<PAGE> 1
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 the quarterly period ended: SEPTEMBER 30, 1998
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 10036-1532
(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.
18,596,047 shares, Common Stock, $1 par value, as of October 30, 1998
Page 1 of 25
<PAGE> 2
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statement of Income:
For the Three Months Ended September 30, 1998 and 1997 3
For the Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statement of Condition as of September 30, 1998
and December 31, 1997 5
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1998 and 1997 6
Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 7
Notes to the Condensed Consolidated Financial Statements 8
Condensed Consolidated Net Interest Revenue and Average Balances:
For the Three Months Ended September 30, 1998 and 1997 22
For the Nine Months Ended September 30, 1998 and 1997 23
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 12 - 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 - 19*
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
</TABLE>
* For further analysis of market risk see Part II - Item 7A of the Corporation's
annual report on Form 10-K for the year ended December 31, 1997.
2
<PAGE> 3
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
BETTER (WORSE)
1998 1997 $ %
---- ---- - -
<S> <C> <C> <C> <C>
Fee Revenue $ 88,892 $ 71,182 $ 17,710 24.9%
Net Interest Revenue 24,690 22,858 1,832 8.0
-------- -------- -------- ------
TOTAL REVENUE 113,582 94,040 19,542 20.8
-------- -------- -------- ------
OPERATING EXPENSES
Salaries 30,402 25,862 (4,540) (17.6)
Employee Benefits and Performance
Compensation 23,758 17,540 (6,218) (35.5)
-------- -------- -------- ------
Total Salaries and Benefits 54,160 43,402 (10,758) (24.8)
Net Occupancy 9,536 10,226 690 6.7
Other 23,849 19,006 (4,843) (25.5)
-------- -------- -------- ------
TOTAL OPERATING EXPENSES 87,545 72,634 (14,911) (20.5)
-------- -------- -------- ------
Income Before Income Tax Expense 26,037 21,406 4,631 21.6
Income Tax Expense 10,155 8,349 (1,806) (21.6)
-------- -------- -------- ------
NET INCOME $ 15,882 $ 13,057 $ 2,825 21.6%
======== ======== ======== ======
BASIC INCOME PER SHARE $ 0.85 $ 0.68 $ 0.17 25.0%
======== ======== ======== ======
DILUTED INCOME PER SHARE $ 0.76 $ 0.61 $ 0.15 24.6%
======== ======== ======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
BETTER (WORSE)
1998 1997 $ %
---- ---- - -
<S> <C> <C> <C> <C>
Fee Revenue $250,805 $205,791 $ 45,014 21.9%
Net Interest Revenue 74,748 66,782 7,966 11.9
-------- -------- -------- ----
TOTAL REVENUE 325,553 272,573 52,980 19.4
-------- -------- -------- ----
OPERATING EXPENSES
Salaries 86,184 74,668 (11,516) (15.4)
Employee Benefits and Performance
Compensation 69,630 50,903 (18,727) (36.8)
-------- -------- -------- ----
Total Salaries and Benefits 155,814 125,571 (30,243) (24.1)
Net Occupancy 27,425 28,622 1,197 4.2
Other 67,117 57,040 (10,077) (17.7)
-------- -------- -------- ----
TOTAL OPERATING EXPENSES 250,356 211,233 (39,123) (18.5)
-------- -------- -------- ----
Income Before Income Tax Expense 75,197 61,340 13,857 22.6
Income Tax Expense 29,327 23,923 (5,404) (22.6)
-------- -------- -------- ----
NET INCOME $ 45,870 $ 37,417 $ 8,453 22.6%
======== ======== ======== ====
BASIC INCOME PER SHARE $ 2.44 $ 1.93 $ 0.51 26.4%
======== ======== ======== ====
DILUTED INCOME PER SHARE $ 2.19 $ 1.75 $ 0.44 25.1%
======== ======== ======== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CONDITION
(Dollars In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
---- ----
<S> <C> <C>
Cash and Due from Banks $ 343,685 $ 74,887
Interest Earning Securities 1,127,243 1,519,083
Loans, Net of Allowance for Credit Losses
($19,212 in 1998 and $18,294 in 1997) 2,067,442 1,920,555
Other Assets 334,029 300,457
---------- ----------
Total Assets $3,872,399 $3,814,982
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Deposits $3,164,961 $3,073,902
Short and Long-Term Credit Facilities 203,812 251,842
Other Liabilities 258,679 258,092
---------- ----------
Total Liabilities 3,627,452 3,583,836
---------- ----------
Stockholders' Equity 244,947 231,146
---------- ----------
Total Liabilities and Stockholders' Equity $3,872,399 $3,814,982
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Treasury Loan to Comprehensive Stockholders'
Stock Surplus Earnings Stock ESOP Income Equity
------- ------- -------- --------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $19,895 $11,067 $246,238 $(42,627) $(7,254) $3,827 $231,146
Net Income 45,870 45,870
Net Unrealized (Loss) on Securities
Available for Sale 2,164 2,164
-------- ------------- -------------
Total Comprehensive Income 45,870 2,164 48,034
Purchases of Treasury Stock (42,648) (42,648)
Principal Payment by ESOP 3,481 3,481
Cash Dividends Declared ($0.54
Per Share) (10,114) (10,114)
Issuance of Shares for Acquisitions 2,453 6,503 8,956
Capital Effect of Employee
Benefit Plans 52 679 1,717 3,644 6,092
------- ------- -------- -------- ------- ------------- --------------
Balance, September 30, 1998 $19,947 $14,199 $283,711 $(75,128) $(3,773) $5,991 $244,947
======= ======= ======== ======== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Treasury Loan to Comprehensive Stockholders'
Stock Surplus Earnings Stock ESOP Income Equity
------- ------- -------- --------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $19,630 $ 3,575 $205,384 $ (4,728) $(10,468) $ 705 $214,098
Net Income 37,417 37,417
Net Unrealized Gain on Securities
Available for Sale 3,095 3,095
--------- -------------- --------------
Total Comprehensive Income 37,417 3,095 40,512
Purchases of Treasury Stock (30,376) (30,376)
Principal Payment by ESOP 3,214 3,214
Cash Dividends Declared ($0.45
Per Share) (8,722) (8,722)
Issuance of Shares for Acquisition 204 6,943 7,147
Capital Effect of Employee Benefit
Plans 51 22 1,365 2,655 4,093
------- ------- -------- --------- -------- ------------- --------------
Balance, September 30, 1997 $19,885 $10,540 $235,444 $(32,449) $ (7,254) $3,800 $229,966
======= ======== ======== ========= ======== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Net Cash Provided by Operating Activities $ 61,152 $ 56,951
--------- ---------
Cash Flows From Investing Activities:
Interest Earning Securities:
Purchases (237,865) (509,331)
Sales 1,315 5,215
Maturities, Calls and Mandatory Redemptions 629,488 633,940
Net Change in Loans (147,822) (128,086)
Other, Net (29,632) (18,315)
--------- ---------
Net Cash Provided by (Used in) Investing Activities 215,484 (16,577)
--------- ---------
Cash Flows From Financing Activities:
Net Change in Non-Interest Bearing Deposits (53,813) (79,109)
Net Change in Interest Bearing Deposits 144,872 44,514
Net Change in Short-Term Credit Facilities (43,549) 27,057
Issuance of Trust Preferred Capital Securities -- 50,000
Repayments of Long-Term Debt (4,481) (3,214)
Purchases of Treasury Stock (42,648) (30,376)
Other, Net (8,219) (7,660)
--------- ---------
Net Cash Provided by (Used in) Financing Activities (7,838) 1,212
--------- ---------
Net Change in Cash and Cash Equivalents 268,798 41,586
Cash and Cash Equivalents at January 1 74,887 78,566
--------- ---------
Cash and Cash Equivalents at September 30 $ 343,685 $ 120,152
========= =========
Income Taxes Paid $ 32,478 $ 24,968
Interest Expense Paid 91,358 89,394
Noncash Item:
Issuance of stock for employee benefit plans $ 5,183 $ 3,283
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
U. S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
U.S. Trust Corporation (individually, the "Parent") and its wholly owned
subsidiaries (collectively with the Parent, the "Corporation"). All material
intercompany accounts and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Corporation conform with
generally accepted accounting principles and general practice within the
investment management and banking industries. The preparation of condensed
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities (including but not limited to
the allowance for credit losses, retirement and postretirement benefits) as of
the financial statement dates and the reported amounts of revenues and expenses
during the reported periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
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 certain
items mentioned in these Notes to the Condensed Consolidated Financial
Statements and/or Management's Discussion and Analysis of Financial Condition
and Results of Operations (Part I - Item 2 of this report), are of a normal
recurring nature. These financial statements should be read in conjunction with
the audited financial statements included in the Corporation's annual report on
Form 10-K for the year ended December 31, 1997 and the Corporation's quarterly
reports on Form 10-Q for the periods ended March 31, 1998 and June 30, 1998.
2. ACCOUNTING CHANGES AND DEVELOPMENTS
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," ("FAS
131") was issued. FAS 131 requires disclosure of financial and descriptive
information about the Corporation's reportable operating segments. The
Corporation has identified two main operating segments, Personal Wealth
Management Services and Institutional Services. Personal Wealth Management
includes the complete array of financial services that the Corporation provides
for individuals and families, including investment management and consulting,
trust, financial and estate planning and private banking. Personal Wealth
Management will also be delineated geographically between New York and
Affiliates. Management believes this geographic distinction is important to
clearly reflect growth for both areas. Institutional Services includes
investment management, corporate trust, brokerage and special fiduciary
services for corporations, endowments, foundations, pension plans and other
institutional clients. The Corporation will present the financial disclosures
and commentary prescribed by FAS 131 starting with its consolidated financial
statements for the year ended December 31, 1998.
8
<PAGE> 9
U.S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING CHANGES AND DEVELOPMENTS (CONTINUED)
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits," ("FAS
132") was issued. FAS 132 revises employer's disclosures about pensions and
other postretirement benefits to include additional information of changes in
benefit obligations and plan assets and eliminates certain disclosures to
facilitate the financial analysis of these plans. The Corporation will present
the financial disclosure starting with its consolidated financial statements for
the year ended December 31, 1998.
FAS 131 and FAS 132 are limited to issues of reporting and presentation
and do not address recognition or measurement. Adoption of FAS 131 and FAS 132
therefore will not affect the Corporation's financial condition or results of
operations.
In March 1998, Statement of Position No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," ("SOP 98-1")
was issued effective for financial statements issued in 1999. SOP 98-1 requires
the capitalization of eligible costs of specified activities related to computer
software developed or obtained for internal use. The Corporation believes that
the adoption of SOP 98-1 will not have a material effect on the Corporation's
financial condition or results of operations.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("FAS 133") was
issued. FAS 133 establishes accounting and reporting standards for derivatives.
FAS 133 requires recognition of all derivatives as either assets or liabilities
in the statement of financial condition and measurement of those instruments at
fair value. Fair market valuation adjustments for derivatives meeting hedge
criteria will be recorded in either comprehensive income or earnings depending
on their classification. FAS 133 is effective for all quarters of years
beginning after June 15, 1999. The Corporation is in the process of assessing
how the adoption of FAS 133 will affect its financial condition and results of
operations.
3. ACQUISITIONS AND SUBSEQUENT EVENTS
On July 31, 1998, the Corporation acquired Wood Island Associates,
Inc., an investment management firm located in Larkspur, California with
approximately $1 billion in assets under management. Under the terms of the
acquisition, the Corporation made a $21.9 million initial payment comprised of
both cash and common stock of the Corporation (99,293 shares) and may make
additional payments based upon business retention and other conditions.
On August 31, 1998, the Corporation acquired Maier & Siebel, Inc., a
real estate investment advisor to affluent individuals with over $300 million of
real estate assets under management. Under the terms of the acquisition, the
Corporation made a $6.5 million initial payment comprised of both cash and
common stock of the Corporation (21,127 shares) and may make additional payments
based upon future profitability.
On October 15, 1998, the Corporation acquired McMurrey Investment
Advisors, Inc., an investment management firm located in Houston, Texas with
approximately $400 million in assets under management. Under the terms of the
agreement, the Corporation made an initial cash payment of $1.0 million and may
make additional payments based upon future profitability.
Each of these transactions was accounted for as a purchase and did not
have a material impact on the Corporation's financial condition or results of
operations.
9
<PAGE> 10
U.S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME PER SHARE
The Corporation adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share," ("FAS 128") effective December 31, 1997. FAS 128
establishes new standards for computing and presenting income per share. All
income per share amounts have been restated to conform to the new requirements.
The computation of basic income per share and diluted income per share
for the three month and nine month periods ended September 30, 1998 and
September 30, 1997 are reflected in the following table.
<TABLE>
<CAPTION>
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
(In Thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC INCOME PER SHARE:
Net Income $15,882 $13,057 $45,870 $37,417
======= ======= ======= =======
Weighted average number of common shares outstanding 18,707 19,239 18,823 19,441
======= ======= ======= =======
Basic Income Per Share $ 0.85 $ 0.68 $ 2.44 $ 1.93
======= ======= ======= =======
DILUTED INCOME PER SHARE:
Net Income $15,882 $13,057 $45,870 $37,417
Dividend equivalents on stock based benefit plans (after-
tax) 179 145 502 405
------- ------- ------- -------
Adjusted Net Income $16,061 $13,202 $46,372 $37,822
======= ======= ======= =======
Weighted average number of common shares outstanding 18,707 19,239 18,823 19,441
Dilutive impact of shares issuable under stock based
benefit plans 2,432 2,342 2,320 2,176
------- ------- ------- -------
Total Dilutive Shares 21,139 21,581 21,143 21,617
======= ======= ======= =======
Diluted Income Per Share $ 0.76 $ 0.61 $ 2.19 $ 1.75
======= ======= ======= =======
</TABLE>
5. NET INTEREST REVENUE
The following is an analysis of the composition of net interest
revenue:
<TABLE>
<CAPTION>
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
(In Thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 38,052 $ 34,039 $ 110,088 $ 98,137
Securities:
Taxable 14,498 16,865 45,284 51,939
Tax Exempt 1,037 966 2,875 2,968
Short-Term Investments and Deposits with Banks 2,051 1,637 8,202 5,091
--------- --------- --------- ---------
Total Interest Income 55,638 53,507 166,449 158,135
--------- --------- --------- ---------
Interest Expense:
Deposits 27,259 24,528 80,123 74,321
Short and Long-Term Credit Facilities 3,540 5,971 11,132 16,441
--------- --------- --------- ---------
Total Interest Expense 30,799 30,499 91,255 90,762
--------- --------- --------- ---------
Net Interest Income 24,839 23,008 75,194 67,373
Provision for Credit Losses (150) (150) (450) (600)
Securities Gains, Net 1 -- 4 9
--------- --------- --------- ---------
Net Interest Revenue $ 24,690 $ 22,858 $ 74,748 $ 66,782
========= ========= ========= =========
</TABLE>
10
<PAGE> 11
U.S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. PLEDGED ASSETS
Financial instruments carried at $246.3 million on September 30, 1998
and $314.3 million on December 31, 1997 were pledged to secure public deposits,
as collateral for borrowings, to qualify for fiduciary powers and for other
purposes.
7. CONTINGENCIES
There are various pending and threatened actions and claims against the
Corporation 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, results of
operations or cash flows.
8. RECLASSIFICATIONS
Certain amounts presented in the prior period have been reclassified to
conform with the current period's presentation.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL REPORTING MATTERS
In this Form 10-Q we made certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Corporation. These statements may be made directly in this document or may be
"incorporated by reference" to other documents. You can find many of these
statements by looking for words such as "believes," "expects," "anticipates,"
"estimates" or similar expressions.
We caution you that these statements are not guarantees of future
performance. They involve a number of risks and uncertainties that are difficult
to predict. Among the factors that may cause our actual results to differ
materially from those expressed or implied in the forward-looking statements are
the following:
- General economic or business conditions may be less favorable
than expected. Such an environment could result in, among
other things, a reduced demand for asset management or other
financial services, or a general decline in assets under
management, both of which could negatively impact fee
revenues.
- Competitive pressures in the investment or asset management,
corporate fiduciary or private banking industries may increase
significantly.
- Legislative or regulatory changes may adversely affect the
business in which we are engaged.
- Necessary technological changes, including changes to address
"Year 2000" data systems issues, may be more difficult or
expensive to implement than anticipated.
RESULTS OF OPERATIONS
Net income for the third quarter of 1998 was $15.9 million, compared to
$13.1 million earned in the third quarter of 1997. On a diluted basis, income
per share was $0.76 in the third quarter of 1998, versus $0.61 in the third
quarter of 1997. The Corporation's annualized return on average stockholders'
equity was 26.6% for the third quarter of 1998, compared to 23.1% for the third
quarter of 1997.
FEE REVENUE
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
---------------------------------------
(In Thousands) September 30, September 30, Better
1998 1997 (Worse)
------------- ------------- --------
<S> <C> <C> <C>
Investment Management
and Related Services $81,712 $64,765 26.2%
Corporate Trust 7,180 6,417 11.9
------- ------- ----
Total Fee Revenue $88,892 $71,182 24.9%
======= ======= ====
Market Related Fees $73,589 $57,977 26.9%
Transaction Related Fees 15,303 13,205 15.9
------- ------- ----
Total Fee Revenue $88,892 $71,182 24.9%
======= ======= ====
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Nine Month Periods Ended
------------------------------------------
September 30, September 30, Better
(In Thousands) 1998 1997 (Worse)
------------- ------------- ---------
<S> <C> <C> <C>
Investment Management
and Related Services $230,909 $187,435 23.2%
Corporate Trust 19,896 18,356 8.4
-------- -------- ----
Total Fee Revenue $250,805 $205,791 21.9%
======== ======== ====
Market Related Fees $204,942 $165,398 23.9%
Transaction Related Fees 45,863 40,393 13.5
-------- -------- ----
Total Fee Revenue $250,805 $205,791 21.9%
======== ======== ====
</TABLE>
Total fee revenue for the third quarter of 1998 increased approximately
$17.7 million to $88.9 million from $71.2 million in the third quarter of 1997.
Market related fee revenue increased by $15.6 million to $73.6 million from
$58.0 million in the third quarter of 1997.
Market related fee revenue is based primarily on the market value of
the assets in clients' investment management accounts. In general, market
related fee revenue is influenced by a variety of factors, including growth or
decline of stock and bond market levels, new business, acquisitions, changes in
fee rate schedules and new services, offset by the outflow of investment
management assets due to terminating trusts, disbursements and lost business.
Market related fee revenue typically is determined on a sliding scale so that as
the value of a client's portfolio grows in size, the Corporation earns a smaller
percentage on the increased account value. Therefore, market value or other
incremental changes in a portfolio's size may not have a proportionate impact on
the level of market related fee revenue. In general, market related fee revenue
is determined quarterly based upon the value of the prior quarters' assets under
management. Another important factor in the determination of the level of market
related fee revenue is the type of assets under management. Depending on how
assets under management are invested, fluctuations in any one market will not
necessarily have a proportionate impact on the level of fee revenue.
The following is a comparative analysis of the composition of assets
under management.
<TABLE>
<CAPTION>
September 30, June 30, September 30,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Equity 52% 56% 51%
Fixed Income 33% 30% 33%
Short-Term and Other 15% 14% 16%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Transaction related fee revenue, principally derived from corporate
trust and agency, estate settlement and brokerage activities increased $2.1
million to $15.3 million in the third quarter of 1998 from $13.2 million for the
third quarter of 1997.
13
<PAGE> 14
<TABLE>
<CAPTION>
Sept. vs. Sept. vs.
June Sept.
Assets Under Management and Administration Sept. 30, June 30, Sept. 30, Better Better
(In Billions) 1998 1998 1997 (Worse) (Worse)
- ------------- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Assets Under Management:
Investment Management $ 53.4 $ 54.2 $ 45.0 (1.5)% 18.6%
Special Fiduciary 12.0 14.0 13.6 (14.3) (11.6)
-------- -------- -------- ------ ------
Total Assets Under Management 65.4 68.2 58.6 (4.1) 11.6
-------- -------- -------- ------ ------
Assets Under Administration:
Personal Custody and Other 21.6 22.4 20.1 (3.7) 7.2
Corporate and Municipal Trusteeships
and Agency Relationships at Par Value 289.2 279.7 239.7 3.4 20.7
-------- -------- -------- ------ ------
Total Assets Under Administration 310.8 302.1 259.8 2.9 19.7
-------- -------- -------- ------ ------
Total Assets Under Management and
Administration $ 376.2 $ 370.3 $ 318.4 1.6% 18.2%
======== ======== ======== === ====
</TABLE>
The carrying amount of assets under management was $65.4 billion at
September 30, 1998, compared to $68.2 billion at June 30, 1998, and $58.6
billion at September 30, 1997. Investment management assets at September 30,
1998 were $53.4 billion compared to $54.2 billion at June 30, 1998, and $45.0
billion at September 30, 1997. The September 30, 1998 amounts include
approximately $1.3 billion attributable to Wood Island Associates, Inc. and
Maier & Siebel, Inc., which were acquired during the third quarter (see Note 3
to Notes to the Condensed Consolidated Financial Statements in Part I - Item 1
of this report).
Corporate trust activities are a source of both interest and
non-interest bearing funds to the Corporation. These funds provide support for
the Corporation's investment and lending strategies. Corporate trust activities
also generate funds which are invested in various Excelsior Funds (several
related portfolios of mutual funds advised by certain subsidiaries of the
Parent) resulting in additional investment management fee revenue to the
Corporation.
Approximately $7.1 billion of assets under management were invested in
the Excelsior Funds at September 30, 1998. At June 30, 1998 and September 30,
1997, total assets under management invested in the Excelsior Funds were $6.9
billion and $5.7 billion, respectively.
NET INTEREST REVENUE
The details of net interest revenue are presented in Note 5 of Notes to
the Condensed Consolidated Financial Statements.
Net interest revenue is affected by changes in interest rates, funding
strategies, and the impact that changes in the credit quality of the loan
portfolio have on the provision for credit losses. The net yield on interest
earning assets increased slightly to 3.18% at September 30, 1998 from 3.14% at
September 30, 1997.
14
<PAGE> 15
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Month Periods Ended
September 30, September 30, Better
(In Thousands) 1998 1997 (Worse)
- -------------- ---- ---- -------
<S> <C> <C> <C>
Salaries $30,402 $25,862 (17.6)%
Employee Benefits and
Performance Compensation 23,758 17,540 (35.5)
------- ------- ------
Total Salaries and Benefits 54,160 43,402 (24.8)
Net Occupancy 9,536 10,226 6.7
Other 23,849 19,006 (25.5)
------- ------- ------
Total Operating Expenses $87,545 $72,634 (20.5)%
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Nine Month Periods Ended
September 30, September 30, Better
(In Thousands) 1998 1997 (Worse)
- -------------- ---- ---- -------
<S> <C> <C> <C>
Salaries $ 86,184 $ 74,668 (15.4)%
Employee Benefits and
Performance Compensation 69,630 50,903 (36.8)
-------- -------- ------
Total Salaries and Benefits 155,814 125,571 (24.1)
Net Occupancy 27,425 28,622 4.2
Other 67,117 57,040 (17.7)
-------- -------- ------
Total Operating Expenses $250,356 $211,233 (18.5)%
======== ======== ======
</TABLE>
Operating expenses increased by $14.9 million in the third quarter of
1998 compared to the third quarter of 1997. The Corporation's pre-tax margin was
22.9% for the third quarter of 1998 and 22.8% for the third quarter of 1997.
For the first nine months of 1998, operating expenses increased by
$39.1 million, compared to the first nine months of 1997. The Corporation's
pre-tax margin was 23.1% for the first nine months of 1998 and 22.5% for the
first nine months of 1997.
Salaries and employee benefits, including performance compensation,
increased in both the third quarter and nine month periods of 1998 when compared
to the corresponding 1997 periods. Performance compensation is determined based
upon the Corporation's financial performance as measured by the Corporation's
diluted income per share, adjusted to offset the impact of extraordinary or
nonrecurring events, or other conditions or circumstances that warrant
consideration. Employee benefit expense is typically a function of staffing
levels. The number of full-time equivalent employees increased 13.2% to 1,709 at
September 30, 1998, compared to 1,510 at September 30, 1997.
Other operating expenses increased $4.8 million in the third quarter of
1998 compared to the third quarter of 1997. This increase is due, in part, to
the increase in amortization of intangibles relating to the acquisitions in the
third quarter of Wood Island Associates, Inc. and Maier & Siebel, Inc.
15
<PAGE> 16
The Corporation makes a substantial commitment to sales, marketing and
advertising. As of September 30, 1998, 131 employees were devoted to these
functions compared to 110 employees as of September 30, 1997. Direct expenses
associated with these functions, including salary, employee benefits and
performance compensation (principally sales commissions) were $10.6 million for
the third quarter of 1998, an increase of 48.0% from the $7.2 million incurred
during the corresponding 1997 period. For the first nine months of 1998 direct
expenses amounted to $28.7 million an increase of 38.6% from the $20.7 million
incurred during the first nine months of 1997. In addition to the
aforementioned expenses, occupancy expense directly allocable to these
functions amounted to approximately $683,000 and $561,000 for the third
quarters of 1998 and 1997, respectively and $1.8 million and $1.6 for the first
nine months of 1998 and 1997, respectively.
Year 2000 Issues
Our State of Readiness
In 1996, we established a Year 2000 Committee with responsibility for
developing an effective plan for identifying, renovating, testing and
implementing simulated solutions for Year 2000 processing. We are working
with The Chase Manhattan Bank and Marshall & Ilsley (providers of our most
significant data processing systems) as well as other vendors to assure
compliance with the required systems changes. The Chase Manhattan Bank and
Marshall & Ilsley are responsible for and bear the cost of effecting all
necessary changes to such systems. In accordance with our Year 2000 plan,
software code remediation is already completed and testing of all critical
systems will be substantially completed by the end of 1998. Thus, we expect
to have dealt with our Year 2000 issues well in advance of the event.
The Costs of Addressing Year 2000 Issues
We expect to incur expenses of approximately $5 million to $6 million
relating to Year 2000 issues. To date, we have spent approximately $2
million. This figure does not include the substantial management time our
officers and employees have spent on Year 2000 issues. While we have
deferred certain other projects as a result of our efforts regarding Year
2000, we believe that these deferrals will have no material impact on our
operating results.
The Risks of Year 2000 Issues
In the unlikely event that our systems fail (or the third party systems on
which we rely fail), we may lose the ability to service our clients for a
period of time. Because the variables are so numerous, we cannot estimate
the financial impact of these potential failures on the Corporation.
Contingency Plan
We have developed a contingency plan to deal with Year 2000 issues,
including (1) identity of likely contingencies; (2) developing procedures
to follow in the event of each contingency; and (3) identifying personnel
responsible for each part of our business. While our plan is now
substantially complete, it remains subject to change and refinement.
16
<PAGE> 17
FINANCIAL CONDITION
CAPITAL AND LIQUIDITY
Regulatory capital amounts and ratios for the Corporation and its
wholly owned subsidiary United States Trust Company of New York (the "Trust
Company") as of September 30, 1998 and 1997 are set forth in the following
table. Minimum ratio requirements and ratios required to be considered "well
capitalized" by the Board of Governors of the Federal Reserve Board are also
presented.
<TABLE>
<CAPTION>
Minimum Well
Federal Capitalized
Reserve Ratio Under Prompt
Actual as of Actual as of For Capital Corrective
September 30, 1998 September 30, 1997 Adequacy Action Provisions
(Dollars in ------------------ ------------------ -------- -----------------
Thousands) Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital:
Corporation $239,160 13.1% $250,673 15.2% 4.0% 6.0%
Trust Company $156,615 10.0% $143,861 10.1% 4.0% 6.0%
Total Capital:
Corporation $258,372 14.2% $268,723 16.3% 8.0% 10.0%
Trust Company $173,475 11.0% $159,928 11.3% 8.0% 10.0%
Tier 1 Leverage:
Corporation $239,160 6.7% $250,673 7.4% 3.0-5.0% --
Trust Company $156,615 5.5% $143,861 5.3% 3.0-5.0% 5.0%
</TABLE>
The objective of liquidity management is to ensure the availability of
financial resources to meet the Corporation's cash flow requirements and to
capitalize on opportunities for business expansion. Management monitors the
liquidity position of the Parent and each of its subsidiaries on an ongoing
basis to ensure that funds are available to meet loan and deposit cash flow
requirements. Liquidity management is also structured to ensure that the capital
needs of the Parent and each of the subsidiaries are met on a day to day basis.
The Parent's liquidity requirements consist mainly of dividend payments
to common stockholders, interest and principal payments to debt holders, capital
additions to its subsidiaries and repurchases of its common stock. On January
27, 1998, the Parent announced a 20% increase in its regular quarterly common
stock dividend, indicating an annual dividend of $0.72 per share. During the
nine months ended September 30, 1998, the Board of Directors of the Parent (the
"Board") declared three quarterly dividends of $0.18 per share. Dividends
declared per share as a percentage of diluted income per share was 24.7% for the
first nine months of 1998 and 25.7% for the comparable 1997 period. Actual
dividend declarations for the remaining quarter of 1998 will be subject to the
approval of the Board and regulatory capital limitations.
Prior to 1998, the Board authorized the repurchase of two million
shares of common stock. During the nine month period ended September 30, 1998,
629,400 common shares were repurchased at a weighted average purchase price of
$67.76 per share. The repurchased shares are available to meet the Parent's
obligations under its stock-based benefit plans and for general capital
management purposes. The Parent has remaining authority to repurchase 426,510
additional common shares.
17
<PAGE> 18
The Parent's sources of liquidity are primarily derived from dividends
from its subsidiaries, issuances of common stock and issuances of long and
short-term debt instruments. At September 30, 1998, the subsidiaries have the
ability to pay dividends of approximately $57.1 million without prior approval
of the regulatory authorities.
The Parent has a $40.0 million unsecured revolving credit facility
maturing in 1999. As of September 30, 1998, the Parent had $5.0 million
outstanding under this facility. Additionally, the Parent may borrow, subject to
certain regulatory restrictions, on a fully collateralized basis from its
subsidiaries.
The Parent is authorized to issue up to $5.0 million, $1.00 par value,
preferred stock. As of September 30, 1998, no preferred stock has been issued.
In addition to traditional interest and non-interest bearing deposit
raising capabilities, subsidiaries of the Parent have established their own
external funding sources. Certain subsidiaries have established credit
facilities with the Federal Home Loan Bank ("FHLB") totaling approximately
$369.4 million. As of September 30, 1998, borrowing under these credit
facilities was $14.0 million.
The subsidiaries also generate liquidity from the types of financial
instruments that they carry as investments. Approximately $818.5 million or 83%
of the interest earning securities portfolio is invested in U.S. Treasury
obligations or securities backed by the full faith and credit of the U.S.
Government. These securities are readily marketable and may be sold or financed
through repurchase agreements, as appropriate. At September 30, 1998, securities
sold under agreements to repurchase aggregated $98.5 million. The subsidiaries
also may pledge these securities to secure public deposits to qualify for
fiduciary powers and as collateral for FHLB and other borrowings. Pledged assets
at September 30, 1998 totaled $246.3 million.
ASSET/LIABILITY MANAGEMENT
The objective of asset and liability management is to maximize net
interest revenue within the constraint of acceptable levels of interest rate
sensitivity while maintaining high asset quality and adequate liquidity. The
Corporation's assets are principally liquid and low-risk. Approximately 35% of
average total assets for the first nine months of 1998 consist of short-term
financial instruments and readily marketable securities.
The loan portfolio is the largest component of average total assets.
For the first nine months of 1998, average loans comprised approximately 54% of
average total assets. Average loans increased $226.2 million, or 13.3%, to $1.9
billion during the first nine months of 1998, from $1.7 billion for the first
nine months of 1997. See the "Quality of Lending Activities" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for a further discussion of the Corporation's loan portfolio.
Market Risk and Sensitivity Analysis
The Corporation does not trade financial instruments nor does the
Corporation invest in financial instruments denominated in foreign currencies.
The Corporation's primary market risk exposure is interest rate risk mainly
through mortgage lending activities and through investments in mortgage backed
securities. The Corporation uses interest rate swaps ("Swaps") as hedges to
mitigate interest rate exposure created by financing long-term, fixed rate
financial instruments with shorter-term, floating rate, interest bearing
deposits.
18
<PAGE> 19
Prudent asset/liability management activities generate net interest
revenue that results from timing differences in the maturity and/or repricing of
assets, liabilities and off balance sheet positions. The results of these timing
differences are presented below in the interest sensitivity gap analysis. Gap
analysis has inherent limitations as an analytical tool because it measures the
Corporation's exposure to interest rate risk at a single point in time.
The Corporation also uses simulation analysis to monitor and control
net interest revenue at risk and the economic value of equity at risk under
multiple interest rate scenarios. The Corporation has established limits for net
interest revenue at risk equal to about 2.5% of total revenue given a 200 basis
point adverse change in rates occurring over a twelve month period.
The table below provides information about the Corporation's financial
instruments that are sensitive to changes in interest rates as well as
non-interest earning assets, non-interest bearing liabilities and stockholders'
equity. To reflect anticipated payments, certain asset and liability categories
(including items with no stated maturity) are included in the table based on
estimated rather than contractual maturity or repricing dates.
<TABLE>
<CAPTION>
Carrying Amount by Expected Maturity
---------------------------------------------------------------------------------------------
Within 1-2 2-3 3-4 4-5 Over 5
(Dollars in Thousands) 1 Year Years Years Years Years Years Total
- ---------------------- ------ ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Interest Earning Securities $ 632,860 $ 195,544 $ 74,214 $ 58,780 $ 57,205 $ 108,640 $ 1,127,243
Loans, Net of Allowance for
Credit Losses 1,001,272 310,172 214,190 219,136 84,410 238,262 2,067,442
----------- --------- --------- -------- --------- --------- -----------
Total Interest Earning Assets 1,634,132 505,716 288,404 277,916 141,615 346,902 3,194,685
----------- --------- --------- -------- --------- --------- -----------
INTEREST BEARING
LIABILITIES:
Interest Bearing Deposits (2,445,025) (1,954) (25,198) -- (156) (127) (2,472,460)
Short and Long-Term Credit
Facilities (140,812) (11,000) (1,000) (1,000) -- (50,000) (203,812)
----------- --------- --------- -------- --------- --------- -----------
Total Interest Bearing
Liabilities (2,585,837) (12,954) (26,198) (1,000) (156) (50,127) (2,676,272)
----------- --------- --------- -------- --------- --------- -----------
Asset/(Liability) Sensitivity
Gap (951,705) 492,762 262,206 276,916 141,459 296,775 518,413
Interest Rate Swaps 490,000* (150,000) (90,000) (75,000) (175,000) -- --
----------- --------- --------- -------- --------- --------- -----------
Interest Rate Sensitivity Gap (461,705) 342,762 172,206 201,916 (33,541) 296,775 518,413
Net Non-Interest Earning
Assets, Non-Interest Bearing
Liabilities and Stockholders'
Equity 41,539 (247,486) (63,692) (6,613) (6,613) (235,548) (518,413)
----------- --------- --------- -------- --------- --------- -----------
Maturity/Repricing Gap (420,166) 95,276 108,514 195,303 (40,154) 61,227 --
----------- --------- --------- -------- --------- --------- -----------
Cumulative Gap $ (420,166) $(324,890) $(216,376) $(21,073) $ (61,227) $ -- $ --
=========== ========= ========= ======== ========= ========= ===========
</TABLE>
* Includes $585.0 million of total outstanding notional principal balance of
which $95.0 million will mature within one year.
The following table provides details, as of September 30, 1998, 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.
19
<PAGE> 20
<TABLE>
<CAPTION>
Maturing
--------------------------------------------
Within 1 1 to 5
(Dollars In Thousands) Year Years Total
- ---------------------- ---- ----- -----
<S> <C> <C> <C>
Fixed Pay Swaps $95,000 $490,000 $585,000
Average Rate Paid 6.64% 6.56% 6.57%
Average Rate Received (1) 5.60% 5.64% 5.63%
</TABLE>
(1) 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 three month and nine month periods ended September 30, 1998 and
1997, are detailed in the following table.
<TABLE>
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
------------------------------------ ----------------------------------
(Dollars In Thousands) Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
- ---------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Interest Revenue:
As Reported $24,690 $22,858 $74,748 $66,782
Excluding Hedging Activities $26,030 $24,156 $78,613 $71,163
Net Yield on Interest Earning Assets:
As Reported 3.18% 3.14% 3.23% 3.08%
Excluding Hedging Activities 3.34% 3.30% 3.41% 3.29%
</TABLE>
The difference between results "As Reported" and "Excluding Hedging
Activities" in each period reflects the cost of utilizing Swaps to hedge
interest rate risk.
Interest Earning Securities
Included in interest earning securities are $43.4 million and $242.6
million of interest bearing deposits with banks, $983.8 million and $1.13
billion of securities available for sale and $100.0 million and $145.0 million
of federal funds sold at September 30, 1998 and December 31, 1997, respectively.
The Corporation maintains a high quality securities portfolio with
approximately 83% comprised of U.S. Treasury obligations, obligations of the
Government National Mortgage Association ("GNMAs") and other securities backed
by the full faith and credit of the U.S. Government. The remaining portfolio is
comprised of variable rate collateralized mortgage obligations ("CMOs") and
obligations of states and municipalities. CMOs are principally collateralized by
GNMAs.
The fair value of securities exceeded their amortized cost by $10.6
million and $7.0 million at September 30, 1998 and December 31, 1997,
respectively. The Corporation classified all of its securities portfolio as
"available for sale". While the Corporation does not trade its securities
portfolio, it needs to have the ability to sell securities as required to meet
its asset/liability objectives.
QUALITY OF LENDING ACTIVITIES
The Corporation's loan portfolio is predominantly comprised of loans to
private banking customers. At September 30, 1998, the loan portfolio totaled
$2.1 billion of which approximately 75% was collateralized by residential real
estate mortgages.
An analysis of the allowance for credit losses follows:
20
<PAGE> 21
<TABLE>
<CAPTION>
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
----------------------- ----------------------
(In Thousands) 1998 1997 1998 1997
- -------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance, Beginning of Period $ 19,037 $ 17,629 $ 18,294 $ 16,693
Provision for Credit Losses 150 150 450 600
Recoveries 43 393 507 879
Charge-offs (18) (122) (39) (122)
-------- -------- -------- --------
Net Recoveries 25 271 468 757
-------- -------- -------- --------
Balance, End of Period $ 19,212 $ 18,050 $ 19,212 $ 18,050
======== ======== ======== ========
</TABLE>
The level of the allowance for credit losses is based upon management's
judgment as to the current condition of the credit portfolio determined by a
continuous surveillance process. In assessing the adequacy of the allowance for
credit losses, management relies on its ongoing review of specific loans, past
experience, the present loan portfolio composition and general economic and
financial considerations.
For the nine months of 1998, annualized net loan recoveries as a
percentage of average loans were three basis points, versus annualized net loan
recoveries of six basis points for the first nine months of 1997. The allowance
for credit losses at September 30, 1998, was 0.96% of average loans for the
quarter. This compares with 1.03% of average loans for the quarter ended
September 30, 1997.
Nonperforming assets, which include non-accrual ("impaired") loans and
real estate acquired through foreclosure or restructurings, for the most recent
five quarters are as follows:
<TABLE>
<CAPTION>
Sept 30, June 30, March 31, Dec. 31, Sept.30,
(In Millions) 1998 1998 1998 1997 1997
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 7.6 $ 8.2 $ 9.8 $ 9.7 $ 9.5
Real estate owned, net 0.5 -- -- -- 0.7
------ ------ ------ ------ -------
Total Nonperforming Assets $ 8.1 $ 8.2 $ 9.8 $ 9.7 $ 10.2
====== ====== ====== ====== =======
</TABLE>
The allowance for credit losses as a percentage of non-accrual loans
was 252.3% at September 30, 1998, compared to 190.3% at September 30, 1997. The
ratio of nonperforming assets to average loans and real estate owned for the
quarter was 0.4% at September 30, 1998, compared to 0.6% at September 30, 1997.
21
<PAGE> 22
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 MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Securities (1) (2) $1,173,074 $18,208 6.16% $1,268,059 $20,308 6.35%
Loans (3) 2,014,626 38,052 7.49 1,762,683 34,039 7.66
---------- ------- ---- ---------- ------- ----
Total Interest Earning Assets 3,187,700 56,260 7.01 3,030,742 54,347 7.13
---------- ------- ---- ---------- ------- ----
Interest Bearing Deposits 2,295,320 27,259 4.71 2,023,216 24,528 4.81
Short-Term Credit Facilities 161,799 2,170 5.32 322,831 4,508 5.54
Long-Term Credit Securities 67,773 1,370 8.02 73,254 1,463 7.92
---------- ------- ---- ---------- ------- ----
Total Sources on Which
Interest is Paid 2,524,892 30,799 4.84 2,419,301 30,499 5.00
---------- ------- ---- ---------- ------- ----
Net Interest Revenue -
Tax Equivalent Basis 25,461 23,848
Net Free Funds (4) $ 662,808 $ 611,441
========== ==========
Credit Loss Provision (150) (150)
Tax Equivalent Adjustment (2) (622) (840)
Securities Gains, Net 1 -
------- -------
Net Interest Revenue $24,690 $22,858
======= =======
Net Yield on Interest
Earning Assets 3.18% 3.14%
==== ====
Interest Spread 2.17% 2.13%
==== ====
</TABLE>
(1) The average balance and average rate for securities available for sale
have 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 a
marginal tax rate of 47%.
(3) Loans and Stockholders' Equity include the Loan to ESOP, which had an
average balance of $3.8 million in 1998 and $7.3 million in 1997.
(4) Net Free Funds consist of non-interest bearing deposits, other
liabilities and stockholders' equity, net of non-interest earning
assets.
22
<PAGE> 23
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 NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
1998 1997
--------------------------------------- -----------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Securities (1) (2) $1,263,478 $ 58,542 6.19% $1,327,099 $ 62,640 6.31%
Loans (3) 1,930,296 110,088 7.63 1,707,567 98,137 7.68
---------- -------- ---- ---------- -------- ----
Total Interest Earning Assets 3,193,774 168,630 7.05 3,034,666 160,777 7.08
---------- -------- ---- ---------- -------- ----
Interest Bearing Deposits 2,273,143 80,123 4.71 2,068,166 74,321 4.80
Short-Term Credit Facilities 175,799 6,987 5.31 301,441 12,385 5.49
Long-Term Credit Securities 68,607 4,145 8.08 68,662 4,056 7.90
---------- -------- ---- ---------- -------- ----
Total Sources on Which
Interest is Paid 2,517,549 91,255 4.85 2,438,269 90,762 4.98
---------- -------- ---- ---------- -------- ----
Net Interest Revenue -
Tax Equivalent Basis 77,375 70,015
Net Free Funds (4) $ 676,225 $ 596,397
========== ==========
Credit Loss Provision (450) (600)
Tax Equivalent Adjustment (2) (2,181) (2,642)
Securities Gains, Net 4 9
-------- --------
Net Interest Revenue $ 74,748 $ 66,782
======== ========
Net Yield on Interest
Earning Assets 3.23% 3.08%
==== ====
Interest Spread 2.20% 2.10%
==== ====
</TABLE>
(1) The average balance and average rate for securities available for sale
have 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 a
marginal tax rate of 47%.
(3) Loans and Stockholders' Equity include the Loan to ESOP, which had an
average balance of $4.1 million in 1998 and $7.6 million in 1997.
(4) Net Free Funds consist of non-interest bearing deposits, other
liabilities and stockholders' equity, net of non-interest earning
assets.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 31, 1998, the Corporation issued 99,293 of its common shares as
a portion of the consideration paid in the Corporation's acquisition of Wood
Island Associates Inc., a California corporation ("Wood Island"). These common
shares were issued to the six former stockholders (or their designated trusts)
of Wood Island.
On August 31, 1998, the Corporation issued 21,127 of its common shares
as a portion of the consideration paid in the Corporation's acquisition of Maier
& Seibel, Inc., a California corporation. These common shares were issued to the
seven stockholders (or their designated trusts) of Maier & Seibel, Inc.
These issuances of common shares were exempt from registration under
the Securities Act of 1933 pursuant to section 4(2) thereof. The common shares
were issued to a limited number of sophisticated investors who acquired the
common shares for their own account. See Note 3 of Notes to the Condensed
Consolidated Financial Statements in Part I - Item 1 of this report for further
information concerning these issuances.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
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, inasmuch as the total
amount of debt authorized under any such instrument does not exceed 10%
of the total assets of the Corporation 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.
27 Financial Data Schedule.
(1) Incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
None during the quarter for which this report is filed.
24
<PAGE> 25
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: November 10, 1998 By: Richard E. Brinkmann
----------------- ---------------------------
Richard E. Brinkmann
Managing Director and
Comptroller
(Chief Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 343,685
<INT-BEARING-DEPOSITS> 43,429
<FED-FUNDS-SOLD> 100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 983,814
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,086,654
<ALLOWANCE> 19,212
<TOTAL-ASSETS> 3,872,399
<DEPOSITS> 3,164,961
<SHORT-TERM> 136,039
<LIABILITIES-OTHER> 258,679
<LONG-TERM> 67,773
0
0
<COMMON> 19,947
<OTHER-SE> 225,000
<TOTAL-LIABILITIES-AND-EQUITY> 3,872,399
<INTEREST-LOAN> 38,052
<INTEREST-INVEST> 15,535
<INTEREST-OTHER> 2,051
<INTEREST-TOTAL> 55,638
<INTEREST-DEPOSIT> 27,259
<INTEREST-EXPENSE> 30,799
<INTEREST-INCOME-NET> 24,839
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 87,545
<INCOME-PRETAX> 26,037
<INCOME-PRE-EXTRAORDINARY> 15,882
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,882
<EPS-PRIMARY> 0.85<F1>
<EPS-DILUTED> 0.76<F1>
<YIELD-ACTUAL> 3.18
<LOANS-NON> 7,616
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,037
<CHARGE-OFFS> 18
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 19,212
<ALLOWANCE-DOMESTIC> 19,212
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 19,212
<FN>
<F1>Represents the Corporation's basic and diluted income per share calculated in
accordance with Statement of Financial Accounting Standards No. 128 "Earnings
Per Share".
</FN>
</TABLE>
