<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, 1998 0-20469
---------------
U.S. TRUST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-3818952
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
114 WEST 47TH STREET, NEW YORK, NEW YORK 10036
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 852-1000
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Shares, Par Value $1 Per Share, Nasdaq National Market
(Title of Class and name of each exchange on which registered)
Rights to Purchase Series A Participating Cumulative Preferred Shares, Nasdaq
National Market
(Title of Class and name of each exchange on which registered)
---------------
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.)
$1,357,621,223 as of January 31, 1999
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
18,597,551 Common Shares, Par Value $1 Per Share, as of January 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1998, are incorporated by reference into Parts I and II. Portions of the
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held
April 27, 1999 are incorporated by reference into Part III.
<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
included in Exhibit 13 to the Form 10-K for the fiscal year ended December 31,
1998. 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
Item 8 - Financial Statements and Supplementary Data
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
REVENUE
Fee Revenue...................................................... $339,619 $281,691 $244,211
1998 1997 1996
-------- -------- -------
Interest Revenue................. 224,743 212,521 174,731
Interest Expense................. (122,117) (120,862) (95,861)
Provision for Credit Losses...... (600) (750) (1,000)
Securities Gains, Net............ 4 216 642
-------- -------- -------
Net Interest Revenue............................................. 102,030 91,125 78,512
-------- -------- --------
Total Revenue.................................................... 441,649 372,816 322,723
-------- -------- --------
OPERATING EXPENSES
Salaries......................................................... 117,889 100,997 92,728
Performance Compensation......................................... 41,028 32,472 24,621
Sales Commissions and Incentives................................. 19,448 14,050 10,183
Other Employee Benefits.......................................... 32,373 24,904 19,746
-------- -------- --------
Total Salaries, Performance
Compensation and Other Benefits................................ 210,738 172,423 147,278
Occupancy........................................................ 36,574 39,294 34,214
Other............................................................ 93,243 77,440 71,958
-------- -------- --------
Total Operating Expenses......................................... 340,555 289,157 253,450
-------- -------- --------
Income Before Income Taxes....................................... 101,094 83,659 69,273
Income Taxes..................................................... 39,427 32,627 28,369
-------- -------- --------
Net Income....................................................... $ 61,667 $ 51,032 $ 40,904
======== ======== ========
Basic Earnings Per Share......................................... $ 3.29 $ 2.64 $ 2.09
======== ======== ========
Diluted Earnings Per Share....................................... $ 2.96 $ 2.39 $ 1.95
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE> 2
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
<S> <C> <C>
- --------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks..................................... $ 108,346 $ 74,887
Short-Term Investments...................................... 459,263 387,608
Securities Available for Sale............................... 1,058,088 1,131,475
Loans, Net of Allowance for Credit Losses ($19,414 in 1998
and $18,294 in 1997)...................................... 2,171,393 1,920,555
Premises and Equipment, Net................................. 77,020 77,563
Other Assets................................................ 268,752 222,894
---------- ----------
Total Assets................................................ $4,142,862 $3,814,982
========== ==========
LIABILITIES
Deposits:
Non-Interest Bearing...................................... $ 824,585 $ 746,314
Interest Bearing.......................................... 2,590,206 2,327,588
---------- ----------
Total Deposits.............................................. 3,414,791 3,073,902
Short-Term Credit Facilities................................ 140,925 179,588
Accounts Payable and Accrued Liabilities.................... 274,738 258,092
Long-Term Debt.............................................. 67,773 72,254
---------- ----------
Total Liabilities........................................... 3,898,227 3,583,836
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, Par Value $1.00; Authorized 5,000,000;
Issued, None.............................................. -- --
Common Stock, Par Value $1.00; Authorized 40,000,000 Shares;
Issued 19,970,842 in 1998 and 19,894,785 in 1997.......... 19,971 19,895
Capital Surplus............................................. 18,902 12,325
Retained Earnings........................................... 293,289 244,980
Treasury Stock, at Cost (1,502,184 Shares in 1998 and
879,706 Shares in 1997)................................... (87,768) (42,627)
Loan to ESOP................................................ (3,773) (7,254)
Accumulated Other Comprehensive Income...................... 4,014 3,827
---------- ----------
Total Stockholders' Equity.................................. 244,635 231,146
---------- ----------
Total Liabilities and Stockholders' Equity.................. $4,142,862 $3,814,982
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<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 Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998.............. $19,895 $12,325 $244,980 $(42,627) $ (7,254) $3,827 $231,146
Net Income............................ 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
======= ======= ======== ======== ======== ====== ========
Balance, January 1, 1996.............. $9,739 $ 125 $183,804 $(13,434) $1,609 $181,843
Effect of Two-For-One Stock Split..... 9,739 (125) (9,690) (76)
Net Income............................ 40,904 40,904
Change in Net Unrealized Gain on
Securities Available for Sale....... (904) (904)
------- ---------- -----------
Total Comprehensive Income............ 40,904 (904) 40,000
------- ---------- -----------
Purchases of Treasury Stock (124,000
Shares)............................. $(4,728) (4,728)
Principal Payment by ESOP............. 2,966 2,966
Cash Dividends Declared ($0.50 Per
Share).............................. (9,778) (9,778)
Issuance of Shares for Acquisitions
(71,258 Shares)..................... 72 2,458 2,530
Issuance of Shares Under Employee
Benefit Plans (80,016 Shares)....... 80 1,117 1,197
Tax Benefits From Stock Based Awards.. 144 144
------- ------- -------- -------- -------- ------ --------
Balance, December 31, 1996............ $19,630 $ 3,575 $205,384 $(4,728) $(10,468) $ 705 $214,098
======= ======= ======== ======== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
52
<PAGE> 4
U.S. TRUST CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income................................. $ 61,667 $ 51,032 $ 40,904
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Credit Losses................ 600 750 1,000
Depreciation and Amortization of Premises
and Equipment and Other Assets........... 20,053 14,023 11,776
Net Amortization of Premium on
Securities............................... 3,384 2,778 9
Deferred Income Taxes...................... (3,279) (2,938) 975
Net Change in Accrued Interest and Accounts
Receivable............................... (3,865) (3,185) 7,513
Net Change in Accounts Payable and Other
Liabilities.............................. 16,866 25,117 (371)
Other, Net................................. 5,831 2,399 2,397
--------- ----------- -----------
Net Cash Provided by Operating
Activities............................... 101,257 89,976 64,203
--------- ----------- -----------
Cash Flows From Investing Activities:
Net Change in Short-Term Investments....... (71,655) (101,658) (281,082)
Purchases of Securities Available for
Sale..................................... (368,657) (625,721) (1,505,453)
Proceeds from Sales of Securities Available
for Sale................................. 1,315 20,804 268,280
Proceeds from Maturities, Calls and
Mandatory Redemptions of Securities
Available for Sale....................... 437,599 642,546 830,287
Net Change in Loans........................ (251,983) (250,762) (228,493)
Purchases of Premises and Equipment........ (13,416) (10,942) (14,110)
Cash used in Acquisitions.................. (22,184) -- --
Other, Net................................. (7,183) (12,240) (10,430)
--------- ----------- -----------
Net Cash Used in Investing Activities...... (296,164) (337,973) (941,001)
--------- ----------- -----------
Cash Flows From Financing Activities:
Net Change in Non-Interest Bearing
Deposits................................. 78,271 58,372 198,115
Net Change in Interest Bearing Deposits.... 262,618 251,741 572,416
Net Change in Short-Term Credit
Facilities............................... (38,663) (60,695) 105,468
Repayment of Long-Term Debt................ (4,481) (4,214) (2,966)
Issuance of Long-Term Debt................. -- 50,000 --
Issuance of Common Stock................... 1,767 755 42
Purchases of Treasury Stock................ (58,173) (40,492) (4,728)
Dividends Paid............................. (12,973) (11,149) (9,768)
--------- ----------- -----------
Net Cash Provided by Financing
Activities............................... 228,366 244,318 858,579
--------- ----------- -----------
Net Change in Cash and Cash Equivalents.... 33,459 (3,679) (18,219)
Cash and Cash Equivalents at Beginning of
Year..................................... 74,887 78,566 96,785
--------- ----------- -----------
Cash and Cash Equivalents at End of Year... $ 108,346 $ 74,887 $ 78,566
========= =========== ===========
Cash Payments:
Income Taxes............................. $ 43,697 $ 34,372 $ 18,017
========= =========== ===========
Interest Expense......................... 121,887 119,064 94,619
========= =========== ===========
Issuance of Stock for Employee Benefit
Plans.................................... 5,701 3,283 944
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE> 5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
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. 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 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
54
<PAGE> 6
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 awarded under the Executive
Incentive Plan and 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 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 $204.3
million and $242.6 million of interest bearing deposits with banks and $255.0
million and $145.0 million of federal funds sold at December 31, 1998 and 1997,
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.
- -------------------------------------------------------
2. OPERATING SEGMENTS
The Corporation has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," ("FAS
131") effective beginning with consolidated financial statements for each of the
years in the three year period ended December 31, 1998.
The Corporation is in the business of providing wealth management services
to individuals and institutions. It operates in two business segments - Personal
Wealth Management and Institutional. The Personal Wealth Management segment is
comprised of New York Wealth Management and National Wealth Management. National
Wealth Management includes all of the Corporation's operations outside of New
York that provide wealth management services to individuals and families.
Personal Wealth Management delivers an array of financial products and services
including investment management, consulting,
55
<PAGE> 7
trust, financial and estate planning and private banking to individuals and
families.
The Institutional segment engages in delivering a broad range of financial
products and services including investment management, corporate trust, special
fiduciary and brokerage to corporations, endowments, foundations, pension plans
and other institutional clients in New York as well as throughout the United
States. Institutional clients are served in New York and in each of the
Corporation's operating locations. See "The Business of U.S. Trust" section of
Management's Discussion and Analysis for further information on the services
provided by each of these business segments.
Business segment results are presented in order to reflect financial
performance and strategic direction. Fee revenue is generally credited to the
segment that has the contractual relationship with the client. Allocated net
interest revenue is credited to each segment based upon the level of financial
instruments managed by the segment, after taking into effect the internally
developed cost of fund transfers. All costs directly attributable to a business
segment are charged directly to that segment. These costs include salaries,
performance compensation, sales commissions and incentives, employee benefits,
occupancy and all other operating costs. Corporate expenses are charged to the
segments based upon management's determination of the direct or indirect
benefits realized by each segment utilizing such corporate services. The
amortization of intangibles resulting from business combinations are charged to
the segment that manages the acquired business.
Segment results are based upon estimates and judgements. Internal
management accounting reflects the way management views its business and may not
be comparable to other financial institutions. Comparability is achieved by
periodic restatement to conform with changes in organizational structure and
changes in allocation policies.
The information below reflects results by segments for the three years
ended December 31, 1998:
56
<PAGE> 8
<TABLE>
<CAPTION>
Personal Wealth Management
--------------------------------------- Total
(Dollars in Thousands) New York National Total Institutional Corporation
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Fee revenue........................... $ 185,232 $ 71,189 $ 256,421 $ 83,198 $ 339,619
Allocated net interest revenue........ 70,668 20,962 91,630 10,400 102,030
----------- ----------- ----------- ------------ ------------
Total revenue......................... 255,900 92,151 348,051 93,598 441,649
Operating expense..................... 183,904 85,132 269,036 71,519 340,555
----------- ----------- ----------- ------------ ------------
Income before taxes................... $ 71,996 $ 7,019 $ 79,015 $ 22,079 $ 101,094
=========== =========== =========== ============ ============
Profit margin......................... 28.1% 7.6% 22.7% 23.6% 22.9%
=========== =========== =========== ============ ============
Percentage of income before taxes..... 71.2% 6.9% 78.1% 21.9%
============ =========== =========== ============
Total assets.......................... $ 3,065,637 $ 967,004 $ 4,032,641 $ 110,221 $ 4,142,862
=========== =========== =========== ============ ============
Assets under management............... $33,056,000 $13,644,000 $46,700,000 $ 28,336,000 $ 75,036,000
=========== =========== =========== ============ ============
Assets under administration........... $13,269,000 $2,067,000 $15,336,000 $311,124,000 $326,460,000
=========== =========== =========== ============ ============
Year ended December 31, 1997
Fee revenue........................... $ 158,437 $ 51,386 $ 209,823 $ 71,868 $ 281,691
Allocated net interest revenue........ 62,248 18,362 80,610 10,515 91,125
----------- ----------- ----------- ------------ ------------
Total revenue......................... 220,685 69,748 290,433 82,383 372,816
Operating expense..................... 164,127 61,286 225,413 63,744 289,157
----------- ----------- ----------- ------------ ------------
Income before taxes................... $ 56,558 $ 8,462 $ 65,020 $ 18,639 $ 83,659
=========== =========== =========== ============ ============
Profit margin......................... 25.6% 12.1% 22.4% 22.6% 22.4%
=========== =========== =========== ============ ============
Percentage of income before taxes..... 67.6% 10.1% 77.7% 22.3%
=========== ==========- =========== ============
Total assets.......................... $ 2,936,293 $ 766,835 $ 3,703,128 $ 111,854 $ 3,814,982
=========== =========== =========== ============ ============
Assets under management............... $27,408,000 $10,186,000 $37,594,000 $ 23,594,000 $ 61,188,000
=========== =========== =========== ============ ============
Assets under administration........... $ 9,883,000 $1,772,000 $11,655,000 $257,081,000 $268,736,000
=========== =========== =========== ============ ============
Year ended December 31, 1996
Fee revenue........................... $ 136,713 $ 40,837 $ 177,550 $ 66,661 $ 244,211
Allocated net interest revenue........ 55,446 13,131 68,577 9,935 78,512
----------- ----------- ----------- ------------ ------------
Total revenue......................... 192,159 53,968 246,127 76,596 322,723
Operating expense..................... 142,826 50,206 193,032 60,418 253,450
----------- ----------- ----------- ------------ ------------
Income before taxes................... $ 49,333 $ 3,762 $ 53,095 $ 16,178 $ 69,273
=========== =========== =========== ============ ============
Profit margin......................... 25.7% 7.0% 21.6% 21.1% 21.5%
=========== =========== =========== ============ ============
Percentage of income before taxes..... 71.2% 5.4% 76.6% 23.4%
=========== ========== =========== ===========
Total assets.......................... $ 2,603,601 $ 763,229 $ 3,366,830 $ 110,488 $ 3,477,318
=========== =========== =========== ============ ============
Assets under management............... $21,788,000 $7,317,000 $29,105,000 $ 24,194,000 $ 53,299,000
=========== =========== =========== ============ ============
Assets under administration........... $ 8,385,000 $1,519,000 $ 9,904,000 $222,379,000 $232,283,000
=========== =========== =========== ============ ============
</TABLE>
- -------------------------------------------------------
3. ACQUISITIONS
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. Certain of these transactions provide for
additional payments of cash and the Corporation's common stock based upon
business retention and future profitability. Each transaction was accounted for
as a purchase.
During 1997, the Corporation acquired the assets and liabilities of
Florence Fearrington, Inc., a New York investment advisory firm that managed
approximately $400 million in assets, for approximately $7.2 million of the
Corporation's common stock. During 1996, the
57
<PAGE> 9
Corporation acquired Lilienthal Associates, a California based investment
advisory firm that managed approximately $270 million in assets, for
approximately $2.5 million of the Corporation's common stock. These transactions
were accounted for using the purchase method of accounting.
- -------------------------------------------------------
4. CASH AND DUE FROM BANKS
The average non-interest earning balances held at the Federal Reserve Bank for
the years ended December 31, 1998 and 1997 were $32.9 million and $37.4 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, 1998, 1997 and 1996, are
presented in the following table.
<TABLE>
<CAPTION>
Aggregate Gross Gross
Amortized Fair Unrealized Unrealized
(Dollars in Thousands) Cost Value Gains Losses
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
========== ========== ======= ======
December 31, 1996:
U.S. treasury securities............. $ 514,180 $ 514,514 $ 831 $ 497
U.S. government sponsored agencies
and corporations.................. 427,866 427,642 2,426 2,650
State and municipal obligations...... 76,690 77,715 1,067 42
Collateralized mortgage
obligations(1).................... 25,666 25,859 193 --
All other............................ 120,208 120,189 24 43
---------- ---------- ------- ------
Total.................................. $1,164,610 $1,165,919 $ 4,541 $3,232
========== ========== ======= ======
</TABLE>
- --------------------------------------------------------------------------------
(1) Collateralized by either GNMA, Federal National Mortgage Association, or
Federal Home Loan Corporation obligations.
58
<PAGE> 10
A profile of the maturities of the securities portfolio as of December 31, 1998,
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...... $233,807 $ 40,746 -- -- $ 274,553
Federal agency obligations....... 125,034 379,357 $20,509 $36,195 561,095
State and municipal
obligations.................... 13,592 64,843 20,291 -- 98,726
Collateralized mortgage
obligations(1)................. -- -- -- 10,076 10,076
Other securities(2).............. 71,517 13,902 -- 3 85,422
-------- -------- ------- ------- ----------
Total at amortized cost(2)....... 443,950 498,848 40,800 46,274 1,029,872
Estimated fair value(2).......... 446,220 502,808 41,462 46,612 1,037,102
-------- -------- ------- ------- ----------
Net unrealized gains............. $ 2,270 $ 3,960 $ 662 $ 338 $ 7,230
Weighted average yield(3)........ 5.84% 5.95% 6.76% 5.95% 5.94%
======== ======== ======= ======= ==========
</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 $21 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, 1998.
The components of net securities gains for the years ended December 31, 1998,
1997 and 1996 are presented in the following table.
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------
(Dollars in Thousands) 1998 1997 1996
- ------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains from
sales, maturities, calls, and
mandatory redemptions $4 $218 $ 1,857
Gross realized (losses) from
sales, maturities, calls, and
mandatory redemptions -- (2) (1,215)
-- ---- -------
Securities gains, net $4 $216 $ 642
== ==== =======
</TABLE>
At December 31, 1998 and 1997, financial instruments in the amount of
$230.3 million and $314.3 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) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Private banking:
Residential real estate
mortgages...................... $1,630,500 $1,358,003 $1,093,107 $ 937,856 $ 851,074
Other............................. 525,614 537,024 525,446 457,843 490,719
---------- ---------- ---------- ---------- ----------
Total private banking loans......... 2,156,114 1,895,027 1,618,553 1,395,699 1,341,793
---------- ---------- ---------- ---------- ----------
Short-term trust credit
facilities........................ -- -- -- -- 154,988
Loans to financial institutions for
purchasing and carrying
securities........................ 31,972 41,064 62,866 61,372 126,640
All other........................... 2,721 2,758 6,722 2,624 3,477
---------- ---------- ---------- ---------- ----------
Total............................... $2,190,807 $1,938,849 $1,688,141 $1,459,695 $1,626,898
========== ========== ========== ========== ==========
</TABLE>
59
<PAGE> 11
An analysis of nonperforming assets is presented in the following table.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans................................... $6,203 $9,666 $ 8,882 $13,285 $ 6,371
Other real estate owned, net........................ 534 -- 727 9,586 11,884
------ ------ ------- ------- -------
Total nonperforming assets.......................... $6,737 $9,666 $ 9,609 $22,871 $18,255
====== ====== ======= ======= =======
Average non-accrual loans........................... $8,322 $8,829 $12,261 $ 8,475 $ 5,965
====== ====== ======= ======= =======
</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 1994 through
1998.
There was no reserve for ORE in 1998 and 1997. The reserve for ORE was
$477,000, $978,000 and $478,000 in 1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
7. ALLOWANCE FOR CREDIT LOSSES
An analysis of the allowance for credit losses is presented for the five-year
period ended December 31, 1998.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Analysis of allowance for credit losses:
Balance, January 1............................... $18,294 $16,693 $16,086 $14,699 $13,393
------- ------- ------- ------- -------
Charge-offs:
Private banking................................ (327) (160) (658) (1,910) (1,349)
Other.......................................... -- -- (517) (1,520) (150)
------- ------- ------- ------- -------
Total charge-offs.............................. (327) (160) (1,175) (3,430) (1,499)
------- ------- ------- ------- -------
Recoveries:
Private banking................................ 800 684 702 2,844 611
Other.......................................... 47 327 80 373 194
------- ------- ------- ------- -------
Total recoveries............................... 847 1,011 782 3,217 805
------- ------- ------- ------- -------
Net (charge-offs) recoveries..................... 520 851 (393) (213) (694)
------- ------- ------- ------- -------
Provision charged to income...................... 600 750 1,000 1,600 2,000
------- ------- ------- ------- -------
Balance, December 31............................. $19,414 $18,294 $16,693 $16,086 $14,699
======= ======= ======= ======= =======
</TABLE>
The Corporation maintains the allowance for credit losses at a level deemed to
be adequate. The level of the allowance is based on management's judgment as to
the current condition of the loan portfolio, determined by a continuous
surveillance process. Loan officers are expected to be the first to identify
potential credit problems. In addition, experienced credit review professionals
provide independent internal oversight of these credits.
On a quarterly basis, management determines which credits, if any, are to
be charged off partially or in full. This is based on a review of all
underperforming credits highlighted in the surveillance process. Since
substantially all of the Corporation's loan portfolio relates to private banking
activities, the Corporation does not apportion the allowance among specific
credit categories.
- -------------------------------------------------------
8. PREMISES AND EQUIPMENT
An analysis of premises and equipment is presented in the following table.
<TABLE>
<CAPTION>
December 31,
-------------------
(Dollars in Thousands) 1998 1997
- --------------------------------------------------
<S> <C> <C>
Land $ 1,675 $ 1,675
Building 13,820 13,414
Leasehold improvements 74,670 70,773
Furniture and equipment 50,520 48,247
-------- --------
140,685 134,109
Less: accumulated amortization
and depreciation (63,665) (56,546)
-------- --------
Total $ 77,020 $ 77,563
======== ========
</TABLE>
Amortization and depreciation expense amounted to $14.0 million, $10.3 million
and
60
<PAGE> 12
$9.0 million for 1998, 1997 and 1996, respectively.
Included in Other Operating Expenses is approximately $12.4 million in
1998, $9.2 million in 1997 and $7.7 million in 1996 of equipment expense.
- -------------------------------------------------------
9. SHORT-TERM CREDIT FACILITIES
An analysis of borrowings under short-term credit facilities is presented in the
following table.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Year-end balance $30,250 $ 10,175 $ 12,700
Daily average balance 45,271 63,965 121,929
Maximum end-of-month
balance 34,075 194,765 288,100
Weighted average
interest rate during
year 5.37% 5.48% 5.42%
Weighted average
interest rate at year-
end 4.75% 6.65% 6.10%
Securities sold under
agreements to
repurchase:
Year-end balance $90,309 $169,413 $ 70,516
Daily average balance 116,740 108,007 43,966
Maximum end-of-month
balance 148,185 177,851 120,053
Weighted average
interest rate during
year 5.11% 5.29% 5.08%
Weighted average
interest rate at year-
end 4.86% 5.87% 5.69%
Other borrowed funds:
Year-end balance $20,366 -- $157,067
Daily average balance 6,145 $114,479 47,285
Maximum end-of-month
balance 50,066 163,086 157,066
Weighted average
interest rate during
year 5.94% 5.68% 5.43%
Weighted average
interest rate at year-
end 5.98% --% 5.61%
</TABLE>
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, 1998, is the utilization
of $20.0 million of the Corporation's $40.0 million unsecured revolving credit
facility. The interest rate on this facility, which is based on LIBOR, was
5.98%. There were no funds borrowed under this facility at December 31, 1997. At
December 31, 1996, the utilization was $17.0 million and the interest rate was
5.88%. This credit facility expires on July 28, 1999.
- -------------------------------------------------------
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
-----------------
(Dollars in Thousands) 1998 1997
- --------------------------------------------------
<S> <C> <C>
8.414% Trust preferred capital
securities $50,000 $50,000
8.35% Senior unsecured ESOP
notes due 1999 3,773 7,254
Federal home loan bank 14,000 15,000
------- -------
Total $67,773 $72,254
======= =======
</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 will be 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 8.35% Senior Unsecured ESOP Notes due 1999 ("ESOP Notes") are
obligations of the Corporation that require annual payments of principal and
interest. The Corporation loaned the proceeds from the ESOP Notes to the trust
established to administer the 401(k) Plan and ESOP of United States Trust
Company of New York and Affiliated Companies ("401(k) Plan") on the same terms.
The 401(k) Plan used the proceeds to purchase 1,380,996 shares of common stock
from the Corporation's treasury stock holdings for an Employee Stock Ownership
Plan ("the ESOP"). (See "Notes to the Consolidated Financial Statements No.
18.") The ESOP Notes call for a final principal repayment of $3.8 million
payable on February 1, 1999. Interest expense related to the ESOP Notes was
approximately $0.3 million, $0.6 million and $0.9 million for the years 1998,
1997 and 1996, respectively.
The Federal Home Loan Bank ("FHLB") borrowings have maturities ranging from
1999 to 2002. The FHLB borrowings bear interest ranging between 6.25% and 6.76%
and are collateralized by the pledge of qualifying assets.
61
<PAGE> 13
- -------------------------------------------------------
11. 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.
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars ------------------------------
in Thousands) 1998 1997 1996
- ----------------------------------------------------
<S> <C> <C> <C>
Interest revenue:
Loans $149,493 $133,433 $117,459
Securities:
Taxable 58,622 68,053 48,046
Tax-exempt 3,878 3,893 3,244
Short-term
investments 10,144 5,467 4,192
Deposits with banks 2,606 1,675 1,790
-------- -------- --------
Total interest
revenue 224,743 212,521 174,731
-------- -------- --------
Interest expense:
Deposits 107,846 99,623 82,551
Short-term credit
facilities 8,755 15,714 11,374
Long-term debt 5,516 5,525 1,936
-------- -------- --------
Total interest
expense 122,117 120,862 95,861
-------- -------- --------
Net interest income 102,626 91,659 78,870
Provision for credit
losses (600) (750) (1,000)
Securities gains, net 4 216 642
-------- -------- --------
Net interest revenue $102,030 $ 91,125 $ 78,512
======== ======== ========
</TABLE>
- -------------------------------------------------------
12. 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>
Years Ended December 31,
(Dollars ---------------------------
in Thousands) 1998 1997 1996
- --------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $34,920 $26,876 $21,409
State and local 7,786 8,689 5,985
------- ------- -------
Total current
income taxes 42,706 35,565 27,394
------- ------- -------
Deferred:
Federal (2,626) (1,380) 238
State and local (653) (1,558) 737
------- ------- -------
Total deferred
income taxes
(benefits) (3,279) (2,938) 975
------- ------- -------
Total $39,427 $32,627 $28,369
======= ======= =======
</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) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax Expense at U.S. Federal income tax rate...... $35,383 35.0% $29,281 35.0% $24,246 35.0%
Increase (decrease) in effective rate resulting
from:
Tax-exempt interest revenue.................... (1,150) (1.1) (1,298) (1.5) (1,059) (1.5)
State and local taxes, net of federal income
tax benefit.................................. 4,636 4.6 4,635 5.5 4,369 6.3
Miscellaneous items............................ 558 0.5 9 -- 813 1.2
------- ---- ------- ----- ------- ----
Total tax expense and effective rate............. $39,427 39.0% $32,627 39.0% $28,369 41.0%
======= ==== ======= ===== ======= ====
</TABLE>
62
<PAGE> 14
The components of total income tax expense for the years ended December 31,
1998, 1997 and 1996 that are applicable to operations and stockholders' equity
are presented in the following table.
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars ---------------------------
in Thousands) 1998 1997 1996
- --------------------------------------------------
<S> <C> <C> <C>
Income taxes
applicable to:
operations $39,427 $32,627 $28,369
Stockholders' equity:
Change in fair
value of
securities
available for
sale 37 2,573 (774)
Tax benefit on
stock-based
awards (1,642) (1,258) --
Tax benefit on
dividends paid to
the ESOP on
unallocated
shares (93) (143) (144)
------- ------- -------
Total $37,729 $33,799 $27,451
======= ======= =======
</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,
1998 and 1997 resulted from the items listed in the following table.
<TABLE>
<CAPTION>
December 31,
-------------------
(Dollars in Thousands) 1998 1997
<S> <C> <C>
- --------------------------------------------------
Deferred tax (assets):
Employee benefits $(45,570) $(40,857)
Trust and fiduciary
activities (11,980) (11,820)
Property and equipment
leasing (9,433) (11,806)
Allowance for credit losses (8,591) (8,136)
Other (4,090) (4,363)
-------- --------
(79,664) (76,982)
======== ========
Deferred tax liabilities:
Net unrealized gains on
securities available for
sale 3,214 3,177
Premises and equipment 7,503 9,547
Other 8,144 6,697
-------- --------
18,861 19,421
-------- --------
Net deferred tax (asset) $(60,803) $(57,561)
======== ========
</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.
- -------------------------------------------------------
13. EARNINGS PER SHARE
The calculations of Basic Earnings per Share and Diluted Earnings per Share for
the three year period ended December 31, 1998 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) 1998 1997 1996
- --------------------------------------------------
<S> <C> <C> <C>
Net income for basic
earnings per share $61,667 $51,032 $40,904
Dividend equivalents
on stock based
benefit plans
(after-tax) 682 550 423
------- ------- -------
Net income for
diluted earnings
per share $62,349 $51,582 $41,327
------- ------- -------
Weighted average
shares outstanding
for basic earnings
per share 18,750 19,354 19,538
Dilutive effect of
stock based
benefit plans 2,335 2,267 1,692
------- ------- -------
Total dilutive
shares
outstanding 21,085 21,621 21,230
------- ------- -------
Basic earnings per
share $ 3.29 $ 2.64 $ 2.09
======= ======= =======
Diluted earnings per
share $ 2.96 $ 2.39 $ 1.95
======= ======= =======
</TABLE>
- -------------------------------------------------------
14. 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 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
63
<PAGE> 15
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 and backup lines of credit for various financial institutions. The
mortgage lending commitments are generally expected to be utilized, while the
backup lines of credit typically expire unused. Commitments totaled $248.9
million and $193.2 million at December 31, 1998 and 1997, 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, 1998 and 1997
amounted to $87.0 million and $87.6 million, respectively. Collateral to the
extent appropriate is obtained based on management's credit assessment of the
customer. At December 31, 1998, $75.9 million of the standbys outstanding were
partially or fully collateralized by cash, marketable equity securities,
marketable debt securities (including corporate and U.S. Treasury debt
securities) and other assets, compared with $69.8 million at December 31, 1997.
- -------------------------------------------------------
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, 1998 and 1997, the Corporation was a counterparty to Swaps
with a total notional principal amount of $560.0 million and $666.5 million,
respectively. Swaps involve the exchange of fixed and floating rate interest
payment obligations computed on notional principal amounts. Outstanding Swaps
had a weighted average maturity of approximately 2.4 years at December 31, 1998
and 3.6 years at December 31, 1997.
- -------------------------------------------------------
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," ("FAS 107") requires the disclosure of the
estimated fair values of financial instruments. Substantially all of the
Corporation's assets, liabilities and off-balance sheet products are considered
financial instruments as defined by FAS 107. Fair value is defined as the price
at which a financial instrument could be liquidated in an orderly manner over a
reasonable time period under present market conditions.
FAS 107 requires that the fair value of financial instruments 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 have been estimated using primarily discounted cash flow analyses
and other valuation techniques. These derived fair values are significantly
affected by assumptions used, principally the timing of future cash flows and
the discount rate. 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
64
<PAGE> 16
available, or fair value quotes obtained from third party pricing services.
Securities are reported in the Consolidated Statement of Condition at estimated
fair value.
- -------------------------------------------------------
Loans
The estimated fair value of the Corporation's performing fixed rate 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. The Corporation's performing adjustable rate loans reprice
frequently at current market rates. Therefore, the fair value of these loans has
been estimated to be approximately equal to their carrying amount. Estimated
fair value for nonperforming loans was based upon a discounted estimated cash
flow method and, for residential real estate mortgage loans, underlying
collateral. The discount rate used was commensurate with the risk associated
with the estimated cash flows.
- -------------------------------------------------------
Long-Term Debt
The estimated fair value of 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.
The estimated fair value of the trust preferred capital securities was
obtained from quotes by third party investment bankers.
- -------------------------------------------------------
Interest Rate Swap Agreements
The Corporation is the net fixed rate payor under all of its Swaps and at
December 31, 1998 and 1997 had an accrued net payable of $908,000 and $678,000,
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,
---------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
* *
Par/ Unrealized Par/ Unrealized
Notional Fair Gain Notional Fair Gain
(Dollars in Millions) Amount Value (Loss) Amount Value (Loss)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities....................... $1,051 $1,058 $ 7 $1,124 $1,131 $ 7
Loans............................ 2,171 2,192 21 1,921 1,935 14
Long-term debt................... 68 70 (2) 72 76 (4)
Interest rate swap agreements.... 560 (18) (18) 667 (11) (11)
- --------------------------------------------------------------------------------------------------
</TABLE>
* The 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.
- -------------------------------------------------------
16. 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 2016. 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 1998, 1997 and 1996 was
$26.4 million, $30.1 million and $26.1 million, respectively. Operating lease
rent expense includes rent escalation adjustments of $7.0 million in 1998, $11.0
million in 1997 and $6.6 million in 1996 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
65
<PAGE> 17
non-cancelable leases as of December 31, 1998 follows.
<TABLE>
<CAPTION>
Minimum
(Dollars in Thousands) Rentals
- -------------------------------------------------
<S> <C>
Year ending December 31:
1999 $ 27,443
2000 29,098
2001 28,951
2002 28,742
2003 28,303
Later years 266,518
--------
Total minimum payments required $409,055
========
</TABLE>
- -------------------------------------------------------
17. CONTINGENCIES
There are various pending and threatened actions and claims against the
Corporation in which the Corporation has denied liability and which it will
vigorously contest. Management, after consultation with counsel, is of the
opinion that the ultimate resolution of such matters is unlikely to have any
future material adverse effect on the Corporation's financial position, results
of operations or cash flows.
- -------------------------------------------------------
18. 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 $38.5 million,
$31.3 million and $24.4 million in 1998, 1997 and 1996, respectively.
- -------------------------------------------------------
Stock-Based Compensation
The Executive Incentive Plan (the "EIP") is authorized to grant up to 540,000
Restricted Stock Units ("RSUs") to eligible employees. 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 the five year vesting period) at which time they
may be converted into shares of the Parent's common stock. During 1998, the
Corporation granted 94,915 RSUs with a weighted average fair value of $64.64 per
unit. During 1997, 105,114 RSUs were granted with a weighted average fair value
of $47.78 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 $2.6 million, $1.1 million and $158,000 in 1998, 1997
and 1996, respectively. At December 31, 1998, the Corporation had 308,587 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, 1998, the Parent had 872,212 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 vest either after five
years or 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
66
<PAGE> 18
Option Plan for the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
Under Option Price Per
Option Per Share Share
- -------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31,
1995 988,800 $20.69 -- $24.83 $22.53
Granted 503,100 23.63 -- 27.63 23.72
Exercised (2,048) 20.69 20.69
Canceled (6,276) 20.69 -- 23.63 22.84
--------- --------------- ------
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
========= ================ ======
</TABLE>
Options outstanding at December 31, 1998 are further detailed in the following
table:
<TABLE>
<CAPTION>
Remaining
Shares Weighted
Under Option Price Average
Option Per Share Life
- --------------------------------------
<S> <C> <C>
1,352,001 $20.69 -- $27.63 6.9 Years
542,854 44.69 -- 59.13 8.2 Years
380,000 62.63 -- 74.88 9.2 Years
=========
2,274,855
=========
</TABLE>
The number of options exercisable and their weighted average exercise price for
the three year period ended December 31, 1998 are detailed in the following
table:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Options exercisable 693,020 351,493 134,788
======= ======= =======
Weighted average
exercise price of
exercisable options $ 26.86 $ 21.63 $ 20.69
======= ======= =======
</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 1998,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Grants Grants Grants
- ---------------------------------------------------
<S> <C> <C> <C>
Dividend yield 2.6% 2.7% 2.1%
Expected volatility 24.7% 22.2% 24.4%
Risk-free interest
rate 5.6% 6.4% 5.8%
Expected option life 5 Years 5 Years 5 Years
</TABLE>
The weighted average fair value of options granted in 1998, 1997 and 1996 was
$15.45 per option, $11.25 per option and $6.17 per option, respectively. If
compensation cost for the Corporation's Option Plan had been recorded based on
the fair value at the grant dates for awards 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, 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
For the year ended December
31, 1996:
Net income $40,904 $39,185
Diluted earnings per share $ 1.95 $ 1.87
</TABLE>
- -------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation sponsors a 401(k) Plan and ESOP (collectively, the "Plan")
covering all employees who satisfy a one year service requirement. Depending
upon the Corporation satisfying certain profitability criteria and other
factors, eligible employees receive merit-based annual awards calculated as a
percentage of such employees' compensation. Awards are comprised of an ESOP
award, which is mandatorily contributed to the Plan, and an elective award,
which may be taken in cash or, subject to certain limitations, deferred and
contributed to the Plan.
As of December 31, 1998, the ESOP held a total of 1,729,071 shares of the
Corporation's common stock with 1,504,860 shares allocated to participant
accounts and 224,211 unallocated. Unallocated ESOP shares are pledged as
collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to active employees. On February 1, 1999 upon making
the final debt service payment, all remaining unallocated shares were allocated
to eligible participants. Dividends on ESOP shares used for debt repayment were
$1.2 million,
67
<PAGE> 19
$1.1 million and $1.0 million in 1998, 1997 and 1996, respectively.
Dividends declared on allocated and unallocated ESOP shares are recorded as
deductions from retained earnings. The Corporation receives a tax benefit for
dividends paid on allocated shares. These tax benefits are recorded in the
Consolidated Statement of Income as a reduction of income tax expense. The tax
benefits for dividends paid on unallocated shares are recorded in the
Consolidated Statement of Condition as an increase in retained earnings.
For earnings per share purposes, shares held by the ESOP, both allocated
and unallocated, are considered to be outstanding.
- -------------------------------------------------------
19. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
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.
68
<PAGE> 20
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------ ------------------------------
Pension Health & Pension Health & Pension Health &
(Dollars in Thousands) 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............ $ 6,617 $ 278 $ 6,895 $ 5,402 $ 309 $ 5,711 $ 5,565 $ 307 $ 5,872
Interest cost......... 14,077 1,779 15,856 12,458 2,182 14,640 12,042 1,865 13,907
Amortization of prior
service cost........ 177 (391) (214) 177 (391) (214) -- (391) (391)
Actual return on plan
assets.............. (46,341) -- (46,341) (45,135) -- (45,135) (19,594) -- (19,594)
Other net
amortizations and
deferrals(1)........ 30,541 (6,759) 23,782 24,455 285 24,740 (646) 519 (127)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net expense
(credit).......... $ 5,071 $ (5,093) $ (22) $ (2,643) $ 2,385 $ (258) $ (2,633) $ 2,300 $ (333)
======== ======== ======== ======== ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan
assets at beginning
of year............. $253,442 -- $216,070 -- $204,983 --
Actual return on plan
assets.............. 46,341 -- 45,135 -- 19,594 --
Employer
contribution........ -- 1,666 -- 1,688 -- 1,765
Benefits and expenses
paid................ (8,655) (1,666) (7,763) (1,688) (8,507) (1,765)
-------- -------- -------- -------- -------- --------
Fair value of plan
assets at end
of year............. 291,128 -- 253,442 -- 216,070 --
-------- -------- -------- -------- -------- --------
Change in benefit
obligation:
Benefit obligation at
beginning of year... 192,352 31,940 170,045 26,660 165,657 30,915
Service cost.......... 6,417 278 5,402 309 5,565 307
Interest cost......... 14,077 1,779 12,458 2,182 12,042 1,865
Actuarial (gain)/
loss(1)............. 16,327 (11,510) 10,071 4,477 (4,712) (4,662)
Benefits paid......... (8,458) (1,666) (7,763) (1,688) (8,507) (1,765)
Amendments............ -- -- 2,139 -- -- --
-------- -------- -------- -------- -------- --------
Benefit obligation at
end of year......... 220,715 20,821 192,352 31,940 170,045 26,660
-------- -------- -------- -------- -------- --------
Prepaid/(accrued) cost:
Excess of plan assets
over benefit
obligation.......... 70,413 (20,821) 61,090 (31,940) 46,025 (26,660)
Unrecognized
cumulative net
(gains) losses...... (40,246) 595 (23,630) 5,346 (6,848) 1,155
Unrecognized prior
service cost........ 1,539 (1,973) 1,716 (2,364) (246) (2,756)
Unrecognized net
liability (asset) at
date of initial
application......... (7,196) -- (9,595) -- (11,993) --
-------- -------- -------- -------- -------- --------
Prepaid (accrued)
cost................ $ 24,510 $(22,199) $ 29,581 $(28,958) $ 26,938 $(28,261)
======== ======== ======== ======== ======== ========
Discount rate........... 6.75% 6.75% 7.0% 7.0% 7.5% 7.5%
Rate of increase
in salary............. 6%(3) 6%(3) 4.5% 4.5% 4.5% 4.5%
Health care cost
trend rate............ N/A 9.0% N/A 11.3% N/A 11.9%
Expected rate of return
on plan assets........ 9.0% N/A 9.0% N/A 9.0% N/A
</TABLE>
- --------------------------------------------------------------------------------
(1) Pension plan expense 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 salary is based on current experience and assumes a
continuation of the Corporation's national expansion and a lower average age
of employees.
69
<PAGE> 21
The assumed rate of future increases in per capita cost of health care benefits
(the health care cost trend rate) is 9.0% in 1998, 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>
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)
1996:
Effect on total of service and
interest cost components $ 71 $ (71)
Effect on postretirement benefit
obligation $809 $(850)
</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 is
$11.5 million, $9.3 million and $7.7 million for the three-year period ended
December 31, 1998.
- --------------------------------------------------------------------------------
20. 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) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Equity in Net Income of Subsidiaries:
Banks............................................. $71,525 $56,254 $42,838
Non-Bank.......................................... (206) (212) 766
Interest Revenue..................................... 1,066 1,433 1,245
Other Income......................................... 138 130 --
------- ------- -------
Total Income........................................... 72,523 57,605 44,849
------- ------- -------
Expenses:
Interest Expense..................................... 4,983 4,705 1,745
Professional Fees.................................... 7,450 367 315
Other Operating Expense.............................. 6,753 4,832 3,458
------- ------- -------
Total Expenses......................................... 19,186 9,904 5,518
------- ------- -------
Income Before Income Taxes............................. 53,337 47,701 39,331
Income Taxes (Benefits)................................ (8,330) (3,331) (1,573)
------- ------- -------
Net Income............................................. $61,667 $51,032 $40,904
======= ======= =======
</TABLE>
70
<PAGE> 22
- --------------------------------------------------------------------------------
U. S. TRUST CORPORATION (PARENT COMPANY ONLY)
STATEMENT OF CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------
(Dollars in Thousands) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Equity Investments in Subsidiaries:
Banks..................................................... $306,079 $269,670
Non-Bank.................................................. 734 4,468
-------- --------
Total Equity Investments in Subsidiaries.................... 306,813 274,138
Short-Term Investments...................................... 25,503 8,001
Securities.................................................. 1,042 19,199
Other Assets(1)............................................. 100,335 82,327
-------- --------
Total Assets................................................ $433,693 $383,665
======== ========
LIABILITIES
Short-Term Credit Facilities................................ $ 20,000 $ --
Other Liabilities........................................... 113,738 93,718
Long-Term Debt(2)........................................... 55,320 58,801
-------- --------
Total Liabilities........................................... 189,058 152,519
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................................. 244,635 231,146
-------- --------
Total Liabilities and Stockholders' Equity.................. $433,693 $383,665
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes $5,000 of cash and cash equivalents at December 31, 1997.
(2) Includes the 8.414% Junior Subordinated Debt issued to U.S. Trust Capital A
at December 31, 1998 and December 31, 1997. Refer to Notes to the
Consolidated Financial Statements No. 10.
71
<PAGE> 23
U. S. TRUST CORPORATION (PARENT COMPANY ONLY)
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
(Dollars In Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................ $ 61,667 $ 51,032 $ 40,904
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Equity in Net (Income) of Subsidiaries.......... (71,319) (56,042) (43,604)
Dividends Received from Subsidiaries............ 51,000 53,000 30,500
Deferred Income Taxes........................... (739) (849) (3,576)
Net Change in Other Assets...................... (14,571) (20,025) (7,638)
Net Change in Other Liabilities................. 20,661 12,240 7,829
Other, Net...................................... 1,735 1,345 143
-------- -------- --------
Net Cash Provided by Operating Activities......... 48,434 40,701 24,558
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in Subsidiaries....................... (240) (8,000) (2,000)
Net Change in Short-Term Investments.............. (17,502) 2,729 (10,730)
Securities:
Proceeds from Sales............................. 18,157 -- 5,310
Purchases....................................... -- (17,539) --
Principal Payment from ESOP....................... 3,482 3,214 2,966
Other, Net........................................ 525 (1,547) --
-------- -------- --------
Net Cash Provided by (Used in) Investing
Activities...................................... 4,422 (21,143) (4,454)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Short-Term Credit Facilities........ 20,000 (17,000) (3,000)
Issuance of Long-Term Debt........................ -- 51,547 --
Repayment of Long-Term Debt....................... (3,482) (3,214) (2,966)
Issuance of Common Stock.......................... 1,767 755 42
Purchases of Treasury Stock....................... (58,173) (40,492) (4,728)
Dividends Paid.................................... (12,973) (11,149) (9,768)
-------- -------- --------
Net Cash (Used in) Financing Activities........... (52,861) (19,553) (20,420)
-------- -------- --------
Net Change in Cash and Cash Equivalents........... (5) 5 (316)
Cash and Cash Equivalents at Beginning of Year.... 5 -- 316
-------- -------- --------
Cash and Cash Equivalents at End of Year.......... $ -- $ 5 $ --
======== ======== ========
Income Taxes Paid................................. $ 39,818 $ 30,289 $ 16,281
Interest Expense Paid............................. 5,157 3,173 2,223
</TABLE>
72
<PAGE> 24
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, 1999, the Parent's banking subsidiaries
can declare, in aggregate, dividends of approximately $46.4 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, 1998.
The following table sets forth the Corporation's and Trust Company's
regulatory capital and ratios as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Actual as of Actual as of
December 31, December 31,
1998 1997
------------------- -------------------
(Dollars in Thousands) Amount Rate(a) Amount Rate(a)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital:
Corporation.................................... $235,835 12.0% $252,414 14.1%
Trust Company.................................. 158,806 9.7% 144,881 9.4%
Total capital:
Corporation.................................... 255,249 13.0% 270,708 15.1%
Trust Company.................................. 176,005 10.7% 161,083 10.4%
Leverage:
Corporation.................................... 235,835 6.2% 252,414 7.3%
Trust Company.................................. 158,806 5.1% 144,881 5.3%
</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, 1998
and December 31, 1997, 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.
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<PAGE> 25
21. QUARTERLY CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
(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..................... $88,814 $88,892 $83,293 $78,620 $75,900 $71,182 $67,913 $66,696
Net interest revenue............ 27,282 24,690 24,704 25,354 24,343 22,858 22,167 21,757
------- ------- ------- ------- ------- ------- ------- -------
Total revenue................... 116,096 113,582 107,997 103,974 100,243 94,040 90,080 88,453
Operating expense............... 90,199 87,545 82,927 79,884 77,924 72,634 69,689 68,910
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes...... 25,897 26,037 25,070 24,090 22,319 21,406 20,391 19,543
Income taxes.................... 10,100 10,155 9,777 9,395 8,704 8,349 7,952 7,622
------- ------- ------- ------- ------- ------- ------- -------
Net income...................... $15,797 $15,882 $15,293 $14,695 $13,615 $13,057 $12,439 $11,921
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic earnings per share...... $ 0.85 $ 0.85 $ 0.81 $ 0.78 $ 0.71 $ 0.68 $ 0.64 $ 0.61
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share.... $ 0.76 $ 0.76 $ 0.73 $ 0.70 $ 0.64 $ 0.61 $ 0.58 $ 0.55
======= ======= ======= ======= ======= ======= ======= =======
Stock price high................ $ 76.75 $ 84.13 $ 77.50 $ 66.50 $ 65.75 $ 57.25 $ 49.13 $ 47.88
Stock price low................. 46.75 58.88 64.00 56.63 52.50 44.75 39.25 37.63
Cash dividends declared......... 0.18 0.18 0.18 0.18 0.15 0.15 0.15 0.15
</TABLE>
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The common shares of the Corporation are traded in the Nasdaq national market.
The market prices shown above are based on Nasdaq national market prices. As of
January 1, 1999, there were approximately 1,880 record holders of the
Corporation's common shares.
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<PAGE> 26
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 retained earnings and of cash flows
present fairly, in all material respects, the financial position of U.S. Trust
Corporation and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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 20, 1999
75
