This section discusses the
evaluation of the current operating
results of a trust department and its impact on the bank's profitability. In reviewing the
trust department's earnings performance, the examiner must evaluate past earnings
trends and assess the effect on profitability of anticipated future business growth. The evaluation
also considers senior bank and trust department management's views about trust department profitability, including the emphasis placed on establishing reasonable goals and
objectives for profitability, expressed either in terms of an expected level of
profitability or the growth of new business).
This section of the Manual is organized into the following parts:
recent years banks have become increasingly aware of, and focused
on, the contribution of noninterest income to profitability.
Recurring fee income can enhance profitability, and it is often less
volatile than interest income. Trust department income can be an
important component of noninterest income. As individuals
increasingly accumulate financial assets to store wealth, trust
departments have experienced vigorous growth in assets under
management. The profitability of these departments has heightened
the attention of management. This trend has also resulted in a
proliferation of nonbank financial and fiduciary service providers,
greatly increasing the competition faced by banks offering trust and
other fiduciary services.
The Corporation recognizes that not every trust
department will be profitable. Many small trust departments are operated primarily as a
community service. Trust services are also offered in order to retain more profitable
relationships elsewhere in the bank.
Although various reasons for offering trust services
exist, the FDIC expects each bank operating a trust department to be aware of the
department's contribution, or cost, to the operating earnings of the bank. Banks operating
trust departments should regularly measure and
evaluate the impact of both direct and indirect trust
income and expenses on their overall profitability. Some form of accounting system should
be implemented to provide the basis for an analysis of the department's income and expense
data. Management may use those results to determine which services should be continued or discontinued,
whether fees should be adjusted, and which types of accounts should be emphasized in new
business development efforts.
The shareholders of a bank operating a trust department
have the right to expect a reasonable return on their investment. This requires profit
motivation from the board of directors, and a fee structure which covers the costs of providing
trust and fiduciary services and
provides a reasonable return. A trust department's fee structure should
be reviewed and approved periodically by the trust committee, or some other senior
operating committee. Trust management should establish a business plan, with realistic
goals, that takes into consideration the department's size and resources. Business
plans and budgets that are integrated with those of the entire bank have a greater
likelihood of communicating trust profitability goals, objectives, and expectations to bank management
and personnel. However, in banks with very small trust departments, policies or plans covering overall bank operating performance may
satisfactorily embody the trust department's budget, fee
schedule, or business plan. In these situations, examiners should avoid criticizing a bank
for not establishing separate trust operating policies, or for not integrating these
policies with the institution's operating plan.
Trust policies should
also include management's position on fee discounting, fee concessions and waivers,
and compensating balances. Policies should clearly describe those to whom discounts will be
allowed, the purpose for granting discounts, the types of services for which fees may be
discounted, and the method by which the trust department may be compensated by the bank
for such discounts. Trust policies should require that all discounts, concessions, or
compensatory arrangements be documented and approved by the trust committee, or some other
operating committee. The policies should also indicate who is authorized to grant such
discounts. Policies which permit trust personnel to unilaterally approve discounts,
concessions, or waivers without the informed approval of a senior operating committee pose
control weaknesses. Such policies permit individual staff members to alter approved fee
schedules without the directorate's knowledge and
approval. They also provide
individuals with the ability to waive account fees to mask account problems and errors
that should be brought to management's attention.
Another aspect of rating trust profitability is the
department's prospects for future growth. Examiners should evaluate the control and
management of the trust department growth and new
business development prospects. An essential element in a
successful business plan is marketing, which should identify the segments of the fiduciary
services market where the department will concentrate its new business development
efforts. In marketing the department's services, management must ensure that the bank
has the expertise, staff, and facilities to satisfactorily manage the volume and types of
new business sought.
Examiners should evaluate
the reasonableness of the marketing plan. While no one approach
will suit every bank and market, there are some areas which are common to most
departments. The marketing plan should include a definition of the market area for trust
services (which may differ from the market identified for commercial and retail banking
products). The characteristics of the market area, including demographics, geographic or
legal impediments (e.g., there may be difficulties in marketing some products in an
adjoining state), and existing trust competition should be considered in estimating the
growth potential of various services. Sources of new business (existing bank customers,
new customers based on demographics, professional referrals, etc.) should be evaluated. Finally,
the means of generating new business should be addressed. These may take the form of
presentations to attorneys or public groups, direct mailings and statement fliers, lobby
posters and brochures, and print and broadcast advertising. The bank's strengths and
capabilities must be factored into any plan, particularly one which projects large or
rapid growth, or contemplates offering new products.
Each trust department should have a system for measuring
and monitoring its income and expenses. The system does not necessarily need to be
elaborate to provide sufficient information for management, but it should be commensurate
with the department's size and growth trends. Systems should track direct income and
expenses and, to the extent possible, include indirect expenses, as well.
Fee and other direct income of a particular department
are usually measured using either a cash or an accrual accounting method. Fees
charged to trust accounts are usually the primary component of direct rust revenue. These fees are often based on the size (market value) of the account, but may take
into consideration the type and complexity of the assets under management, the volume of
transactions in the account, the customer's total relationship with the bank, and
other factors. Less often, fees may be assessed as a
percentage of the income earned by an account. Other direct income may include sweep fees, 12b-1 fees, etc. (Note: Gross
income from the trust department is reported as a separate line item of noninterest income
on the quarterly Report of Income) Other common contributors to trust income are:
Indirect income - Indirect income may include
intracompany income credits, such as credits for deposits, allocated to
the trust department in recognition of income earned in other areas of the
bank's operations as a result of the business relationship developed by
the trust department. Indirect income is more difficult to measure than direct income.
While it is generally recognized that a trust
department generates other, often more profitable, business for an institution,
many institutions do not attempt to estimate the profits that client
relationships developed in the trust department produce in other areas of
Bank calculated credit for deposits - A
credit for deposits is based upon deposit balances maintained in the
commercial bank by accounts in the trust department. Both interest bearing
and non-interest bearing deposits should be included in the calculation to
obtain a realistic estimate of contribution of the department's deposits
to commercial bank profitability. Typically, the calculation considers how
the bank is investing the funds deposited by the department, determines
(or estimates) the average interest rate the assets acquired when
investing trust department deposits are earning, and subtracts the interest paid for each type of deposit (plus deposit insurance premiums and administrative
costs) in arriving at the net rate earned. The net rate is then applied
to the average balances
for each type of deposit account to determine or estimate the dollar
value of credit for
The role played
by trust department deposits in bank profitability should not be
ignored when evaluating the profitability of the department. Credit for
deposits remains a
key element in determining a trust department's contribution to bank profitability.
Furthermore, specialized trust activities such as
corporate trusts and agencies (refer to subsection
B. in Section 6), frequently
rely on trust deposit balances to achieve trust profitability in the
highly competitive market for these services. Consequently, the
volume and anticipated float duration of corporate trust deposits
plays a vital role in the structuring of corporate trust and agency
fees and commissions. With respect to the deposits of personal and
employee benefit accounts, however, a high level of trust deposits,
and a correspondingly higher credit for deposits, may be indicative
of a breach of prudent fiduciary practice, since investments in
own-bank deposits is both a conflict of interest and self-dealing.
Refer to subsection E.3. Use of Own-Bank or Affiliate Bank
Deposits, located in Section 8 for specific conflict of interest issues
relating to trust deposits.
Since banks may include a credit for deposits in
calculating the profitability of trust services, examiners should evaluate the
reasonableness of the methodology and assumptions used to calculate the credit for
deposits. An analysis that includes a credit for deposits should not be limited to
own-bank demand deposits, but should include all trust-generated own-bank deposits in
determining the credit for deposits, since all deposits,
and time deposits, can be invested to provide a positive return to the
With the advent of the
automated sweeping of uninvested funds (refer to
subsection F.1.b. Sweep Arrangements, located in Section 3) into overnight
investments, the volume of idle demand deposits, as well as the associated credits for
deposits, has significantly diminished in many trust departments. Nevertheless,
departments with a high volume of corporate trust activity may still carry significant
uninvested cash balances. The investment of these funds for the department's benefit,
in the form of relatively risk-free overnight investments, should not be criticized
unless the fiduciary is required to invest the funds for the benefit of the obligor under
terms of the governing instrument or corporate trust indenture.
generally fall into two categories, direct and indirect.
Direct expenses are
identifiable costs directly chargeable to, for and under the control of the
fiduciary and related services function. These expenses include: salaries,
bonuses, hourly wages, overtime pay and incentive pay associated with
officers and employees, expenses associated with employee benefits, such as
contributions to employee benefit plans, health and life insurance costs,
social security and unemployment taxes, relocation expenses and other fringe
benefits, expenses associated with occupancy, such as maintenance, service
and repairs, telephones and utilities, insurance coverage, real estate or
property taxes, depreciation/amortization, lease/retail payments for
premises and equipment, any leasehold improvements charged directly to
expense, fees paid directly for external or internal audits of the fiduciary
and related services, trust examination fees, employee training, fees
directly paid for outside legal counsel and/or consultants, and, expenses
paid directly for advertising and business development activities.
Indirect expenses are
those expenses charged to the fiduciary and related services activity from
other departments of the institution.
Indirect expenses are generally reflected in the institution's retail
accounting system and include any allocation for the proportionate share of
corporate expenses that are not directly charged to a particular department
or function. If the institution's internal accounting system is unable to
provide the information, the institution may use a reasonable alternate
method to estimate indirect expenses. Indirect expenses include: the
proportionate share of data processing expenses, building rent or
depreciation, utilities, real estate taxes, and insurance, internal and
external audits of trust activities, in-house and/or outside legal expenses,
non-trust employee incentives, business development activities, charitable
contributions, and corporate overhead, such as allocated expenses for
corporate planning and/or financial staff, board of director/committee fees,
training, temporary personnel and professionals, travel, entertainment,
stationary and postage, and automobile expenses. Reporting methods for
indirect expenses should remain consistent from period to period.
Settlements, surcharges and other losses
should not be included in direct or indirect expenses, but should be
reported separately. Refer to discussion of losses below.
not unusual for a given type of expense to be incurred on both a direct and an allocated
basis. Salaries are likely to be the largest direct expense category in most trust
departments. Examples of expenses likely to be incurred, other than salaries, are listed
in the Direct and Indirect Trust Expenses table located in
In larger departments, cost accounting systems may
provide a sophisticated means of measuring trust department profitability. Elaborate
systems can measure costs by product line, type of account, individual administrator, type
of transaction, or other areas or functions within a department. An effective cost
accounting system may also help establish a fiduciary services pricing structure based
upon the cost of services provided, such as the amount of labor
required to provide particular services or to
execute transactions, the number of transactions processed, portfolio valuations and
investment advisory services, etc.
Even in small departments, the major expense
category, salaries, can be estimated by determining the percentage of each staff member's
time devoted to trust activities. In the same way, employee benefits may be allocated to
the trust department by taking the total amount of benefits for the bank as a whole
and dividing it by total salaries. This percentage can then be applied against the
previously determined trust salary figure. Data processing and auditing costs can often be
identified, or easily allocated to the trust department as well.
An important consideration in any
evaluation of trust department profitability is the level of settlements,
surcharges and other losses. Persistent or a large volume of losses
underlying account or asset administration problems, or other operational weaknesses. Management
should have reliable systems that identify all settlements, surcharges, and
other losses. Settlements, surcharges and other losses should be
reported to the trust committee, or
some other senior operating committee. Losses may be attributable to the following:
Formal and informal agreements to reimburse trust accounts, customers,
or beneficiaries, but which are reached without a court decree.
Amounts that the fiduciary is required by court decree to pay trust
accounts, customers, or beneficiaries. Surcharges are normally associated with negligence,
failure to perform fiduciary duties, or misconduct.
Fee Waivers and Concessions
The most common form of fee loss. Many departments will waive or rebate
previously charged fees and commissions. While some fee waivers may be based on banking
relationships, some fee waivers may also be a way to adjust an account in response to
customer complaints for: operating, administrative, or investment errors, the failure to
invest funds promptly, the failure to file timely tax returns, losses attributable to the
failure to renew a insurance policy or losses attributable to inadequate insurance
coverage of property losses, etc
from trade processing, lost or stolen securities, miscalculation of fees or
taxes, pricing discrepancies or other losses that are realized in the
attributable to the fiduciary and related services.
Other sources of losses from fiduciary activities
include: defalcations; uncollectible fees; and civil money
penalties imposed by regulatory agencies; etc.
In analyzing settlements, surcharges
and losses, examiners
should recognize that the gross amount of the loss may be offset, in many cases, by
insurance coverage. Further, trust accounting systems may account for
settlements, surcharges and losses
on either a gross or net basis. On a gross basis, the entire amount is
loss, and any recovery, such as from insurance proceeds, is reported as an income item. On a net basis, insurance proceeds and other recoveries are netted against the loss, with only the net figure reflected.
Either approach is satisfactory if applied on a consistent basis. However, when trust
policies permit any form of netting, examiners should determine whether trust management is
reporting gross losses to senior management, or "netting" the losses as a
method of masking, or hiding, the actual amount of trust losses.
Examiners should be aware that many institutions do not
recognize settlements, surcharges, and losses as a component of trust department
profitability. Instead, they are shown as losses and recoveries in the
accounting system. Thus, the review of trust profitability should consider
the possibility that significant settlements, surcharges and losses may not
appear in the trust accounting system at all. It is imperative that the
trust department's reporting systems inform senior management and the directorate of the actual dollar amount and nature of trust
losses. If not, senior management and the Board may remain unaware of serious
operational and administrative deficiencies. Such Internal control
should be brought to senior management's attention and discussed in the report of examination.
Trust departments with greater than $100
million in fiduciary assets must report fiduciary settlements,
surcharges, losses, and recoveries in Memorandum item 4 of Call Report of
Condition Schedule RC-T. Institutions complete Memorandum item 4
only for the December 31st filing, and are required to report settlements
surcharges, losses and recoveries on a gross basis, i.e. before insurance
payments. Recoveries reported may be for current or prior years'
losses, and are reported only when the recovery is actually realized, i.e.
payment is received. The filing of an insurance claim does not support
the realization of a recovery for RC-T purposes.
While earnings can largely be determined through a
review of the trust department's accounting system, several other factors should be
evaluated concurrently. These are:
The emphasis placed by senior management on profitability, in terms of
establishing profitability objectives and monitoring operating results;
The bank's size and demographics of
geographical market (e.g., a young population is not likely to produce many estates;
trust department or commercial bank size may impose natural limitations on absolute levels
of profitability; and geographic location may dictate the level of competition for
The degree of dependence on nonrecurring fees (e.g., estates or
other court appointed accounts);
Special circumstances, such as major declines in the securities markets,
or the loss of a major local employer; and
Unusual circumstances regarding the composition of business,
fee schedules, settlements, charge-offs or other compromise actions, or adverse publicity.
In evaluating earnings, emphasis should be placed not
only on the existing levels of profitability, but also on recent earnings trends, the
department's new business development efforts, and competitive factors. Such n
analysis will permit examiners to determine the likelihood that current earnings
performance will continue.
Budgets are encouraged for all trust departments, and
should be expected in larger, more complex trust departments. Management should
document the reasonableness of the assumptions used in the budget process. Budgets
should be established, approved, and periodically reviewed by senior management.
Significant deviations between actual and budgeted performance should be brought to the
attention of senior management.
Examiners should evaluate policies regarding the
operating performance and earnings prospects of the trust department. In situations where
management has no clear policy in these matters, or where record keeping is inadequate,
the examiner should make appropriate comments in the report of examination.
All expenses paid by, or directly chargeable to, the trust function for
advertising and other business development activities
Incentives paid to non-trust employees.
Institution's business development activities, whether performed in-house
or by outside contractors.
Non-trust audit and examination fees.
Salaries and benefits of executive management.
Board of directors, trust committee (and related subcommittees) fees.
Public relations and institutional marketing.
Holding company overhead.
Functions such as personnel, corporate planning, and corporate financial
Other expenses which would likely be found in a trust
department operation are:
Stationery, postage, travel and entertainment, vault and security costs,
automobile expenses, etc.
Applicable state trust examination fees.
Temporary staffing expenses, including those for attorneys, accountants,
consultants, investment advisors or managers, and other professionals who are not salaried
officers or employees of the institution.
Training and testing expenses, as well as dues, fees, and other expense
associated with memberships in clubs and organizations.
Trust institutions are required
to report certain data concerning the profitability of trust and fiduciary
services. Because these reports provide a
standardized set of data prepared in a uniform manner, they should be used
whenever possible to aid examiner efficiency and eliminate needless requests for earnings
data. Nonetheless, examiners should review the reasonableness and accuracy of
the trust and fiduciary services
profitability data reported. If significant errors in the
reported data are found, the institution should be requested to promptly
file amended reports correcting the errors.
Report - Report of Income Gross fiduciary
income is reported as a separate noninterest income line item (5a) of the Report of
Income on both the small-bank report (FFIEC Form 041) and the large-bank
report (FFIEC Form 031).
Through year-end 2000, gross fiduciary
income was reported as a separate line item of noninterest income only by
large bans (i.e. banks with $100 million or more in total bank assets),
which filed FFIEC Form 031. Smaller banks and trust companies aggregated
trust income with other fee income.
G.2. Call Report - Fiduciary Schedule RC-T Beginning in December 2001, a new schedule,
RC-T, "Fiduciary and Related Services," was added to the Call Report
of Condition. Schedule RC-T includes information on Fiduciary and
Related Services Income, as well as a memorandum item which covers
Fiduciary Settlements, Surcharges, and Losses. Fiduciary and Related
Services Income data, as well as the Fiduciary Settlements,
Surcharges, and Losses data are confidential and, therefore, not
available to the public on an individual-bank basis. Not all
institutions, however, are required to report data on fiduciary
income, expenses and losses. Only those institutions with
greater than $100 million in fiduciary assets, as of the previous
year-end, and those that do not meet the fiduciary income test ,
i.e. institutions where gross fiduciary and related services income
exceeds ten percent of revenue (net interest income plus noninterest
income), are required to report income, expense and loss data in
Trust companies, large institutions (i.e. those with
more than $250 million in total
fiduciary assets), and institutions that do not meet the fiduciary
income test are required to complete
certain line items of Schedule RC-T on a quarterly basis. Banks with total
fiduciary-related assets between $100 and $250 million must complete all applicable line items of Schedule RC-T
only as of the December 31st year-end Call Report submission. The trust
asset thresholds are based on total fiduciary assets as of the previous year-end.
Fiduciary and related services income should be reported on the basis of the various
lines of trust business reported in the Fiduciary and Related Assets section of Schedule RC-T.
Direct and indirect fee income is reported in
Items 12 through 18 of Schedule RC-T. The total of these items must equal the amount
reported in Item 5.a., i.e. Income from Fiduciary Services, of the Call
Report of Income.
Item 18 (Other fiduciary & related services income) is used to report investment
advisory fees when the assets are not held by the institution.
Item 20 (Expenses) includes all direct and indirect expenses
attributable to the fiduciary and related services reported in RC-T.
Item 21 (Net losses from fiduciary and related services) must equal
the net totals from Memorandum # 4 (Fiduciary settlements, surcharges, and
Item 22 (Intracompany income credits for
fiduciary and related services). Three basic types of income
credits should be reported at this item: any credit for own-bank
deposits calculated by the bank; allocations of income received
from elsewhere in the bank; and credits received for other
intracompany services and transactions.
G.3. Annual Report of Trust Assets - Schedule E (Fiduciary Income Statement) Prior to the implementation of Call Report
Schedule RC-T, institutions reported fiduciary income, expenses and
losses in Schedule E of the Annual Report of Trust Assets.
Schedule E was implemented in 1996, and, as is the case with the
income, expense and loss data reported in Call Report Schedule RC-T,
the information reported in Schedule E is confidential and not
available on an individual institution basis. Aggregate
Schedule E data, however, is available to the public via the FFIEC
publication "Trust Assets of Financial Institutions." Schedule
E aggregate reports can accessed via the FDIC's website at
The 1998 Uniform Interagency Trust Rating System
(UITRS) [refer to subsection A. in Appendix B]
was implemented under Division of Supervision Regional Director Memorandum transmittal
number 98-102, which was issued on December 31, 1998. Guidelines for the
Corporation's implementation of the new rating system, including instructions for the
preparation of the Earnings examination schedule, and an alternative rating system for
small trust departments, were outlined in this Regional Director memorandum.
The 1998 UITRS permits agencies to adopt their own
guidelines governing the assignment of an Earnings rating for institutions total assets of less than $100 million, as reported on
Schedule A, Line 18, Column F of the FFIEC Annual Report of Trust Assets
(FFIEC 001). [Note that with the discontinuation of
the Annual Report of Trust Assets at the end of the 2000 reporting year, the
$100 million threshold is calculated by adding total fiduciary assets
reported on line 9 of Call Report Schedule RC-T to total custody and
safekeeping assets reported on line 10 of RC-T.] The Corporation issued the following guidelines in its
December 31, 1998 memorandum:
Required Examination Coverage
- Trust earnings
must be reviewed, analyzed and evaluated at each trust
Mandatory Ratings- Trust earnings are to be routinely rated only
Institutions with $100 million or more in trust assets (based on the
latest FFIEC Annual Report of Trust Assets) and
Trust company subsidiaries of nonmember banks.
Alternative Ratings Assignment for
Small Trust Institutions - Trust earnings must be rated in small
("community") trust institutions when one o the following is present:
The trust department has $90 million or more in total fiduciary and custody and safekeeping
assets, as reported in Call Report Schedule RC-T, and its recent growth indicates that it is reasonable to
believe that it will exceed the $100 million asset threshold by the end
of the current calendar year.
The trust department has dropped below $100 million
asset threshold in the past year, butis reasonablyexpected to exceed
$100 million in the near future.
Trust department earnings are a significant to the
bank's overall earnings (gross trust fees are 50 percent or more of net
When trust earnings are rated in smaller trust
institutions, the revised UITRS provides a different set of
standards for evaluating the adequacy of trust earnings. In these cases, the examiner
should primarily focus on the following management oversight and approval issues,
rather than numerical profitability:
A reasonable method of measuring trust income and expense, commensurate
with the volume and nature of fiduciary services offered,
Appropriate reporting of trust profitability, not less than annually, to
the board of directors or an appropriate committee thereof, and
Approvals, from the board of directors or an appropriate committee
thereof, for the offering of fiduciary services.
The 1998 Uniform Interagency Trust Rating System
(UITRS) [refer to subsection A. in Appendix B],
provides minimum standards and ratings definitions for rating the earnings component of
smaller institutions under an alternate rating system. As discussed above, the Corporation
adopted the alternate earnings rating approach for
smaller institutions in 1998.
Minimum Standards for Smaller Institutions:
Alternate ratings are assigned based on the level of
implementation of four minimum standards by the board of directors and management. These
Standard No. 1--The institution has reasonable methods for measuring
income and expense commensurate with the volume and nature of the fiduciary services
Standard No. 2--The level of profitability is reported to the board of
directors, or a committee thereof, at least annually.
Standard No. 3--The board of directors periodically determines that the
continued offering of fiduciary services provides an essential service to the
institution's customers or to the local community.
Standard No. 4--The board of directors, or a committee thereof, reviews
the justification for the institution to continue to offer fiduciary services even if the
institution does not earn sufficient income to cover the expenses of providing those
Alternate Ratings Definitions for Smaller
A rating of 1 may be assigned where an
institution as implemented all four minimum standards. If fiduciary earnings are
lacking, management views this as a cost of doing business as a full service institution
and believes that the negative effects of not offering fiduciary services are more
significant than the expense of administrating those services.
A rating of 2 may be assigned where an
institution has implemented, at a minimum, at least three of the four standards.
This rating may be assigned if the institution is not generating positive earnings or
where formal earnings information may not be available.
A rating of 3 may be assigned if the institution
has implemented at least two of the four standards. While management may have
attempted to identify and quantify other revenue to be earned by offering fiduciary
services, it has decided that these services should be offered as a service to customers,
even if they cannot be operated profitably.
A rating of 4 may be assigned if the institution
has implemented only one of the four standards. Management has undertaken little or
no effort to identify or quantify the collateral advantages, if any, to the institution
from offering fiduciary services.
A rating of 5 may be assigned if the institution
has implemented none of the standards.