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