenue from Campbell and Delafield in 1993 and 1992
represent less than 5% of total Asset Management Fee Revenue earned in
the respective years. Pacific Northwest accounted for 4.8% of total
assets under management at December 31, 1994. Campbell and Delafield
accounted for 5.6% and 4.0% of total assets under management as of
December 31, 1993 and 1992, respectively.
The Corporation believes it is well positioned to increase Asset
Management Fee Revenue due to favorable growth rates in the overall
affluent market, expansion into new geographic markets, selective
acquisitions, development of new services, solicitation of new market
segments and new business development. Increases in Asset Management Fee
Revenue are expected to come from the Corporation's Institutional Asset
Management business, where the Corporation has developed a dedicated
sales force and has expanded the range of investment products it offers.
Another key strategy for increasing Asset Management Fee Revenue is the
Corporation's recently implemented initiative to broaden the distribution
of its investment products via third parties.
As noted in the preceding table, assets under management include
assets under management for clients of the Processing Business.
Substantially all of these assets derive from short-term cash management
account relationships. The average rate charged for short-term cash
management is significantly less than the average rate charged on the
entire portfolio of assets under management. These short-term asset
management relationships are expected to leave the Corporation and be
managed by Chase upon the consummation of the Disposition and Merger.
<PAGE>
U.S. TRUST CORPORATION
Corporate Trust and Agency
Corporate Trust and Agency ("Corporate Trust") activities include the
indenture trustee business for corporate and municipal debt issues, as
well as complex new types of securities, and the bond immobilization
business. Corporate Trust Fee Revenue is affected by the volume of new
debt issuances and redemptions at, or in advance of, maturity of existing
issues. The volume of corporate and municipal trusteeships and agency
relationships (measured by the par value of the outstanding debt)
increased 4.8% in 1994 and 13.1% in 1993.
Assets Under Administration - The Processing Business
Institutional asset services ("IAS") includes master trust and custody
services, securities lending and global custody services to corporate
employee benefit funds, public funds, financial institutions and
endowments and foundations. IAS Fee Revenue is influenced by the market
value of its accounts and transactional activity. IAS assets
administered in custody accounts increased 23.4% in 1994 and 5.1% in
1993.
Funds Services provides custody administration, fund accounting and
administration and transfer agent activities for open and closed-end
mutual funds and custodian, recordkeeping, income collection and
disbursement, and transfer agent services for taxable and tax-exempt unit
investment trusts. Funds Services assets under administration decreased
by 0.3% in 1994 and increased by 12.5% in 1993. The 1994 decrease in
assets under administration reflects a normal decline in assets held in
unit investment trusts as the underlying bonds mature and units are
redeemed by the unit holders, almost entirely offset by increases in
mutual fund custody business. The increase in Funds Services assets
under administration in 1993 is primarily attributable to expanded
business with mutual funds, both open and closed-end. The par value of
bonds held in custody for unit investment trusts has declined in 1992 and
1993, reflecting accelerated prerefundings and redemptions of municipal
securities underlying unit investment trusts by issuers taking advantage
of decreasing interest rates during the same period. While this reduced
fee income earned from unit investment trusts in 1993 and 1992, the
redemption activity had also temporarily increased the volume of non
interest bearing deposits reflecting uninvested balances derived from
these accounts. See "Net Interest Income" in this Financial Review for
an expanded discussion of non-interest-bearing balances derived from the
Processing Business.
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Securities Transactions and Other Income
Years Ended December 31,
------------------------------------------------
% Change
-------------
(Dollars In Thousands) 1994 1993 1992 94-93 93-92
-------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Other Income:
Securities Gains (Losses), Net $(42,118) $ 3,025 $ 2,801 - % 8.0%
Other 16,748 8,863 6,939 89.0 27.7
-------- -------- --------
Total Other Income $(25,370) $ 11,888 $ 9,740 - % 22.1%
======== ======== ======== ==== ====
</TABLE>
Net securities losses in the fourth quarter of 1994 totaled $44.2 million
($23.3 million after-taxes). During the 1994 fourth quarter, the
Corporation sold approximately $800 million of long and medium-term U.S.
Government Agency and Treasury Securities. The sales occurred as a
result of the fundamental change in the Corporation's asset and liability
structure as a result of signing the agreement to sell the Processing
Business to Chase. The deposit liabilities associated with the
Processing Business were a source of long-term funds which financed
certain of the Corporation's long and medium-term interest earning
investments. With the anticipated closing date of the transaction
occurring during the second quarter of 1995, the deposit liabilities
become short-term in nature. As a result, the securities sales were
consummated to substantially effect a rebalancing of the Corporation's
overall asset and liability structure. During 1994, net securities
losses were $42.1 million compared to a net gain of $3.0 million in 1993.
The proceeds from the sales were invested in short-term investment
securities and used to reduce short-term borrowings.
Other Income for 1994 includes $6.4 million ($3.4 million after
-taxes or $0.36 per fully diluted share for the fourth quarter and $0.33
per fully diluted share for the year) resulting from the sale of the
Corporation's partnership interest in Financial Technologies
International L.P. in the fourth quarter of 1994.
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Net Interest Income (Taxable Equivalent Basis)
Years Ended December 31,
----------------------------------
(Dollars In Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest Income $187,116 $169,600 $173,211
Taxable Equivalent Adjustment 4,654 5,810 8,237
-------- -------- --------
Total Interest Income 191,770 175,410 181,448
Interest Expense 79,004 53,358 64,323
-------- -------- --------
Net Interest Income $112,766 $122,052 $117,125
======== ======== ========
Percentage Increase (Decrease) from Prior Period (7.6)% 4.2% 10.2%
======== ======== ========
</TABLE>
Significant influences on the Corporation's net interest income over the
past three years included: the average balance of net non-interest
bearing funds primarily attributable to the non-interest bearing deposits
generated by the Processing Business; a reduction in the average yield on
short-term and variable rate investments and loans; and an increase in
total interest earning assets.
<TABLE>
Years Ended December 31,
----------------------------
(Dollars In Millions) 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Average Volume:
Interest Earning Assets $3,232 $3,086 $2,834
Interest Bearing Liabilities 2,032 1,699 1,674
------ ------ ------
Net Interest Earning Assets $1,200 $1,387 $1,160
====== ====== ======
Percentage Increase (Decrease) from Prior Period (13.5)% 19.6% 38.0%
====== ====== ======
Non-Interest Bearing Deposits $1,565 $1,761 $1,508
====== ====== ======
Percentage Increase (Decrease) from Prior Period (11.1)% 16.8% 47.7%
====== ====== ======
Average Rates (Taxable Equivalent Basis)
Interest Earning Assets: 5.93% 5.68% 6.40%
Cost of Funding Interest Earning Assets 2.44 1.73 2.27
------ ------ ------
Net Yield on Interest Earning Assets 3.49% 3.95% 4.13%
====== ====== ======
</TABLE)
<PAGE>
U.S. TRUST CORPORATION
The net yield on interest earning assets is dependent upon the
Corporation's average level of non-interest bearing funds, the maturity
structure of the Corporation's interest earning assets and interest
bearing liabilities and the general interest rate environment. If the
average volume of all sources of funds is stable, the net yield will
generally be higher in a rising interest rate environment. Conversely,
in a declining interest rate environment, the net yield will be lower.
The volume of the Processing Business's non-interest bearing
deposits, however, is generally inversely related to the level of
interest rates. Thus, in periods of decreasing interest rates, the
average balance of non-interest bearing deposits derived from the
Processing Business tends to increase, whereas in periods of rising
interest rates, the average balance typically declines. Interest rates
were low in 1993 and the Processing Business experienced its highest
level of average deposit balances. Average non-interest bearing
deposits, net of uncollected funds, for the Processing Business amounted
to $776 million in 1994, $983 million in 1993 and $832 million in 1992.
Temporary inflows of deposits, mainly related to the Processing
Business, are invested in high quality liquid short-term financial
instruments that ensure the Corporation an adequate rate of return, while
maintaining liquidity and credit quality to satisfy the eventual outflow
of the deposits.
For the year ended December 31, 1994, average interest earning
assets increased by $146 million from the corresponding 1993 period,
consisting primarily of $174 million of private banking loans, offset by
a net decline of $28 million in securities and short-term financial
instruments. Average interest earning assets increased in 1993 by
$252 million from the 1992 period consisting primarily of an increase of
$148 million of private banking loans and a net increase of $104 million
in securities and short-term financial instruments. In 1993, the higher
volume of average interest earning assets was funded mainly by net non
interest bearing funds, derived principally from the Processing Business.
For the year ended December 31, 1994, the average balance of non-interest
bearing funds derived principally from the Processing Business declined
by $187 million from the corresponding 1993 period. In 1994, the higher
volume of average interest earning assets was funded primarily by
increases in average interest bearing deposits and short-term borrowings.
Total Revenues
Total revenues, defined as net interest income after the provision for
credit losses, fee income and other income for the Core Businesses and
the Processing Business for the years ended December 31, 1994, 1993 and
1992 are as follows:
<PAGE>
U.S. TRUST CORPORATION
</TABLE>
<TABLE>
Years Ended December 31,
----------------------------------
(Dollars In Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Core Businesses Revenues $270,200 $236,815 $206,029
Processing Business Revenues 150,284 151,390 142,423
-------- -------- --------
Total Revenues $420,484* $388,205 $348,452
======== ======== ========
----------------
* In 1994, Total Revenues exclude the $44.2 million of securities losses incurred in
anticipation of the sale of the Chase Acquired Business.
</TABLE>
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 net 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.
Operating Expenses
The following table provides details of operating expenses other than
interest expense and provision for credit losses for the last three
years.
<TABLE>
Years Ended December 31,
----------------------------------
(Dollars In Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Salaries $135,415 $120,770 $104,506
Employee Benefits and Incentive Compensation 72,068 68,383 60,426
Net Occupancy 40,030 40,035 37,420
Equipment 18,371 18,536 18,591
Other 76,051 67,796 68,589
-------- -------- --------
Total $341,935 $315,520 $289,532
======== ======== ========
Percentage Increase From Prior Period 8.4% 9.0% 13.6%
======== ======== ========
Total Operating Expenses as a Percent of Taxable Equivalent
Operating Income, Net of Interest Expense and Provision
for Credit Losses 79.0%* 80.1% 81.2%
======== ======== ========
<PAGE>
U.S. TRUST CORPORATION
----------------
* The 1994 ratio has been calculated excluding the impact of $44.2 million of securities losses
and $6.0 million of professional fees and related costs incurred in connection with the sale of
the Chase Acquired Business.
</TABLE>
Salaries in 1994 increased 12.1% from 1993 and increased 15.6% in 1993
from 1992. The increases were due mainly to staff additions in the asset
management business and the mutual funds servicing division within the
Processing Business. The number of full-time equivalent employees
increased 4.0% to 2,676 at December 31, 1994, compared to 2,574 at
December 31, 1993. During 1993, the number of full-time equivalent
employees increased 12.1% to 2,574 from 2,296. Excluding the impact of
the acquisition of Pacific Northwest in 1993, salaries increased by 10.6%
in 1994. Excluding the impact of the acquisitions of Delafield, Campbell
and Pacific Northwest, salaries increased by 13.3% in 1993.
Employee benefits and incentive compensation increased 5.4% in 1994
from 1993 and increased 14.7% in 1993 compared with 1992. These changes
were due primarily to incentive award plans, which are determined based
upon the Corporation's financial performance, adjusted to offset the
impact of nonrecurring charges and credits, as measured by its return on
stockholders' equity, and to other employee benefits whose expense level
is a function of staffing levels.
In addition to the approximately 1,150 of the Corporation's
employees that will be employed by Chase following the Disposition and
Merger, the Corporation will reduce its staffing levels by approximately
153 employees, which will reduce corporate staff salaries and related
employee benefits and incentive compensation by an estimated
$12.4 million on an annualized basis. It is anticipated that these
employees will be terminated by the Closing Date.
Occupancy charges remained stable in 1994 compared with 1993 and
increased 7.0% in 1993 from the 1992 level. The increase in 1993
reflects the impact of the asset management acquisitions. The Chase
Acquired Business includes leased space in the building located in New
York at 770 Broadway and the leased premises of Mutual Funds Service
Company in Boston. As of the Closing Date, the transfer of those
premises is expected to reduce the occupancy expense of the Corporation
by approximately $11 million on an annualized basis.
Other expenses in 1994 increased 12.2% compared to 1993, while
decreasing 1.2% in 1993 compared to 1992. The 1994 increase includes
$6.0 million of professional fees and related costs associated with the
Disposition and Merger. The 1993 decline is a result, in part, of lower
costs related to real estate acquired in debt restructurings.
<PAGE>
U.S. TRUST CORPORATION
As part of the Disposition and Merger, Chase will acquire the
Corporation's back office operations. The Corporation and Chase will
enter into a Services Agreement pursuant to which Chase will furnish
necessary securities processing, custodial, data processing and other
services to the Corporation. The initial term of the Services Agreement
will be for five years beginning on the Closing Date, with certain
renewal options. In consideration of the services provided to it under
the Services Agreement, during the initial term, the Corporation will pay
Chase an annual base fee of $10 million, which is significantly less than
the Corporation's estimate of the annual cost of providing such services
to itself.
Operating expenses applicable to the Core Businesses and the
Processing Business for the years ended December 31, 1994, 1993 and 1992
are as follows:
<TABLE>
Years Ended December 31,
----------------------------------
(Dollars In Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Core Businesses:
Salaries and Benefits $120,036 $108,481 $ 91,355
Net Occupancy 21,125 18,778 16,996
Other 52,974 46,143 46,652
-------- -------- --------
Subtotal 194,135 173,402 155,003
-------- -------- --------
Processing Business:
Salaries and Benefits 72,798 61,855 58,021
Net Occupancy 10,616 9,360 8,792
Other 30,190 31,988 29,152
-------- -------- --------
Subtotal 113,604 110,130 95,965
-------- -------- --------
Corporate Overhead 34,196* 31,988 38,564
-------- -------- --------
Total Operating Expenses $341,935 $315,520 $289,532
======== ======== ========
----------------
* Includes $6.0 million of professional fees and related costs incurred in connection with the sale of
the Chase Acquired Business.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
Operating expenses associated with the Core Businesses and Processing
Business are determined by the Company's internal management accounting
information system. The Company'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.
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 effective tax rates on income before income taxes and cumulative
effect of accounting changes for 1994, 1993 and 1992 were 39.0%, 41.8%
and 38.0%, respectively. The decline in the effective tax rate in 1994
from 1993 is due to lower state and local income taxes. The increase in
the 1993 effective tax rate from 1992 is due to the decline in tax-exempt
income as a result of maturities and redemptions of state and municipal
bonds and the impact of the increase in the federal corporate income tax
rate that was retroactive to January 1, 1993.
Financial Condition
Capital and Regulatory Ratios
The Corporation has maintained its strong capital position throughout
1994. The ratio of Tier 1 capital at December 31, 1994 to period end
risk-adjusted assets (as defined by the Federal Reserve Board) was
13.52%. The ratio of Total Capital at December 31, 1994 to period end
risk-adjusted assets was 14.79%. The Tier 1 leverage ratio (Tier 1
capital as of the period end divided by quarterly (3 month) total average
assets) was 5.68%.
For the year ended December 31 1994, 90,000 shares of common stock
were acquired under the Corporation's share repurchase program at an
average price of $50.81 per share. For the same period during 1993,
157,500 shares were repurchased at an average cost of $53.88 per share.
<PAGE>
U.S. TRUST CORPORATION
One of the principal purposes of the Corporation's common stock
repurchase program has been to provide a supply of common shares for
issuance under the Corporation's various common stock incentive and
compensation plans. Such common shares have been acquired through
systematic purchases in the open market in amounts deemed sufficient to
satisfy the Corporation's immediate and near-term (i.e., less than two
years) obligations to issue common shares under its benefit plans.
During 1994, the Corporation issued 182,500 common shares under its
various stock-based plans.
The adoption of a stock repurchase program by New USTC following the
Disposition and Merger would be subject to (i) the approval of the New
USTC's Board, (ii) maintaining regulatory capital ratios necessary to
remain "well capitalized", (iii) maintaining appropriate parent company
liquidity, and (iv) existing statutory authority that permits repurchases
of shares in an amount that does not exceed 10% of the parent company's
stockholders' equity at the beginning of the year.
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 sensitive assets and interest
sensitive 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.
The Corporation's asset mix is predominantly liquid and low-risk,
while its exposure to credit risk from lending activities is well
controlled.
<TABLE>
Years Ended December 31,
Average Balances --------------------------------------------------------
(Percentage) 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Due From Banks 8.1% 8.5% 8.3%
Short-Term Financial Instruments 8.2 14.7 11.5
Marketable Securities 39.6 37.2 42.5
----- ----- -----
Total Cash, Short-Term Financial Instruments
and Marketable Securities 55.9 60.4 62.3
Loans, Net of Allowance for Credit Losses 32.4 28.5 26.8
Other Assets 11.7 11.1 10.9
----- ----- -----
Total Assets 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
In excess of 55% of average total assets consist of cash and due from
banks, short-term financial instruments and readily marketable
securities. The securities portfolio is concentrated in investments in
U.S. Government and Federal Agencies securities. See "Notes to the
Consolidated Financial Statements No. 5" for additional details
concerning securities.
The loan portfolio is currently the second largest category of
average total assets, compared to most other banking institutions where
the loan portfolio is the largest component of interest earning assets.
The Corporation's loan portfolio is comprised primarily of loans to
private banking customers. Average loans increased $212.2 million, or
19.4%, to $1,307.9 million at December 31, 1994, from $1,095.7 million in
1993. Residential real estate mortgages accounted for approximately 65%
of the increase in the portfolio. Average private banking loans, which
comprise approximately 89% of total loans outstanding, grew by
$174.5 million, or 17.7% from 1993. In excess of 68% of average private
banking loans are secured by residential mortgages. Average loans
increased by 16.4% in 1993, with average private banking loans increasing
by 17.7%.
As part of its overall asset and liability management process, the
Corporation uses interest rate swaps ("Swaps") and forward rate
agreements ("FRAs") as hedges. Swaps are used to hedge the net yield
earned on pools of fixed rate residential real estate mortgage loans
originated in the year of the Swap's inception. The following table
provides details, as of December 31, 1994, 1993 and 1992, 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
Year Years Total
(Dollars In Thousands) -------- -------- --------
----------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1994:
Fixed Pay Swaps $ 42,000 $ 44,375 $ 86,375
Average Rate Paid 6.8486% 7.0047% 6.9288%
Average Rate Received* 5.7426% 6.0806% 5.9163%
December 31, 1993:
Fixed Pay Swaps $ 42,000 $ 61,375 $103,375
Average Rate Paid 8.9464% 7.3274% 7.9852%
Average Rate Received* 3.3938% 3.4182% 3.4083%
December 31, 1992:
Fixed Pay Swaps $ 14,000 $ 79,875 $ 93,875
Average Rate Paid 8.8357% 8.7814% 8.7895%
Average Rate Received* 3.5910% 3.6995% 3.6833%
<PAGE>
U.S. TRUST CORPORATION
---------------
* 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.
</TABLE>
Customer deposit balances associated with the Processing Business have
provided the Corporation with a stable, long-term source of funds that
historically has been used to finance fixed-rate loans and investments.
In the fourth quarter of 1994, the Corporation sold over $800 million of
U.S. Government Treasury and Agency securities in anticipation of the
closing of the Disposition and Merger and the resultant need to fund the
deposit balances being transferred as part of the Chase Acquired
Business. 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 is expected to increase, as a greater
proportion of the Corporation's fixed rate assets will be funded with
short-term interest bearing liabilities. In addition, the Corporation
may issue term financing or sell loans to maintain an appropriate
matching of its asset/liability structure.
The impact of the Corporation's hedging activities upon net interest
income for the years ended December 31, 1994, 1993 and 1992, are detailed
in the following table.
<TABLE>
For the Years Ended December 31,
----------------------------------------
(Taxable Equivalent Basis; Dollars In Thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income:
As Reported $112,766 $122,052 $117,125
Excluding Hedging Activities $116,007 $127,112 $122,092
Net Yield on Interest Earning Assets:
As Reported 3.49% 3.95% 4.13%
Excluding Hedging Activities 3.59% 4.12% 4.31%
</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 to hedge interest rate risk and lock in a specified level
of return.
Securities Available for Sale
During 1994, the Corporation purchased $1,283.4 million of securities
(primarily U.S. Government agency and Treasury securities ($1,269.3
million)) classified as available for sale.
<PAGE>
U.S. TRUST CORPORATION
The Corporation's portfolio of securities classified as available
for sale is principally comprised of the following: U.S. Treasury fixed
rate obligations with weighted average original maturities of one and one
half years (58%); Government National Mortgage Association ("GNMA") fixed
rate mortgage-backed securities ("Fixed Rate GNMAs") and GNMA adjustable
rate mortgage-backed securities ("GNMA ARMs") (21%); obligations of
states and municipalities (7%) and variable rate collateralized mortgage
obligations backed by GNMAs ("CMOs") (6%). GNMAs are backed by the full
faith and credit of the U. S. Government.
The amortized cost of securities available for sale exceeded their
market value by $5.8 million at December 31, 1994. The market value of
securities available for sale exceeded their amortized cost by
$16.5 million at December 31, 1993. The decrease in market value
relative to amortized cost reflected several factors. First, in the
first quarter of 1994, high yielding available for sale securities
(mainly Treasuries) were sold for a $2.0 million gain, and the proceeds
from sales, maturities, calls and mandatory redemption of securities of
$258.6 million were reinvested (mainly in Treasuries) at then-lower
prevailing interest rates. Second, since the beginning of 1994, interest
rates have significantly increased. For example, the Federal funds
interest rate increased 250 basis points from January to December 1994.
In the fourth quarter of 1994, the Corporation sold $390.0 million
of U.S. Treasury Notes in addition to $41.9 million of securities
available for sale sold in January 1994. (See "Securities Transactions
and Other Income" in this Financial Review for additional information.)
Securities Held to Maturity
During 1994, the Corporation purchased $402.5 million of securities
classified as held to maturity, primarily consisting of U.S. Government
agency securities ($388.4 million).
In the fourth quarter of 1994, the Corporation sold approximately
$412.0 million of U.S. Government Agency securities classified as held to
maturity. (See "Securities Transactions and Other Income" in this
Financial Review for additional information.) No securities are
classified as held to maturity at December 31, 1994. At December 31,
1993, the market value of securities held to maturity was $87.1 million,
which exceeded their carrying amount by $300,000. A reconciliation of
the activity in held to maturity securities for the year ended
December 31, 1994 is provided below:
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
(Dollars In Thousands) 1994
--------------------------------------------------------------------------------
<S> <C>
Balance, Beginning of Year $ 86,748
Purchases 402,502
Proceeds from Sales (379,954)
Realized Losses on Sales (32,168)
Proceeds from Maturities, Calls and Mandatory Redemptions (46,229)
Transfers to Available for Sale (28,884)
Net Amortization of Premium (2,015)
----------
Balance, End of Year $ -
==========
</TABLE>
Impact of the Disposition and Merger on the Investment Portfolio
The Corporation anticipates that after the Disposition and Merger New
USTC's securities portfolio will be concentrated in shorter-term U.S.
Government Treasury securities and floating rate CMO's collateralized by
GNMA mortgage pass-through securities. A lesser amount will be invested
in GNMA mortgage pass-through securities and tax-exempt state and
municipal obligations. Tax-exempt state and municipal securities are
largely fixed-rate investments with an average life of approximately 4.4
years and a duration of approximately 3.3 years. GNMA securities are
mostly 15 year original maturity securities and 30 year original maturity
securities with a remaining maturity of about 20 years. The average life
of the GNMA portfolio is about 7.4 years and the duration is about 5.1
years.
The shorter term portfolio of U.S. Government Treasury Securities
and floating rate CMO's will be primarily used for liquidity. The GNMAs
and state and municipal obligations are intended to provide longer term
returns with low credit risk.
Mortgage Securities and Prepayment Risk
At December 31, 1994, the Corporation held GNMA and CMO securities
("mortgage securities") having a carrying value of approximately
$279 million in its available for sale portfolio. While these mortgage
securities, as well as the Corporation's residential real estate mortgage
loans ("mortgage loans"), are subject to prepayment risk, management
believes that these are appropriate investments for the Corporation.
Historically, relatively high levels of non-interest bearing deposits
derived from the Processing Business helped to mitigate the financial
risk associated with the unpredictable experience of these holdings.
<PAGE>
U.S. TRUST CORPORATION
Impact of the Disposition and Merger on Liquidity
The Corporation requires access to funds sufficient to pay dividends to
common shareholders, interest and principal to debt holders and for other
corporate purposes, such as loans and capital investments in affiliates
and purchases of treasury stock.
Historically, the Corporation has maintained strong liquidity at
both the parent and the operating subsidiaries. While the Disposition
and Merger will have a significant effect on capital resources and the
overall asset and liability structure, the Corporation believes that New
USTC will maintain sufficient liquidity at the parent and at each of its
active subsidiaries.
In connection with the Disposition and Merger, United States Trust
Company of New York will redeem its outstanding 8 1/2% Capital Notes Due
2001. The funds required to redeem the Capital Notes will be obtained
through normal business operations.
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.
Additional sources of liquidity will include a new multi-year
$35 million credit facility which the Corporation is currently
negotiating. The Corporation expects that the new facility will have
terms and conditions at least as favorable as the Corporation's existing
credit facility. The existing credit facility is a $25.0 million
revolving, unsecured credit arrangement with a major financial
institution. At December 31, 1994, the Corporation had no borrowings
outstanding under its revolving credit arrangement The Corporation
expects that the new credit facility will be finalized prior to the
consummation of the Disposition and Merger. Additionally, New USTC may
borrow, subject to certain regulatory restriction, on a fully
collateralized basis from its affiliate banks.
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. The following table provides the components of
the Corporation's interest rate sensitivity gaps at December 31, 1994.
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, the gap table 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 "Impact of the Disposition and Merger on
Liquidity" section of this Financial Review.
<PAGE>
U.S. TRUST CORPORATION
As set forth in the following table, as of December 31, 1994, the
Corporation had more liabilities repricing than assets (liability
sensitive) in the 0-3 month and 4-6 month categories, reflecting the
impact of the Disposition and Merger on the classification of Processing
Business non-interest bearing deposits. 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 falling rate environment.
<PAGE>
<TABLE>
U.S. TRUST CORPORATION
0-3 4-6 7-12 1-5 Over
(Dollars in Thousands) Months Months Months Years 5 Years Total
---------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest Bearing Deposits
with Banks $ 21,524 $ -- $ -- $ -- $ -- $ 21,524
Securities Available for Sale 427,759 239,582 132,443 168,421 65,321 1,033,526
Federal Funds Sold and
Securities Purchased Under
Agreements to Resell 120,000 -- -- -- -- 120,000
Loans, Net of Allowance for
Credit Losses 980,241 18,574 35,118 211,649 366,617 1,612,199
Cash and Other Non-Interest
Earning Assets 212,316 23,116 28,643 68,683 103,204 435,962
---------- --------- --------- ---------- --------- ----------
Total Assets 1,761,840 281,272 196,204 448,753 535,142 3,223,211
========== ========= ========= ========== ========= ==========
Liabilities and Stockholders' Equity
Non-Interest Bearing Deposits 134,278 745,532 45,480 106,248 -- 1,031,538
Interest Bearing Deposits 1,378,437 7,601 14,468 8,327 -- 1,408,833
Federal Funds Purchased,
Securities Sold Under
Agreements to Repurchase
and Other Borrowings 350,515 -- -- -- -- 350,515
Accounts Payable and Accrued
Liabilities 44,460 45,465 38,030 9,239 10,884 148,078
Long Term Debt 41,753 2,020 11,080 6,071 60,924
Stockholders' Equity -- -- -- -- 223,323 223,323
---------- --------- --------- ---------- --------- ----------
Total Liabilities and
Stockholders' Equity 1,907,690 840,351 99,998 134,894 240,278 3,223,211
---------- --------- --------- ---------- --------- ----------
Asset/(Liability) Sensitivity
Gap (145,850) (559,079) 96,206 313,859 294,864 --
---------- --------- --------- ---------- --------- ----------
Interest Rate Swaps * 48,750 (1,125) (3,250) (44,375) -- --
---------- --------- --------- ---------- --------- ----------
Interest Rate Sensitivity Gap (97,100) (560,204) 92,956 269,484 294,864 --
---------- --------- --------- ---------- --------- ----------
Cumulative Interest Rate
Sensitivity Gap $ (97,100) $(657,304) $(564,348) $ (294,864) $ -- $ --
========== ========== ========== ========== ========= ==========
---------------
* Includes $86,375 of total outstanding notional principal of Swaps less $37,625 of Swaps
maturing or amortizing within three months.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
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 reduce its exposure to fixed rate
investments through its sale of held to maturity securities and to
rebalance its asset/liability mix through the sale of certain available
for sale securities. See "Asset/Liability Management" in this Financial
Review.
The Disposition and Merger will have no direct impact on the
Corporation's private banking loan portfolio. Approximately 50% of the
current loan portfolio is made up of fixed rate mortgages. The fixed
rate mortgage portfolio has an average maturity of about 7.4 years and a
duration of about 5.1 years. While it is anticipated that the portion of
fixed rate loans will remain about constant, changes in the level and
direction of interest rates will cause prepayments of existing loans and
origination of new fixed rate loans to vary. Consequently the proportion
of fixed rate loans may vary from period to period.
Asset Quality
The Corporation's loan portfolio is comprised primarily of loans to
private banking customers. Average loans increased $212.2 million, or
19.4%, to $1.3 billion at December 31, 1994, from $1.1 billion in 1993.
Residential real estate mortgages accounted for approximately 65% of the
increase in the portfolio.
An analysis of the allowance for credit losses for the years ended
December 31, 1994, 1993 and 1992, follows.
<TABLE>
(In Thousands) 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $13,393 $11,676 $ 8,661
------- ------- -------
Provision charged to income 2,000 4,000 6,000
------- ------- -------
Recoveries 805 1,817 581
Charge-offs (1,499) (4,100) (3,566)
------- ------- -------
Net charge-offs (694) (2,283) (2,985)
------- ------- -------
Balance, December 31 $14,699 $13,393 $11,676
======= ======= =======
Ratios:
Allowance to Average Loans 1.12% 1.22% 1.24%
Net Charge-Offs to Average Loans 0.05 0.21 0.32
Allowance to Loans at Year-End 0.90 0.96 0.93
Net Charge-Offs to Loans at Year-End 0.04 0.16 0.24
Nonperforming Assets to Average Loans and Real Estate Owned 1.42 1.58 2.33
Allowance to Nonperforming Loans 230.72 223.03 135.75
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
The provision for credit losses in 1994 was $2.0 million, compared to
$4.0 million and $6.0 million in 1993 and 1992, respectively. The
provision for credit losses reflects the addition to the allowance for
credit losses that management deems appropriate to maintain the allowance
at a level adequate when related to the risk of loss inherent in the
credit portfolio. In assessing adequacy, management relies on its
ongoing review of specific credits, on past experience, present credit
portfolio composition and general economic and financial considerations.
See "Summary of Credit Loss Experience" on page 48 for a more detailed
discussion of the allowance for credit losses. The improvement in these
ratios between December 31, 1994 and December 31, 1993, reflects a net
addition to the allowance for credit losses since December 31, 1993 as
the provision has exceeded net loan charge-offs.
At December 31, 1994, the loan portfolio included loans to
individuals involved in the financial services industry of approximately
$420 million. The Corporation's credit loss experience with these loans
has been excellent. Net charge-offs from loans to individuals involved
in the financial services industry amounted to $438,000 in 1994, $237,000
in 1993 and $707,000 in 1992. Such net charge-offs as a percentage of
average total loans amounted to 3 basis points, 2 basis points and 8
basis points in 1994, 1993 and 1992, respectively.
Nonperforming assets, which include non-accrual and restructured
loans and real estate acquired in debt restructurings, are as follows:
<TABLE>
December 31,
---------------------
(In Thousands) 1994 1993
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual and restructured loans $ 6,371 $ 6,005
Real estate acquired in debt restructurings 12,362 11,542
------- -------
Total nonperforming assets $18,733 $17,547
======= =======
</TABLE>
After the consummation of the Disposition and Merger, New USTC's loan
portfolio will become a more significant percentage of total interest
earning assets. It is not anticipated that the Disposition and Merger
will effect the quality of the loan portfolio.
Acquisitions and Subsidiaries
The Corporation's business strategy calls for expansion of its asset
management customer base in key areas of wealth concentration through the
acquisition of investment advisory firms, the de novo establishment of
subsidiaries and the establishment of branch offices of existing
subsidiaries. A summary of these activities follows.
<PAGE>
U.S. TRUST CORPORATION
o On January 17, 1995, the Corporation announced an agreement to
acquire the individual account business of J. & W. Seligman & Co.
Inc., and to purchase J. & W. Seligman Trust Company. J. &
W. Seligman & Co. Inc., is a privately held investment manager and
advisor located in New York. Under the agreement, the Corporation
will pay up to $20 million in cash for the business being acquired
(approximately $900 million in assets under management). The
transaction, which is subject to approval by the Federal Reserve
Board and New York State banking authorities, is expected to close
during the second quarter of 1995.
o In July 1994, U.S. Trust Company of Florida Savings Bank, located in
Palm Beach, converted the Boca Raton sales office into a full-
service branch office. In 1992, a branch office was opened in
Naples, Florida. U.S. Trust Company of Florida Savings Bank,
including the Boca Raton and Naples branch offices, had
approximately $1.2 billion of assets under management at December
31, 1994.
o In June 1993, U.S. Trust Company of Connecticut ("UST Connecticut")
was opened for business as a limited purpose trust company. At
December 31, 1994, UST Connecticut had approximately $678 million
of assets under management. A substantial portion of these assets
were from Connecticut domiciled clients, who requested that their
account be transferred from New York.
o In July 1993, the Corporation acquired Capital Trust Company
("Capital Trust"), a Portland, Oregon-based trust and investment
management firm, for 75,831 shares of its common stock valued at $4
million. The acquisition was accounted for as a pooling-of
-interests. At December 31, 1994, Capital Trust had approximately
$1.6 billion of assets under management. As of January 1, 1994,
Capital Trust changed its name to U.S. Trust of the Pacific
Northwest and its consulting practice was contributed to a separate
subsidiary, CTC Consulting Inc.
o In November 1993, U.S. Trust Company of California, N.A., opened a
new full-service branch office in Costa Mesa, California, to serve
the growing affluent region of Orange County. U.S. Trust Company of
California, N.A., including the Costa Mesa branch office, had
approximately $5.9 billion of assets under management at December
31, 1994.
<PAGE>
U.S. TRUST CORPORATION
o In March 1992, the Corporation purchased Delafield, Harvey, Tabell,
Inc. ("Delafield"), a Princeton, New Jersey-based investment
advisory company that also provides broker/dealer services, for
206,307 shares of its common stock valued at $9 million. The
acquisition was accounted for as a purchase. In late 1992, U.S.
Trust Company of New Jersey was granted authority to operate as a
full-service trust company and the investment advisory business of
Delafield was contributed to it. At December 31, 1994, U.S. Trust
Company of New Jersey had approximately $592 million of assets under
management.
o In December 1992, the Corporation acquired Campbell,
Cowperthwait & Co., Inc. ("Campbell"), a New York City-based
investment advisory company, for 106,541 shares of its common stock
valued at $5 million. The acquisition was accounted for as a
pooling-of-interests. At December 31, 1994, Campbell had
approximately $450 million of assets under management.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," ("FAS 107") requires disclosure of
the estimated fair values of the Corporation's financial instruments.
The FAS 107 disclosures and commentary concerning the usefulness of these
disclosures is set forth in "Notes to the Consolidated Financial
Statements No. 18." A discussion of the Corporation's most significant
financial instruments under FAS 107 follows.
The carrying amount of the Corporation's loan portfolio exceeded its
estimated fair value by approximately $30 million at December 31, 1994.
At December 31, 1993, the estimated fair value of the Corporation's loan
portfolio exceeded its carrying amount by approximately $19 million. The
estimated fair value of loans was derived using a discounted cash flow
model which considers average rates earned by the portfolio, current
rates offered to clients and current loan prepayment rates. The decline
in the fair value of the Corporation's loan portfolio is primarily due to
the impact on fixed rate loans of the significant increase in interest
rates since the beginning of 1994. At December 31, 1994, the spread
between the yield on the Corporation's existing fixed rate loans and the
interest rate offered to qualified borrowers for similar loans was
approximately 184 basis points.
The amortized cost of the Corporation's securities portfolio
exceeded its estimated fair value by approximately $6 million at
December 31, 1994. At December 31, 1993, the estimated fair value
exceeded its amortized cost by approximately $17 million. See the
discussion in "Asset/Liability Management - Securities Available for
Sale" in this Financial Review for an analysis of the decrease in the
estimated fair value of the securities portfolio.
<PAGE>
U.S. TRUST CORPORATION
The carrying amount of the Corporation's long term debt exceed the
estimated fair value by approximately $2 million at December 31, 1994 At
December 31, 1993, the estimated fair value exceeded the carrying amount
by approximately $5 million. The decrease in the fair value of long term
debt reflects the increase in the interest rate environment between the
two periods.
The estimated fair value of interest rate swaps was a gain of
approximately $1 million at December 31, 1994 compared to of a loss of
approximately $(4) million at December 31, 1993. The Corporation is a
net fixed rate payor under its interest rate swap agreements. The
increase in the estimated fair value of interest rate swaps reflects the
gradual increase in interest rates in 1994. Since the Corporation is a
fixed rate payer on all of its interest rate swaps, it receives the
benefit of an increase in the LIBOR rate throughout 1994.
Adoption of New Accounting Standards
Disclosure Requirements related to Derivative Financial Instruments
The Corporation has adopted, as of December 31, 1994, Statement of
Financial Accounting Standards No 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments," ("FAS
119"). FAS 119 requires new disclosures about derivative financial
instruments and amends certain existing disclosure requirements. Since
FAS 119 is a disclosure requirement only, its adoption did not have any
effect on either the Corporation's financial condition or its results of
operations.
Accounting for Debt and Equity Securities
The Corporation adopted, as of December 31, 1993, Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," ("FAS 115"). FAS 115 requires that investments
in debt securities be classified in one of three categories, each having
a different financial accounting method. The three categories are:
securities held to maturity; trading securities; and securities available
for sale. See "Notes to the Consolidated Financial Statements Nos. 2 (c)
and 5" for additional discussion of FAS 115.
<PAGE>
U.S. TRUST CORPORATION
Accounting for Postemployment Benefits
The Corporation adopted, as of December 31, 1993, Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits," ("FAS 112"). FAS 112 requires employers to accrue currently
the cost of benefits, including salary continuation and severance
benefits, provided to former or inactive employees after employment but
before retirement. The adoption of FAS 112 did not have a significant
impact on the results of operations or financial condition of the
Corporation.
Accounting Standards Not Yet Adopted
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan", ("FAS 114")," issued in May 1993,
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, issued in October
1994, address the accounting by creditors for impairment of certain
loans. 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 in FAS 114.
FAS 114 and FAS 118 are effective for fiscal years beginning after
December 15, 1994. Based upon a preliminary review of the present loan
portfolio, the Corporation does not believe that the adoption of FAS 114
and FAS 118 will have a significant impact on the financial condition or
results of operations of the Corporation.
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Consolidated Statement of Income
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Amounts) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans............................................................................... $ 94,525 $ 77,204 $ 70,088
Securities:
Taxable........................................................................... 74,980 67,868 77,669
Exempt from Federal Income Taxes.................................................. 5,038 7,267 10,842
Federal Funds Sold and Securities Purchased Under Agreements to Resell.............. 9,027 12,213 8,338
Deposits with Banks................................................................. 3,546 5,048 6,274
-------- -------- --------
Total Interest Income............................................................... 187,116 169,600 173,211
-------- -------- --------
INTEREST EXPENSE
Deposits............................................................................ 47,928 37,478 42,450
Federal Funds Purchased, Securities Sold Under Agreements to Repurchase
and Other Borrowings.............................................................. 25,992 10,509 16,356
Long Term Debt...................................................................... 5,084 5,371 5,517
-------- -------- --------
Total Interest Expense.............................................................. 79,004 53,358 64,323
-------- -------- --------
NET INTEREST INCOME................................................................. 108,112 116,242 108,888
Provision for Credit Losses......................................................... 2,000 4,000 6,000
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES............................... 106,112 112,242 102,888
-------- -------- --------
FEES AND OTHER INCOME
Fiduciary and Other Fees............................................................ 295,565 264,075 235,824
Securities Gains (Losses), Net...................................................... (42,118) 3,025 2,801
Other............................................................................... 16,748 8,863 6,939
-------- -------- --------
Total Fees and Other Income......................................................... 270,195 275,963 245,564
-------- -------- --------
Total Operating Income Net of Interest Expense and Provision for Credit Losses...... 376,307 388,205 348,452
-------- -------- --------
OPERATING EXPENSES
Salaries............................................................................ 135,415 120,770 104,506
Employee Benefits and Incentive Compensation........................................ 72,068 68,383 60,426
-------- -------- --------
Total Salaries and Benefits......................................................... 207,483 189,153 164,932
Net Occupancy....................................................................... 40,030 40,035 37,420
Equipment........................................................................... 18,371 18,536 18,591
Other............................................................................... 76,051 67,796 68,589
-------- -------- --------
Total Operating Expenses............................................................ 341,935 315,520 289,532
-------- -------- --------
Income From Operations Before Income Taxes and Cumulative Effect
of Accounting Changes............................................................. 34,372 72,685 58,920
Income Taxes........................................................................ 13,405 30,418 22,389
-------- -------- --------
Income From Operations Before Cumulative Effect of Accounting Changes............... 20,967 42,267 36,531
Cumulative Effect of Changes in Accounting for Postretirement Benefits and
Income Taxes (Notes 10 and 17).................................................... - - (7,780)
-------- -------- --------
Net Income.......................................................................... $ 20,967 $ 42,267 $ 28,751
======== ======== ========
Primary Net Income Per Share:
Income From Operations Before Cumulative Effect of Accounting Changes............. $ 2.12 $ 4.26 $ 3.76
Cumulative Effect of Changes in Accounting for Postretirement Benefits
and Income Taxes................................................................ - - (0.80)
-------- -------- --------
Net Income........................................................................ $ 2.12 $ 4.26 $ 2.96
======== ======== ========
Fully Diluted Net Income Per Share:
Income From Operations Before Cumulative Effect of Accounting Changes............. $ 2.09 $ 4.25 $ 3.74
Cumulative Effect of Changes in Accounting for Postretirement Benefits
and Income Taxes................................................................ - - (0.80)
-------- -------- --------
Net Income........................................................................ $ 2.09 $ 4.25 $ 2.94
======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Consolidated Statement of Condition
December 31,
-------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1994 1993
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks....................................................................... $ 164,610 $ 179,117
Interest Bearing Deposits with Banks.......................................................... 21,524 61,476
Securities:
Available for Sale, at Estimated Fair Value................................................. 1,033,526 836,532
Held to Maturity (Estimated Fair Value $87,069 in 1993)..................................... - 86,748
Federal Funds Sold and Securities Purchased Under Agreements to Resell........................ 120,000 237,000
Loans......................................................................................... 1,626,898 1,398,723
Less: Allowance for Credit Losses............................................................ 14,699 13,393
---------- ----------
Net Loans..................................................................................... 1,612,199 1,385,330
Premises and Equipment........................................................................ 109,346 109,767
Other Assets.................................................................................. 162,006 290,382
---------- ----------
Total Assets.................................................................................. $3,223,211 $3,186,352
========== ==========
LIABILITIES
Deposits:
Non-Interest Bearing........................................................................ $1,031,538 $1,241,085
Interest Bearing............................................................................ 1,408,833 1,245,529
---------- ----------
Total Deposits................................................................................ 2,440,371 2,486,614
Federal Funds Purchased, Securities Sold Under Agreements to Repurchase
and Other Borrowings........................................................................ 350,515 258,072
Accounts Payable and Accrued Liabilities...................................................... 148,078 147,979
Long Term Debt................................................................................ 60,924 65,100
---------- ----------
Total Liabilities............................................................................. 2,999,888 2,957,765
---------- ----------
Commitments and Contingencies (Notes 1, 13, 14, 15)
STOCKHOLDERS' EQUITY
Common Stock, Par Value $1.00; Authorized 40,000,000 Shares;
Issued 11,581,373 in 1994 and 11,436,293 in 1993............................................. 11,581 11,436
Capital Surplus................................................................................ 72,605 67,898
Retained Earnings.............................................................................. 244,639 242,112
Treasury Stock, at Cost (2,129,448 Shares in 1994 and 2,076,868 Shares in 1993)................ (86,139) (82,857)
Loan to ESOP................................................................................... (16,171) (18,697)
Unrealized Gain (Loss), Net of Taxes, on Securities Available for Sale......................... (3,192) 8,695
---------- ----------
Total Stockholders' Equity..................................................................... 223,323 228,587
---------- ----------
Total Liabilities and Stockholders' Equity..................................................... $3,223,211 $3,186,352
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------------------------------
Dollars in Thousands, Except Per Share Amounts) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance, Beginning of Year.......................................................... $ 11,436 $ 56,506 $ 55,864
Issuance of Shares Under Employee Benefit Plans (145,080,
135,080 and 128,497 Shares)....................................................... 145 467 642
Change in Par Value of Common Stock................................................. - (45,537) -
-------- -------- --------
Balance, End of Year................................................................ $ 11,581 $ 11,436 $ 56,506
======== ======== ========
CAPITAL SURPLUS
Balance, Beginning of Year.......................................................... $ 67,898 $ 23,280 $ 23,385
Employee Benefit Plans.............................................................. 4,707 4,011 2,282
Acquisitions........................................................................ - (4,930) (2,387)
Change in Par Value of Common Stock................................................. - 45,537 -
-------- -------- --------
Balance, End of Year................................................................ $ 72,605 $ 67,898 $ 23,280
======== ======== ========
RETAINED EARNINGS
Balance, Beginning of Year.......................................................... $242,112 $216,839 $203,441
Net Income.......................................................................... 20,967 42,267 28,751
Cash Dividends Declared ($2.00, $1.88 and $1.72 Per Share).......................... (18,750) (17,677) (15,860)
Tax Benefit on Dividends Paid to ESOP............................................... 310 683 507
-------- -------- --------
Balance, End of Year................................................................ $244,639 $242,112 $216,839
======== ======== ========
TREASURY STOCK
Balance, Beginning of Year.......................................................... $(82,857) $(78,443) $(77,452)
Purchases (90,000, 157,500 and 292,000 Shares)...................................... (4,573) (8,485) (13,277)
Issuance of Shares Under Employee Benefit Plans, Net (37,420,
33,692 and 27,780) Shares)........................................................ 1,291 1,175 821
Issuance of Shares for Acquisitions (75,831 in 1993 and 312,848 Shares in 1992)..... - 2,896 11,465
-------- -------- --------
Balance, End of Year................................................................ $(86,139) $(82,857) $(78,443)
======== ======== ========
LOAN TO ESOP
Balance, Beginning of Year.......................................................... $(18,697) $(21,029) $(23,181)
Principal Payment by ESOP........................................................... 2,526 2,332 2,152
-------- -------- --------
Balance, End of Year................................................................ $(16,171) $(18,697) $(21,029)
======== ======== ========
UNREALIZED GAIN (LOSS), NET OF TAXES, ON SECURITIES AVAILABLE FOR SALE
Balance, Beginning of Year.......................................................... $ 8,695 $ - $ -
Net Change in Fair Value, After Taxes............................................... (11,887) 8,695 -
-------- -------- --------
Balance, End of Year................................................................ $ (3,192) $ 8,695 $ -
======== ======== ========
Total Stockholders' Equity.......................................................... $223,323 $228,587 $197,153
======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Consolidated Statement of Cash Flows
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------------------------------
(In Thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income..................................................................... $ 20,967 $ 42,267 $ 28,751
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses.................................................... 2,000 4,000 6,000
Depreciation and Amortization of Premises and Equipment and Other Assets....... 15,158 14,896 13,326
Net Amortization of Premium on Securities...................................... 4,637 10,768 9,752
Net Change in Accrued Interest and Accounts Receivable......................... (11,001) (27,066) 2,456
Net Change in Accounts Payable and Other Liabilities........................... 1,397 39,405 25,267
Other, Net..................................................................... 31,951 (2,738) (84)
----------- --------- ---------
Net Cash Provided by Operating Activities...................................... 65,109 81,532 85,468
----------- --------- ---------
Cash Flows From Investing Activities:
Net Change in Interest Bearing Deposits with Banks............................. 39,952 384 33,480
Purchases of Securities:
Available for Sale........................................................... (1,283,359) - -
Held to Maturity............................................................. (402,502) - -
Investment................................................................... - (854,446) (961,837)
Proceeds from Sales of Securities:
Available for Sale........................................................... 578,777 - -
Held to Maturity............................................................. 379,954 - -
Investment................................................................... - 202,080 169,968
Proceeds from Maturities, Calls and Mandatory Redemptions of Securities:
Available for Sale........................................................... 653,972 - -
Held to Maturity............................................................. 46,229 - -
Investment................................................................... - 781,561 607,660
Net Change in Federal Funds Sold and Securities Purchased
Under Agreements to Resell................................................... 117,000 (237,000) 304,525
Net Change in Loans............................................................ (228,175) (138,262) (96,816)
Purchases of Premises and Equipment............................................ (12,626) (19,405) (7,595)
Other, Net..................................................................... 7,492 5,399 (14,995)
----------- --------- ---------
Net Cash Provided by (Used in) Investing Activities............................ (103,286) (259,689) 34,390
----------- --------- ---------
Cash Flows From Financing Activities:
Net Change in Non-Interest Bearing Deposits.................................... (209,547) 20,408 183,928
Net Change in Money Market and Other Savings Deposits.......................... 147,674 115,971 58,284
Net Change in Time Deposits.................................................... 15,630 (4,916) 5,066
Net Change in Federal Funds Purchased, Securities Sold Under
Agreements to Repurchase and Other Borrowings................................ 92,443 32,777 (248,486)
Repurchases/Repayment of Long Term Debt........................................ (4,176) (5,282) (3,822)
Issuance of Common Stock....................................................... 4,686 4,297 3,119
Purchases of Treasury Stock.................................................... (4,573) (8,485) (13,277)
Dividends Paid................................................................. (18,467) (17,205) (15,570)
----------- --------- ---------
Net Cash Provided by (Used in) Financing Activities............................ 23,670 137,565 (30,758)
----------- --------- ---------
Net Change in Cash and Cash Equivalents........................................ (14,507) (40,592) 89,100
Cash and Cash Equivalents at January 1......................................... 179,117 219,709 130,609
----------- --------- ---------
Cash and Cash Equivalents at December 31....................................... $ 164,610 $ 179,117 $ 219,709
=========== ========= =========
Income Taxes Paid.............................................................. $ 27,551 $ 29,678 $ 23,670
Interest Expense Paid.......................................................... 76,711 53,536 65,436
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
1. Pending Disposition and Merger Transaction
On November 18, 1994, U.S. Trust Corporation (the "Corporation") and The
Chase Manhattan Corporation ("Chase") entered into an agreement under
which Chase will acquire the Corporation's institutional custody, mutual
funds servicing and unit trust businesses (the "Processing Business") and
certain back office operations (collectively the "Chase Acquired
Business") for $363.5 million in Chase common stock. The transaction,
which is subject to bank regulatory approvals, U.S. Trust shareholder
approval and a favorable ruling from the Internal Revenue Service
regarding its tax-free status, is expected to be consummated during the
second quarter of 1995.
The transaction will be effected in two virtually simultaneous
steps. First, the Corporation will spin off to its shareholders the
assets not included in the Chase Acquired Business (the "Disposition")
(the asset management, private banking, special fiduciary and corporate
trust businesses and related subsidiaries) in the form of a new holding
company ("New USTC"). The Corporation's shareholders will receive shares
in New USTC on a share-for-share basis. Immediately following the
Disposoition, the Corporation, which will include only the assets and
liabilities of the Chase Acquired Business, will be merged with Chase
(the "Merger").
In conjunction with the Disposition and Merger, Chase will provide
securities processing, custodial, data processing and other services to
New USTC under the five-year term of the 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.
Under the agreement, the Corporation will transfer to Chase at the
closing date readily available funds and assets employed by the Chase
Acquired Business equal to the liabilities assumed by Chase. The
Processing Business deposits provided a long-term source of funds to the
Corporation which financed a portion of the Corporation's long- and
medium-term interest earning assets. In anticipation of consummating the
Disposition and Merger and to substantially effect a rebalancing of the
Corporation's overall asset and liability structure, in the fourth
quarter of 1994, the Corporation sold approximately $800 million of U.S.
Government Treasury and Agency securities.
<PAGE>
U.S. TRUST CORPORATION
Estimated Transaction Costs
In conjunction with the announcement of the Disposition and Merger, the
Corporation disclosed that it may incur up to $110 million of
restructuring charges on an after-tax basis in connection with the
Disposition and Merger. The following table lists the estimated
nonrecurring adjustments that satisfy the definition of "exit costs" as
set forth in Emerging Issues Task Force Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring)"
("EITF 94-3") that are directly related to the Disposition and Merger.
The difference between the $110 million and the charges described below
represents charges that do not presently meet the definition of "exit
costs" as defined by EITF 94-3.
<TABLE>
(Thousands) (1)
----------
<C> <S>
Loss on sale of securities held to maturity
and available for sale $ 44,177 (2)
Severance, post-retirement benefits and related costs 21,100
Professional fees 12,000 (3)
Cost of terminating leases for premises 12,000
Cost of terminating computer hardware leases, computer
software licenses, contracts and capitalized software 32,986
Cost of incentive compensation plans that are being
terminated 5,100
Payout for stock options 39,045
--------
166,408
Applicable tax benefits 72,116
--------
Total after-tax charges 94,292
Less after-tax charges recorded in the fourth quarter of 1994 (27,934)
--------
After-tax charges to be recorded in 1995 $ 66,358
========
(1) Except where otherwise noted, these expenses will be accrued or paid in the first
and second quarters of 1995.
(2) The losses on the sale of securities were incurred in the fourth quarter of 1994.
(3) $6.0 million of professional fees were accrued or paid in the fourth quarter of
1994. The balance of the professional fees will be incurred in the first and
second quarters of 1995.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
While the amounts set forth in the table 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 of the transaction. 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 Corporation continues to review its staffing requirements. This
review will be completed by the closing date of the transaction and may
result in lower staffing levels. Accordingly, the cost of severance and
related benefits may range from the above listed $21.1 million to
approximately $24.0 million.
The payout for stock options is based upon various assumptions,
including: the estimated fair market value of the shares of the
Corporation's common stock, the number of stock options that are
outstanding as of the closing date of the transaction and the average
exercise price of such outstanding options. As a result, the actual
amount of the cash payment will not be determinable until that date.
Other Contingencies and Commitments
In connection with the Disposition and Merger, United States Trust
Company of New York (the "Trust Company") will redeem its outstanding
8 1/2% Capital Notes Due 2001. The Corporation also will satisfy and
discharge its 8% Notes Due 1996. See "Notes to the Consolidated
Financial Statements No. 11" for additional discussion of long term debt.
Under the terms of the Merger Agreement, if the transaction is
terminated due to the Corporation's failure to satisfy certain
conditions, including the failure of the Corporation's stockholders to
approve the Disposition and Merger, the Corporation will pay Chase
$7.5 million as liquidated damages.
2. Accounting Policies
The accounting and reporting policies of the Corporation and its
subsidiaries conform with generally accepted accounting principles and
general practice within the banking industry.
The following is a summary of the significant policies:
(a) Basis of Presentation - The consolidated financial statements
include the accounts of the Corporation and its majority owned
subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.
(b) Trust Assets - Property (other than cash deposits) held by the Trust
Company or the Corporation's other subsidiaries in a fiduciary or agency
capacity for customers are not assets of the Corporation and are not
included in the consolidated statement of condition.
<PAGE>
U.S. TRUST CORPORATION
(c) Securities - Effective December 31, 1993, the Corporation adopted
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," ("FAS 115"). In
accordance with the provisions of FAS 115, debt securities that the
Corporation has both the positive intent and ability to hold to maturity
are classified as Securities Held to Maturity and carried at historical
cost, adjusted for amortization of premiums and accretion of discounts
("amortized cost"). Gains and losses related to Securities Held to
Maturity are not recorded until realized. Debt securities that may be
sold prior to maturity as part of asset/liability management or in
response to other factors are classified as Securities Available for Sale
and carried at their estimated fair value with unrealized gains and
losses reported in a separate component of stockholders' equity, net of
deferred taxes.
The Corporation has evaluated all of its investments in debt and
equity securities and has classified them as either held to maturity or
available for sale. Premiums and discounts on these securities are
amortized or accreted in accordance with the policy set forth in "Notes
to the Consolidated Financial Statements No. 1(d)." Realized gains and
losses from sales of securities held to maturity and securities available
for sale are determined on a specific identification cost basis.
Prior to the adoption of FAS 115, the Corporation had classified its
investments in debt and equity securities as investment securities, that
were carried at amortized cost. Premiums and discounts on investment
securities were amortized or accreted in accordance with the policy set
forth in "Notes to the Consolidated Financial Statements No.1(d)."
Realized gains and losses from sales of investment securities were
determined on a specific identification cost basis.
See "Notes to the Consolidated Financial Statements No. 5" for
additional discussion.
(d) Interest Bearing Financial Instruments - Interest income/expense is
accrued on interest bearing financial instruments based upon the
contractual terms of the instrument. Premiums and discounts are
amortized or accreted, respectively, on a basis that approximates the
effective yield method.
<PAGE>
U.S. TRUST CORPORATION
(e) Nonperforming Assets - Nonperforming assets consist of non-accrual
financial instruments, restructured assets and real estate acquired in
debt restructurings. Interest accruals are discontinued when principal
or interest is contractually past due ninety days or more. In addition,
interest accruals may be discontinued when principal or interest is
contractually past due less than ninety days if in the opinion of
management the amount due is not likely to be paid in accordance with the
terms of the contractual agreement, even though the financial instruments
are currently performing. Any accrued but unpaid interest previously
recorded on a non-accrual financial instrument is reversed against
interest income. Subsequent cash receipts of interest on non-accrual
financial instruments are applied either to the outstanding principal
balance or recorded as interest income, depending on management's
assessment of the ultimate collectibility of principal. Non-accrual
financial instruments are generally returned to accrual status only when
all delinquent principal and interest payments are brought current and
the collectibility of future principal and interest on a timely basis is
reasonably assured.
If a financial instrument is restructured as a result of the
deterioration of a borrower's financial condition, interest will accrue
at the renegotiated or effective rate, as appropriate.
Real estate acquired in debt restructurings ("ORE") is recorded in
other assets at the lower of the carrying amount of the loan or the ORE's
estimated fair value less estimated costs to sell. After the acquisition
date of the ORE, operating expenses and revenue, additional writedowns,
as appropriate, and gains and losses on the ultimate disposition of ORE
are reported in other expenses.
(f) Allowance for Credit Losses - The allowance for credit losses is
established through charges to income based on management's evaluation of
the adequacy of the allowance in meeting present and possible future
losses in the existing credit portfolio, which includes loans,
commitments to extend credit and standby letters of credit. The adequacy
of the allowance is continually reviewed by management, taking into
consideration current economic conditions, past loss experience and the
risks inherent in the credit portfolio.
(g) Premises and Equipment - Premises and equipment, including leasehold
improvements, are stated at cost less accumulated amortization and
depreciation. Amortization and depreciation expenses are computed on a
straight-line method over the lesser of the term of the lease or the
estimated useful lives of the assets. Maintenance and repairs expenses
are charged to operating expenses as incurred.
<PAGE>
U.S. TRUST CORPORATION
(h) Postretirement Plans - The Corporation has a trusteed,
noncontributory, qualified defined benefit retirement plan that provides
retirement benefits to substantially all employees. The retirement plan
benefit formula is based upon years of service, average compensation over
the final years of service and the social security covered compensation.
The Corporation's funding policy is consistent with the funding
requirements of Federal laws and regulations. Retirement plan assets are
managed by the Trust Company and consist primarily of listed stocks and
commingled debt and international and domestic equity pension trust
funds. The Corporation also maintains an unfunded, non-trusteed,
noncontributory, non-qualified retirement plan for participants whose
retirement benefit payments under the qualified plan are expected to
exceed the limits imposed by Federal tax law.
Effective January 1, 1992, the Corporation adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." See "Notes to the
Consolidated Financial Statements No. 17" for additional discussion.
(i) Income Taxes - The Corporation files a consolidated Federal income
tax return. Applicable taxes of the individual companies are determined
as if they filed a separate return and every subsidiary is charged or
credited for its amount of computed tax.
Deferred income taxes are provided for items that are recognized for
income tax purposes in years other than those in which they are
recognized for financial reporting purposes.
Effective January 1, 1992, the Corporation adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
See "Notes to the Consolidated Financial Statements No. 10" for
additional discussion.
(j) Derivative Financial Instruments - The Corporation accounts for its
interest rate swap agreements ("Swaps") and forward rate agreements
("FRAs") as hedges. The differential to be paid or received over the
life of the Swap is recognized on an accrual basis as an adjustment to
interest expense. FRAs are accounted for by deferring the cash
received/paid on settlement date and amortizing the cash settlement as an
adjustment to interest expense until the maturity date of the contract.
(k) Net Income Per Share - Primary net income per share is computed by
dividing net income by the total weighted average common and common
equivalent shares outstanding. Common equivalent shares include the
dilutive effect of outstanding stock options and the assumed issuance of
deferred stock awards earned from incentive plans. Total common and
common equivalent shares outstanding amounted to 10,019,592 in 1994,
9,968,033 in 1993 and 9,697,987 in 1992.
Fully diluted net income per share is computed under the assumption
that all contingent increases in common stock have occurred to the extent
that they have a dilutive effect on net income per share. Total common
shares outstanding on a fully diluted basis amounted to 10,198,301 in
1994, 9,994,591 in 1993 and 9,768,499 in 1992.
<PAGE>
U.S. TRUST CORPORATION
(l) Cash and Cash Equivalents - For purposes of the Consolidated
Statement of Cash Flows, the Corporation considers the Consolidated
Statement of Condition caption "Cash and Due from Banks" as cash and cash
equivalents. For purposes of the U.S. Trust Corporation (Parent Company
Only) (See "Notes to the Consolidated Financial Statements No. 20")
Statement of Cash Flows, the Corporation considers the Statement of
Condition caption "Total Due From Banks" as cash and cash equivalents.
(m) Reclassifications - Prior periods have been reclassified to conform
with the current presentation.
3. Acquisitions
On July 7, 1993, the Corporation exchanged 75,831 shares of its common
stock, valued at approximately $4.0 million, for 100% of the shares of
Capital Trust Company ("Capital Trust"), a Portland, Oregon-based trust
and investment management and consulting company. On December 1, 1992,
the Corporation exchanged 106,541 shares of its common stock, valued at
approximately $5.0 million, for 100% of the shares of Campbell,
Cowperthwait & Co., Inc. ("Campbell"), a New York City-based investment
advisory company. These acquisitions were accounted for as poolings-of
-interests. Neither acquisition had a significant effect on the
Corporation's consolidated financial statements. Accordingly, the
results of operations for Capital Trust and Campbell have been recorded
as of their respective dates of acquisition and prior period financial
statements were not restated.
On March 31, 1992, the Corporation purchased 100% of the stock of
Delafield, Harvey, Tabell Inc., an investment advisory company located in
Princeton, New Jersey, for 206,307 shares of the Corporation's common
stock valued at $9.0 million. The acquisition was accounted for as a
purchase. Substantially all of the purchase price was allocated to the
value of investment management contracts that are being amortized on a
straight-line basis over their estimated ten-year life. The acquisition
did not have a material impact on the Corporation's 1992 operating
results.
4. Cash and Due from Banks
The average non-interest earning balances held at the Federal Reserve
Bank for the years ended December 31, 1994 and 1993 were $65 million and
$73 million, respectively. These amounts represent reserve requirements
which must be maintained on deposits. There are no other restrictions on
cash and due from banks.
5. Securities
The Corporation adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
("FAS 115") as of December 31, 1993. Prior to adopting FAS 115, all of
the Corporation's investments in debt and equity securities had been
classified as investment securities that were recorded at their amortized
cost.
<PAGE>
U.S. TRUST CORPORATION
A comparison of the amortized cost, estimated fair value and gross
unrealized gains and losses as of December 31, 1994 and 1993,
respectively, for securities available for sale and securities held to
maturity follows.
<TABLE>
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
(In Thousands) Cost Value Gains Losses
-------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Securities available for sale:
December 31, 1994:
U.S. Government and Federal Agency obligations:
U.S. Treasury obligations $ 606,999 $ 601,120 $ 17 $ 5,896
Government National Mortgage Association obligations (Ginnie Mae) (1) 105,810 107,143 2,666 1,333
U.S. Government Sponsored Agencies and Corporations (2) 134,612 133,119 73 1,566
---------- ---------- ------- -------
847,421 841,382 2,756 8,795
---------- ---------- ------- -------
States and Municipal obligations (3) 75,086 75,879 1,437 644
Collateralized mortgage obligations (4) 58,842 58,580 69 331
All other 57,954 57,685 - 269
---------- ---------- ------- -------
Total $1,039,303 $1,033,526 $ 4,262 $10,039
========== ========== ======= =======
December 31, 1993:
U.S. Government and Federal Agency obligations:
U.S. Treasury obligations $ 210,265 $ 212,312 $ 2,100 $ 53
Government National Mortgage Association obligations (Ginnie Mae) (1) 153,239 162,379 9,401 261
U.S. Government Sponsored Agencies and Corporations (2) 189,755 190,467 784 72
---------- ---------- ------- -------
553,259 565,158 12,285 386
---------- ---------- ------- -------
States and Municipal obligations (3) 85,341 89,748 4,417 10
Collateralized mortgage obligations (4) 115,516 115,728 447 235
All other 65,907 65,898 - 9
---------- ---------- ------- -------
Total $ 820,023 $ 836,532 $17,149 $ 640
========== ========== ======= =======
Securities held to maturity:
December 31, 1993:
U.S. Government and Federal Agency obligations:
Government National Mortgage Association
obligations (Ginnie Mae) (1) $ 73,300 $ 73,591 $ 291 $ -
U.S. Government Sponsored Agencies and Corporations (2) 13,448 13,478 32 2
---------- ---------- ------- ------
$ 86,748 $ 87,069 $ 323 $ 2
========== ========== ======= ======
<PAGE>
U.S. TRUST CORPORATION
(1) Backed by the full faith and credit of the U.S. Government.
(2) Securities available for sale are comprised of Federal National Mortgage Association (Fannie Mae), Federal Home Loan
Mortgage Corporation (Freddie Mac) and Small Business Administration (SBA) obligations. Securities held to maturity
are comprised of SBA obligations.
(3) Comprised mainly of highly rated investment grade general obligation and revenue bonds.
(4) Collateralized by either Ginnie Mae, Fannie Mae or Freddie Mac obligations.
</TABLE>
The amortized cost and estimated fair value of securities available for
sale at December 31, 1994, by the earlier of contractual maturity or call
date, follows.
<TABLE>
December 31, 1994
------------------------------
Estimated
Amortized Fair
(In Thousands) Cost Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 584,786 $ 581,388
Due after one year through two years 97,538 95,031
Due after two years through five years 37,716 38,381
Due after five years through ten years 1,395 1,358
Due after ten years 14,764 14,687
---------- ----------
Sub-Total 736,199 730,845
Collateralized mortgage obligations, mortgage-backed securities
and other asset-backed securities (1)(2)(3) 299,265 298,842
---------- ----------
Sub-Total 1,035,464 1,029,687
Federal Reserve Bank and Federal Home Loan Bank stock 3,839 3,839
---------- ----------
Total $1,039,303 $1,033,526
========== ==========
(1) In excess of 93% of these securities are collateralized mortgage obligations and mortgage-backed securities.
(2) At December 31, 1994, the Corporation's available for sale collateralized mortgage obligations, mortgage-
backed securities and other asset-backed securities had a weighted-average life of 5.5 years reflecting
anticipated future prepayments based on a consensus of dealers in the market.
(3) Expected maturities for collateralized mortgage obligations, mortgage-backed securities and other asset-
backed securities may differ from contractual maturities because borrowers have the right to prepay obligations
with or without prepayment penalties.
</TABLE>
The components of securities gains (losses), net for the years ended
December 31, 1994, 1993 and 1992 follows.
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Years Ended December 31,
------------------------------------------------
(In Thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains from sales $ 2,116 $3,347 $2,871
Gross realized (losses) from sales (44,263) (370) (206)
Net gains on maturities, calls and mandatory redemptions 29 48 136
-------- ------ ------
Securities gains (losses), net $(42,118) $3,025 $2,801
======== ====== ======
</TABLE>
In December 1994, the Corporation tranferred $28,884,000 (carrying value)
of securities classified as held to maturity to the securities available
for sale category. As a result of this transfer, an unrealized loss of
$503,000 (before-tax) was recorded in "Stockholders' Equity - Unrealized
Gain (Loss), Net of Taxes, on Securities Available for Sale." See "Notes
to the Consolidated Financial Statements No. 1" for additional discussion
regarding the Corporation's disposition of its portfolio of held to
maturity securities.
In December 1993, the Corporation sold $351,460,000 of securities,
which created an account receivable from various brokers of $152,358,000.
The entire amount of this receivable was collected in January 1994.
At December 31, 1994 and 1993, securities in the amount of
$303,304,000 and $285,543,000, respectively, were pledged to secure
public deposits, as collateral for borrowings, to qualify for fiduciary
powers and for other purposes.
6. Loans
The following is an analysis of the composition of the loan portfolio.
<TABLE>
December 31,
----------------------------------------------------------
(In Thousands) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Private banking:
Residential real estate mortgages $ 851,074 $ 699,193 $ 612,142 $ 449,270 $ 353,663
Other 420,442 416,922 319,233 300,859 308 071
---------- ---------- ---------- ---------- ----------
Total private banking loans 1,271,516 1,116,115 931,375 750,129 661,734
---------- ---------- ---------- ---------- ----------
Short-term trust credit facilities* 215,105 211,741 259,729 321,270 341,511
Loans to financial institutions for
purchasing and carrying securities 126,640 57,505 52,652 49,982 20,967
All other 13,637 13,362 16,705 42,264 35,952
---------- ---------- ---------- ---------- ----------
Total $1,626,898 $1,398,723 $1,260,461 $1,163,645 $1,060,164
========== ========== ========== ========== ==========
<PAGE>
U.S. TRUST CORPORATION
* The Trust Company provides short-term credit facilities to certain of its trust customers in anticipation of receiving
interest and dividends due from investments under administration and custody agreements. At December 31, 1994, more
than 75% of the Trust Company's short-term trust credit facilities related to clients of the Processing Business. The
Trust Company has never experienced a credit loss as a result of these arrangements. Approximately 83% of the
December 31, 1994 short-term trust credit facilities were repaid on the next business day.
</TABLE>
The aggregate outstanding principal amounts of non-accrual and
restructured loans follow:
<TABLE>
December 31,
------------------------------------------------------
(In Thousands) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Private banking non-accrual loans $5,592 $4,929 $7,498 $ 9,194 $ 5,054
All other non-accrual and restructured loans 779 1,076 1,103 10,304 11,058
------ ------ ------ ------- -------
Total $6,371 $6,005 $8,601 $19,498 $16,112
====== ====== ====== ======= =======
</TABLE>
The effect of these loans on interest income is presented below:
<TABLE>
Years Ended December 31,
----------------------------
(In Thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income which would have been earned under original terms $571 $689 $648
Interest income recognized during year 245 264 276
---- ---- ----
Reduction in interest income $326 $425 $372
==== ==== ====
</TABLE>
An analysis of real estate acquired in debt restructurings follows:
<TABLE>
December 31,
-------------------------------------------------------
(In Thousands) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Private banking $ 2,984 $ 3,101 $ 3,291 $ 840 $ 240
All other 9,378 8,441 10,386 8,375 9,108
------- ------- ------- ------ ------
Total $12,362 $11,542 $13,677 $9,215 $9,348
======= ======= ======= ====== ======
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
7. Allowance for Credit Losses
An analysis of the allowance for credit losses follows:
<TABLE>
(In Thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $13,393 $11,676 $ 8,661
------- ------- -------
Charge-offs (1,499) (4,100) (3,566)
Recoveries 805 1,817 581
------- ------- -------
Net charge-offs (694) (2,283) (2,985)
Provision charged to income 2,000 4,000 6,000
------- ------- -------
Balance, December 31 $14,699 $13,393 $11,676
======= ======= =======
</TABLE>
8. Premises and Equipment
An analysis of premises and equipment follows:
<TABLE>
December 31,
--------------------
(In Thousands) 1994 1993
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,000 $ 1,000
Building 12,144 12,140
Leasehold improvements 97,463 93,115
Furniture and equipment 65,355 62,776
-------- --------
175,962 169,031
Less accumulated amortization and depreciation 66,616 59,264
-------- --------
Total $109,346 $109,767
======== ========
Amortization and depreciation expense $ 13,056 $ 11,952
======== ========
</TABLE>
Amortization and depreciation expense amounted to $10,669,000 for 1992.
9. Federal Funds Purchased, Securities Sold Under
Agreements to Repurchase and Other Borrowings
An analysis of borrowings follows:
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
(In Thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Year-end balance $ 19,535 $ 31,535 $ 70,945
Daily average balance 313,765 151,005 253,446
Maximum end-of-month balance 941,860 470,325 812,810
Weighted average interest rate during year 4.50% 3.12% 3.78%
Weighted average interest rate at year-end 5.96 3.00 2.04
Securities sold under agreements to repurchase:
Year-end balance $204,280 $189,679 $134,473
Daily average balance 197,416 187,868 192,733
Maximum end-of-month balance 368,750 305,249 378,146
Weighted average interest rate during year 3.87% 2.82% 3.26%
Weighted average interest rate at year-end 5.57 2.86 2.91
Federal funds purchased term and other borrowings:
Year-end balance $126,700 $ 36,858 $ 19,877
Daily average balance 84,813 17,326 20,327
Maximum end-of-month balance 311,511 37,716 101,138
Weighted average interest rate during year 5.01% 2.88% 2.45%
Weighted average interest rate at year-end 5.70 2.59 3.97
</TABLE>
Federal funds purchased and securities sold under agreements to
repurchase generally are overnight borrowing transactions.
10. Income Taxes
The Corporation adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," ("FAS 109") retroactive to January 1,
1992. FAS 109 requires, among other things, that an asset and liability
approach be applied to accounting for income taxes and that the
recognition of deferred tax assets be evaluated using a "more likely than
not" realizability criterion. As a result of adopting FAS 109, 1992 net
income was increased by $4.6 million ($.47 per share).
The components of the provision for income taxes that are
attributable to income from operations are as follows:
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Years Ended December 31,
-------------------------------
(In Thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $11,347 $16,280 $10,543
State and local 2,897 12,318 10,957
------- ------- -------
Total current income taxes 14,244 28,598 21,500
------- ------- -------
Deferred:
Federal (687) 2,180 2,205
State and local (152) (360) (1,316)
------- ------- -------
Total deferred income taxes (839) 1,820 889
------- ------- -------
Total $13,405 $30,418 $22,389
======= ======= =======
</TABLE>
Deferred income taxes that are attributable to income from operations
resulted from:
<TABLE>
Years Ended December 31,
-------------------------------
(In Thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred employee benefits $(980) $(3,878) $(3,248)
Trust and fiduciary activities (812) (337) (499)
Provision for credit losses (575) (706) (1,367)
Other real estate (17) 1,554 107
Depreciation expense 745 2,999 1,593
Leasing transactions 398 11 (17)
Alternative minimum tax - 2,563 3,718
Federal tax rate change - (403) -
Other, net 402 17 602
----- ------- -------
Total $(839) $ 1,820 $ 889
===== ======= =======
</TABLE>
A reconciliation of the Federal statutory income tax rate with the
Corporation's effective income tax rate attributable to income from
operations follows:
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1994 1994 1993 1993 1992 1992
------------------------------------------------------------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. Federal income tax rate $12,030 35.0 % $25,440 35.0 % $20,033 34.0 %
Increase (decrease) in effective rate resulting from:
Tax-exempt interest income (1,668) (4.9) (2,466) (3.4) (3,562) (6.0)
State and local taxes, net of Federal
income tax benefit 1,784 5.2 7,773 10.7 6,363 10.8
Miscellaneous items 1,259 3.7 (329) (0.5) (445) (0.8)
------- ---- ------- ---- ------- ----
$13,405 39.0 % $30,418 41.8 % $22,389 38.0 %
======= ==== ======= ==== ======= ====
</TABLE>
The components of income tax expense for the years ended December 31,
1994, 1993 and 1992 that are applicable to operations, cumulative effect
of changes in accounting principles and stockholders' equity follows:
<TABLE>
Years Ended December 31,
-------------------------------
(In Thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes applicable to:
Operations $ 13,405 $30,418 $ 22,389
Cumulative effect of changes in accounting principles - Adoption of:
FAS 106 - - (10,579)
FAS 109 - - (4,609)
Stockholders' equity:
Change in fair value of securities available for sale (10,399) 7,814 -
Tax benefit on dividends paid to the ESOP on unallocated shares (310) (683) (507)
-------- ------- --------
Total $ 2,696 $37,549 $ 6,694
======== ======= ========
</TABLE>
The components of the net deferred tax liability (asset) as of
December 31, 1994 and 1993 follows:
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
December 31,
-----------------------
(In Thousands) 1994 1993
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax (assets):
Deferred employee benefits $(22,137) $(21,212)
Trust and fiduciary activities (10,025) (9,239)
Allowance for credit losses (6,746) (6,186)
Leasing transactions (3,745) (3,400)
Other real estate (1,190) (1,232)
Other (425) (1,427)
-------- --------
(44,268) (42,696)
-------- --------
Deferred tax liabilities:
Premises and equipment 18,798 18,012
Other 442 494
-------- --------
19,240 18,506
-------- --------
Net deferred tax (asset) $(25,028) $(24,190)
======== ========
</TABLE>
The income tax effect of securities gains (losses), net was
$(19,898,000), $1,433,000 and $1,304,000 in 1994, 1993 and 1992,
respectively.
11. Long Term Debt
The composition of long term debt follows.
<TABLE>
December 31,
-----------------------
(In Thousands) 1994 1993
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8 1/2% Capital Notes due 2001 $10,803 $12,453
8% Notes due 1996 29,950 29,950
8.35% Senior Unsecured ESOP Notes due 1999 16,171 18,697
Federal Home Loan Bank Borrowings 4,000 4,000
------- -------
Total $60,924 $65,100
======= =======
</TABLE>
The capital notes were issued by the Trust Company, and are subordinated
to deposits and certain other liabilities. The capital notes require
annual sinking fund payments of $1,650,000; and are redeemable in whole
or in part, at the option of the Trust Company, subject to the approval
of any bank supervisory authority having jurisdiction, at an initial
redemption price of 104.25% of the principal amount, decreasing to 100%
of the principal amount in 1996 and thereafter, together with accrued
interest.
<PAGE>
U.S. TRUST CORPORATION
The 8% notes are unsecured and unsubordinated obligations of the
Corporation. They are not redeemable or callable by, or at the option
of, the Corporation at any time.
The 8.35% Senior Unsecured ESOP Notes due 1999 ("ESOP Notes") are
obligations of the Corporation that require annual payments of principal
and interest. The Corporation loaned the proceeds from the ESOP Notes to
the trust established to administer the 401(k) Plan and ESOP of United
States Trust Company of New York and Affiliated Companies ("401(k) Plan")
on the same terms. The 401(k) Plan used the proceeds to purchase 690,498
shares of common stock from the Corporation's treasury stock holdings for
an Employee Stock Ownership Plan ("the ESOP"). (See "Notes to the
Consolidated Financial Statements No. 17.") The ESOP Notes call for
principal repayments amounting to $2,737,000, $2,966,000, $3,213,000,
$3,482,000 and $3,773,000, payable annually on February 1, 1995, through
February 1, 1999.
The Federal Home Loan Bank ("FHLB") borrowings represent four
separate drawings of $1 million each, by U.S Trust Company of Texas,
N.A., with maturity dates between 1995 and 1999. The FHLB borrowings
bear interest ranging between 5.56% and 6.43%. Each FHLB borrowing is
collateralized by the pledge of qualifying assets.
12. Stockholders' Equity
At the Annual Meeting of Shareholders on April 27, 1993, the shareholders
approved an amendment to the Certificate of Incorporation which reduced
the par value of the Corporation's common stock from $5.00 per share to
$1.00 per share. Effective as of that date $45,537,000 was transferred
from the Common Stock account to the Capital Surplus account. In
addition, the shareholders approved an increase in the Corporation's
authorized common shares to 40 million from 20 million. Neither of these
actions had any effect on the total amount of Stockholders' Equity.
In April 1992, the Corporation's Board of Directors approved a 1.0
million common stock buyback program. This was in addition to the 2.7
million common stock buyback program that had been previously approved.
Through December 31, 1994, 3,031,787 shares of common stock have been
repurchased in the open market at an average cost of $39.87 per share.
Of the total common shares repurchased, 90,000 common shares were
purchased in 1994 at a total cost of $4.6 million.
The Corporation is authorized to issue up to 5.0 million, $1.00 par
value, preferred shares as of December 31, 1993. No preferred shares
have been issued.
<PAGE>
U.S. TRUST CORPORATION
The Corporation's banking subsidiaries are subject to limitations on
the amount of dividends they can pay to the Corporation without prior
approval of the bank regulatory authorities. Under this limitation, the
banking subsidiaries can declare, in aggregate, dividends in 1995 without
approval of the regulatory authorities of approximately $33.9 million,
plus an additional amount equal to the banking subsidiaries' net income
for 1995 as of the dividend declaration date. In addition, in 1992 the
Trust Company applied for, and was granted permission by the Federal
Reserve Bank of New York, authority to pay a special dividend to the
Corporation of up to $50.0 million. Under this special authority, the
Trust Company has paid dividends to the Corporation of $5.0 million in
1994, $5.0 million in 1993 and $25.0 million in 1992.
13. 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.
14. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Corporation enters into various
transactions involving off-balance sheet financial instruments to meet
the needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These transactions are subject to varying degrees of
market and credit risk. As compensation for the risks assumed, these
instruments generate interest or fee revenue or expense. The controls
used to monitor the credit and market risks of off-balance sheet
financial instruments are consistent with those associated with the
Corporation's on-balance sheet activities.
Credit-Related Financial Instruments
Credit-related financial instruments include firm commitments to extend
credit ("commitments"), standby letters of credit ("standbys") and
indemnifications in connection with securities lending activities
("securities lending"). The credit risk associated with these
instruments varies depending on the creditworthiness of the customer and
the value of the collateral held, if any. Collateral requirements vary
by type of instrument. The contractual amounts of these instruments
represent the amounts at risk should the contract be fully drawn upon and
the client default, with all collateral being worthless.
<PAGE>
U.S. TRUST CORPORATION
Commitments are legally binding agreements to lend to a customer
that generally have fixed expiration dates or other termination clauses,
may require payment of a fee and are not secured by collateral until
funds are advanced. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis prior to approving a commitment
or advancing funds under a commitment and determining the related
collateral requirement. Collateral held includes marketable securities,
real estate mortgages or other assets. The majority of the Corporation's
commitments are related to mortgage lending to private banking clients
and backup lines or credit for various financial institutions. The
mortgage lending commitments are generally expected to be utilized, while
the backup lines of credit typically expire unused. Commitments totaled
$121.4 million and $129.6 million at December 31, 1994 and 1993,
respectively.
Standbys are conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party. Those
guaranties are issued to satisfy margin requirements incurred by
investment banking and broker/dealer companies for their activities
conducted on organized exchanges, to guarantee performance under lease
and other agreements by professional business corporations and for other
purposes. The credit risk involved in issuing standbys is essentially
the same as that involved in extending loans. Standbys outstanding at
December 31, 1994 and 1993 amounted to $79.1 million and $113.5 million,
respectively. Collateral is obtained based on management's credit
assessment of the counterparty. At December 31, 1994, $58.8 million of
the standbys outstanding were partially or fully secured by collateral
consisting of cash, marketable equity securities, marketable debt
securities (including corporate and U.S. Treasury debt securities) and
other assets, compared with $92.7 million at December 31, 1993.
Approximately 56% of the standbys outstanding at December 31, 1994 expire
within one year compared with approximately 54% at December 31, 1993.
The Trust Company has established a program through which
participating trust customers may lend their securities to
counterparties. In certain cases, the Trust Company indemnifies the
trust customer for losses if the counterparty defaults and the collateral
received is insufficient to compensate for the loss of the loaned
securities. Collateral value is monitored daily and additional
collateral is obtained when appropriate. Securities lending obligations
subject to the Trust Company's indemnification amounted to
$2,233.2 million at December 31, 1994 and $1,231.1 million at
December 31, 1993. Collateral, principally cash, held against these
security lending obligations totaled $2,270.0 million and
$1,253.2 million, respectively, at December 31, 1994 and 1993,
respectively.
<PAGE>
U.S. TRUST CORPORATION
Derivative Financial Instruments
From time to time, as part of its overall asset and liability management
process, the Corporation utilizes derivative financial instruments, such
as Swaps and FRAs as hedges. Swaps are used to hedge the net yield
earned on pools of fixed rate residential real estate mortgage loans
originated in the year of the Swaps' inception. FRAs are used to hedge
either the rate earned from the investment of a portion of the
Corporation's non-interest bearing deposit flows in pools of short term
investments, such as U.S. Treasury Bills and short term interest bearing
deposits with banks, or the rate earned on other anticipated short term
investments that are funded by other sources of funds.
The market values associated with these instruments can vary
depending on movements in interest rates. The measurement of the market
risks associated with these instruments is meaningful only when all
related and offsetting transactions are identified. The notional or
contractual amounts of these instruments are indications of the volume of
transactions and do not represent amounts at risk. The amounts at risk
upon default are generally limited to the unrealized market valuation
gains of the instruments and will vary based on changes in interest
rates. The risk of default depends on the creditworthiness of the
counterparty to the instrument. The Corporation evaluates the
creditworthiness of its counterparties as part of its normal credit
review procedures.
At December 31, 1994 and 1993, the Corporation was a counterparty to
Swaps with a total notional principal amount of $86 million and
$103 million, respectively. Swaps involve the exchange of fixed and
floating rate interest payment obligations computed on notional principal
amounts. The Corporation enters into Swaps with counterparties as a
principal. Outstanding Swaps had a weighted average maturity of
approximately 13 months at December 31, 1994 and 19 months at
December 31, 1993.
FRAs involve the exchange of net interest differentials calculated
as the difference between a contractual interest rate and a market
interest rate determined on the contract's settlement date. At
ecember 31, 1994, the Corporation had no FRAs outstanding, compared with
a total notional principal amount of $150 million outstanding at
December 31, 1993. Outstanding FRAs at December 31, 1993 had a weighted
average maturity of approximately 90 days.
15. Rental Commitments on Premises and Equipment
Substantially all of the Corporation's operations are conducted from
premises that are leased. The initial lease periods expire between 1995
and 2016. The lease for the Corporation's headquarters building expires
in 2014 and is renewable at the Corporation's option for two successive
terms of ten years each at the then current market rate. In addition,
the Corporation leases data processing equipment under leases with
expiration dates ranging from two to seven years. Management expects
that in the normal course of business most leases will be renewed or
replaced by other leases.
<PAGE>
U.S. TRUST CORPORATION
Rent expense on operating leases for the years 1994, 1993 and 1992,
net of sublease rentals, was $35,326,000, $35,799,000 and $35,021,000,
respectively. Operating lease rent expense includes adjustments
amounting to $2,676,000 in 1994, $2,584,000 in 1993 and $2,222,000 in
1992 for increases in real estate taxes, labor costs and certain
operating expenses of the landlords, net of similar adjustments applied
on sublease rentals.
A schedule of future minimum rental payments that have noncancelable
lease terms in excess of one year as of December 31, 1994 follows.
Rental commitments related ot the Chase Acquired Business have been
included in the schedule and amounted to approximately $50 million of the
total minimum payments required.
<TABLE>
Minimum
(In Thousands) Rentals
-------------------------------------------------------------------------------------------------------------------------
<S> <C>
Year Ending December 31:
1995 $ 28,822
1996 29,285
1997 27,929
1998 28,077
1999 28,154
Later years 262,225
--------
Total minimum payments required $404,492
========
</TABLE>
The foregoing minimum rental amounts include, and are subject to
escalations based upon increases in certain operating expenses incurred
by the lessors.
16. Incentive Compensation Plans
The Corporation sponsors a 401(k) Plan and ESOP covering all employees
who satisfy a one year service requirement. The 401(k) Plan provides
that, depending upon the Corporation satisfying certain profitability
criteria and other factors, eligible employees receive annual awards
calculated as a percentage of such employees' compensation. Awards to
senior officers are calculated under the provisions of the Annual
Incentive Plan ("AIP"), while awards to non-senior officers and other
employees are governed by the terms of the Incentive Award Plan ("IAP").
Awards under either the AIP or IAP plan are comprised of an ESOP award,
which is mandatorily contributed to the 401(k) Plan, and of an elective
award, which may be taken in cash or, subject to certain limitations,
deferred and contributed to the 401(k) Plan. Total incentive awards were
$26.8 million, $26.0 million and $23.8 million in 1994, 1993 and 1992,
respectively.
<PAGE>
U.S. TRUST CORPORATION
The ESOP had originally purchased 690,498 shares of the
Corporation's common stock with borrowed funds (See "Notes to the
Consolidated Financial Statements No. 11"). Debt service requirements
are satisfied through the dividends received by the ESOP and the ESOP
award to the extent required. Any remaining ESOP award is invested in
the U.S. Trust Corporation Stock Fund of the 401(k) Plan. Unallocated
ESOP shares are as collateral for its debt. As the debt is repaid,
shares are released from collateral and allocated to active employees.
All dividends declared on allocated and unallocated ESOP shares are
recorded as deductions from retained earnings. The related tax benefits
for dividends paid on allocated shares are recorded in the Consolidated
Statement of Income as a reduction of Income Tax Expense. The tax
benefits for dividends paid on unallocated shares are recorded in the
Consolidated Statement of Condition as an increase in Retained Earnings.
The external borrowings related to the ESOP are included in the
Consolidated Statement of Condition under the caption "Long Term Debt."
The original cost of the ESOP shares has been recorded in the
Consolidated Statement of Condition caption Stockholders' Equity - Loan
to ESOP. As annual debt service payments are made, the balances in Long
Term Debt and Loan to ESOP are reduced. For earnings per share purposes,
shares held by the ESOP, both allocated and unallocated, are considered
to be outstanding.
At December 31, 1994, 414,199 shares of stock held by the ESOP have
been allocated to participant accounts, including 69,075 shares that have
been allocated based upon the anticipated February 1, 1995 debt service
payment. Unallocated shares at December 31, 1994 amounted to 276,299.
The Corporation has no obligation to repurchase any ESOP shares from
either the ESOP or any participants in the 401(k) Plan.
The Corporation's 1989 Stock Compensation Plan ("the 1989 Plan")
governs the granting of stock option, restricted common stock and Long
-Term Performance ("LTP") awards to eligible employees. The 1989 Plan,
as amended in April 1992, authorizes the issuance of a maximum of 1.3
million common shares plus common shares previously authorized but not
utilized under certain predecessor stock compensation plans. At
December 31, 1994, the Corporation had 343,761 shares of common stock
available for issuance as restricted stock awards, incentive stock
options, non-qualified stock options and performance share units.
Awards of restricted common stock to key executives are contingent
upon their continued employment, generally between two to seven years.
The fair value of the shares at the date of grant is recorded as
compensation expense over the restriction period. At December 31, 1994,
a total of 90,296 shares with an unamortized cost of $1,844,000 were
outstanding with restrictions. During 1994, 34,550 shares with an
aggregate fair value at their date of grant of approximately $1,771,000
were awarded. The expense recognized for the plan amounted to $1,521,000
in 1994, $1,465,000 in 1993 and $1,240,000 in 1992.
Under the 1989 Plan, the Corporation may award either incentive
stock options or non-qualified stock options. The options expire ten
years from the date of grant and their exercise price is not less than
the fair value of a common share on the date of grant.
<PAGE>
U.S. TRUST CORPORATION
In 1989, the shareholders of the Corporation approved the Stock
Option Plan for Non-Employee Directors of U.S. Trust Corporation ("the
Directors Plan"). The Directors Plan provides for the granting of non
qualified options to non-employee directors, as defined in the Directors
Plan. The Directors Plan authorizes the issuance of a maximum of 125,000
shares of common stock. The options expire ten years from the date of
grant and their exercise price is not less than the fair value of a
common share on the date of grant.
The following is a combined summary of option transactions which
occurred under the 1989 Plan and the Directors Plan during 1994, 1993 and
1992.
<TABLE>
Shares
Under Option Price
Option Per Share
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1. 1992 1,188,133 $16.72 - 42.13
Granted 210,000 44.75 - 49.63
Exercised (128,497) 16.72 - 38.75
Cancelled (17,238) 30.75 - 44.75
--------- --------------
Balance, December 31, 1992 1,252,398 16.72 - 49.63
Granted 179,200 53.88
Exercised (135,080) 16.72 - 44.75
Cancelled (9,345) 28.00 - 53.88
--------- --------------
Balance, December 31, 1993 1,287,173 19.00 - 53.88
Granted 205,000 51.25 - 51.60
Exercised (145,080) 19.00 - 53.88
Cancelled (27,084) 19.00 - 53.88
--------- --------------
Balance, December 31, 1994 1,320,009 $27.75 - 53.88
========= ==============
</TABLE>
Options exercisable at December 31, 1994 and 1993 amounted to 812,305
shares and 750,121 shares, respectively.
LTP awards are calculated as a percentage of such officers'
compensation to the extent that certain goals defined in the plan are
met. LTP awards are based upon three-year cycles. Awards are charged to
expense over the three-year cycle subject to the Corporation meeting the
goals specified for the award cycle. The Corporation provided for awards
of $5,097,000, $4,222,000 and $3,691,000 for the LTP in the years 1994,
1993 and 1992.
17. Health Care and Life Insurance Benefits
The Corporation provides certain health care and life insurance benefits
for all employees, certain qualifying retired employees and their
dependents.
<PAGE>
U.S. TRUST CORPORATION
The Corporation adopted Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," ("FAS 106") retroactive to January 1, 1992, using the
immediate recognition method. FAS 106 requires that employers accrue,
during the years that the employee renders service, the expected cost of
providing health care and life insurance and other benefits to an
employee upon retirement. Under the immediate recognition transition
method, the accumulated postretirement benefit obligation of
$23.0 million, net of deferred taxes of $10.6 million, was charged
against 1992 net income. In addition, employee benefits expense was
increased by $2.2 million ($1.4 million after taxes) reflecting the
ongoing impact of FAS 106.
Effective January 1, 1993, the Corporation's postretirement health
care plans were amended to change the health care insurance cost-sharing
formula for retirees and their qualified dependents. Under the revised
cost-sharing formula, the Corporation will not absorb any insurance
premium cost increases after 1999. The impact of this amendment
($8.5 million reduction in the accumulated postretirement benefit
obligation) is being amortized over the estimated remaining service lives
of the affected employee group of 11 years, commencing in 1993.
The following tables detail the components of expense for the
Corporation's unfunded postretirement health care and life insurance
plans and the composition of the accumulated postretirement benefit
obligation.
<TABLE>
Years Ended December 31,
-----------------------------------------------------------------------------------
1994 1993 1992
------------------------ ----------------------- -----------------------
(In Thousands) Health Life Total Health Life Total Health Life Total
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Components of postretirement
benefit expense:(1)
Service cost $ 395 $ 131 $ 526 $ 436 $ 109 $ 545 $ 915 $ 102 $ 1,017
Interest cost 949 586 1,535 1,099 465 1,564 1,704 331 2,035
Amortization of prior
service cost (812) - (812) (771) - (771) - - -
Amortization of loss 4 247 251 - 97 97 - - -
------- ------- ------- ------- ------- ------- ------- ------ -------
Net postretirement benefit
expense $ 536 $ 964 $ 1,500 $ 764 $ 671 $ 1,435 $ 2,619 $ 433 $ 3,052
======= ======= ======= ======= ======= ======= ======= ====== =======
<PAGE>
U.S. TRUST CORPORATION
Composition of accumulated post-
retirement benefit obligation:(1)
Retirees (including covered
dependents) $ 3,996 $ 4,465 $ 8,461 $ 4,252 $ 4,234 $ 8,486 $ 5,390 $1,994 $ 7,384
Fully eligible active employees 2,919 1,344 4,263 3,209 926 4,135 2,381 713 3,094
Other active employees 5,845 1,782 7,627 8,237 2,039 10,276 5,455 1,635 7,090
------- ------- ------- ------- ------- ------- ------- ------ -------
Total obligation 12,760 7,591 20,351 15,698 7,199 22,897 13,226 4,342 17,568
Unrecognized prior service
cost amendment 7,354 - 7,354 7,713 - 7,713 8,484 - 8,484
Unrecognized net gain (loss) 1,531 (3,729) (2,198) (1,659) (3,599) (5,258) (123 (725) (848)
------- ------- ------- ------- ------- ------- ------- ------ -------
Accrued liability $21,645 $ 3,862 $25,507 $21,752 $ 3,600 $25,352 $21,587 $3,617 $25,204
======= ======= ======= ======= ======= ======= ======= ====== =======
(1) The postretirement benefit expense is determined using the assumptions as of the beginning of the year. The
accumulated postretirement benefit obligation is determined using the assumptions as of the end of the year.
</TABLE>
The assumed rate of future increases in per capita cost of health care
benefits (the health care cost trend rate) is 12.9% in 1995, decreasing
gradually to 6% in the year 2009. An increase in the health care cost
trend rate by 1% will increase the annual net postretirement benefit
expense by approximately $66,000 and the accumulated postretirement
benefit obligation by approximately $621,000.
A discount rate of 8.25% was used at December 31, 1994 to measure
the accumulated postretirement benefit obligation.
18. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," ("FAS 107") requires the disclosure
of the estimated fair values of financial instruments. Substantially all
of the Corporation's assets, liabilities and off-balance sheet products
are considered financial instruments as defined by FAS 107. Fair value
is defined as the price at which a financial instrument could be
liquidated in an orderly manner over a reasonable time period under
present market conditions.
FAS 107 requires that the fair value of financial instruments be
estimated using various valuation methodologies. Quoted market prices,
when available, are used as the measure of fair value. Where quoted
market prices are not available, fair values have been estimated using
primarily discounted cash flow analyses and other valuation techniques.
These derived fair values are significantly affected by assumptions used,
principally the timing of future cash flows and the discount rate.
Because assumptions are inherently subjective, the estimated fair values
cannot be substantiated by comparison to third party evidence and may not
be indicative of the value that could be realized in a sale or settlement
of the financial instrument.
<PAGE>
U.S. TRUST CORPORATION
The relevance of this information is also severely constrained
because FAS 107 provides only a partial estimate of the fair value of the
Corporation. The FAS 107 disclosures do not provide an estimated fair
value of the various ongoing businesses in which the Corporation
operates. For example, FAS 107 specifically excludes the fair value of
certain fee generating businesses, the value of long-term trust
relationships and anticipated future business activities from its scope.
A discussion of the fair value estimation methodologies used for
material financial instruments follows.
Loans
The estimated fair value of the Corporation's performing fixed rate loans
(primarily residential real estate mortgages) was calculated by
discounting contractual cash flows adjusted for current prepayment
estimates. The discount rates were based on the interest rates charged
to current customers for comparable loans. The Corporation's performing
adjustable rate loans reprice frequently at current market rates.
Therefore, the fair value of these loans has been estimated to be
approximately equal to their carrying amount. Estimated fair value for
nonperforming loans was based upon a discounted estimated cash flow
method and, for residential real estate mortgage loans, current
appraisals. The discount rate used was commensurate with the risk
associated with the estimated cash flows. See "Notes to the Consolidated
Financial Statements No. 6" for additional discussion of the
Corporation's entire loan portfolio.
Securities
The estimated fair value of securities is based upon quoted bid market
prices, where available, or fair value quotes obtained from third party
pricing services. See "Notes to the Consolidated Financial Statements
No. 5" for additional discussion of securities.
Long Term Debt
The estimated fair value of long term debt was calculated using a
discounted cash flow method, where the estimated cash flows considered
contractual principal and interest payments, as well as required sinking
fund payments. The discount rate used consisted of two components.
First, the credit risk spread was determined for each debt issue i.e.,
the spread that the Corporation paid over the comparable risk-free rate
at the date of issuance. The credit risk spread was added to the current
risk-free market interest rate for the comparable remaining maturity.
See "Notes to the Consolidated Financial Statements No. 11" for
additional discussion of long term debt.
A comparison of the fair value and carrying amounts of the
Corporation's significant on-balance sheet financial instruments follows.
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
December 31,
----------------------------------------------
1994 1993
-------------------- --------------------
Carrying Fair Carrying Fair
(In Millions) Amount Value Amount Value
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $1,612* $1,582 $1,385* $1,404
Securities:
Available for sale 1,034 1,034 837 837
Held to maturity - - 87 87
Long term debt 61 59 65 70
* Net of allowance for credit losses.
</TABLE>
Interest Rate Swap Agreements
The Corporation is a net fixed rate payor under its Swaps and at
December 31, 1994 and 1993 had a net payable of $111,000 and $468,000,
respectively. Swaps are used as a hedge of the Corporation's funding of
various fixed rate interest earning assets. The estimated fair value of
Swaps are obtained from dealer quotes. These values represent the
estimated amount that the Corporation would have to pay to terminate the
Swaps, taking into account current interest rates and, when appropriate,
the current creditworthiness of the counterparties. See "Notes to the
Consolidated Financial Statements No. 14" for additional discussion of
Swaps.
Forward Rate Agreements
FRAs are used as a hedge of the Corporation's short-term interest earning
assets. The estimated fair value of FRAs are obtained from dealer
quotes. There were no FRAs outstanding at December 31, 1994. The fair
value of FRAs at December 31, 1993 was nominal. See "Notes to the
Consolidated Financial Statements No. 14" for additional discussion of
FRAs.
A comparison of the fair value and notional amounts of the
Corporation's significant off-balance sheet financial instruments
follows.
<TABLE>
December 31,
----------------------------------------------
1994 1993
-------------------- --------------------
Notional Fair Notional Fair
(In Millions) Amount Value Amount Value
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swap agreements $86 $1.0 $103 $(4.0)
Forward rate agreements - - 150 0.1
<PAGE>
U.S. TRUST CORPORATION
Other Financial Instruments
The Corporation's other financial instruments are generally short-term in
nature and contain very little credit risk. These instruments consist of
cash and due from banks, interest bearing deposits with banks, Federal
funds sold, securities purchased under agreements to resell, accrued
interest receivable and accounts receivable, demand deposit liabilities,
time deposit liabilities, Federal fund purchased, securities sold under
agreements to repurchase, other borrowings and accrued interest payable
and accounts payable. Consequently, carrying amounts of these assets and
liabilities approximate estimated fair value.
19. Retirement Plan
The following table details the components of pension expense (credit)
and the funded status of the Corporation's qualified and non-qualified
retirement plans and the major assumptions used to determine these
amounts.
<PAGE>
U.S. TRUST CORPORATION
</TABLE>
<TABLE>
Qualified Plan Non-Qualified Plan
---------------------------------- -----------------------------------
(In Thousands) 1994 1993 1992 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of pension expense (credit):
Service cost $ 5,615 $ 5,072 $ 4,267 $ 838 $ 260 $ 157
Interest cost 9,534 9,212 8,313 658 355 396
Actual return on plan assets 14,854 (31,233) (15,892) - - -
Net amortization and deferral (33,447) 15,189 821 339 110 191
-------- -------- -------- ------- ------- -------
Net pension expense (credit) $ (3,444) $ (1,760) $ (2,491) $ 1,835 $ 725 $ 744
======== ======== ======== ======= ======= =======
Funded status of retirement plans:
Plan assets, at market value $174,915 $194,141 $167,180 $ - $ - $ -
Actuarial present value of benefit
obligations:
Accumulated benefit obligations:
Vested 98,956 99,757 78,468 4,361 2,684 1,749
Non-vested 7,360 7,519 6,559 507 209 205
-------- -------- -------- ------- ------- -------
Total 106,316 107,276 85,027 4,868 2,893 1,954
Provision for future salary increases 15,503 18,370 17,916 3,609 2,130 2,626
-------- -------- -------- ------- ------- -------
Projected benefit obligations 121,819 125,646 102,943 8,477 5,023 4,580
-------- -------- -------- ------- ------- -------
Excess of plan assets over projected
benefit obligations 53,096 68,495 64,237 (8,477) (5,023) (4,580)
Unrecognized cumulative net losses (gains) (13,446) (32,072) (27,366) 995 1,283 1,459
Prior service cost not yet recognized
in periodic pension costs (396) 1,786 1,976 2,212 245 270
Unrecognized net liability (asset)
at date of initial application (16,791) (19,189) (21,588) 362 414 466
-------- -------- -------- ------- ------- -------
Prepaid (accrued) pension cost $ 22,463 $ 19,020 $ 17,259 $(4,908) $(3,081) $(2,385)
======== ======== ======== ======= ======= =======
Major assumptions at year-end (1):
Discount rate 8.25% 7.5% 8.5% 8.25% 7.5% 8.5%
Rate of increase in compensation 4.5% 4.5% 5.5% 4.5% 4.5% 5.5%
Expected rate of return on plan assets 9% 9% 9% 9% 9% 9%
-------------------------------------------------------------------------------------------------------------------------
(1) The pension expense (credit) is determined using the assumptions as of the beginning of the year. The funded status
is determined using the assumptions as of the end of the year.
</TABLE>
The Corporation uses the projected unit credit cost method to compute the
vested benefit obligation, where the vested benefit obligation is the
actuarial present value of the vested benefits to which the employee is
entitled based on the employee's expected date of separation or
retirement.
<PAGE>
U.S. TRUST CORPORATION
20. Parent Company Only
Condensed statements of income, condition and cash flows for U.S. Trust
Corporation (Parent Company Only) follow.
<TABLE>
Years Ended December 31,
STATEMENT OF INCOME ---------------------------------
(In Thousands) 1993 1993 1992
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Equity in Net Income (Loss) of Subsidiaries:
Bank $21,607 $41,746 $34,046 *
Non-Bank 8,386 1,862 (1,358)*
Interest Income 2,740 2,658 3,228
------- ------- -------
Total Income 32,733 46,266 35,916
------- ------- -------
Expenses:
Interest Expense 3,779 4,131 4,186
Other Expenses 14,357 585 2,240
------- ------- -------
Total Expenses 18,136 4,716 6,422
------- ------- -------
Income Before Income Taxes 14,597 41,550 29,494
Income Tax Expense (Benefit) (6,370) (717) 743
------- ------- -------
Net Income $20,967 $42,267 $28,751
======= ======= =======
* Equity in Net Income (Loss) of Subsidiaries includes the impact of adopting FAS 106 and FAS 109.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
December 31,
STATEMENT OF CONDITION ----------------------
(In Thousands) 1994 1993
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Due from Subsidiary $ 807 $ 219
Due from Other Banks 61 14
-------- --------
Total Due from Banks 868 233
-------- --------
Equity Investments in Subsidiaries:
Bank 239,370 229,239
Non-Bank 34,541 34,165
-------- --------
Total Equity Investments in Subsidiaries 273,911 263,404
-------- --------
Securities Available for Sale, at Estimated Fair Value 27,110 24,078
Other Assets 19,735 5,590
-------- --------
Total Assets $321,624 $293,305
======== ========
LIABILITIES
Due to Subsidiary $ - $ 1,500
Other Liabilities 52,180 14,571
Long Term Debt 46,121 48,647
-------- --------
Total Liabilities 98,301 64,718
-------- --------
TOTAL STOCKHOLDERS' EQUITY 223,323 228,587
-------- --------
Total Liabilities and Stockholders' Equity $321,624 $293,305
======== ========
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
Years Ended December 31,
STATEMENT OF CASH FLOWS ---------------------------------
(In Thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 20,967 $ 42,267 $ 28,751
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Equity in Net (Income) of Subsidiaries (29,993) (43,608) (32,688)
Dividends Received from Subsidiaries 11,810 30,000 43,836
Deferred Income Taxes (2,281) 2,445 3,577
Net Change in Accruals, Receivables and Other Assets (11,493) (5,750) 622
Net Change in Accruals, Payables and Other Liabilities 37,326 6,399 2,188
Other, Net 310 683 508
-------- -------- --------
Net Cash Provided by Operating Activities 26,646 32,436 46,794
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in Subsidiaries (3,800) (17,028) (11,900)
Net Change in Securities Purchased Under Agreements to Resell - 19,289 (19,289)
Securities:
Proceeds from Sales 8,554 - 3,778
Proceeds from Maturities, Calls and Mandatory Redemptions 1,601 2,234 1,927
Purchases (13,969) (14,517) -
Net Change in Loans to Subsidiaries - 700 (700)
Principal Payment from ESOP 2,526 2,332 2,152
-------- -------- --------
Net Cash Provided by (Used in) Investing Activities (5,088) (6,990) (24,032)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Loans from Subsidiaries (1,500) 1,500 -
Net Change in Short-Term Borrowings - (5,000) 5,000
Repayment of Long Term Debt (2,526) (2,332) (2,152)
Issuance of Common Stock Under Employee Benefit Plans 6,143 5,653 3,745
Purchases of Treasury Stock (4,573) (8,485) (13,277)
Dividends Paid (18,467) (17,205) (15,570)
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities (20,923) (25,869) (22,254)
-------- -------- --------
Net Change in Cash and Cash Equivalents 635 (423) 508
Cash and Cash Equivalents at January 1 233 656 148
-------- -------- --------
Cash and Cash Equivalents at December 31 $ 868 $ 233 $ 656
======== ======== ========
Income Taxes Paid (Refund) Received $ 4,475 $ 5,285 $ (592)
Interest Expense Paid 3,972 4,258 4,392
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
21. Quarterly Consolidated Statement of Income (Unaudited)
<TABLE>
1994 1993
------------------------------------ -----------------------------------
(In Thousands, Except Fourth Third Second First Fourth Third Second First
Per Share Amounts) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 25,721 $ 28,013 $ 26,348 $ 28,030 $ 27,683 $31,588 $27,284 $29,687
Provision for Credit Losses 500 500 500 500 500 1,000 1,250 1,250
-------- -------- -------- -------- -------- ------- ------- -------
Net Interest Income After Provision for
Credit Losses 25,221 27,513 25,848 27,530 27,183 30,588 26,034 28,437
Total Fees and Other Income 40,510 76,976 75,433 77,276 75,714 68,683 67,353 64,213
-------- -------- -------- -------- -------- ------- ------- -------
Total Operating Income Net of Interest
Expense and Provision for Credit Losses 65,731 104,489 101,281 104,806 102,897 99,271 93,387 92,650
Total Operating Expenses 94,313 82,522 82,329 82,771 87,711 78,328 76,534 72,947
-------- -------- -------- -------- -------- ------- ------- -------
Income (Loss) Before Income Taxes (28,582) 21,967 18,952 22,035 15,186 20,943 16,853 19,703
Income Taxes (13,036) 9,022 8,054 9,365 6,038 9,027 7,078 8,275
-------- -------- -------- -------- -------- ------- ------- -------
Net Income (Loss) $(15,546) $ 12,945 $ 10,898 $ 12,670 $ 9,148 $11,916 $ 9,775 $11,428
======== ======== ======== ======== ======== ======= ======= =======
Net Income (Loss) Per Share:
Primary $ (1.65) $ 1.31 $ 1.10 $ 1.28 $ .92 $ 1.20 $ .99 $ 1.16
======== ======== ======== ======== ======== ======= ======= =======
Fully Diluted $ (1.65) $ 1.30 $ 1.10 $ 1.28 $ .92 $ 1.20 $ .99 $ 1.15
======== ======== ======== ======== ======== ======= ======= =======
</TABLE>
Report of Independent Accountants
To the Board of Directors and Stockholders of U.S. Trust Corporation:
We have audited the accompanying consolidated statements of condition of
U.S. Trust Corporation and Subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on the financial statements based on our audits.
<PAGE>
U.S. TRUST CORPORATION
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
U.S. Trust Corporation and Subsidiaries at December 31, 1994 and 1993,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Notes 10 and 17 to the consolidated financial
statements, U.S. Trust Corporation and Subsidiaries has adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
and Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," retroactive
to January 1, 1992.
Coopers & Lybrand
New York, New York
February 14, 1995
<PAGE>
U.S. TRUST CORPORATION
Analysis of Change in Net Interest Income
For the Years Ended December 31,
The following table, on a taxable equivalent basis, is an analysis of the
year-to-year changes in the categories of interest income and interest
expense resulting from changes in volume and rate.
<TABLE>
1994 Compared to 1993 1993 Compared to 1992
Increase (Decrease) Due to Change in: Increase (Decrease) Due to Change in:
------------------------------------- -------------------------------------
Average Average Average Average
(In Thousands) Balance Rate Total Balance Rate Total
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Interest Bearing Deposits with Banks.. $(3,079) $ 1,577 $ (1,502) $ (137) $ (1,089) $ (1,226)
Loans (1)(2).......................... 14,912 2,373 17,285 11,112 (4,068) 7,044
Federal Funds Sold and Securities
Purchased Under Agreements to Resell (5,917) 2,731 (3,186) 5,662 (1,787) 3,875
Securities (3):
U.S. Government Obligations......... 21,851 (10,190) 11,661 (7,451) (1,601) (9,052)
Federal Agency Obligations.......... (4,288) 2,070 (2,218) 16,368 (8,490) 7,878
State and Municipal Obligations..... (2,677) (958) (3,635) (5,056) (421) (5,477)
Collateralized Mortgage Obligations. (5,333) 2,670 (2,663) (4,890) (4,219) (9,109)
Other Securities.................... 440 178 618 339 (310) 29
------- -------- -------- ------- -------- --------
Total Securities...................... 9,993 (6,230) 3,763 (690) (15,041) (15,731)
------- -------- -------- ------- -------- --------
Total Interest Earning Assets......... 15,909 451 16,360 15,947 (21,985) (6,038)
------- -------- -------- ------- -------- --------
Interest Bearing Sources of Funds:
Interest Bearing Deposits............. 2,966 7,484 10,450 5,090 (10,062) (4,972)
Federal Funds Purchased, Securities
Sold Under Agreements to
Repurchase and Other Borrowings..... 9,053 6,430 15,483 (3,500) (2,347) (5,847)
Long Term Debt........................ 253 (34) (287) (84) (62) (146)
------- -------- -------- ------- -------- --------
Total Sources on Which Interest
is Paid............................. 11,766 13,880 25,646 1,506 (12,471) (10,965)
------- -------- -------- ------- -------- --------
Change in Net Interest Income......... $ 4,143 $(13,429) $ 19,286 $14,441 $ (9,514) $ 4,927
======= ======== ======== ======= ======== ========
Changes that are not due solely to volume or rate have been allocated ratably to their respective categories.
(1) The average principal balances of non-accrual and reduced rate loans are included in the above figures.
(2) Loans include the Loan to ESOP, which had an average balance of $16,385,000 in 1994, $18,902,000 in 1993 and
$21,211,000 in 1992.
(3) Includes securities classified as available for sale and held to maturity during 1994 and at December 31, 1993 at
amortized cost and securities classified as investment securities in 1992. The average balance and average rate for
securities available for sale has been calculated using their amortized cost.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
Three-Year Net Interest Income and Average Balances
For the Years Ended December 31,
<TABLE>
1994
--------------------------------------------------
Average Average
(Dollars in Thousands) Balance Interest Rate
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest Bearing Deposits with Banks............................... $ 82,632 $ 3,546 4.29
---------- --------
Securities (1):
U.S. Government Obligations...................................... 768,798 34,718 4.52
Federal Agency Obligations....................................... 598,097 36,194 6.05
State and Municipal Obligations (2).............................. 81,189 8,068 9.94
Collateralized Mortgage Obligations (3).......................... 79,972 3,533 4.42
Other Securities................................................. 52,774 2,135 4.05
---------- --------
Total Securities................................................... 1,580,830 84,648 5.35
---------- --------
Loans (2)(4)(5).................................................... 1,324,285 94,549 7.14
---------- --------
Federal Funds Sold and Securities Purchased Under
Agreements to Resell............................................. 243,944 9,027 3.70
---------- --------
Total Interest Earning Assets...................................... 3,231,691 191,770 5.93
---------- --------
Allowance for Credit Losses........................................ (14,093)
Cash and Due From Banks............................................ 321,549
Other Assets....................................................... 465,752
----------
Total Assets....................................................... $4,004,899
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits.......................................... $1,373,421 47,928 3.49
Federal Funds Purchased, Securities Sold Under Agreements to
Repurchase and Other Borrowings.................................. 595,994 25,992 4.36
Long Term Debt..................................................... 62,513 5,084 8.13
---------- --------
Total Sources on Which Interest is Paid............................ 2,031,928 79,004 3.89
---------- --------
Total Non-Interest Bearing Deposits................................ 1,565,158
Other Liabilities.................................................. 164,443
Stockholders' Equity (5)........................................... 243,370
----------
Total Liabilities and Stockholders' Equity......................... $4,004,899
==========
Net Interest Income................................................ $112,766
========
Net Yield on Interest Earning Assets............................... 3.49
<PAGE>
U.S. TRUST CORPORATION
------------------------------------------------------------------------------------------------------------------------
(1) Includes securities classified as available for sale and held to maturity during 1994
and at December 31, 1993 at amortized cost and securities classified as investment
securities in 1992. The average balance and average rate for securities available
for sale has been calculated using their amortized cost.
(2) Yields on state and municipal obligations are stated on a taxable equivalent basis,
employing the Federal statutory income tax rate adjusted for the effect of state and
local taxes, resulting in effective tax rate of approximately 47% for 1994, 1993
and 1992.
(3) Primarily comprised of variable rate collateralized mortgage obligations.
(4) The average principal balances of non-accrual and reduced rate loans are included
in the above figures.
(5) Loans include the Loan to ESOP, which had an average balance of $16,385,000 in 1994,
$18,902,000 in 1993 and $21,211,000 in 1992.
</TABLE>
<TABLE>
1993
--------------------------------------------------
Average Average
(Dollars in Thousands) Balance Interest Rate
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest Bearing Deposits with Banks............................... $ 154,376 $ 5,048 3.27
---------- --------
Securities (1):
U.S. Government Obligations...................................... 394,717 23,057 5.84
Federal Agency Obligations....................................... 668,951 38,412 5.74
State and Municipal Obligations (2).............................. 107,463 11,703 10.89
Collateralized Mortgage Obligations (3).......................... 200,714 6,196 3.09
Other Securities................................................. 41,571 1,517 3.65
---------- --------
Total Securities................................................... 1,413,416 80,885 5.72
---------- --------
Loans (2)(4)(5).................................................... 1,114,575 77,264 6.93
---------- --------
Federal Funds Sold and Securities Purchased Under
Agreements to Resell............................................. 403,846 12,213 3.02
---------- --------
Total Interest Earning Assets...................................... 3,086,213 175,410 5.68
---------- --------
Allowance for Credit Losses........................................ (13,601)
Cash and Due From Banks............................................ 324,802
Other Assets....................................................... 423,888
----------
Total Assets....................................................... $3,821,302
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits.......................................... $1,277,467 37,478 2.93
Federal Funds Purchased, Securities Sold Under Agreements to
Repurchase and Other Borrowings.................................. 356,199 10,509 2.95
Long Term Debt..................................................... 65,619 5,371 8.19
---------- --------
Total Sources on Which Interest is Paid............................ 1,699,285 53,358 3.14
---------- --------
<PAGE>
U.S. TRUST CORPORATION
Total Non-Interest Bearing Deposits................................ 1,760,892
Other Liabilities.................................................. 135,749
Stockholders' Equity (5)........................................... 225,376
----------
Total Liabilities and Stockholders' Equity......................... $3,821,302
==========
Net Interest Income................................................ $122,052
========
Net Yield on Interest Earning Assets............................... 3.95
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
1992
---------------------------------------------------
Average Average
(Dollars in Thousands) Balance Interest Rate
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest Bearing Deposits with Banks............................... $ 157,903 $ 6,274 3.97%
---------- --------
Securities (1):
U.S. Government Obligations...................................... 521,049 32,109 6.16
Federal Agency Obligations....................................... 435,502 30,534 7.01
State and Municipal Obligations (2).............................. 153,795 17,180 11.17
Collateralized Mortgage Obligations (3).......................... 329,014 15,305 4.65
Other Securities................................................. 33,858 1,488 4.40
---------- --------
Total Securities................................................... 1,473,218 96,616 6.56
---------- --------
Loans (2)(4)(5).................................................... 962,301 70,220 7.30
---------- --------
Federal Funds Sold and Securities Purchased Under
Agreements to Resell............................................. 240,520 8,338 3.47
---------- --------
Total Interest Earning Assets...................................... 2,833,942 181,448 6.40
---------- --------
Allowance for Credit Losses........................................ (10,446)
Cash and Due From Banks............................................ 286,450
Other Assets....................................................... 378,032
----------
Total Assets....................................................... $3,487,978
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits.......................................... $1,140,696 42,450 3.72
Federal Funds Purchased, Securities Sold Under Agreements to
Repurchase and Other Borrowings.................................. 466,506 16,356 3.51
Long Term Debt..................................................... 66,647 5,517 8.28
---------- --------
Total Sources on Which Interest is Paid............................ 1,673,849 64,323 3.84
---------- --------
Total Non-Interest Bearing Deposits................................ 1,507,622
Other Liabilities.................................................. 97,126
Stockholders' Equity (5)........................................... 209,381
----------
Total Liabilities and Stockholders' Equity......................... $3,487,978
==========
Net Interest Income................................................ $117,125
========
Net Yield on Interest Earning Assets............................... 4.13
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
Statistical Summary
<TABLE>
(In Millions) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities (Carrying Amount at Year End) (1):
U.S. Government Obligations..................................................... $ 601 $212 $ 336
Federal Agency Obligations...................................................... 240 439 424
State and Municipal Obligations................................................. 76 90 131
Collateralized Mortgage Obligations............................................. 59 116 285
Other Securities................................................................ 58 66 20
------ ---- ------
Total......................................................................... $1,034 $923 $1,196
====== ==== ======
(1) 1994 amounts are comprised of securities available for sale, that are carried at their estimated fair value. 1993
amounts include securities available for sale, that are carried at their estimated fair value, and securities held to
maturity, that are carried at their amortized cost. 1992 amounts consist of investment securities, that are carried
at their amortized cost.
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
-------------------------------------------------------------------------------------------------------------------------
Within 1 Year 1 - 5 Years 5 - 10 Years Over 10 Years
--------------- --------------- --------------- ---------------
Weighted Weighted Weighted Weighted
Average Average Average Average
(Dollars in Millions) Amount Yield(2) Amount Yield(2) Amount Yield(2) Amount Yield(2) Total
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maturity Schedule of Securities Based
on Amortized Cost at December 31, 1994:(3)
U.S. Government Obligations..... $516 5.55% $ 91 4.24% $ - -% $ - -% $ 607
Federal Agency Obligations...... 54 5.35 153 7.38 2 7.00 31 6.53 240
State and Municipal Obligations. 11 13.14 48 10.08 1 10.00 15 8.17 75
Collateralized Mortgage
Obligations................... 26 6.22 14 5.48 - - 19 6.61 59
Other Securities................ 48 5.07 6 6.34 - - - - 54
---- ---- ---- ---- ------
Total......................... $655 $312 $ 3 $ 65 $1,035
==== ==== ==== ==== ======
(2) Yields have been computed by dividing annualized interest income, on a taxable equivalent basis, by the amortized cost
of the respective securities.
(3) Includes securities available for sale; Excludes Federal Reserve Bank and Federal Home Loan Bank stock of $3.8
million; Excludes unrealized losses of $5.8 million related to securities available for sale.
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
-------------------------------------------------------------------------------------------------------------------------
(In Thousands) Within 1 Year 1-5 Years Over 5 Years Total
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity Schedule of Loans at December 31, 1994:
Private banking:
Residential real estate mortgages (4)........... $194,743 $145,660 $510,671 $ 851,074
Other........................................... 392,467 10,174 17,801 420,442
-------- -------- -------- ----------
Total private banking loans....................... 587,210 155,834 528,472 1,271,516
-------- -------- -------- ----------
Short-term trust credit facilities................ 215,105 - - 215,105
Loans to financial institutions for purchasing and
carrying securities............................. 126,640 - - 126,640
All other......................................... 10,945 1,984 708 13,637
-------- -------- -------- ----------
Total........................................... $939,900 $157,818 $529,180 $1,626,898
======== ======== ======== ==========
Interest Sensitivity of Loans at December 31, 1994:
Loans with predetermined interest rates........... $105,635 $390,914 $ 496,549
Loans with floating or adjustable interest rates.. 52,183 138,266 190,449
-------- -------- ----------
Total........................................... $157,818 $529,180 $ 686,998
======== ======== ==========
(4) Maturities are based upon the contractual terms of the loans.
</TABLE>
Statistical Summary
<TABLE>
1994 1993 1992
---------------- ---------------- ----------------
(Dollars in Millions) Amount Rate Amount Rate Amount Rate
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Analysis of Average Daily Deposits:
Non-Interest Bearing Deposits................. $1,565 $1,761 $1,508
Certificates of Deposit of $100,000 or more... 33 4.18% 26 3.04% 33 4.01%
Money Market and Other Savings Deposits....... 1,340 3.45 1,251 2.93 1,107 3.71
------ ------ ------
Total Deposits.............................. $2,938 $3,038 $2,648
====== ====== ======
</TABLE>
<PAGE>
U.S. TRUST CORPORATION
<TABLE>
-------------------------------------------------------------------------------------------------------------------------
Certificates Other
(In Millions) of Deposit Deposits
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maturity Distribution of Interest Bearing Deposits in
Amounts of $100,000 or more at December 31, 1994:
Time remaining until maturity:
Three months or less.............................................................. $31 $1,127
Three through six months.......................................................... 6 -
Six through twelve months......................................................... 1 -
Over twelve months................................................................ 5 -
--- ------
Total........................................................................... $43 $1,127
=== ======
</TABLE>
<TABLE>
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Market Price of the Corporation's Common Shares
and Related Security Holder Matters
The common shares of the Corporation are traded in the over-the-counter
market. Market prices (based on NASDAQ national market prices as
reported in The Wall Street Journal) and dividends declared per share for
the past two years are shown below:
-------------------------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For Each Quarter
1994 High.............................................................. $52 7/8 $52 1/2 $52 1/2 $65
Low............................................................... 49 1/2 49 3/4 50 1/2 52
Cash Dividends Declared........................................... 0.50 0.50 0.50 0.50
1993 High.............................................................. $58 1/2 $59 $54 1/2 $54 1/2
Low............................................................... 49 1/4 50 1/4 51 1/4 52
Cash Dividends Declared........................................... 0.47 0.47 0.47 0.47
</TABLE>
<TABLE>
-------------------------------------------------------------------------------------------------------------------------
As of January 1, 1995, there were approximately 2,085 record holders of
the Corporation's common shares.
<PAGE>
U.S. TRUST CORPORATION
Summary of Credit Loss Experience
(In Thousands) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Analysis of Allowance for Credit Losses:
Balance, January 1.................................... $ 13,393 $ 11,676 $ 8,661 $ 8,599 $ 7,300
---------- ---------- -------- -------- --------
Charge-Offs:
Private banking..................................... (1,349) (3,762) (2,856) (5,776) (1,743)
Residual corporate loans............................ (150) (338) (710) (509) (5,878)
---------- ---------- -------- -------- --------
Total charge-offs..................................... (1,499) (4,100) (3,566) (6,285) (7,621)
---------- ---------- -------- -------- --------
Recoveries:
Private banking..................................... 611 612 465 133 226
Residual corporate loans............................ 194 1,205 116 189 318
---------- ---------- -------- -------- --------
Total recoveries...................................... 805 1,817 581 322 544
---------- ---------- -------- -------- --------
Net charge-offs....................................... (694) (2,283) (2,985) (5,963) (7,077)
---------- ---------- -------- -------- --------
Provision charged to income........................... 2,000 4,000 6,000 6,025 8,376
---------- ---------- -------- -------- --------
Balance, December 31.................................. $ 14,699 $ 13,393 $ 11,676 $ 8,661 $ 8,599
========== ========== ======== ======== ========
Loan Statistics (Dollars in Thousands):
Average total loans................................... $1,307,900 $1,095,673 $941,090 $739,316 $710,715
Allowance for credit losses, end of year,
as a percent of average total loans................. 1.12% 1.22% 1.24% 1.17% 1.21%
Net loans charged off as a percent of
average total loans................................. 0.05 0.21 0.32 0.81 1.00
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation maintains the allowance for credit losses at a level
deemed to be adequate. The level of the allowance is based on
management's judgment as to the current condition of the credit
portfolio, which includes loans, commitments to extend credit and standby
letters of credit, determined by a continuous surveillance process. In
addition, management looks to past experience, current loan composition
and volume and general economic conditions.
Senior management determines, at least quarterly, which credits are
to be charged off partially or in full. This is based on a review of all
underperforming credits highlighted in the surveillance process. Loan
officers are expected to be the first to identify potential credit
problems. In addition, experienced credit review professionals provide
independent internal oversight of these credits. Credit reviews by the
Federal Reserve and New York State Bank Examiners, as well as our
certified public accounting firm, as part of the regular bank examination
and audit processes, are also considered in the credit surveillance
process.
<PAGE>
U.S. TRUST CORPORATION
Since substantially all of the Corporation's loan portfolio relates
to private banking accounts, the Corporation does not attempt to allocate
the allowance among specific credit categories.
<PAGE>
