<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1999 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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 852-1000
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
COMMON SHARES, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A NEW YORK STOCK EXCHANGE
PARTICIPATING CUMULATIVE PREFERRED SHARES
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
---------------
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. (See definition of affiliate in Rule
405, 17 CFR 230.405.)
$2,220,375,862 as of January 31, 2000
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
18,740,512 Common Shares, Par Value $1 Per Share, as of January 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Current Report on Form 8-K filed February 22, 2000 are
incorporated by reference into Parts I and II of this Report.
<PAGE> 2
The following amendment to Item 8 "Financial Statements and Supplementary Data"
is for the sole purpose of adding the city and state of the independent
accountant's office to the Report of Independent Accountants. Item 8 was
incorporated into the Form 10-K by reference to Exhibit 99.5 to the Form 8-K
filed February 22, 2000, which Form 8-K was filed as Exhibit 99 to the Form 10-K
Report. No other change was made to Item 8 "Financial Statements and
Supplementary Data".
Pursuant to the requirements of Section 13 or 15(d) 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)
Dated: April 28, 2000 By: /s/ RICHARD E. BRINKMANN
--------------------------------------
Richard E. Brinkmann
Comptroller and Chief Planning Officer
2
<PAGE> 1
EXHIBIT NO. 99.5
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Fee Revenue.................................................................. $ 424,467 $ 339,619 $ 281,691
1999 1998 1997
----------- ------------ ------------
Interest Revenue.................. $ 246,929 $ 224,743 $ 212,521
Interest Expense.................. (129,816) (122,117) (120,862)
Provision for Credit Losses....... -- (600) (750)
Securities Gains, Net............. 17 4 216
----------- ------------ ------------
Net Interest Revenue......................................................... 117,130 102,030 91,125
------------ ------------ ------------
Total Revenue................................................................ 541,597 441,649 372,816
------------ ------------ ------------
OPERATING EXPENSES
Salaries..................................................................... 141,417 117,889 100,997
Performance Compensation..................................................... 58,303 41,028 32,472
Sales Commissions and Incentives............................................. 29,012 19,448 14,050
Other Employee Benefits...................................................... 34,039 32,373 24,904
------------ ------------ ------------
Total Salaries, Performance
Compensation and Other Benefits............................................ 262,771 210,738 172,423
Occupancy.................................................................... 41,786 36,574 39,294
Amortization of Intangibles.................................................. 6,950 5,799 3,521
Other........................................................................ 102,414 87,444 73,919
------------ ------------ ------------
Total Operating Expenses..................................................... 413,921 340,555 289,157
------------ ------------ ------------
Income Before Income Taxes................................................... 127,676 101,094 83,659
Income Taxes................................................................. 50,107 39,427 32,627
------------ ------------ ------------
Net Income................................................................... $ 77,569 $ 61,667 $ 51,032
============ ============ ============
Basic Earnings Per Share..................................................... $ 4.18 $ 3.29 $ 2.64
============ ============ ============
Diluted Earnings Per Share................................................... $ 3.72 $ 2.96 $ 2.39
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 2
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31,
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks............................................................... $ 407,329 $ 108,346
Short-Term Investments................................................................ 425,456 459,263
Securities Available for Sale......................................................... 1,079,158 1,058,088
Loans, Net of Allowance for Credit Losses ($20,169 in 1999 and $19,414 in 1998)....... 2,689,206 2,171,393
Premises and Equipment, Net........................................................... 79,447 77,020
Other Assets.......................................................................... 342,455 268,752
----------------- -----------------
Total Assets.......................................................................... $ 5,023,051 $ 4,142,862
----------------- -----------------
LIABILITIES
Deposits:
Non-Interest Bearing................................................................ $ 1,247,252 $ 824,585
Interest Bearing.................................................................... 2,957,691 2,590,206
----------------- -----------------
Total Deposits........................................................................ 4,204,943 3,414,791
Short-Term Credit Facilities.......................................................... 141,157 140,925
Accounts Payable and Accrued Liabilities.............................................. 312,110 274,738
Long-Term Debt........................................................................ 63,000 67,773
----------------- -----------------
Total Liabilities..................................................................... 4,721,210 3,898,227
----------------- -----------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, Par Value $1.00; Authorized 5,000,000;
Issued, None........................................................................ -- --
Common Stock, Par Value $1.00; Authorized 70,000,000 Shares;
Issued 20,087,780 in 1999 and 19,970,842 in 1998.................................... 20,088 19,971
Capital Surplus....................................................................... 36,819 18,902
Retained Earnings..................................................................... 354,510 293,289
Treasury Stock, at Cost (1,427,179 Shares in 1999 and
1,502,184 Shares in 1998)........................................................... (96,742) (87,768)
Loan to ESOP.......................................................................... -- (3,773)
Accumulated Other Comprehensive Income (Loss)......................................... (12,834) 4,014
----------------- -----------------
Total Stockholders' Equity............................................................ 301,841 244,635
----------------- -----------------
Total Liabilities and Stockholders' Equity............................................ $ 5,023,051 $ 4,142,862
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
(DOLLARS IN THOUSANDS, EXCEPT PER COMMON CAPITAL RETAINED TREASURY LOAN TO COMPREHENSIVE STOCKHOLDERS'
SHARE AMOUNTS) STOCK SURPLUS EARNINGS STOCK ESOP INCOME (LOSS) EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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............................. 77,569 77,569
Change in Net Unrealized Gain (Loss) on
Securities Available for Sale........ (16,848) (16,848)
------------ ----------- -----------
Total Comprehensive Income............. 77,569 (16,848) 60,721
------------ ----------- -----------
Purchases of Treasury Stock
(655,785 Shares)..................... (53,924) (53,924)
Principal Payment by ESOP.............. 3,773 3,773
Cash Dividends Declared ($0.88
Per Share)........................... (16,366) (16,366)
Issuance of Shares for Acquisitions
(525,077 Shares)..................... 12,564 32,181 44,745
Issuance of Shares Under Employee
Benefit Plans (322,651
Shares).............................. 117 3,301 12,769 16,187
Tax Benefits From Stock Based Awards... 2,052 18 2,070
---------- ---------- ------------ ------------ ---------- ----------- -----------
Balance, December 31, 1999............. $ 20,088 $ 36,819 $ 354,510 $ (96,742) $ -- $ (12,834) $ 301,841
========== ========== ============ ============ ========== =========== ===========
Balance, January 1, 1998 $ 19,895 $ 12,325 $ 244,980 $ (42,627) $ (7,254) $ 3,827 $ 231,146
Net Income............................. 61,667 61,667
Change in Net Unrealized Gain on
Securities Available for Sale........ 187 187
------------ ----------- -----------
Total Comprehensive Income............. 61,667 187 61,854
------------ ----------- -----------
Purchases of Treasury Stock
(866,900 Shares)..................... (58,173) (58,173)
Principal Payment by ESOP.............. 3,481 3,481
Cash Dividends Declared ($0.72
Per Share)........................... (13,451) (13,451)
Issuance of Shares for Acquisitions
(173,593 Shares)..................... 2,917 9,538 12,455
Issuance of Shares Under Employee
Benefit Plans (146,886
Shares).............................. 76 2,018 3,494 5,588
Tax Benefits From Stock Based Awards... 1,642 93 1,735
---------- ---------- ------------ ------------ ---------- ----------- -----------
Balance, December 31, 1998............. $ 19,971 $ 18,902 $ 293,289 $ (87,768) $ (3,773) $ 4,014 $ 244,635
========== ========== ============ ============ ========== =========== ===========
Balance, January 1, 1997............... $ 19,630 $ 3,575 $ 205,384 $ (4,728) $ (10,468) $ 705 $ 214,098
Net Income............................. 51,032 51,032
Change in Net Unrealized Gain on
Securities Available for Sale........ 3,122 3,122
------------ ----------- -----------
Total Comprehensive Income............. 51,032 3,122 54,154
------------ ----------- -----------
Purchases of Treasury Stock (820,090
Shares).............................. (40,492) (40,492)
Principal Payment by ESOP.............. 3,214 3,214
Cash Dividends Declared ($0.60 Per
Share)............................... (11,579) (11,579)
Issuance of Shares for Acquisitions
(204,218 Shares)..................... 204 6,943 7,147
Issuance of Shares Under Employee
Benefit Plans (125,389 Shares)....... 61 549 2,593 3,203
Tax Benefits From Stock Based Awards... 1,258 143 1,401
---------- ---------- ------------ ------------ ---------- ----------- -----------
Balance, December 31, 1997............. $ 19,895 $ 12,325 $ 244,980 $ (42,627) $ (7,254) $ 3,827 $ 231,146
========== ========== ============ ============ ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income......................................................... $ 77,569 $ 61,667 $ 51,032
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Credit Losses................................... -- 600 750
Amortization of Restricted Stock Units........................ 4,190 2,560 1,133
Depreciation and Amortization of Premises
and Equipment and Other Assets.............................. 24,435 20,053 14,023
Net Amortization of Premium on Securities..................... 4,677 3,384 2,778
Deferred Income Taxes......................................... 352 (3,279) (2,938)
Net Change in Accrued Interest and Accounts Receivable........ (9,985) (3,865) (3,185)
Net Change in Accounts Payable and Other Liabilities.......... 19,750 16,866 25,117
Other, Net.................................................... 3,047 3,271 1,266
----------------- -------------- ---------------
Net Cash Provided by Operating Activities.......................... 124,035 101,257 89,976
----------------- -------------- ---------------
Cash Flows From Investing Activities:
Net Change in Short-Term Investments............................... 33,807 (71,655) (101,658)
Purchases of Securities Available for Sale......................... (469,596) (368,657) (625,721)
Proceeds from Sales of Securities Available for Sale............... 10,019 1,315 20,804
Proceeds from Maturities, Calls and
Mandatory Redemptions of Securities
Available for Sale............................................... 420,330 437,599 642,546
Net Change in Loans................................................ (518,621) (251,983) (250,762)
Purchases of Premises and Equipment................................ (18,343) (13,416) (10,942)
Cash used in Acquisitions.......................................... (2,809) (22,184) --
Other, Net......................................................... (2,858) (7,183) (12,240)
----------------- -------------- ---------------
Net Cash Used in Investing Activities.............................. (548,071) (296,164) (337,973)
----------------- -------------- ---------------
Cash Flows From Financing Activities:
Net Change in Non-Interest Bearing
Deposits......................................................... 422,667 78,271 58,372
Net Change in Interest Bearing Deposits............................ 367,485 262,618 251,741
Net Change in Short-Term Credit
Facilities....................................................... 232 (38,663) (60,695)
Repayment of Long-Term Debt........................................ (4,773) (4,481) (4,214)
Issuance of Long-Term Debt......................................... -- -- 50,000
Issuance of Common Stock........................................... 6,937 1,767 755
Purchases of Treasury Stock........................................ (53,924) (58,173) (40,492)
Dividends Paid..................................................... (15,605) (12,973) (11,149)
----------------- -------------- ---------------
Net Cash Provided by Financing Activities.......................... 723,019 228,366 244,318
----------------- -------------- ---------------
Net Change in Cash and Cash Equivalents............................ 298,983 33,459 (3,679)
Cash and Cash Equivalents at Beginning of Year..................... 108,346 74,887 78,566
Cash and Cash Equivalents at End of Year........................... ----------------- -------------- ---------------
$ 407,329 $ 108,346 $ 74,887
================= ============== ===============
Cash Payments:
Income Taxes..................................................... $ 46,156 $ 43,697 $ 34,372
Interest Expense................................................. 127,210 121,887 119,064
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PENDING BUSINESS COMBINATION
U.S. Trust Corporation (individually, the "Parent" collectively with its wholly
owned subsidiaries, the "Corporation") is an investment management company with
fiduciary and banking powers.
The Parent has entered into an agreement and plan of merger (the "Merger
Agreement") dated January 12, 2000 with The Charles Schwab Corporation
("Schwab") and a wholly owned subsidiary of Schwab pursuant to which all of the
outstanding common shares of the Parent will be exchanged for shares of Schwab
common stock. The transaction, which is subject to, among other things,
regulatory approvals and Parent shareholder approval, is expected to be
consummated by July 2000.
Under the terms of the Merger Agreement, Patriot Merger Corporation, a
wholly owned subsidiary of Schwab, will merge with and into the Parent. The
surviving legal entity will be the Parent which will thereafter be a wholly
owned subsidiary of Schwab. The Parent's shareholders will receive 3.427 shares
of Schwab common stock for each common share of the Parent in a tax-free
exchange. The total transaction value was estimated at $2.7 billion as announced
on January 13, 2000 in a joint press release from Schwab and the Corporation.
The Parent and Schwab expect the transaction to qualify for pooling of interests
accounting treatment.
The Merger Agreement provides for a retention bonus program of
approximately $150 million (consisting of approximately $125 million in cash and
$25 million of value in Schwab stock options). Starting with the second
anniversary of the consummation of the business combination, employees will be
eligible to receive the benefits under the retention program, if employed at
that time. One-half of the stock options will vest on the third anniversary of
the consummation of the business combination and the remaining half will vest
on the fourth anniversary.
In connection with the change-in-control provisions of certain of the
Parent's compensation plans, all outstanding stock options and substantially all
restricted stock awards will vest and be paid on the closing of the transaction.
Payment in respect of these awards will be made in Schwab common stock.
The Notes to the Consolidated Financial Statements have been prepared under
the presumption (e.g., Notes 19 and 20 Performance Compensation and Retirement
and Other Employee Benefits) that the Corporation is a going concern and do not
attempt to take into consideration the impact, if any, that the Pending Business
Combination may have on the matters discussed therein.
- --------------------------------------------------------------------------------
2. ACCOUNTING POLICIES
The Corporation is an investment management company with fiduciary and banking
powers. Through its subsidiaries, including its principal subsidiary, United
States Trust Company of New York (the "Trust Company"), the Corporation provides
investment management, private banking, special fiduciary and corporate trust
services to affluent individuals, families and institutions located throughout
the United States.
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 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.
The following is a summary of the significant financial accounting
policies:
(a) BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of the Corporation. All material intercompany accounts and transactions
have been eliminated in consolidation. In the opinion of management, all
adjustments necessary for a fair presentation of the consolidated financial
position and results of operations for the periods have been made. Such
adjustments, unless otherwise noted in these Notes to the Consolidated Financial
Statements and/or Management's Discussion and Analysis, are of a normal
recurring nature.
(b) TRUST ASSETS -- Property (other than cash deposits) held by the Trust
Company or the Corporation's other bank subsidiaries in a fiduciary
5
<PAGE> 6
or agency capacity for customers is not an asset of the Corporation and is not
included in the Consolidated Statement of Condition.
(c) INTEREST EARNING/BEARING FINANCIAL INSTRUMENTS -- Interest income and
expense are accrued on interest earning/bearing financial instruments based upon
the contractual terms of the instruments. Premiums and discounts are amortized
or accreted, as applicable, on a basis that approximates the effective yield
method.
Securities that may be sold prior to maturity as part of asset/liability
management or in response to other factors are classified as securities
available for sale and carried at their estimated fair value with unrealized
gains and losses reported in a separate component of stockholders' equity, net
of taxes. Realized gains and losses from sales of securities are determined on a
specific identification cost basis.
(d) NONPERFORMING ASSETS -- Nonperforming assets consist of non-accrual
financial instruments and other real estate owned. Interest accruals are
discontinued when principal or interest is contractually past due ninety days or
more. In addition, interest accruals may be discontinued when principal or
interest is contractually past due less than ninety days if, in the opinion of
management, the amount due is not likely to be paid in accordance with the terms
of the contractual agreement, even though the financial instruments are
currently performing. Any accrued but unpaid interest previously recorded on a
non-accrual financial instrument is reversed and recorded as a reduction of
interest income. Interest received on non-accrual financial instruments is
applied either to the outstanding principal balance or recorded as interest
income, depending on management's assessment of the ultimate collectibility of
principal. Non-accrual financial instruments are generally returned to accrual
status only when all delinquent principal and interest payments become current
and the collectibility of future principal and interest on a timely basis is
reasonably assured.
Other real estate owned ("ORE") acquired through foreclosure in
satisfaction of the loan is recorded in other assets at the lower of the
carrying amount of the loan or the ORE's estimated fair value less estimated
selling and disposition costs. After the acquisition date of the ORE, operating
expenses and revenue, additional writedowns, as appropriate, and gains and
losses on the ultimate disposition of ORE are reported in other expenses.
(e) ALLOWANCE FOR CREDIT LOSSES -- The allowance for credit losses is
established through charges to income based on management's evaluation of the
adequacy of the allowance in meeting losses in the existing credit portfolio.
The adequacy of the allowance is reviewed continually by management, taking
into consideration current economic conditions, past loss experience and risks
inherent in the credit portfolio, including the value of impaired loans.
(f) PREMISES AND EQUIPMENT -- Premises and equipment, including leasehold
improvements, are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed by the straight-line method over the
lesser of the term of the lease or the estimated useful lives of the assets.
(g) INTANGIBLE ASSETS -- The fair value of intangible assets recorded as a
result of the acquisition of investment management enterprises is reported in
other assets on the Consolidated Statement of Condition and is amortized over
the estimated period benefited. An impairment review is performed periodically
on these assets.
(h) PERFORMANCE COMPENSATION -- The Corporation's performance compensation plans
provide for awards in the form of cash, stock options and restricted stock
units. Cash awards are accrued and paid annually. The exercise price of stock
options is the fair market value on the date of grant and no compensation
expense is recorded. Restricted stock units are recorded as compensation expense
ratably over the vesting period of the award based on the fair market value of
the award at the grant date.
(i) INCOME TAXES -- The Corporation files a consolidated Federal income tax
return. Deferred income taxes are provided for items that are recognized for
income tax purposes in years other than those in which they are recognized for
financial reporting purposes.
(j) DERIVATIVE FINANCIAL INSTRUMENTS -- As part of its asset and liability
management activities, the Corporation employs interest rate swaps ("Swaps") to
ameliorate the interest rate risk associated with nontrading-related balance
sheet financial instruments. The Corporation utilizes Swaps solely as hedging
instruments.
To be effective as a hedge, Swaps must reduce interest rate risk and must
be designated as a hedge at the inception of the derivative contract. That is,
Swaps are linked to the related liability, whereby the terms of the Swap
generally equal the terms of the related liability, at the inception and
throughout the term of the derivative contract.
Swaps that qualify as hedges are accounted for under the accrual method;
the interest component associated with Swaps is recognized over the life of
6
<PAGE> 7
the contract in net interest revenue and there is no recognition of unrealized
gains and losses on the Swap in the statement of financial condition. It has
been the Corporation's practice not to terminate its Swaps or sell the
underlying financial instruments that are being hedged by the Swaps. However, if
the Corporation did terminate a Swap, any amounts received from (a gain) or paid
to (a loss) the counterparty would be deferred and amortized over the shorter of
the remaining original life of the hedged item or the terminated Swap. In
addition if the hedged item was sold, the fair value of the Swap would be
recognized as an adjustment to the gain or loss of the hedged item.
(k) SHORT-TERM INVESTMENTS -- Included in Short-Term Investments are $50.5
million and $204.3 million of interest bearing deposits with banks and $375.0
million and $255.0 million of federal funds sold at December 31, 1999 and 1998,
respectively.
(l) CASH AND CASH EQUIVALENTS -- For purposes of the Consolidated Statement of
Cash Flows, the Corporation considers the Consolidated Statement of Condition
caption cash and due from banks as cash and cash equivalents. For purposes of
the U.S. Trust Corporation (Parent Company Only) Statement of Cash Flows, the
Corporation considers due from banks (which is included in the Statement of
Condition caption other assets) as cash and cash equivalents.
(m) RECLASSIFICATIONS -- Certain amounts presented in prior periods have been
reclassified to conform with the current year's presentation.
- --------------------------------------------------------------------------------
3. ACQUISITIONS
During 1999, the Corporation acquired NCT Holdings, Inc., the parent of North
Carolina Trust Company, a non-deposit banking corporation headquartered in
Greensboro, North Carolina and Radnor Capital Management, Inc., an investment
management company located in Wayne, Pennsylvania. Assets under management at
the closing dates from these acquisitions totaled approximately $2.8 billion.
The initial consideration paid at the closing of these business combinations was
approximately $49.3 million, substantially in the form of the Parent's common
stock.
During 1998, the Corporation acquired Wood Island Associates, Inc., Maier &
Siebel, Inc., and McMurrey Investments Advisors, Inc. These firms provide
investment management services to high net worth individuals and institutions.
The aggregate amount of assets under management at the closing dates was
approximately $1.6 billion. The Corporation also acquired Strategic Trading
Corporation which provides consultation and agency services on in-kind stock
distributions and derivative hedging strategies to high net worth individuals.
The initial consideration paid at the closing of these business combinations was
approximately $32.9 million.
Each of these transactions provide for additional payments of cash and the
Parent's common stock based upon business retention and future profitability.
Each transaction was accounted for as a purchase.
- --------------------------------------------------------------------------------
4. CASH AND DUE FROM BANKS
The average non-interest earning balances held at the Federal Reserve Bank for
the years ended December 31, 1999 and 1998 were $38.7 million and $32.9 million,
respectively. These amounts represent reserve requirements which must be
maintained on deposits. There are no other restrictions on cash and due from
banks.
- --------------------------------------------------------------------------------
5. SECURITIES
The amortized cost, estimated fair value and gross unrealized gains and losses
on securities available for sale as of December 31, 1999, 1998 and 1997, are
presented in the following table.
7
<PAGE> 8
<TABLE>
<CAPTION>
AGGREGATE GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
(DOLLARS IN THOUSANDS) COST VALUE GAINS LOSSES
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999:
U.S. treasury securities................ $ 178,068 $ 176,816 $ 24 $ 1,276
U.S. government sponsored agencies
and corporations..................... 690,450 672,103 2,507 20,854
State and municipal obligations......... 119,633 117,936 185 1,882
Collateralized mortgage
obligations(1)....................... 5,185 5,209 24 --
All other............................... 107,658 107,094 370 934
--------------- ----------------- --------------- ---------------
Total..................................... $ 1,100,994 $ 1,079,158 $ 3,110 $ 24,946
=============== ================= =============== ===============
December 31, 1998:
U.S. treasury securities................ $ 274,553 $ 276,562 $ 2,050 $ 41
U.S. government sponsored agencies
and corporations..................... 561,095 564,256 5,631 2,470
State and municipal obligations......... 98,726 100,423 1,715 18
Collateralized mortgage
obligations(1)....................... 10,076 10,128 53 1
All other............................... 106,408 106,719 435 124
--------------- ----------------- --------------- ---------------
Total..................................... $ 1,050,858 $ 1,058,088 $ 9,884 $ 2,654
=============== ================= =============== ===============
December 31, 1997:
U.S. treasury securities................ $ 417,545 $ 419,189 $ 1,832 $ 188
U.S. government sponsored agencies
and corporations..................... 508,389 512,442 7,047 2,994
State and municipal obligations......... 72,650 73,658 1,009 1
Collateralized mortgage
obligations(1)....................... 15,186 15,299 113 --
All other............................... 110,701 110,887 234 48
--------------- ----------------- --------------- ---------------
Total..................................... $ 1,124,471 $ 1,131,475 $ 10,235 $ 3,231
=============== ================= =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
(1)Collateralized by either GNMA, Federal National Mortgage Association, or
Federal Home Loan Corporation obligations.
8
<PAGE> 9
A profile of the maturities of the securities portfolio as of December 31, 1999,
and the related weighted average yield on such securities is presented in the
following table.
<TABLE>
<CAPTION>
WITHIN 1-5 5-10 OVER 10
(DOLLARS IN THOUSANDS) 1 YEAR YEARS YEARS YEARS TOTAL
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government obligations...... $ 52,991 $ 125,078 -- -- $ 178,069
Federal agency obligations....... 31,324 552,064 $ 63,666 $ 43,397 690,451
State and municipal
obligations.................... 14,554 66,685 38,393 -- 119,632
Collateralized mortgage
obligations(1)................. -- -- -- 5,185 5,185
Other securities(2).............. 63,147 17,345 2,706 18 83,216
------------ ------------ ------------ ----------- -------------
Total at amortized cost(2)....... 162,016 761,172 104,765 48,600 1,076,553
Estimated fair value(2).......... 161,702 741,203 102,844 48,968 1,054,717
------------ ------------ ------------ ----------- -------------
Net unrealized gains (losses) ... $ (314) $ (19,969) $ (1,921) $ 368 $ (21,836)
============ ============ ============ =========== =============
Weighted average yield(3)........ 5.31% 6.04% 6.45% 6.35% 5.99%
============ ============ ============ =========== =============
</TABLE>
------------------------------------------------------------------------------
(1) Collateralized Mortgage Obligations have been allocated over maturity
groupings based on contractual maturities. Expected maturities may differ
from contractual maturities because borrowers have the right to prepay
obligations with or without prepayment penalties.
(2) Excludes Federal Reserve Bank and Federal Home Loan Bank stock of
approximately $24 million.
(3) Yields have been computed by dividing annualized interest revenue, on a
taxable equivalent basis, by the amortized cost of the respective
securities as of December 31, 1999.
The components of net securities gains for the years ended December 31, 1999,
1998 and 1997 are presented in the following table.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains from
sales, maturities, calls, and
mandatory redemptions $ 17 $ 4 $ 218
Gross realized (losses) from
sales, maturities, calls, and
mandatory redemptions -- -- (2)
-------- ------------ -------------
Securities gains, net $ 17 $ 4 $ 216
======== ============ =============
</TABLE>
At December 31, 1999 and 1998, financial instruments in the amount of
$254.4 million and $230.3 million, respectively, were pledged to secure public
deposits, to qualify for fiduciary powers and for other purposes or as
collateral for borrowings.
- --------------------------------------------------------------------------------
6. LOANS
The following is an analysis of the composition of the loan portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Private banking:
Residential real estate
mortgages....................... $ 1,984,732 $ 1,630,500 $ 1,358,003 $ 1,093,107 $ 937,856
Other.............................. 663,977 525,614 537,024 525,446 457,843
-------------- --------------- --------------- -------------- --------------
Total private banking loans.......... 2,648,709 2,156,114 1,895,027 1,618,553 1,395,699
-------------- --------------- --------------- -------------- --------------
Loans to financial institutions for
purchasing and carrying
securities......................... 57,686 31,972 41,064 62,866 61,372
All other............................ 2,980 2,721 2,758 6,722 2,624
-------------- --------------- --------------- -------------- --------------
Total................................ $ 2,709,375 $ 2,190,807 $ 1,938,849 $ 1,688,141 $ 1,459,695
============== =============== =============== ============== ==============
</TABLE>
An analysis of nonperforming assets is presented in the following table.
9
<PAGE> 10
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans............... $ 1,673 $ 6,203 $ 9,666 $ 8,882 $ 13,285
Other real estate owned, net.... -- 534 -- 727 9,586
-------------- ------------- ------------- ----------- -----------
Total nonperforming assets...... $ 1,673 $ 6,737 $ 9,666 $ 9,609 $ 22,871
============== ============= ============= =========== ===========
Average non-accrual loans....... $ 832 $ 8,322 $ 8,829 $ 12,261 $ 8,475
============== ============= ============= =========== ===========
</TABLE>
The Corporation considers all non-accrual loans impaired. The impact of interest
revenue which would have been earned on non-accrual loans versus interest
revenue recognized on these loans was negligible for the years 1995 through
1999.
There was no reserve for ORE in 1997 through 1999. The reserve for ORE was
$477,000 and $978,000 in 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
7. ALLOWANCE FOR CREDIT LOSSES
An analysis of the allowance for credit losses is presented for the five-year
period ended December 31, 1999.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Analysis of allowance for credit losses:
Balance, January 1.......................... $ 19,414 $ 18,294 $ 16,693 $ 16,086 $ 14,699
------------ ------------ ------------ ------------ ------------
Charge-offs:
Private banking........................... (292) (327) (160) (658) (1,910)
Other..................................... -- -- -- (517) (1,520)
------------ ------------ ------------ ------------ ------------
Total charge-offs......................... (292) (327) (160) (1,175) (3,430)
------------ ------------ ------------ ------------ ------------
Recoveries:
Private banking........................... 1,047 800 684 702 2,844
Other..................................... -- 47 327 80 373
------------ ------------ ------------ ------------ ------------
Total recoveries.......................... 1,047 847 1,011 782 3,217
------------ ------------ ------------ ------------ ------------
Net (charge-offs) recoveries................ 755 520 851 (393) (213)
------------ ------------ ------------ ------------ ------------
Provision charged to income................. -- 600 750 1,000 1,600
------------ ------------ ------------ ------------ ------------
Balance, December 31........................ $ 20,169 $ 19,414 $ 18,294 $ 16,693 $ 16,086
============ ============ ============ ============ ============
</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 economic and
financial considerations.
- --------------------------------------------------------------------------------
8. PREMISES AND EQUIPMENT
An analysis of premises and equipment is presented in the following table.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,675 $ 1,675
Building 14,063 13,820
Leasehold improvements 71,111 74,670
Furniture and equipment 53,524 50,520
------------------- ---------------
140,373 140,685
Less: accumulated amortization
and depreciation (60,926) (63,665)
=================== ===============
Total $ 79,447 $ 77,020
=================== ===============
</TABLE>
Amortization and depreciation expense amounted to $17.1 million, $14.0 million
and $10.3 million for 1999, 1998 and 1997, respectively.
Included in Other Operating Expenses is approximately $15.3 million in
1999, $12.4 million in 1998 and $9.2 million in 1997 of equipment expense.
- --------------------------------------------------------------------------------
9. INTANGIBLE ASSETS
An analysis of intangible assets is presented in the following table.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $ 54,839 $ 29,497
Acquisitions 44,760 31,141
Less: amortization 6,950 5,799
---------------- ----------------
Balance, December 31 $ 92,649 $ 54,839
================ ================
</TABLE>
Intangible assets are amortized over a period not to exceed fifteen years.
10
<PAGE> 11
- --------------------------------------------------------------------------------
10. SHORT-TERM CREDIT FACILITIES
An analysis of borrowings under short-term credit facilities is presented in the
following table.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Year-end balance $ 14,630 $ 30,250 $ 10,175
Daily average balance 51,830 45,271 63,965
Maximum end-of-month
balance 127,690 34,075 194,765
Weighted average
interest rate during
year 4.96% 5.37% 5.48%
Weighted average
interest rate at year-
end 4.50% 4.75% 6.65%
Securities sold under
agreements to
repurchase:
Year-end balance $ 64,429 $ 90,309 $ 169,413
Daily average balance 79,306 116,740 108,007
Maximum end-of-month
balance 104,164 148,185 177,851
Weighted average
interest rate during
year 4.76% 5.11% 5.29%
Weighted average
interest rate at year-
end 4.50% 4.86% 5.87%
Other borrowed funds:
Year-end balance $ 62,098 $ 20,366 $ --
Daily average balance 15,388 6,145 114,479
Maximum end-of-month
balance 62,098 50,066 163,086
Weighted average
interest rate during
year 5.72%* 5.94% 5.68%
Weighted average
interest rate at year-
end 6.62%* 5.98% --%
</TABLE>
- --------------------------------------------------------------------------------
*The calculation of the weighted average interest rate during the year 1999
excludes $402,000 on an average daily basis of an overdraft balance in the
Corporation's clearing account with Chase and the year-end calculation excludes
$26.8 million of overdrafts. In 1998 and 1997 there were no overdraft balances
in other borrowed funds.
- --------------------------------------------------------------------------------
The term of federal funds purchased and securities sold under agreements to
repurchase generally do not exceed one week.
Included in other borrowed funds at December 31, 1999 is the utilization of
$35.0 million of the Corporation's $80.0 million unsecured revolving credit
facility. The weighted average interest rate on this facility is 6.62% at
December 31, 1999. At December 31, 1998, the amount outstanding under similar
credit facilities was $20.0 million at an interest rate of 5.98%. There were no
funds borrowed under these facilities at December 31, 1997.
- --------------------------------------------------------------------------------
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
8.414% Trust preferred capital
securities $ 50,000 $ 50,000
8.35% Senior unsecured ESOP
notes due 1999 -- 3,773
Federal home loan banks 13,000 14,000
------------ ------------
Total $ 63,000 $ 67,773
============ ============
</TABLE>
The Trust Preferred Capital Securities qualify as Tier 1 Capital under
guidelines of the Board of Governors of the Federal Reserve System (the "Board
of Governors") and have no voting rights. Holders of the Trust Preferred Capital
Securities are entitled to receive cumulative cash distributions semi-annually.
The Corporation has the right to redeem the Trust Preferred Capital Securities
prior to their stated maturity of February 1, 2027, on or after February 1,
2007, upon approval (if then required) of the Board of Governors.
The Federal Home Loan Bank ("FHLB") borrowings have maturities ranging from
2000 to 2002. The FHLB borrowings bear interest at rates ranging from 6.59% to
6.76% and are collateralized by the pledge of qualifying assets.
The 8.35% Senior Unsecured ESOP Notes due 1999 ("ESOP Notes") matured
February 1, 1999.
- --------------------------------------------------------------------------------
12. NET INTEREST REVENUE
The following is an analysis of the composition of net interest revenue. See the
"Financial and Other Data Supplement" for average balance and related yield
analyses on a tax equivalent basis.
11
<PAGE> 12
<TABLE>
<CAPTION>
(DOLLARS YEARS ENDED DECEMBER 31,
--------------------------------------------------
IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------------
Interest revenue:
<S> <C> <C> <C>
Loans $ 174,514 $ 149,493 $ 133,433
Securities:
Taxable 55,441 58,622 68,053
Tax-exempt 4,705 3,878 3,893
Short-term
investments 8,671 10,144 5,467
Deposits with
banks 3,598 2,606 1,675
-------------- -------------- --------------
Total interest
revenue 246,929 224,743 212,521
-------------- -------------- --------------
Interest expense:
Deposits 117,489 107,846 99,623
Short-term credit
facilities 7,198 8,755 15,714
Long-term debt 5,129 5,516 5,525
-------------- -------------- --------------
Total interest
expense 129,816 122,117 120,862
-------------- -------------- --------------
Net interest income 117,113 102,626 91,659
Provision for
credit losses -- (600) (750)
Securities gains,
net 17 4 216
-------------- -------------- --------------
Net interest
revenue $ 117,130 $ 102,030 $ 91,125
============== ============== ==============
</TABLE>
- -----------------------------------------------------------------------------
13. INCOME TAXES
The current and deferred portions of income tax expense (benefit) included in
the Consolidated Statement of Income are presented in the following table.
<TABLE>
<CAPTION>
(DOLLARS YEARS ENDED DECEMBER 31,
-----------------------------------------------
IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 41,214 $ 34,920 $ 26,876
State and local 8,541 7,786 8,689
-------------- -------------- -------------
Total current
income taxes 49,755 42,706 35,565
-------------- -------------- -------------
Deferred:
Federal 641 (2,626) (1,380)
State and local (289) (653) (1,558)
-------------- -------------- -------------
Total deferred
income taxes
(benefits) 352 (3,279) (2,938)
-------------- -------------- -------------
Total $ 50,107 $ 39,427 $ 32,627
============== ============== =============
</TABLE>
A reconciliation of the Federal statutory income tax rate with the Corporation's
effective income tax rate is presented in the following table.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax Expense at U.S. Federal income tax rate......... $ 44,687 35.0 % $ 35,383 35.0 % $ 29,281 35.0 %
Increase (decrease) in effective rate resulting
from:
Tax-exempt interest revenue....................... (1,403) (1.1) (1,150) (1.1) (1,298) (1.5)
State and local taxes, net of federal income
tax benefit..................................... 5,363 4.2 4,636 4.6 4,635 5.5
Miscellaneous items............................... 1,460 1.2 558 0.5 9 --
------------- ---------- ------------ --------- ------------- --------
Total tax expense and effective rate................ $ 50,107 39.3 % $ 39,427 39.0 % $ 32,627 39.0 %
============= ========== ============ ========= ============= ========
</TABLE>
12
<PAGE> 13
The components of total income tax expense for the years ended December 31,
1999, 1998 and 1997 that are applicable to operations and stockholders' equity
are presented in the following table.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(DOLLARS --------------------------------------------------
IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes
applicable to:
operations $ 50,107 $ 39,427 $ 32,627
Stockholders' equity:
Change in fair
value of
securities
available for
sale (12,217) 37 2,573
Tax benefit on
stock-based
awards (2,052) (1,642) (1,258)
Tax benefit on
dividends paid to
the ESOP on
unallocated
shares (18) (93) (143)
-------------- -------------- --------------
Total $ 35,820 $ 37,729 $ 33,799
============== ============== ==============
</TABLE>
The net deferred tax asset is included in "other assets" in the Consolidated
Statement of Condition. Deferred tax (assets) liabilities as of December 31,
1999 and 1998 resulted from the items listed in the following table.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax (assets):
Employee benefits $ (48,919) $ (45,570)
Trust and fiduciary
activities (10,698) (11,980)
Net unrealized losses on
securities available for sale (9,002) --
Allowance for credit losses (8,965) (8,591)
Property and equipment
leasing (7,007) (9,433)
Other (5,003) (4,090)
--------------- --------------
(89,594) (79,664)
=============== ==============
Deferred tax liabilities:
Premises and equipment 4,539 7,503
Net unrealized gains on
securities available for sale -- 3,214
Other 12,387 8,144
--------------- --------------
16,926 18,861
--------------- --------------
Net deferred tax (asset) $ (72,668) $ (60,803)
=============== ==============
</TABLE>
Deferred tax assets are attributable to temporary differences primarily
generated from expenses recognized for financial reporting purposes that are not
yet deductible on the tax return. The Corporation believes it is more likely
than not that it will generate sufficient taxable income in future periods to
absorb these items as they are recognized as deductions on the tax return.
- --------------------------------------------------------------------------------
14. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The Parent is authorized to issue 5,000,000 shares of preferred stock, $1.00 par
value per share. As of December 31, 1999, no preferred shares have been issued.
In 1999, stockholders' approved the proposal to amend the Corporation's
Certificate of Incorporation to increase the authorized number of shares of
common stock from 40 million shares to 70 million shares.
The calculations of basic earnings per share and diluted earnings per share
for the three-year period ended December 31, 1999 are reflected in the following
table. The impact of the stock split distributed on February 21, 1997 has been
reflected in all earnings per share calculations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
(IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income for basic
earnings per share $ 77,569 $ 61,667 $ 51,032
Dividend equivalents
on stock based
benefit plans
(after-tax) 836 682 550
------------- ------------- -------------
Net income for
diluted earnings
per share $ 78,405 $ 62,349 $ 51,582
============= ============= =============
Weighted average
shares outstanding
for basic earnings
per share 18,568 18,750 19,354
Dilutive effect of
stock based
benefit plans 2,518 2,335 2,267
------------- ------------- -------------
Total dilutive
shares
outstanding 21,086 21,085 21,621
============= ============= =============
Basic earnings per
Share $ 4.18 $ 3.29 $ 2.64
============= ============= =============
Diluted earnings per
Share $ 3.72 $ 2.96 $ 2.39
============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Corporation enters into various
transactions involving off-balance sheet financial instruments to meet the needs
of its customers and to reduce its own exposure to interest rate risk. These
transactions may be subject to credit risk. As compensation for the risks
assumed, these
13
<PAGE> 14
instruments generate interest or fee revenue or expense. The controls used to
monitor the credit and market risks of off-balance sheet financial instruments
are consistent with those associated with the Corporation's on-balance sheet
activities.
- --------------------------------------------------------------------------------
Credit-Related Financial Instruments
Credit-related financial instruments include firm commitments to extend credit
("commitments") and standby letters of credit ("standbys"). The credit risk
associated with these instruments varies depending on the creditworthiness of
the customer and the value of any collateral held. Collateral requirements vary
by type of instrument. The contractual amounts of these instruments represent
the amounts at risk should the contract be fully drawn upon, the client default,
and the value of any existing collateral become worthless.
Commitments are legally binding agreements to lend to a customer that
generally have fixed expiration dates or other termination clauses, may require
payment of a fee and are not secured by collateral until funds are advanced. The
Corporation evaluates each customer's creditworthiness on a case-by-case basis
prior to approving a commitment or advancing funds under a commitment and
determining the related collateral requirement. Collateral held includes
marketable securities, real estate mortgages or other assets. The majority of
the Corporation's commitments are related to mortgage lending to private banking
clients. Commitments totaled $306.7 million and $248.9 million at December 31,
1999 and 1998, respectively.
Standbys are conditional commitments issued by the Corporation to guarantee
the performance of a customer to a third party. For example, standbys are issued
to satisfy margin requirements incurred by investment banking and broker/dealer
financial institutions for their activities conducted on organized exchanges, or
in other situations standbys guarantee performance under lease and other
agreements by professional business corporations and for other purposes. The
credit risk involved in issuing standbys is essentially the same as that
involved in extending loans. Standbys outstanding at December 31, 1999 and 1998
amounted to $79.8 million and $87.0 million, respectively. Standbys are
generally partially or fully collateralized by cash, marketable equity
securities, marketable debt securities (including corporate and U.S. Treasury
debt securities) and other assets.
- --------------------------------------------------------------------------------
Derivative Financial Instruments
As part of its overall asset and liability management process, the Corporation
utilizes Swaps as hedges. Swaps are used to ameliorate the interest rate
characteristics of nontrading-related balance sheet instruments. The Corporation
enters into Swaps with counterparties as a principal.
The market values of Swaps can vary depending on movements in interest
rates. The measurement of the market risks associated with Swaps is meaningful
only when all related and offsetting transactions are identified. The notional
or contractual amounts of Swaps are indications of the volume of transactions
and do not represent amounts at risk. The amounts at risk upon default are
generally limited to the unrealized market value gains of the Swaps, if any, and
will vary based on changes in interest rates. The risk of default depends on the
creditworthiness of the counterparty. The Corporation evaluates the
creditworthiness of its counterparties as part of its normal credit review
procedures.
At December 31, 1999 and 1998, the Corporation was a counterparty to Swaps
with a total notional principal amount of $1,070.0 million and $560.0 million,
respectively. Outstanding Swaps had a weighted average maturity of approximately
3.3 years at December 31, 1999 and 2.4 years at December 31, 1998.
- --------------------------------------------------------------------------------
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments may be estimated using various
valuation methodologies. Quoted market prices, when available, are used as the
measure of fair value. Where quoted market prices are not available, fair values
may be estimated using primarily discounted cash flow analyses and other
valuation techniques. Assumptions used, principally the timing of future cash
flows and the discount rate significantly affect these derived fair values.
Because assumptions are inherently subjective, the estimated fair values may not
be substantiated by comparison to third party evidence and may not be indicative
of the value that could be realized in a sale or settlement of the financial
instrument.
A discussion of the fair value estimation methodologies used for material
financial instruments follows.
- --------------------------------------------------------------------------------
Securities
The estimated fair value of securities is based upon quoted bid market prices,
where available, or fair value quotes obtained from third party pricing
services. Securities are reported in the Consolidated Statement of Condition at
estimated fair value.
14
<PAGE> 15
- --------------------------------------------------------------------------------
Loans
The estimated fair value of the Corporation's loans (primarily residential real
estate mortgages) was calculated by discounting contractual cash flows adjusted
for current prepayment estimates. The discount rates were based on the interest
rates charged to current customers for comparable loans.
- --------------------------------------------------------------------------------
Long-Term Debt
The estimated fair value of the trust preferred capital securities was obtained
from quotes by third party investment bankers.
The estimated fair value of other long-term debt was calculated using a
discounted cash flow method, where the estimated cash flows considered
contractual principal and interest payments. The discount rate used was the
current rate for borrowings with comparable remaining maturities.
- --------------------------------------------------------------------------------
Interest Rate Swap Agreements
The Corporation is the net fixed rate payor under all of its Swaps and at
December 31, 1999 and 1998 had an accrued net payable of $274,000 and $908,000,
respectively. The estimated fair value of Swaps is obtained from dealer quotes.
These values represent the estimated amount that the Corporation would have to
pay or receive to terminate the Swaps, taking into account current interest
rates and, when appropriate, the current creditworthiness of the counterparties.
- --------------------------------------------------------------------------------
Other Financial Instruments
The Corporation's other financial instruments are generally short-term in nature
and contain negligible credit risk. These instruments consist of cash and due
from banks, short-term investments, accrued interest receivable and accounts
receivable, demand deposit liabilities, time deposit liabilities, short-term
credit facilities and accrued interest payable and accounts payable.
Consequently, carrying amounts of these assets and liabilities approximate their
estimated fair value.
The estimated fair values of the Corporation's significant, long-term
financial instruments are reflected in the following table.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------
1999 1998
------------------------------------------ --------------------------------------
PAR VALUE/ UNREALIZED PAR VALUE/ UNREALIZED
NOTIONAL FAIR GAIN NOTIONAL FAIR GAIN
(DOLLARS IN MILLIONS) AMOUNT* VALUE (LOSS) AMOUNT* VALUE (LOSS)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities.......................... $ 1,101 $ 1,079 $ (22) $ 1,051 $ 1,058 $ 7
Loans............................... 2,689 2,631 (58) 2,171 2,192 21
Long-term debt...................... 63 59 4 68 70 (2)
Interest rate swap agreements....... 1,070 16 16 560 (18) (18)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Par value is the amortized cost for securities, the carrying amount net of
the allowance for credit losses for loans, the carrying amount for long-term
debt and the notional amount for interest rate swaps.
- --------------------------------------------------------------------------------
17. RENTAL COMMITMENTS ON PREMISES AND EQUIPMENT
Most of the Corporation's operations are conducted from premises that are
leased. The initial lease periods expire between 2000 and 2020. The lease for
the Corporation's headquarters building expires in 2014 and is renewable at the
Corporation's option for two successive terms of ten years each at the then
current market rate.
Rent expense on operating leases for the years 1999, 1998 and 1997 was
$30.0 million, $26.4 million and $30.1 million, respectively. Operating lease
rent expense includes rent escalation adjustments of $6.7 million in 1999, $7.0
million in 1998 and $11.0 million in 1997 for increases in certain operating
expenses of the landlords as defined in the lease agreements.
Minimum rental commitments, including the current level of escalation
costs, on non-cancelable leases as of December 31, 1999 follows.
<TABLE>
<CAPTION>
MINIMUM
(DOLLARS IN THOUSANDS) RENTALS
- ----------------------------------------------------------------------------
<S> <C>
Year ending December 31:
2000 $ 32,651
2001 33,083
2002 32,767
2003 32,044
2004 31,148
Later years 256,237
------------------
Total minimum payments required $ 417,930
==================
</TABLE>
- --------------------------------------------------------------------------------
18. 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
15
<PAGE> 16
future material adverse effect on the Corporation's financial position, results
of operations or cash flows.
- --------------------------------------------------------------------------------
19. PERFORMANCE COMPENSATION
Cash-Based Performance Compensation
The Corporation's cash-based performance compensation award plans provide for
annual cash performance awards to eligible employees. The overall size of the
cash-based performance compensation award is determined by the achievement of
certain corporate financial objectives established by the Board of Directors at
the beginning of each year. Eligible employee awards are determined on an
individual basis based upon an employee's contribution to the overall success of
the Corporation. Total cash-based performance compensation was $54.1 million,
$38.5 million and $31.3 million in 1999, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
Stock-Based Compensation
Stock-based compensation may be made in the form of Restricted Stock Units
("RSUs") or stock options. The overall size of the stock-based awards are
determined by the achievement of certain corporate financial objectives
established by the Board of Directors at the beginning of each year. Eligible
employee awards are determined on an individual basis based upon an employee's
contribution to the overall success of the Corporation. RSUs accrue dividend
equivalent credits and generally cliff vest (the entire award typically vests at
the end of a five year vesting period) at which time they may be converted into
shares of the Parent's common stock. During 1999, the Corporation granted
125,697 RSUs with a weighted average fair value of $78.26 per unit. During 1998,
94,915 RSUs were granted with a weighted average fair value of $64.64 per unit.
The fair value of a RSU is determined by averaging the high and low prices of a
share of common stock of the Parent on the date of grant. The value of the grant
is recorded as a component of compensation expense ratably over the vesting
period. Total stock-based compensation expense which is included as a component
of performance compensation in the consolidated statement of income was $4.2
million, $2.6 million and $1.1 million in 1999, 1998 and 1997, respectively. At
December 31, 1999, the unamortized cost of RSUs was $12.2 million. Through
December 31, 1999, the Corporation had issued 344,017 RSUs and had 202,820 RSUs
available for future issuance.
The 1995 Stock Option Plan (the "Option Plan") provides for stock option
grants to eligible employees. The Option Plan authorizes the issuance of a
maximum of 3,200,000 options to acquire shares of the Parent's common stock. At
December 31, 1999, the Parent had 501,081 shares of common stock available for
issuance. Under the Option Plan, the Corporation awards either incentive stock
options or non-qualified stock options. The stock options expire ten years from
the date of grant and their exercise price is not less than the fair market
value of a common share on the date of grant. Awards generally vest in four
equal annual installments. Options granted are issued with the exercise price at
least equal to the fair market value of a common share of the Parent.
The following is a summary of stock option transactions which occurred
under the Option Plan for the three-year period ended December 31, 1999.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
UNDER OPTION PRICE PER
OPTION PER SHARE SHARE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31,
1996 1,483,576 $ 20.69 - $27.63 $ 22.93
Granted 576,350 44.69 - 56.63 47.75
Exercised (40,425) 20.69 - 23.63 21.72
Canceled (34,900) 20.69 - 47.88 31.10
------------- -------------------- ------------
Balance, December 31,
1997 1,984,601 20.69 - 56.63 30.02
Granted 385,750 59.13 - 74.88 63.84
Exercised (76,057) 20.69 - 47.88 25.62
Canceled (19,439) 20.69 - 62.63 45.13
------------- -------------------- ------------
Balance, December 31,
1998 2,274,855 20.69 - 74.88 35.78
Granted 455,350 63.63 - 93.72 76.39
Exercised (116,938) 20.69 - 63.63 27.58
Canceled (20,751) 20.69 - 75.75 53.67
------------- -------------------- ------------
Balance, December 31,
1999 2,592,516 $ 20.69 - $93.72 $ 43.13
============= ==================== ============
</TABLE>
Options outstanding at December 31, 1999 are further detailed in the following
table:
<TABLE>
<CAPTION>
REMAINING
SHARES WEIGHTED
UNDER OPTION PRICE AVERAGE
OPTION PER SHARE LIFE
- ------------------------------------------------------------------------------
<S> <C> <C>
1,253,796 $20.69 -- $27.63 5.9 Years
518,317 44.69 -- 59.13 7.2 Years
795,403 62.63 -- 78.28 8.7 Years
25,000 82.25 -- 93.72 9.4 Years
------------
2,592,516
============
</TABLE>
- --------------------------------------------------------------------------------
The number of options exercisable and their weighted average exercise price for
the three-year period ended December 31, 1999 are detailed in the
16
<PAGE> 17
following table:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Options
exercisable 1,046,975 693,020 351,493
================ ============== ===============
Weighted
average
exercise
price of
exercisable
options $ 31.82 $ 26.86 $ 21.63
================ ============== ===============
</TABLE>
The fair value of each option grant is estimated using the Black-Scholes option
pricing model. The weighted average assumptions used for grants made in 1999,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
GRANTS GRANTS GRANTS
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1.1% 2.6% 2.7%
Expected volatility 29.4% 24.7% 22.2%
Risk-free interest
rate 4.6% 5.6% 6.4%
Expected option life 5 Years 5 Years 5 Years
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997 was
$23.30 per option, $15.45 per option and $11.25 per option, respectively. If
compensation cost for the Corporation's Option Plan had been recorded based on
the fair value at grant date and recognized over the vesting period of the
award, the impact on the Corporation's net income and earnings per share would
have been as follows:
<TABLE>
<CAPTION>
AS PRO
(DOLLARS IN THOUSANDS) REPORTED FORMA
- ------------------------------------------------------------------------------
<S> <C> <C>
For the year ended
December 31, 1999:
Net income $ 77,569 $ 72,773
Diluted earnings per share $ 3.72 $ 3.49
For the year ended
December 31, 1998:
Net income $ 61,667 $ 58,256
Diluted earnings per share $ 2.96 $ 2.80
For the year ended
December 31, 1997:
Net income $ 51,032 $ 48,327
Diluted earnings per share $ 2.39 $ 2.26
</TABLE>
- -----------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan ("ESPP"), which commenced on January 1, 1999,
permits eligible employees to deduct between one and ten percent of their base
pay on an after-tax basis to purchase shares under the ESPP, subject to a limit
of $25,000 in any calendar year. The per-share purchase price is the lower of
85% of the fair market value on the first or the last day of the applicable
offering period. Up to 350,000 shares of common stock have been authorized for
issuance under the ESPP. As of December 31, 1999, 61,802 shares were purchased
by ESPP. The fair value of shares issued to the ESPP exceeded the proceeds
received by the Corporation by $1.0 million. The ESPP is non-compensatory in
nature and accordingly, no charge to earnings was recorded.
- --------------------------------------------------------------------------------
20. RETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
Deferred Contribution Plan
The Corporation sponsors a 401(k) Plan and ESOP covering all employees who
satisfy the specified service requirement.
On February 1, 1999 the final debt service payment on the ESOP debt was
made (see Note 11 to Notes to the Consolidated Financial Statements) and all
remaining shares were allocated to eligible participants. As of December 31,
1999 the ESOP held a total of 1,517,836 shares of the Parent's common stock.
Dividends on ESOP shares used for debt repayment were $0.3 million, $1.2 million
and $1.1 million in 1999, 1998 and 1997, respectively.
Dividends declared on ESOP shares are recorded as deductions from retained
earnings. The Corporation receives a tax benefit for dividends paid on ESOP
shares. These tax benefits are recorded in the Consolidated Statement of Income
as a reduction of income tax expense. For earnings per share purposes, shares
held by the ESOP are considered to be outstanding.
Employees can participate in the 401(k) plan by making contributions, on a
tax-deferred basis, up to the maximum annual amount allowed by law. The
Corporation matched the employees' contribution at the rate of 60% of the first
5% of each participant's eligible compensation contributed to the 401(k) plan.
The provisions of the 401(k) plan which provide for the company match became
effective as of January 1, 1999. The Corporation's match is made in the form of
the Corporation's common stock. For the year ended December 31, 1999,
approximately 33,260 shares were credited to participant's accounts. The cost of
the employer matching contribution ($2.7 million) was included in Other
Employee Benefits expense based upon the fair value of the Parent's common
stock at December 31, 1999.
17
<PAGE> 18
- --------------------------------------------------------------------------------
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Corporation provides pension and other postretirement benefits to qualifying
employees.
The pension plan is a trusteed, noncontributory, qualified defined benefit
pension plan that provides pension benefits to substantially all employees.
Benefits are based upon years of service, average compensation over the final
years of service and the social security covered compensation. The Corporation's
funding policy is consistent with the funding requirements of Federal laws and
regulations. The pension plan's investment assets are managed by the Trust
Company. The pension plan's investment assets principally are invested in shares
of various domestic and international equity, fixed income and money market
portfolios of the Excelsior Series of mutual funds. The Trust Company is the
investment advisor of the Excelsior funds.
The Corporation uses the projected unit credit cost method to compute the
vested benefit obligation, where the vested benefit obligation is the actuarial
present value of the vested benefits to which the employee is entitled based on
the employee's expected date of separation or retirement.
The Corporation provides certain health care and life insurance benefits
for all employees, certain qualifying retired employees and their dependents.
Postretirement medical and life insurance benefits are accrued during the years
that the employee renders service to reflect the expected cost of providing
health care and life insurance and other benefits to an employee upon
retirement.
The following table summarizes the components of retirement and
postretirement benefit expenses (credits), the funded status of the
Corporation's qualified retirement plan, changes in the benefit obligations
related to these plans and the major assumptions used to determine these
amounts.
18
<PAGE> 19
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------- --------------------------------- ----------------------------------
Pension Health & Pension Health & Pension Health &
Plan Life Total Plan Life Total Plan Life Total
- ------------------------------------------------------------ --------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Components of expense
(credit):
Service cost and
expenses............. $ 9,119 $ 238 $ 9,357 $ 6,617 $ 278 $ 6,895 $ 5,402 $ 309 $ 5,711
Interest cost.......... 14,601 1,394 15,995 14,077 1,779 15,856 12,458 2,182 14,640
Amortization of prior
service cost......... 87 (391) (304) 177 (391) (214) 177 (391) (214)
Actual return on plan
assets............... (84,668) -- (84,668) (46,341) -- (46,341) (45,135) -- (45,135)
Other net amortizations
and deferrals(1)..... 58,987 34 59,021 30,541 (6,759) 23,782 24,455 285 24,740
Special termination
benefits charge...... 193 -- 193 -- -- -- -- -- --
---------- ---------- --------- ---------- ----------- ---------- ----------- ----------- ---------
Net expense
(credit) (2) ...... $ (1,681) $ 1,275 $ (406) $ 5,071 $ (5,093) $ (22) $ (2,643) $ 2,385 $ (258)
========== ========== ========= ========== =========== ========== =========== =========== =========
Change in plan assets:
Fair value of plan assets
at beginning of year... $291,128 $ -- $ 253,442 -- $ 216,070 --
Actual return on plan
assets............... 84,668 -- 46,341 -- 45,135 --
Employer
contribution......... -- 1,630 -- 1,666 -- 1,688
Benefits and expenses
paid................. (9,008) (1,630) (8,655) (1,666) (7,763) (1,688)
---------- ---------- --------- ----------- ----------- -----------
Fair value of plan assets
at end of year...... $366,788 $ -- $ 291,128 $ -- $ 253,442 $ --
---------- ---------- --------- ----------- ----------- -----------
Change in benefit
obligation:
Benefit obligation at
beginning of year.... 220,715 20,821 192,352 31,940 170,045 26,660
Service cost........... 8,919 238 6,417 278 5,402 309
Interest cost.......... 14,601 1,394 14,077 1,779 12,458 2,182
Actuarial (gain)/
loss(1).............. (34,850) (1,822) 16,327 (11,510) 10,071 4,477
Benefits paid.......... (8,717) (1,630) (8,458) (1,666) (7,763) (1,688)
Amendments............. (474) -- -- -- 2,139 --
Special termination
benefits charge...... 193 -- -- -- -- --
---------- ---------- ---------- ----------- ----------- -----------
Benefit obligation at
end of year.......... $200,387 $ 19,001 $220,715 $ 20,821 $ 192,352 $ 31,940
---------- ---------- ---------- ----------- ----------- -----------
Prepaid/(accrued) cost:
Excess of plan assets
over benefit
obligation........... 166,401 (19,001) 70,413 (20,821) 61,090 (31,940)
Unrecognized cumulative
net (gains) losses... (136,391) (1,261) (40,246) 595 (23,630) 5,346
Unrecognized prior
service cost......... 978 (1,582) 1,539 (1,973) 1,716 (2,364)
Unrecognized net
liability (asset) at
date of initial
application.......... (4,797) -- (7,196) -- (9,595) --
---------- ---------- --------- ----------- ----------- ----------
Prepaid (accrued)
cost................. $ 26,191 $(21,844) $ 24,510 $ (22,199) $ 29,581 $ (28,958)
========== ========== ========= =========== =========== ==========
Discount rate............ 8.00% 8.00% 6.75% 6.75% 7.00% 7.00%
Rate of increase
in salary (3) 6.00% 6.00% 6.00% 6.00% 4.50% 4.50%
Health care cost
trend rate............. N/A 8.50% N/A 9.00% N/A 11.30%
Expected rate of return
on plan assets......... 9.00% N/A 9.00% N/A 9.00% N/A
</TABLE>
- --------------------------------------------------------------------------------
(1) Pension plan expense in 1998 includes a charge of $7.3 million arising from
the actuarial recalculation of certain benefit obligations. Health & Life
other net amortization and deferrals for the year ended December 31, 1998
includes a $7.3 million gain reflecting an actuarial gain arising from a
change in actuarial assumptions with regard to future retiree medical
claims.
(2) The pension expense (credit) and postretirement benefit expense are
determined using the assumptions as of the beginning of the year. The
benefit obligations and the funded status are determined using the
assumptions as of the end of the year.
(3) The rate of increase in compensation is based on an age-related table with
assumed rates of increase in compensation ranging from 9.0% to 3.5%. The
amount shown is the average assumed rate of increase for the given plan
year.
19
<PAGE> 20
The assumed rate of future increases in per capita cost of health care benefits
(the health care cost trend rate) is 8.5% in 1999, decreasing gradually to 5.5%
in the year 2005. A one percentage point change in the assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1% 1%
(DOLLARS IN THOUSANDS) INCREASE DECREASE
- ----------------------------------------------------------------------------
<S> <C> <C>
1999:
Effect on total of service and
interest cost components $ 17 $ (16)
Effect on postretirement benefit
obligation $ 208 $ (217)
1998:
Effect on total of service and
interest cost components $ 26 $ (26)
Effect on postretirement benefit
obligation $ 317 $ (333)
1997:
Effect on total of service and
interest cost components $ 80 $ (80)
Effect on postretirement benefit
obligation $ 950 $ (998)
</TABLE>
In addition to the pension plan, the Corporation also maintains an unfunded,
non-trusteed, non-contributory, non-qualified retirement plan ("BEP") for
participants whose retirement benefits under the qualified plan exceed Federal
tax law limits. As of January 1, 1997, the Corporation amended this
non-qualified plan to change the Plan from a "defined benefit" to a "defined
contribution" type of plan. The Corporation's accrued liability for the BEP was
$13.8 million, $11.5 million and $9.3 at December 31, 1999, December 31, 1998
and December 31, 1997, respectively.
- --------------------------------------------------------------------------------
21. PARENT COMPANY ONLY AND REGULATORY MATTERS
Condensed statements of income, condition and cash flows for the Parent follow:
U. S. TRUST CORPORATION (PARENT COMPANY ONLY)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Equity in Net Income of Subsidiaries:
Banks.................................... $ 85,508 $ 71,525 $ 56,254
Non-Banks................................ (1,758) (206) (212)
Interest Revenue............................ 442 1,066 1,433
Other Income................................ 142 138 130
----------------- ------------------- ------------------
Total Income.................................. 84,334 72,523 57,605
----------------- ------------------- ------------------
Expenses:
Interest Expense............................ 5,117 4,983 4,705
Professional Fees........................... 996 7,450 367
Other Operating Expense..................... 5,534 6,753 4,832
----------------- ------------------- ------------------
Total Expenses................................ 11,647 19,186 9,904
----------------- ------------------- ------------------
Income Before Income Taxes.................... 72,687 53,337 47,701
Income Taxes (Benefits)....................... (4,882) (8,330) (3,331)
----------------- ------------------- ------------------
Net Income.................................... $ 77,569 $ 61,667 $ 51,032
================= =================== ==================
</TABLE>
20
<PAGE> 21
- --------------------------------------------------------------------------------
U. S. TRUST CORPORATION (PARENT COMPANY ONLY)
STATEMENT OF CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Equity Investments in Subsidiaries:
Banks........................................................ $ 337,217 $ 306,079
Non-Banks.................................................... 39,666 734
------------------ ----------------
Total Equity Investments in Subsidiaries....................... 376,883 306,813
Short-Term Investments......................................... 21,142 25,503
Securities..................................................... 578 1,042
Other Assets................................................... 115,455 100,335
------------------ ----------------
Total Assets................................................... $ 514,058 $ 433,693
================== ================
LIABILITIES
Short-Term Credit Facilities................................... $ 35,000 $ 20,000
Other Liabilities.............................................. 125,670 113,738
Long-Term Debt(1).............................................. 51,547 55,320
------------------ ----------------
Total Liabilities.............................................. 212,217 189,058
------------------ ----------------
TOTAL STOCKHOLDERS' EQUITY..................................... 301,841 244,635
------------------ ----------------
Total Liabilities and Stockholders' Equity..................... $ 514,058 $ 433,693
================== ================
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes the 8.414% Trust Preferred Capital Securities. Refer to Notes to
the Consolidated Financial Statements No. 11.
21
<PAGE> 22
U. S. TRUST CORPORATION (PARENT COMPANY ONLY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................................. $ 77,569 $ 61,667 $ 51,032
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Equity in Net (Income) of Subsidiaries................ (83,750) (71,319) (56,042)
Dividends Received from Subsidiaries.................. 41,000 51,000 53,000
Deferred Income Taxes................................. 1,834 (739) (849)
Net Change in Other Assets............................ (12,486) (14,571) (20,025)
Net Change in Other Liabilities....................... 13,283 20,661 12,240
Other, Net............................................ 4,741 1,735 1,345
------------------ ------------------- -------------------
Net Cash Provided by Operating Activities............... 42,191 48,434 40,701
------------------ ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in Subsidiaries............................. 576 (240) (8,000)
Net Change in Short-Term Investments.................... 4,361 (17,502) 2,729
Securities:
Proceeds from Sales................................... 464 18,157 --
Purchases............................................. -- -- (17,539)
Principal Payment from ESOP............................. 3,773 3,481 3,214
Other, Net.............................................. -- 525 (1,547)
------------------ ------------------- -------------------
Net Cash Provided by (Used in) Investing Activities..... 9,174 4,421 (21,143)
------------------ ------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Short-Term Credit Facilities.............. 15,000 20,000 (17,000)
Issuance of Long-Term Debt.............................. -- -- 51,547
Repayment of Long-Term Debt............................. (3,773) (3,481) (3,214)
Issuance of Common Stock................................ 6,937 1,767 755
Purchases of Treasury Stock............................. (53,924) (58,173) (40,492)
Dividends Paid.......................................... (15,605) (12,973) (11,149)
------------------ ------------------- -------------------
Net Cash (Used in) Financing Activities................. (51,365) (52,860) (19,553)
------------------ ------------------- -------------------
Net Change in Cash and Cash Equivalents................. -- (5) 5
Cash and Cash Equivalents at Beginning of Year.......... -- 5 --
------------------ ------------------- -------------------
Cash and Cash Equivalents at End of Year................ $ -- $ -- $ 5
================== =================== ===================
Income Taxes Paid....................................... $ 41,100 $ 39,818 $ 30,289
Interest Expense Paid................................... 5,529 5,157 3,173
</TABLE>
22
<PAGE> 23
The Parent's banking subsidiaries are subject to limitations on the amount of
dividends they can pay to the Parent without prior approval of the bank
regulatory authorities. As of January 1, 2000, the Parent's banking subsidiaries
can declare, in aggregate, dividends of approximately $77.1 million without
prior regulatory approval.
There are various statutory and regulatory limitations on the extent to
which banking subsidiaries of the Parent can finance or otherwise transfer funds
to the Parent or its nonbanking subsidiaries. These "covered transactions" are
limited to 20% of all bank subsidiary's regulatory capital and surplus and
covered transactions with any one such affiliate are limited to 10% of a bank
subsidiary's regulatory capital and surplus. Covered transactions include, among
other things, loans and extensions of credit to, purchases of assets from, and
guarantees, acceptances, and letters of credit issued on behalf of, an
affiliate. Such covered transactions must be collateralized by qualifying
collateral as defined by applicable law.
The Federal Reserve Board, the Corporation's primary federal regulator,
establishes regulatory capital requirements. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by the
Federal Reserve Board that, if undertaken, could have a direct material effect
on the Corporation's financial statements. Under capital adequacy guidelines set
by the Federal Reserve Board, banks and bank holding companies must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Capital requirements and classifications are also subject
to qualitative judgments by the Federal Reserve Board about components, risk
weightings and other factors. The capital of the Corporation and its
subsidiaries exceeded minimum requirements at December 31, 1999.
The following table sets forth the Corporation's and Trust Company's
regulatory capital and ratios as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31,
1999 1998
------------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATE(a) AMOUNT RATE(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital:
Corporation................. $ 272,044 11.8% $ 235,835 12.0%
Trust Company............... 186,360 9.7% 158,806 9.7%
Total capital:
Corporation................. 292,213 12.7% 255,249 13.0%
Trust Company............... 204,153 10.7% 176,005 10.7%
Leverage:
Corporation................. 272,044 6.2% 235,835 6.2%
Trust Company............... 186,360 5.4% 158,806 5.1%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Minimum tier 1 capital, total capital and tier 1 leverage ratios are 4%, 8%
and 3%-5%, respectively, for bank holding companies and banks.
Under the prompt corrective action provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), five capital categories were
established for banks. Pursuant to that statute, the federal bank regulatory
agencies have specifically defined these categories by determining that a bank
is well capitalized if it maintains a tier 1 capital ratio of at least 6%, a
total capital ratio of at least 10% and a leverage ratio of at least 5%.
The Federal Reserve Board has also adopted these same thresholds for the
tier 1 capital ratio and total capital ratio in defining a well capitalized bank
holding company. The well capitalized threshold for the leverage ratio may be
set at 3% to 5%, depending on other regulatory criteria.
Based on their respective regulatory capital ratios at December 31, 1999
and December 31, 1998, the Corporation and its subsidiaries are well
capitalized. There are no conditions or events that management believes have
changed the Corporation's and subsidiaries well-capitalized status.
23
<PAGE> 24
22. QUARTERLY CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
1999 1998
----------------------------------------------- -------------------------------------------
(DOLLARS IN THOUSANDS, FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fee revenue................. $115,924 $103,478 $105,095 $99,970 $88,814 $88,892 $83,293 $78,620
Net interest revenue........ 30,644 28,557 29,008 28,921 27,282 24,690 24,704 25,354
---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------
Total revenue............... 146,568 132,035 134,103 128,891 116,096 113,582 107,997 103,974
Operating expense........... 113,530 100,021 101,803 98,567 90,199 87,545 82,927 79,884
---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------
Income before income taxes.. 33,038 32,014 32,300 30,324 25,897 26,037 25,070 24,090
Income taxes................ 12,885 12,485 12,759 11,978 10,100 10,155 9,777 9,395
---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------
Net income.................. $20,153 $19,529 $19,541 $18,346 $15,797 $15,882 $15,293 $14,695
========== ========== ========== =========== ========== ========== ========== =========
Earnings per share:
Basic earnings per share.. $1.08 $1.05 $1.05 $0.99 $0.85 $0.85 $0.81 $0.78
---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------
Diluted earnings per share $0.96 $0.93 $0.93 $0.88 $0.76 $0.76 $0.73 $0.70
---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------
Stock price high............ $85.13 $94.88 $95.50 $84.00 $76.75 $84.13 $77.50 $66.50
Stock price low............. 72.50 76.75 71.59 70.75 46.75 58.88 64.00 56.63
Cash dividends declared..... 0.22 0.22 0.22 0.22 0.18 0.18 0.18 0.18
</TABLE>
Since April 23, 1999, the common shares of the Parent have been listed on the
New York Stock Exchange. Prior to this the common shares of the Parent were
traded on the Nasdaq national market. As of January 1, 2000, there were 1,890
record holders of the Parent's common shares.
23. OPERATING SEGMENTS
As of December 31, 1998, U.S. Trust adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." U.S. Trust has two lines of business as defined by the Statement,
which are Personal Wealth Management and Institutional. Personal is further
subdivided into New York and National Wealth Management.
Further financial information by segment is contained within the "Businesses
of U.S. Trust " section of Management's Discussion and Analysis.
The following is a summary of the lines of business operating results for the
year ended December 31,
<TABLE>
<CAPTION>
NEW YORK NATIONAL INSTITUTIONAL TOTAL
-------------------------- ------------------------ ---------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN
MILLIONS) (1) 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ---------------------------------------------- ------------------------ ---------------------- ----------------------------
Total Revenue...... $309 $255 $221 $132 $92 $70 $100 $95 $82 $542 $442 $373
------ ------ ------ ------ ---- ---- ---- ---- ---- ------ ------ ------
Income Before
Income Tax......... $90 $69 $57 $10 $9 $8 $27 $24 $19 $128 $101 $84
------ ------ ------ ------ ---- ---- ---- ---- ---- ------ ------ ------
Total Assets....... $3,710 $3,069 $2,936 $1,182 $973 $767 $131 $101 $112 $5,023 $4,143 $3,815
------ ------ ------ ------ ---- ---- ---- ---- ---- ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Columns may not tally due to rounding.
24
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of U.S. Trust Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
U.S. Trust Corporation and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
January 31, 2000
25
