<PAGE> 1
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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, 1999
Commission file number: 1-14933
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)
Not Applicable
--------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
18,665,033 shares, Common Stock, $1 par value, as of October 29, 1999
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<PAGE> 2
FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Statement of Income:
For the Three Months Ended September 30, 1999 and 1998 3
For the Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statement of Condition as of September 30, 1999
and December 31, 1998 5
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1999 and 1998 6
Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 7
Notes to the Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 12 - 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 - 24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURE 29
</TABLE>
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,
---------------------------------------------------
INCREASE (DECREASE)
-------------------
1999 1998 $ %
------------ ------------ ----------- -------
<S> <C> <C> <C> <C>
Fee Revenue $ 103,478 $ 88,892 $ 14,586 16.4 %
Net Interest Revenue * 28,557 24,690 3,867 15.7
------------ ------------ ----------- -------
TOTAL REVENUE 132,035 113,582 18,453 16.2
------------ ------------ ----------- -------
OPERATING EXPENSES
Salaries 36,175 30,402 5,773 19.0
Performance Compensation 12,448 11,121 1,327 11.9
Sales Commissions and Incentives 7,585 4,807 2,778 57.8
Other Employee Benefits 9,241 7,830 1,411 18.0
------------ ------------ ----------- -------
Total Salaries, Performance
Compensation and Other Benefits 65,449 54,160 11,289 20.8
Net Occupancy 9,992 9,536 456 4.8
Other 24,580 23,849 731 3.1
------------ ------------ ----------- -------
TOTAL OPERATING EXPENSES 100,021 87,545 12,476 14.3
------------ ------------ ----------- -------
Income Before Income Tax Expense 32,014 26,037 5,977 23.0
Income Tax Expense 12,485 10,155 2,330 22.9
------------ ------------ ----------- -------
NET INCOME $ 19,529 $ 15,882 $ 3,647 23.0 %
============ ============ =========== =======
BASIC EARNINGS PER SHARE $ 1.05 $ 0.85 $ 0.20 23.5 %
============ ============ =========== =======
DILUTED EARNINGS PER SHARE $ 0.93 $ 0.76 $ 0.17 22.4 %
============ ============ =========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
*Net Interest Revenue consists of interest income, net securities gains (losses)
less interest expense and the provision for credit losses. There was no
provision for credit losses for the three month period ended September 30,
1999. The provision for credit losses was $150,000 for the three month period
ended September 30, 1998
3
<PAGE> 4
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,
---------------------------------------------------
INCREASE (DECREASE)
-------------------
1999 1998 $ %
------------ ------------ ----------- -------
<S> <C> <C> <C> <C>
Fee Revenue $ 308,543 $ 250,805 $ 57,738 23.0 %
Net Interest Revenue * 86,486 74,748 11,738 15.7
------------ ------------ ----------- -------
TOTAL REVENUE 395,029 325,553 69,476 21.3
------------ ------------ ----------- -------
OPERATING EXPENSES
Salaries 103,529 86,184 17,345 20.1
Performance Compensation 43,628 33,208 10,420 31.4
Sales Commissions and Incentives 20,968 13,823 7,145 51.7
Other Employee Benefits 25,838 22,599 3,239 14.3
------------ ------------ ----------- -------
Total Salaries, Performance
Compensation and Other Benefits 193,963 155,814 38,149 24.5
Net Occupancy 29,131 27,425 1,706 6.2
Other 77,297 67,117 10,180 15.2
------------ ------------ ----------- -------
TOTAL OPERATING EXPENSES 300,391 250,356 50,035 20.0
------------ ------------ ----------- -------
Income Before Income Tax Expense 94,638 75,197 19,441 25.9
Income Tax Expense 37,221 29,327 7,894 26.9
------------ ------------ ----------- -------
NET INCOME $ 57,417 $ 45,870 $ 11,547 25.2 %
============ ============ =========== =======
BASIC EARNINGS PER SHARE $ 3.10 $ 2.44 $ 0.66 27.0 %
============ ============ =========== =======
DILUTED EARNINGS PER SHARE $ 2.75 $ 2.19 $ 0.56 25.6 %
============ ============ =========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
* Net Interest Revenue consists of interest income, net securities gains
(losses) less interest expense and the provision for credit losses. There
was no provision for credit losses for the nine month period ended September
30, 1999. The provision for credit losses was $450,000 for the nine month
period ended September 30, 1998.
4
<PAGE> 5
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CONDITION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
-------------- ---------------
<S> <C> <C>
Cash and Due from Banks $ 209,739 $ 108,346
Interest Earning Securities 1,183,662 1,517,351
Loans, Net of Allowance for Credit Losses
($20,014 in 1999 and $19,414 in 1998) 2,569,282 2,171,393
Other Assets 413,995 345,772
-------------- ---------------
Total Assets $ 4,376,678 $ 4,142,862
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Deposits $ 3,646,105 $ 3,414,791
Short and Long-Term Credit Facilities 144,469 208,698
Other Liabilities 284,652 274,738
-------------- ---------------
Total Liabilities 4,075,226 3,898,227
-------------- ---------------
Stockholders' Equity 301,452 244,635
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 4,376,678 $ 4,142,862
============== ===============
</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/(LOSS) EQUITY
--------- --------- ---------- ---------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 19,971 $ 18,902 $ 293,289 $ (87,768) $ (3,773) $ 4,014 $ 244,635
Net Income 57,417 57,417
Net Unrealized (Loss) on Securities
Available for Sale (11,375) (11,375)
---------- ---------- ---------
Total Comprehensive Income 57,417 (11,375) 46,042
Purchases of Treasury Stock (35,397) (35,397)
Principal Payment by ESOP 3,773 3,773
Cash Dividends Declared ($0.66 Per Share (12,179) (12,179)
Issuance of Shares for Acquisitions 12,564 32,181 44,745
Capital Effect of Employee Benefit Plans 89 3,260 18 6,466 9,833
--------- --------- ---------- ----------- --------- -------- ---------
Balance, September 30, 1999 $ 20,060 $ 34,726 $ 338,545 $ (84,518) $ - $ (7,361) $ 301,452
========= ========= ========== =========== ========= ======== =========
<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 $ 12,325 $ 244,980 $ (42,627) $ (7,254) $ 3,827 $ 231,146
Net Income 45,870
Net Unrealized Gain on Securities 45,870
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 2,321 75 3,644 6,092
--------- ----------- ---------- ---------- --------- ---------- -----
Balance, September 30, 1998 $ 19,947 $ 17,099 $ 280,811 $ (75,128) $ (3,773) $ 5,991 $ 244,947
========= =========== ========== ========== ========= ========== =========
</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,
-------------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 80,307 $ 61,152
------------- --------------
Cash Flows From Investing Activities:
Interest Earning Securities:
Purchases (337,684) (237,865)
Sales 10,019 1,315
Maturities, Calls and Mandatory Redemptions 638,281 629,488
Net Increase in Loans (398,526) (147,822)
Other, Net (13,657) (29,632)
------------- --------------
Net Cash Provided by (Used in) Investing Activities (101,567) 215,484
------------- --------------
Cash Flows From Financing Activities:
Net Change in Non-Interest Bearing Deposits 19,746 (53,813)
Net Change in Interest Bearing Deposits 211,568 144,872
Net Change in Short and Long -Term Credit Facilities (64,229) (48,030)
Purchases of Treasury Stock (35,397) (42,648)
Other, Net (9,035) (8,219)
------------- --------------
Net Cash Provided by (Used in) Financing Activities 122,653 (7,838)
------------- --------------
Net Change in Cash and Cash Equivalents 101,393 268,798
Cash and Cash Equivalents at January 1 108,346 74,887
------------- --------------
Cash and Cash Equivalents at September 30 $ 209,739 $ 343,685
============= ==============
- -----------------------------------------------------------------------------------------
Income Taxes Paid $ 32,257 $ 32,478
Interest Expense Paid $ 93,588 $ 91,358
Noncash Items:
Issuance of stock for acquisitions $ 44,745 $ 8,955
Issuance of stock for employee benefit plans $ 9,147 $ 5,183
</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 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 and deferred income taxes) as of the
financial statement dates and the reported amounts of revenues and expenses
during the reporting 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, unless otherwise noted
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, 1998 as well as the Form 10-Q for the first two
quarters of 1999.
2. ACCOUNTING CHANGES AND DEVELOPMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," ("FAS 131") was issued in
June 1997, effective for interim and annual periods beginning with consolidated
financial statements for December 31, 1998. Comparative prior period information
is required. FAS 131 requires disclosure of financial and descriptive
information about the Corporation's reportable operating segments. The
Corporation has presented the financial disclosures and commentary prescribed by
FAS 131 in the "Businesses of U.S Trust" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations (Part I - Item 2 of
this report).
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. SOP 98-1 was adopted by the
Company on January 1, 1999. The adoption of SOP 98-1 has not had a material
effect on the Corporation's financial condition or results of operations.
8
<PAGE> 9
U.S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING CHANGES AND DEVELOPMENTS (CONTINUED)
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. The Corporation's use of derivatives to date has been
limited to utilizing interest rate swaps as hedges to mitigate interest rate
exposure associated with short-term floating interest-rate deposits. As such
this use of interest rate swaps would be categorized as a cash flow hedge
under FAS 133 and the effective portion of the gain or loss on the
interest rate swaps would be recorded in comprehensive income. In June 1999,
Statement of Financial Accounting Standards No 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No 133" ("FAS 137") was issued. FAS 137 delayed the effective date of
FAS 133 one year to fiscal years beginning after June 15, 2000. Management is
evaluating the impact of adopting FAS 133 and does not believe that it will have
a material impact on its financial condition or its results from operations.
3. ACQUISITIONS
On August 31, 1999, the Corporation acquired NCT Holdings, Inc. the
parent of North Carolina Trust Company, a non-deposit banking corporation
headquartered in Greensboro, North Carolina. North Carolina Trust Company
primarily engages in the business of investment management and fiduciary
services and has approximately $2.1 billion in assets under management. Under
the terms of the acquisition, the Corporation made a $41.5 million initial
payment comprised of both cash and common stock of the Corporation (411,773
shares) and may make additional payments based upon business retention and other
considerations.
On January 29, 1999, the Corporation acquired Radnor Capital
Management, Inc., an investment management company located in Wayne,
Pennsylvania with approximately $727 million in assets under management. Under
the terms of the acquisition, the Corporation made a $7.8 million initial
payment in the form of the Corporation's common shares (101,604 shares) and may
make additional payments in its own common shares based upon business retention
and other conditions.
These acquisitions were accounted for using the purchase method of
accounting and did not have a material effect on the Corporation's financial
statements.
9
<PAGE> 10
U.S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EARNINGS PER SHARE
The calculations of basic earnings per share and diluted earnings per
share for the three-month and nine-month periods ended September 30, 1999 and
September 30, 1998 are reflected in the following table.
<TABLE>
<CAPTION>
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
- -------------------------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income for basic earnings per share $19,529 $15,882 $57,417 $45,870
Dividend equivalents on stock based benefit plans (after-tax) 220 179 614 502
---------- --------------- ------------- -------------
Net income for diluted earnings per share $19,749 $16,061 $58,031 $46,372
Weighted average shares outstanding for basic earnings per share 18,527 18,707 18,540 18,823
Dilutive effect of stock based benefit plans 2,685 2,432 2,597 2,320
---------- --------------- ------------- -------------
Total dilutive shares outstanding 21,212 21,139 21,137 21,143
========== =============== ============= =============
Basic earnings per share $1.05 $0.85 $3.10 $2.44
========== =============== ============= =============
Diluted earnings per share $0.93 $0.76 $2.75 $2.19
========== =============== ============= =============
</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,
---------------------------------------- ---------------------------------------------
Increase Increase
(In Thousands) 1999 1998 (Decrease) 1999 1998 (Decrease)
- ------------------------------------------ ----------- ------------ ------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue:
Loans $ 45,338 $ 38,052 19.1% 126,213 110,088 14.6%
Securities:
Taxable 13,346 14,498 (7.9) 41,524 45,284 (8.3)
Tax-exempt 1,204 1,037 16.1 3,472 2,875 20.8
Short-term investments and deposits
with banks 1,706 2,051 (16.8) 8,004 8,202 (2.4)
----------- ----------- ----------- ----------- ------------ ----------
Total interest revenue 61,594 55,638 10.7 179,213 166,449 7.7
----------- ------------ ----------- ------------ ------------ ----------
Interest expense:
Deposits 30,087 27,259 10.4 83,818 80,123 4.6
Short and long-term credit facilities 2,950 3,540 (16.7) 8,926 11,132 (19.8)
----------- ------------ ----------- ------------ ------------ ----------
Total interest expense 33,037 30,799 7.3 92,744 91,255 1.6
----------- ------------ ----------- ------------ ------------ ----------
Net interest income 28,557 24,839 15.0 86,469 75,194 15.0
Provision for credit losses - (150) N/M - (450) N/M
Securities gains, net - 1 N/M 17 4 N/M
----------- ------------ ----------- ------------ ------------ ----------
Net interest revenue $ 28,557 $ 24,690 15.7% $ 86,486 $ 74,748 15.7%
=========== ============ =========== ============ ============ ==========
</TABLE>
10
<PAGE> 11
U.S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PLEDGED ASSETS
Financial instruments carried at $203.1 million on September 30, 1999
and $230.3 million on December 31, 1998 were pledged to secure public deposits
as collateral for borrowings, to qualify for fiduciary powers and for other
permitted 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. Although there can be no assurance as to the ultimate
outcome, management, after consultation with counsel and based on current
available information, is of the opinion that the ultimate resolution of such
matters, taken in the aggregate, is unlikely to have a material adverse 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.
9. OPERATING SEGMENTS
The Corporation has presented the financial disclosures on its
operating segments in the "Businesses of U.S. Trust" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations (Part I
- - Item 2 of this report).
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 make certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Corporation. These forward-looking statements may contain words such as
"believes," "expects," "anticipates," "estimates" or similar expressions.
We caution that these statements are not guarantees of future
performance. They involve a number of risks and uncertainties that are difficult
to predict. Factors that may cause actual results to differ materially from
those expressed or implied in the forward-looking statements, include but are
not limited to the following:
- - Competitive pressures in the investment or asset management, corporate
fiduciary or private banking industries may increase significantly.
- - General economic or business conditions, or volatility in the equity, fixed
income and real estate markets, may be unfavorable. Such economic
environments could result in, among other things, a reduced demand for
asset management or other financial services, or a decline in assets under
management over a short or an extended time period. Fee revenues and net
interest revenue could be negatively impacted by such events.
- - Legislative changes, including but not limited to legislation related to
income and estate tax matters, and regulatory changes in banking or other
businesses that the Corporation engages in, may adversely affect its
financial condition.
- - Technological changes, including changes required to address "Year 2000"
data systems issues, may be more difficult or expensive to implement than
anticipated or Year 2000 issues at other companies may adversely affect
operations.
You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this document or the date of any document
incorporated by reference.
CONSOLIDATED RESULTS OF OPERATIONS
Net income for the third quarter of 1999 was $19.5 million, compared to
$15.9 million earned in the third quarter of 1998. On a diluted basis, earnings
per share were $0.93 in the third quarter of 1999, versus $0.76 in the third
quarter of 1998. The Corporation's annualized return on average stockholders'
equity was 29.6% for the third quarter of 1999, compared to 26.6% for the third
quarter of 1998. For the nine month period, the Corporation's annualized return
on average stockholders' equity was 29.9% compared to 26.2% for the 1998 period.
12
<PAGE> 13
FEE REVENUE
<TABLE>
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
------------------------------------------------- ----------------------------------------------
Sept. 30, Sept. 30, Increase Sept. 30, Sept. 30, Increase
(In Thousands) 1999 1998 (Decrease) 1999 1998 (Decrease)
- -------------------------- ------------ ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Personal wealth management $ 82,219 $ 66,490 23.7 % $ 242,448 $ 187,341 29.4 %
Institutional services 21,259 22,402 (5.1) 66,095 63,464 4.1
---------- ----------- ---------- ------------ ----------- ----------
Fee revenue $ 103,478 $ 88,892 16.4 $ 308,543 $ 250,805 23.0
=========== =========== ========== ============ =========== ==========
Market related fees $ 85,374 $ 73,589 16.0 % 253,906 204,942 23.9 %
Transaction related fees 18,104 15,303 18.3 54,637 45,863 19.1
---------- ----------- ---------- ------------ ----------- ----------
Fee revenue $ 103,478 $ 88,892 16.4 $ 308,543 $ 250,805 23.0
=========== =========== ========== ============ ============ ==========
</TABLE>
Fee revenue for the third quarter of 1999 increased approximately $14.6
million to $103.5 million from $88.9 million in the third quarter of 1998.
Market related fee revenue increased by $11.8 million to $85.4 million from
$73.6 million in the third quarter of 1998.
Market related fee revenue is based primarily on the market value of
the assets in clients' investment management accounts. In general, fee revenue
is influenced by a variety of factors, including growth or decline of stock,
fixed income and real estate market levels, new business, acquisitions, changes
in rate schedules and added services. Fee revenue is negatively impacted by the
fee outflow of investment management assets due to terminating trusts, client
withdrawals, income and estate taxes and lost business. Fee revenue related to
market conditions 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 increasing account value. Therefore, market value or other incremental
changes in a portfolio's size may not typically have a proportionate impact on
the level of fee revenue. In general, fee revenue is calculated quarterly based
upon the value of the prior quarters' assets under management. Another important
factor in the determination of fee revenues 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
overall level of fee revenue. The following is a comparative analysis of the
composition of assets under management.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
---------------------------------------------
---------------------------------------------
<S> <C> <C> <C>
Equity securities 54 % 56 % 52 %
Fixed income securities 30 29 33
Short-term money management, real estate and other 16 15 15
=============================================
100 % 100 % 100 %
=============================================
</TABLE>
13
<PAGE> 14
The following table delineates assets under management and administration as of
September 30, 1999, December 31, 1998 and September 30, 1998. This analysis is
presented on a consolidated and segment basis. Unless otherwise noted, asset
values are measured at their estimated fair value.
<TABLE>
<CAPTION>
Sept. vs. Sept. vs.
Dec. Sept.
Sept. 30, Dec. 31, Sept. 30, Increase Increase
(In Billions) 1999 1998 1998 (Decrease) (Decrease)
- -------------------------------- ---------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED ASSETS UNDER MANAGEMENT:
Investment management $ 65.5 $ 61.3 $ 53.4 6.7 % 22.6 %
Special fiduciary 11.9 13.7 12.0 (13.4) (1.0)
--------- ---------- ----------- ------------ --------------
Total assets under management 77.4 75.0 65.4 3.0 18.2
--------- ---------- ----------- ------------ --------------
Assets under administration:
Personal custody and other 24.0 26.0 21.6 (7.7) 11.4
Corporate and municipal trusteeships
and agency relationships, at par 321.2 300.5 289.2 6.9 11.1
--------- ---------- ----------- ------------ --------------
Total assets under administration 345.2 326.5 310.8 5.8 11.1
--------- ---------- ----------- ------------ --------------
Total assets under management and
administration $ 422.6 $ 401.5 $ 376.2 5.2 % 12.3 %
========= ========== =========== ============ ==============
SEGMENT ASSETS UNDER MANAGEMENT AND
ADMINISTRATION:
Personal wealth management
Assets under management $ 52.5 $ 46.7 $ 41.2 12.3 % 27.4 %
Assets under administration 21.4 15.3 15.4 39.6 38.6
--------- ---------- ----------- ------------ --------------
Total 73.9 62.0 56.6 19.0 30.4
--------- ---------- ----------- ------------ --------------
Institutional
Assets under management 24.9 28.3 24.2 (12.2) 2.7
Assets under administration 323.8 311.2 295.4 4.1 9.6
--------- ---------- ----------- ------------ --------------
Total 348.7 339.5 319.6 2.7 9.1
--------- ---------- ----------- ------------ --------------
Total assets under management and
administration $ 422.6 $ 401.5 $ 376.2 5.2 % 12.3 %
========= ========== =========== ============ ==============
</TABLE>
Investment management assets at September 30, 1999 were $65.5 billion
compared to $61.3 billion at December 31, 1998, and $53.4 billion at September
30, 1998. During 1999, the Corporation acquired Radnor Capital Management, Inc.,
and NCT Holdings, Inc. which, in the aggregate, managed approximately $2.8
billion in assets (see Note 3 to Notes to the Condensed Consolidated Financial
Statements in Part I - Item 1 of this report).
14
<PAGE> 15
Approximately $8.4 billion of assets under management were invested in
the Corporation's Excelsior Funds at September 30, 1999. At December 31, 1998
and September 30, 1998, total assets under management invested in the Excelsior
Funds were $7.5 billion and $7.1 billion, respectively.
NET INTEREST REVENUE
Net interest revenue is affected by changes in the absolute levels of
interest rates and shifts in the term structure of interest rates, funding and
hedging strategies, and the impact of changes in the credit quality of the
loan portfolio. The net yield on interest earning assets for the quarter ended
September 30, 1999 has increased moderately to 3.23% from 3.20% for the quarter
ended September 30, 1998. Taxable equivalent net interest revenue for the third
quarter of 1999 was $29.5 million an increase of $3.9 million from the
comparable 1998 period. Average interest earning assets increased by 14.2% to
approximately $3.6 billion as of September 30, 1999 compared to approximately
$3.2 billion at September 30, 1998.
The loan portfolio is the largest component of average total assets.
Average loans for the third quarter of 1999 were $2.5 billion, a $476.6 million
or 23.7% increase over average loans for the third quarter of 1998. The
Corporation's loan portfolio is predominantly comprised of loans to private
banking customers. Approximately 75% of total loans are collateralized by
residential real estate mortgages at September 30, 1999 and September 30, 1998.
<TABLE>
<CAPTION>
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
----------------------------------------- --------------------------------------------
(In Thousands) 1999 Rate 1998 Rate 1999 Rate 1998 Rate
- -------------------------- ----------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Securities $ 1,147,429 5.94 % $1,173,074 6.21 % $ 1,271,037 5.86 % $1,263,478 6.19 %
Loans 2,487,446 7.23 % 2,014,626 7.49 % 2,331,079 7.24 % 1,930,296 7.63 %
----------- ----- ---------- ----- ---------- ----- ---------- ------
Total Interest Earning Assets $ 3,634,875 6.84 % $3,187,700 7.03 % $ 3,602,116 6.75 % $3,193,774 7.05 %
=========== ===== ========== ======= =========== ====== ========== ======
Interest Bearing Deposits 2,778,241 4.30 % 2,295,320 4.71 % 2,700,740 4.15 % 2,273,143 4.71 %
Short-Term Credit Facilities 131,134 5.07 % 161,799 5.32 % 142,379 4.76 % 175,799 5.31 %
Long-Term Credit Facilities 63,000 8.03 % 67,773 8.02 % 63,575 8.10 % 68,607 8.08 %
----------- ----- ---------- ----- ---------- ----- ---------- ------
Total Interest Bearing Liabilities $ 2,972,375 4.41 % $2,524,892 4.84 % $ 2,906,694 4.27 % $2,517,549 4.85 %
=========== ===== ========== ======= =========== ====== ========== ======
Net Free Funds(*) 662,500 662,808 695,422 676,225
----------- ---------- ---------- ----------
Total Interest Bearing Liabilities
And Net Free Funds $ 3,634,875 $3,187,700 $3,602,116 $3,193,774
=========== ========== ========== ===========
Net Yield 3.23 3.20 3.30 3.23
====== ====== ====== ======
Interest Spread 2.43 2.19 2.48 2.20
====== ====== ====== ======
</TABLE>
- ----------------------------
* Net free funds in the table above includes average stockholders' equity of
$261,824 and $241,116 at September 30, 1999 and September 30, 1998, respectively
for the quarters then ended and $256,741 and $238,342, respectively for the nine
month periods then ended. Loans and Stockholders' Equity (included in Net Free
Funds above) include the Loan to ESOP which had an average balance of $3.8
million and $4.1 million for the quarter and nine months ended September 30,
1998, respectively.
15
<PAGE> 16
OPERATING EXPENSES
The following table provides details of operating expenses for the third
quarters of 1999 and 1998.
<TABLE>
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
---------------------------------------- ----------------------------------
Sept. 30, Sept. 30, Increase Sept.30, Sept. 30, Increase
(In Thousands) 1999 1998 (Decrease) 1999 1998 (Decrease)
- ------------------------------------ ------------ ----------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Salaries and other employee benefits $ 45,416 $ 38,232 18.8 % $ 129,367 $108,783 18.9 %
Performance compensation 12,448 11,121 11.9 43,628 33,208 31.4
Sales commissions and incentives 7,585 4,807 57.8 20,968 13,823 51.7
Occupancy 9,992 9,536 4.8 29,131 27,425 6.2
Other 24,580 23,849 3.1 77,297 67,117 15.2
---------- ---------- ----- ---------- -------- -----
Total operating expenses $ 100,021 $ 87,545 14.3 % $ 300,391 $250,356 20.0 %
========== ========== ====== ========== ======== ======
</TABLE>
Operating expenses increased by $12.5 million in the third quarter of
1999, compared to the third quarter of 1998. The Corporation's pre-tax margin
was 24.3% for the third quarter of 1999 and 22.9% for the third quarter of 1998.
Salaries and other employee benefits increased $7.2 million from the
third quarter of 1998. The number of full-time equivalent employees increased
13.5% to 1,939 at September 30, 1999, compared to 1,709 at September 30, 1998.
The increase in employees is attributable to acquisitions and internal growth
required to meet an expanding customer base.
Performance compensation is determined based upon the Corporation's
financial performance as measured by the Corporation's diluted earnings per
share, adjusted to offset the impact of extraordinary or nonrecurring events, or
other conditions or circumstances that warrant consideration. Performance
compensation increased $1.3 million from the third quarter of 1998 reflecting
the Corporation's financial performance and the increase in staffing levels.
Sales commissions and incentives increased $2.8 million in the third
quarter of 1999 compared to the third quarter of 1998. This increase reflects
the Corporation's strong emphasis on sales and higher levels of new business.
The Corporation makes a substantial commitment to sales, marketing and
advertising. As of September 30, 1999, approximately 159 employees were devoted
to sales, marketing and advertising activities compared to 140 as of September
30, 1998. Direct expenses associated with these functions, including salary and
other employee benefits, performance compensation and sales commissions and
incentives were $13.0 million for the third quarter of 1999, an increase of
28.3% from the $10.1 million incurred during the corresponding 1998 period. In
addition to the aforementioned expenses, occupancy expense directly allocable to
these functions amounted to approximately $673,000 for the third quarter of 1999
and $801,000 for the third quarter of 1998.
16
<PAGE> 17
Included in other operating expenses is an outsourcing agreement with
The Chase Manhattan Bank ("Chase"). Pursuant to this agreement, Chase furnishes
necessary securities processing, custodial, data processing and other operations
support services to the Corporation. The initial term of this agreement expires
on August 31, 2000. The Corporation has notified Chase that it is exercising its
option to extend the term of the agreement for two additional years beyond
August 31, 2000. During the initial five-year term of the agreement, the
Corporation pays Chase an annual base fee of $10 million plus additional volume
charges. The base fee for the two additional option years will increase by 10%
of total charges (excluding certain items) incurred in the final year of the
initial term of the agreement.
Management is considering various possible alternatives for obtaining
the services currently provided under the agreement after its expiration on
August 31, 2002. These alternatives include seeking a further extension of the
Chase agreement, obtaining the services from other third-party providers or
providing all or a portion of such services itself. Although the costs of
obtaining or providing such services are expected to increase from the current
level, Management believes, at this time, that such an increase will not have a
material adverse effect on the Corporation's results of operations.
Other operating expenses also includes amortization of intangibles
resulting from acquisitions. Amortization of intangibles was $2.4 million in the
third quarter of 1999 and $3.0 million in the third quarter of 1998. For the
nine month period ended September 30, 1999, amortization of intangibles was $5.1
million versus $4.7 million for the comparable 1998 period. Amortization of
intangibles does not require the use of cash and therefore, Management believes
it may be distinguished from other operating expenses. The impact on net income
after consideration of applicable income tax benefits of these non-cash charges
was approximately $2.0 million in the third quarter of 1999 and $2.4 million in
the third quarter of 1998. Excluding the after-tax impact of amortization of
intangible assets, diluted earnings per share would have been $1.03 and $0.87
for the three-month periods ended September 30, 1999 and 1998, respectively and
$2.94 and $2.38 for the nine month periods ended September 30, 1999 and 1998,
respectively.
THE BUSINESSES OF U.S. TRUST - SEGMENT INFORMATION
The Corporation has two principal businesses: Personal Wealth Management
Services and Institutional Services. Personal Wealth Management Services is
further delineated into two components - New York Wealth Management Services
("New York") and National Wealth Management Services ("National").
17
<PAGE> 18
PERSONAL WEALTH MANAGEMENT SERVICES
The Corporation provides a complete array of financial services for affluent
individuals and families. These services, defined as Personal Wealth Management
Services, include investment management (domestic and international equity,
fixed income and alternative investments, such as venture capital and real
estate), investment consulting, trust, financial and estate planning and private
banking. Personal Wealth Management Services are provided through New York and
National. The Corporation has been well established in the New York Wealth
Management business for many years. More recently, the Corporation has expanded
its presence beyond New York through national expansion resulting in the
establishment of its National Wealth Management business. The Corporation
anticipates that its national expansion will continue over the next several
years.
The cornerstone of the Corporation's services to the personal market in
both its New York and National businesses is investment management. At September
30, 1999, personal assets under management were approximately $52.5 billion. A
major strategy for the growth of the Corporation's Personal Wealth Management
business has been national expansion. Personal Wealth Management clients usually
prefer services to be delivered locally. The Corporation has established
affiliates throughout the United States: California, Connecticut, Florida, New
Jersey, North Carolina, Oregon, Pennsylvania, Texas and Washington D.C.
INSTITUTIONAL SERVICES
Institutional Services includes investment management, corporate trust,
brokerage and special fiduciary services for corporations, endowments,
foundations, pension plans and other institutional clients.
The Corporation's institutional investment management business provides
a wide range of investment options for its clients, including balanced and
specialized domestic and international equity investment styles, structured
investments, alternative investments, fixed-income vehicles and short-term cash
management. At September 30, 1999, the Corporation managed approximately $24.9
billion for its institutional clients.
SEGMENT FINANCIAL RESULTS
The following analysis presents the Corporation's financial results for the
three month and nine month periods ended September 30, 1999 and 1998, on a
segment basis. Certain amounts presented in the prior period have been
reclassified to conform with the current period's presentation. The
Corporation's internal accounting policies credit or charge each segment with
revenues and expenses as incurred and on a consistent basis. Presentation of
financial information on a quarterly basis may and most likely will result in
non-recurring transactions (either revenue or expense) being allocated to a
segment which may result in short-term swings in a segment's profit
contribution. Accordingly, while informative, quarterly segment disclosures may
not be indicative of long-term performance and should not necessarily be used
as long-term forecasting benchmarks.
18
<PAGE> 19
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
(Dollars In Thousands) Personal Wealth Management
------------------------------------------- Total
New York National Total Institutional Corporation
------------------------------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
- ------------------
September 30, 1999
Fee revenue $ 55,306 $26,913 $ 82,219 $21,259 $ 103,478
Allocated net interest
revenue 19,663 6,336 25,999 2,558 28,557
-------- ------- ---------- ------- ---------
Total revenue 74,969 33,249 108,218 23,817 132,035
Operating expense 52,298 30,485 82,783 17,238 100,021
-------- ------- ---------- ------- ---------
Income before taxes $ 22,671 $ 2,764 $ 25,435 $ 6,579 $ 32,014
======== ======= ========== ======= =========
Profit margin 30.2% 8.3% 23.5% 27.6% 24.3%
Percentage of income
before taxes 70.8% 8.6% 79.4% 20.6%
Assets Managed (1) $ 34.6 $ 17.9 $ 52.5 $ 24.9 $ 77.4
Assets Administered (1) $ 18.0 $ 3.4 $ 21.4 $ 323.8 $ 345.2
THREE MONTHS ENDED
- ------------------
September 30, 1998
Fee revenue $47,617 $18,873 $ 66,490 $22,402 $ 88,892
Allocated net interest
revenue 17,061 4,972 22,033 2,657 24,690
-------- ------- ---------- ------- ---------
Total revenue 64,678 23,845 88,523 25,059 113,582
Operating expense 48,422 21,300 69,722 17,823 87,545
-------- ------- ---------- ------- ---------
Income before taxes $ 16,256 $ 2,545 $ 18,801 $ 7,236 $ 26,037
======== ======= ========== ======= =========
Profit margin 25.1% 10.7% 21.2% 28.9% 22.9%
Percentage of income
before taxes 62.4% 9.8% 72.2% 27.8%
Assets Managed (1) $ 30.3 $ 10.9 $ 41.2 $ 24.2 $ 65.4
Assets Administered (1) $ 12.6 $ 2.8 $ 15.4 $ 295.4 $ 310.8
</TABLE>
- -----------------------------------------------
(1) $ in billions
19
<PAGE> 20
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
(Dollars In Thousands) Personal Wealth Management
------------------------------------------- Total
New York National Total Institutional Corporation
------------------------------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
- -----------------
September 30, 1999
Fee revenue $163,773 $78,675 $ 242,448 $66,095 $ 308,543
Allocated net interest
revenue 60,341 18,204 78,545 7,941 86,486
-------- ------- ------- ------- ---------
Total revenue 224,114 96,879 320,993 74,036 395,029
Operating expense 161,675 85,818 247,493 52,898 300,391
-------- ------- ------- ------- ---------
Income before taxes $ 62,439 $11,061 $ 73,500 $21,138 $ 94,638
======== ======= ========== ======= =========
Profit margin 27.9% 11.4% 22.9% 28.6% 24.0%
Percentage of income
before taxes 66.0% 11.7% 77.7% 22.3%
NINE MONTHS ENDED
- -----------------
September 30, 1998
Fee revenue $137,021 $50,320 $ 187,341 $63,464 $250,805
Allocated net interest
revenue 51,520 15,422 66,942 7,806 74,748
-------- ------- ---------- ------- ---------
Total revenue 188,541 65,742 254,283 71,270 325,553
Operating expense 137,974 58,709 196,683 53,673 250,356
-------- ------- ---------- ------- ---------
Income before taxes $ 50,567 $ 7,033 $ 57,600 $17,597 $ 75,197
======== ======= ========== ======= =========
Profit margin 26.8% 10.7% 22.7% 24.7% 23.1%
Percentage of income
before taxes 67.2% 9.4% 76.6% 23.4%
</TABLE>
Fee revenue for the Personal Wealth Management segment increased 23.7%
from the third quarter of 1998. Fee revenue for the New York component of the
Personal Wealth Management segment grew 16.1% from the third quarter of 1998
whereas the National component's fee revenue growth rate was 42.6%. Fee revenue
growth is attributable to new business, the overall strength in the financial
markets and acquisitions.
Allocated net interest revenue attributable to the Personal Wealth
Management segment increased 18.0% from the third quarter of 1998. New York and
National's growth rates were 15.3% and 27.4%, respectively. The increase in
allocated net interest revenue is principally attributable to the growth in
private banking activities in this segment.
20
<PAGE> 21
The Personal Wealth Management Segment's profit margin increased to
23.5% in the third quarter of 1999 from 21.2% in the third quarter of 1998. New
York's profit margin was 30.2% in the third quarter of 1999, and 25.1% in the
third quarter of 1998. National's profit margin was 8.3% and 10.7% for the
three-month periods ended September 30, 1999 and September 30, 1998,
respectively. The volatility in National's profit margin is reflective of the
Corporation's continuing investment in its national expansion strategy.
Institutional's fee revenue has decreased by 5.1% from the third
quarter of 1998. Institutional's allocated net interest revenue has remained
relatively flat from September 30, 1998. Institutional receives interest revenue
credit principally from the customer deposits generated from its corporate trust
activities. Institutional's profit margin has decreased from 28.9% in the third
quarter of 1998 to 27.6% in the third quarter of 1999. The decline is primarily
attributable to the institutional assets withdrawn from the Campbell
Cowperthwait division.
YEAR 2000 ISSUES - STATE OF READINESS
The following discussion relates to the Corporation's Year 2000 state
of readiness and the resulting external remediation costs. All of the external
remediation costs are recorded as other operating expenses.
In 1996, the Corporation established a Year 2000 Committee with the
responsibility for developing an effective plan for identifying, renovating,
testing and implementing simulated solutions for Year 2000 processing. The Plan
consists of the following five phases: (1) awareness of the problem and
commitment by senior management to dedicate the necessary resources to address
this problem; (2) a comprehensive inventory assessment of all hardware and
software, vendor interfaces and service providers to understand the magnitude of
the issue; (3) a systems code remediation schedule for all affected software
systems; (4) a comprehensive validation methodology to test all affected
applications; and (5) production implementation of the corrected software
systems.
The first two phases of the Plan were completed in June, 1997. The
remaining phases of the Plan, software code remediation and testing of critical
systems were substantially completed as of December 31, 1998. During these
phases the Corporation worked with Chase and Marshall & Illsley Data Services,
providers of the Corporation's most significant data processing systems
(collectively, the "Service Providers") to assure compliance with required
systems changes. The Service Providers are responsible for and bear the cost of
effecting all necessary changes to such systems.
As of March 31, 1999, all mission critical systems of the
Corporation, i.e., Asset Management, Banking and Corporate Trust were in full
production. The Corporation will run all of its corrected systems in a
production environment during the balance of 1999.
21
<PAGE> 22
In addition, the Corporation has business relationships with vendors
and suppliers. The Corporation has contacted these entities to determine the
status of their Year 2000 efforts and to track the renovation and readiness of
their systems for the Year 2000. Where appropriate, testing was conducted
between the Corporation and these vendors. A final follow-up regarding these
entities' Year 2000 readiness was conducted during the third quarter of 1999.
YEAR 2000 ISSUES - THE COST
The Corporation estimated the total cost of remediating its Year 2000 issues to
total approximately $5 million. These costs include the costs of remediation,
testing, third party assessment, and contingency planning. To date the
Corporation has spent approximately $4.2 million. This amount does not include
the cost associated with substantial managerial time that senior officers and
employees have dedicated on Year 2000 issues. Since the Service Providers are
responsible for and bear the cost of effecting all necessary changes to the
Corporation's most significant data processing systems, most of the
Corporation's costs were on testing. The Corporation expects remaining costs in
1999 to not exceed $0.5 million most of which will be incurred on
infrastructure/equipment upgrades. While the Corporation has deferred certain
other projects as a result of efforts regarding Year 2000, we believe that
these deferrals will have no material impact on our operating results.
YEAR 2000 ISSUES - CONTINGENCY PLAN
The Corporation has developed a contingency plan to deal with Year 2000
issues, including (1) identifying likely contingencies; (2) developing
procedures to be followed in the event of each contingency; and (3) identifying
personnel responsible for each of the Corporation's businesses that may be
involved in any actual contingency. In the event of an operational disruption,
the Corporation has in place contingency plans for its mission critical
functions. Key area and command recovery personnel within each business sector
will have been identified and trained to initiate the necessary action steps in
maintaining overall control and business continuity. The Corporation's plan has
been completed, and approved by it's Board of Directors. In addition, the plan
has been reviewed by the Corporation's internal audit department.
22
<PAGE> 23
YEAR 2000 ISSUES - RISK
Although it is not possible to predict accurately the consequences of a Year
2000 failure, the Corporation is confident that its efforts at remediation will
greatly reduce any disruption. While not anticipated, the most reasonable likely
worst case scenario would be a failure by either one of the Corporation's
mission critical systems or the Service Providers systems. In this case, the
Corporation would lose the ability to service its clients for a period of time.
If any of these failures were not corrected within a reasonable period of time,
it could have a material negative effect on the operations and financial
condition of the Corporation.
The disclosure contained in this 10-Q as well as the information
previously filed by the Corporation regarding its Year 2000 readiness are
designated as Year 2000 readiness disclosure related to the Year 2000
Information and Readiness Disclosure Act.
MARKET RISK AND SENSITIVITY ANALYSIS
The objective of risk assessment and asset and liability management is
to maximize net interest revenue while maintaining acceptable levels of interest
rate sensitivity, high asset quality and adequate liquidity.
The Corporation does not trade financial instruments nor does the
Corporation invest in financial instruments denominated in foreign currencies.
The Corporation's principal risk is interest rate related. Interest rate risk
results from differences in the maturity and/or repricing of the Corporation's
interest earning assets (which consist primarily of mortgage loans, mortgage
backed securities and other fixed rate investments) and its interest bearing
liabilities, (predominately floating rate deposits). The Corporation uses
interest rate swaps ("Swaps") as hedging vehicles to mitigate interest rate
exposure associated with short-term floating interest-rate deposits.
The Corporation employs net interest income ("NII") simulation modeling
techniques to evaluate and manage the effect of changing interest rates. The
Corporation's simulation model includes all on-balance sheet and off-balance
sheet financial instruments and measures NII under various interest rate
scenarios. Key variables in the NII simulation include changes to the level and
term structure of interest rates, the repricing of financial instruments,
prepayment and reinvestment assumptions, loan and deposit pricing and volume
assumptions. These simulations involve assumptions that are inherently uncertain
and as a result, the simulation models cannot precisely estimate NII or
precisely predict the impact of changes in interest rates on NII. Actual results
may differ from simulated results due to the timing magnitude and frequency of
interest rate changes as well as changes in market conditions and management
strategies, including changes in asset and liability mix.
23
<PAGE> 24
The Corporation's simulation model facilitates the evaluation of a
potential range of net interest revenue, under various interest rate scenarios.
The simulation model as of September 30, 1999 indicates a decrease in net
interest revenue of $0.7 million to $1.4 million over the following three month
period for an immediate 50 to 100 basis points increase in rates. Conversely, if
interest rates immediately decreased by 50 to 100 basis points, the simulation
model indicates a $0.7 to $1.3 million increase in net interest revenue. As of
September 30, 1998 the simulation model indicated a decrease in net interest
revenue of $1.1 million to $2.2 million over the following three months for an
immediate 50 to 100 basis points increase in rates. Conversely, if interest
rates had immediately decreased by 50 to 100 basis points as of September 30,
1998, the simulation model indicated a $1.0 million to $1.9 million increase in
net interest revenue for the subsequent three-month period.
Each of these simulations assumes that the asset and liability
structure of the balance sheet would not be changed as a result of the simulated
changes in interest rates. As the Corporation actively manages its balance sheet
and interest rate exposure, in all likelihood, the Corporation would take steps
to ameliorate any additional interest rate exposure that would result from the
simulated changes in the interest rate environment.
The following table provides details, as of September 30, 1999, of the
notional amounts of Swaps by maturity and the related average interest rates
paid and received. The Corporation is a fixed rate payor on all of its Swaps.
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------
Within 1 1 to 5
(Dollars in Thousands) Year Years Total
- -------------------------------- -------------------- --------------------- -------------------
<S> <C> <C> <C>
Fixed pay swaps $ 150,000 $ 720,000 $ 870,000
Average rate paid 6.89% 6.17% 6.30%
Average rate received (1) 5.37% 5.43% 5.42%
</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 quarters ended September 30, 1999 and 1998, are detailed in the
following table.
<TABLE>
<CAPTION>
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
------------------------------- --------------------------------
(Dollars In Thousands) 1999 1998 1999 1998
- -------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Interest revenue:
As reported $ 28,557 $ 24,690 $ 86,486 $ 74,748
Excluding hedging activities $ 30,660 $ 26,030 $ 92,796 $ 78,613
Net yield on interest earning assets:
As reported 3.23 % 3.20 % 3.30 % 3.23 %
Excluding hedging activities 3.45 % 3.34 % 3.55 % 3.41 %
</TABLE>
24
<PAGE> 25
The difference between results "As reported" and "Excluding hedging activities"
in each period reflects the cost of using swaps to hedge interest rate risk.
CAPITAL AND LIQUIDITY MANAGEMENT
<TABLE>
<CAPTION>
Minimum
Federal Well
Reserve Capitalized
Actual as of Actual as of Ratio For Under Prompt
September 30, 1998 September 30, 1999 Capital Corrective
(Dollars In Thousands) Amount Rate Amount Rate Adequacy Action
- ------------------------- --------------------- --------------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital:
Corporation $ 264,912 12.1% $ 239,160 13.1% 4.0% 6.0%
Trust Company 174,394 9.6% 156,615 10.0% 4.0% 6.0%
Total Capital:
Corporation 284,926 13.0% 258,372 14.2% 8.0% 10.0%
Trust Company 192,186 10.6% 173,475 11.0% 8.0% 10.0%
Tier 1 Leverage:
Corporation 264,912 6.6% 239,160 6.7% 3.0-5.0% 3.0-5.0%
Trust Company 174,394 5.5% 156,615 5.5% 3.0-5.0% 5.0%
</TABLE>
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, 1999 and 1998 are set forth in the above 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.
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. The Corporation 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 its 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,
repurchases of its common stock and capital required for acquisitions or for
additions to its subsidiaries.
25
<PAGE> 26
At the January 26, 1999, Parent's Board of Directors (the "Board")
meeting, the Board authorized the repurchase of an additional two million shares
of the Parent's common stock. The repurchased shares are available to meet the
Parent's obligations under its stock-based benefit plans and for general capital
management purposes. During the third quarter of 1999, 91,100 shares were
repurchased at a weighted average purchase price of $88.54 per share. During the
nine-month period ended September 30, 1999, 416,985 shares of common stock were
acquired at an average price of $84.89 per share. As of September 30, 1999, the
Parent could repurchase an additional 1,772,025 common shares. On January 26,
1999, the Parent announced a 22% increase in its regular quarterly common stock
dividend, indicating an annual dividend of $0.88 per share. Actual dividends
declared are subject to approval by the Board and regulatory capital
limitations.
The Parent's sources of liquidity are derived primarily from dividends
from its subsidiaries, issuances of common stock and issuances of long and
short-term debt instruments. As of September 30, 1999, the subsidiaries have the
ability to pay dividends of approximately $63.7 million without prior approval
of the regulatory authorities.
The Corporation has credit facilities totaling $80.0 million which are
based on LIBOR or Prime and mature on March 31, 2002. As of September 30, 1999
there was $10.0 million outstanding under these facilities.
The Parent is authorized to issue up to 5 million, $1.00 par value,
preferred shares. As of September 30, 1999, no preferred shares have been
issued.
In addition to traditional interest and non-interest bearing deposit
raising capabilities, the banking subsidiaries have established their own
external funding sources. Certain subsidiaries have established credit
facilities with the Federal Home Loan Bank ("FHLB") totaling approximately
$427.9 million. As of September 30, 1999, $13.0 million was outstanding under
these credit facilities.
The subsidiaries also generate liquidity from the types of financial
instruments that they carry as investment securities. As of September 30, 1999
approximately $805.2 million or 81% of the investment securities portfolio is
comprised of U.S. Treasury or federal agency obligations. These securities are
readily marketable and may be sold or financed through repurchase agreements, as
appropriate. At September 30, 1999, securities sold under agreements to
repurchase aggregated $47.8 million. The subsidiaries may also pledge these
securities to secure public deposits, to qualify for fiduciary powers and to use
as collateral for FHLB and other borrowings. Pledged assets at September 30,
1999 totaled $203.1 million.
QUALITY OF LENDING ACTIVITIES
The Corporation's loan portfolio is predominantly comprised of loans to
private banking customers. At September 30, 1999, the loan portfolio totaled
$2.6 billion of which approximately 75.0% were collateralized by residential
real estate mortgages.
An analysis of allowance for credit losses follows:
26
<PAGE> 27
<TABLE>
<CAPTION>
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
------------------------------------------- -------------------------------------
(Dollars In Thousands) 1999 1998 1999 1998
- ----------------------------- -------------------- ---------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Balance, Beginning of Period $ 19,711 $ 19,037 $ 19,414 $ 18,294
Provision for Credit Losses - 150 - 450
Recoveries 311 43 858 507
Charge-offs (8) (18) (258) (39)
-------------------- ---------------------- ------------------- -----------------
Net (Charge-Offs) Recoveries 303 25 600 468
-------------------- ---------------------- ------------------- -----------------
Balance, End of Period $ 20,014 $ 19,212 $ 20,014 $ 19,212
==================== ====================== =================== =================
</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 continuing
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 other current economic
and financial considerations.
As a percentage of average loans, annualized net loan recoveries were
five basis points for the third quarter of 1999, compared to annualized net loan
recoveries of less than one basis point for the third quarter of 1998. The
allowance for credit losses at September 30, 1999, was 0.80% of average loans
for the quarter. This compares with 0.96% of average loans for the quarter ended
September 30, 1998. Given the current credit quality, management anticipates
that the allowance for credit losses as a percentage of loans will continue to
decrease.
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,
1999 1999 1999 1998 1998
----------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 435 $ 637 $ 583 $ 6,203 $ 7,616
Real estate owned, net - - - 534 534
----------------------------------------------------------------------------------
Total Nonperforming $ 435 $ 637 $ 583 $ 6,737 $ 8,150
==================================================================================
</TABLE>
27
<PAGE> 28
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.1 Certificate of Incorporation of the Corporation dated June 2, 1999,
filed as Exhibit 3.1 to Form 10-Q dated June 30, 1999. (1)
3.2 Restated By-Laws of the Corporation dated April 27, 1999, filed as
Exhibit 3.2 to Form 10-Q dated June 30, 1999.(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.
28
<PAGE> 29
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 12, 1999 By: /s/ Richard E. Brinkmann
----------------- ---------------------------------
Richard E. Brinkmann
Managing Director and
Comptroller
(Principal Accounting Officer)
------------------------------
29
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Condition at September 30, 1999 and the Consolidated
Statement of Income for the nine months ended September 30, 1999 and is
qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 209,739
<INT-BEARING-DEPOSITS> 65,983
<FED-FUNDS-SOLD> 120,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 997,679
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,589,296
<ALLOWANCE> 20,014
<TOTAL-ASSETS> 4,376,678
<DEPOSITS> 3,646,105
<SHORT-TERM> 81,469
<LIABILITIES-OTHER> 284,652
<LONG-TERM> 63,000
0
0
<COMMON> 20,060
<OTHER-SE> 281,392
<TOTAL-LIABILITIES-AND-EQUITY> 4,376,678
<INTEREST-LOAN> 126,213
<INTEREST-INVEST> 44,996
<INTEREST-OTHER> 8,004
<INTEREST-TOTAL> 179,213
<INTEREST-DEPOSIT> 83,818
<INTEREST-EXPENSE> 92,744
<INTEREST-INCOME-NET> 86,469
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 300,391
<INCOME-PRETAX> 94,638
<INCOME-PRE-EXTRAORDINARY> 94,638
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,417
<EPS-BASIC> 3.10
<EPS-DILUTED> 2.75
<YIELD-ACTUAL> 3.30
<LOANS-NON> 435
<LOANS-PAST> 1,106
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,414
<CHARGE-OFFS> 258
<RECOVERIES> 858
<ALLOWANCE-CLOSE> 20,014
<ALLOWANCE-DOMESTIC> 20,014
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 20,014
</TABLE>
