<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended: MARCH 31, 2000
Commission file number: 1-14933
U.S. TRUST CORPORATION
(Exact name of registrant as specified in its charter)
New York 13-3818952
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
114 West 47th Street, New York, New York 10036-1532
(Address of principal executive offices) (Zip Code)
(212) 852-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
19,304,578 shares, Common Stock, $1 par value, as of April 30, 2000
<PAGE> 2
FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Statement of Income 3
Statement of Condition 4
Statement of Changes in Stockholders' Equity 5
Statement of Cash Flows 6
Notes to the Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 12-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21-23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
</TABLE>
2
<PAGE> 3
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------------------
INCREASE (DECREASE)
------------------------
2000 1999 $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fee Revenue $121,261 $ 99,970 $21,291 21.3 %
Net Interest Revenue 32,491 28,921 3,570 12.3
-------- -------- -------- --------
TOTAL REVENUE 153,752 128,891 24,861 19.3
-------- -------- -------- --------
OPERATING EXPENSES
Salaries 37,528 32,368 5,160 15.9
Performance Compensation 16,897 16,508 389 2.4
Sales Commissions and Incentives 7,983 6,428 1,555 24.2
Other Employee Benefits 8,176 8,273 (97) (1.2)
-------- -------- -------- --------
Total Salaries, Performance
Compensation and Other Benefits 70,584 63,577 7,007 11.0
Net Occupancy 10,802 9,579 1,223 12.8
Amortization of Intangibles 1,869 1,222 647 52.9
Other 28,071 24,189 3,882 16.0
Merger-related 10,533 -- 10,533 N/A(1)
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 121,859 98,567 23,292 23.6
-------- -------- -------- --------
Income Before Income Tax Expense 31,893 30,324 1,569 5.2
Income Tax Expense 16,183 11,978 4,205 35.1
-------- -------- -------- --------
NET INCOME $ 15,710 $ 18,346 $ (2,636) (14.4)%
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.83 $ 0.99 $ (0.16) (16.2)%
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.74 $ 0.88 $ (0.14) (15.9)%
======== ======== ======== ========
</TABLE>
(1) Not Applicable
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CONDITION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
---------- ----------
<S> <C> <C>
Cash and Due from Banks $ 357,439 $ 407,329
Interest Earning Securities 1,278,238 1,504,614
Loans, Net of Allowance for Credit Losses
($20,185 in 2000 and $20,169 in 1999) 2,751,354 2,689,206
Other Assets 489,606 421,902
---------- ----------
Total Assets $4,876,637 $5,023,051
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Deposits $3,994,479 $4,204,943
Short and Long-Term Credit Facilities 212,626 204,157
Other Liabilities 337,743 312,110
---------- ----------
Total Liabilities 4,544,848 4,721,210
---------- ----------
Stockholders' Equity 331,789 301,841
---------- ----------
Total Liabilities and Stockholders' Equity $4,876,637 $5,023,051
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Treasury Loan to Comprehensive Stockholders'
Stock Surplus Earnings Stock ESOP (Loss) Equity
-------- -------- --------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 $ 20,088 $ 36,819 $ 354,510 $ (96,742) $ -- $ (12,834) $ 301,841
Net Income 15,710 15,710
Net Unrealized (Loss) on Securities
Available for Sale (1,047) (1,047)
--------- ------------- ---------
Total Comprehensive Income 15,710 (1,047) 14,663
Cash Dividends Declared ($0.22 Per Share) (4,109) (4,109)
Issuance of Shares for Acquisitions 13 88 101
Capital Effect of Employee Benefit Plans 540 18,969 (216) 19,293
-------- -------- --------- --------- --------- ------------- ---------
Balance, March 31, 2000 $ 20,628 $ 55,801 $ 366,111 $ (96,870) $ -- $ (13,881) $ 331,789
======== ======== ========= ========= ========= ============= =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Treasury Loan to Comprehensive Stockholders'
Stock Surplus Earnings Stock ESOP Income Equity
-------- -------- --------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 19,971 $ 18,902 $ 293,289 $ (87,768) $ (3,773) $ 4,014 $ 244,635
Net Income 18,346 18,346
Net Unrealized (Loss) on Securities
Available for Sale (2,457) (2,457)
--------- ------------- ---------
Total Comprehensive Income 18,346 (2,457) 15,889
Purchases of Treasury Stock (10,438) (10,438)
Principal Payment by ESOP 3,773 3,773
Cash Dividends Declared ($0.22 Per Share) (4,045) (4,045)
Issuance of Shares for Acquisitions 1,757 5,801 7,558
Capital Effect of Employee Benefit Plans 47 (274) 19 6,466 6,258
-------- -------- --------- --------- --------- ------------- ---------
Balance, March 31, 1999 $ 20,018 $ 20,385 $ 307,609 $ (85,939) $ -- $ 1,557 $ 263,630
======== ======== ========= ========= ========= ============= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
U.S. TRUST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 5,035 $ 5,364
--------- ---------
Cash Flows From Investing Activities:
Interest Earning Securities:
Purchases (201,631) (215,068)
Sales 150 --
Maturities, Calls and Mandatory Redemptions 409,654 473,023
Net Change in Loans (62,182) (28,154)
Other, Net (7,464) (1,357)
--------- ---------
Net Cash Provided by (Used in) Investing Activities 138,527 228,444
--------- ---------
Cash Flows From Financing Activities:
Net Change in Non-Interest Bearing Deposits (305,105) (147,930)
Net Change in Interest Bearing Deposits 94,641 (32,030)
Net Change in Short and Long-Term Credit Facilities 8,469 1,773
Purchases of Treasury Stock -- (10,438)
Other, Net 8,543 (2,150)
--------- ---------
Net Cash Provided by (Used in) Financing Activities (193,452) (190,775)
--------- ---------
Net Change in Cash and Cash Equivalents (49,890) 43,033
Cash and Cash Equivalents at January 1 407,329 108,346
--------- ---------
Cash and Cash Equivalents at March 31 $ 357,439 $ 151,379
========= =========
- -------------------------------------------------------------------------------------
Income Taxes Paid $ 1,507 $ 2,552
Interest Expense Paid 40,873 30,832
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
U. S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
U.S. Trust Corporation (individually, the "Parent" and collectively with its
wholly owned subsidiaries, the "Corporation"). All material intercompany
accounts and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Corporation conform with
generally accepted accounting principles and general practice within the
investment management and banking industries. The preparation of financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities (including, but not limited to, the allowance for credit losses,
retirement and postretirement benefits and deferred taxes) as of the financial
statement dates and the reported amounts of revenues and expenses during the
reporting periods. Since management's judgment involves making estimates
concerning the likelihood of future events, the actual results could differ from
those estimates which will have a positive or negative effect on future period
results.
In the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and results of operations
for the interim periods have been made. Such adjustments, unless otherwise noted
in these Notes to the Condensed Consolidated Financial Statements and/or
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Part I - Item 2 of this report), are of a normal recurring nature.
These Notes to the Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been prepared under the presumption that the Corporation is a
going concern and do not attempt to take into consideration the impact, if any,
that the pending business combination with The Charles Schwab Corporation
("Schwab") may have on the matters discussed therein.
2. PENDING BUSINESS COMBINATION
The Parent has entered into an agreement and plan of merger (the
"Merger Agreement") dated January 12, 2000 with Schwab and a wholly owned
subsidiary of Schwab pursuant to which all of the outstanding common shares of
the Parent will be exchanged for shares of Schwab common stock. The merger
transaction ("Transaction") is subject to the approval of the Board of
Governors of the Federal Reserve System (Federal Reserve Board), other
regulatory approvals and to U.S. Trust shareholder approval. The transaction,
which is expected to be completed by June 2000, is intended to be a non-taxable
stock-for-stock exchange and to qualify for pooling of interests accounting
treatment.
Under the terms of the Merger Agreement, Patriot Merger Corporation, a
wholly owned subsidiary of Schwab, will merge with and into the Parent. The
surviving legal entity will be the Parent which will thereafter be a wholly
owned subsidiary of Schwab. The Parent's shareholders will receive 3.427 shares
of Schwab common shares for each common share of the Parent. The total
transaction value was estimated at $2.7 billion as announced on January 13, 2000
in a joint press release from Schwab and the Corporation -- see Note "9 --
Subsequent Events of Notes to the Condensed Consolidated Financial Statements."
7
<PAGE> 8
U. S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
During the first quarter of 2000, the Corporation recorded
merger-related expenses of $10.5 million pre-tax and a related tax benefit of
$0.1 million in connection with the pending merger. Merger-related expenses
consist of investment bankers', attorneys', accountants', and other consulting
fees; employer payroll taxes and compensation relating to the change of control
provisions in the Corporation's benefit plans and financial printing and other
related charges.
The Merger Agreement provides for a retention bonus program of
approximately $150 million (consisting of approximately $125 million in cash and
$25 million of value in Schwab stock options). Starting with the second
anniversary of the consummation of the business combination, employees will be
eligible to receive the benefits under the retention program, if employed at
that time.
3. ACCOUNTING CHANGES AND DEVELOPMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("FAS 133") was
issued. FAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. FAS 133 requires recognition of all
derivatives as either assets or liabilities in the statement of financial
condition and measurement of those instruments at fair value. Fair market
valuation adjustments for derivatives meeting hedge criteria will be recorded in
either comprehensive income or earnings depending on their classification. The
Corporation's use of derivatives to date has been limited to utilizing interest
rate swaps as hedges to mitigate interest rate exposure associated with
short-term floating interest-rate deposits. As such, this use of interest rate
swaps would be categorized as a cash flow hedge under FAS 133 and the effective
portion of the gain or loss on the interest rate swaps would be recorded in
comprehensive income. The fair value of the Corporation's interest rate swap
portfolio was a pre-tax gain of $21.2 million as of March 31, 2000 compared to a
pre-tax loss of $11.6 million at March 31, 1999. Substantially all of the fair
value of the interest rate swap portfolio for these periods would be recorded as
a component of comprehensive income had FAS 133 been effective.
As issued, FAS 133 was effective for fiscal years beginning after June
15, 1999. In June 1999, Statement of Financial Accounting Standards No 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FAS 133" ("FAS 137") was issued. FAS 137 delayed the effective
date of FAS 133 one year to fiscal years beginning after June 15, 2000.
Management has evaluated the impact of adopting FAS 133 and does not believe
that it will have a material impact on the Corporation's financial condition or
results from operations.
8
<PAGE> 9
U. S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Month Periods
Ended March 31,
- --------------------------------------------------------------------------------------------
(In Thousands) 2000 1999
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net income for basic earnings per share $15,710 $18,346
Dividend equivalents on stock based benefit plans (after-tax) 226 176
------- -------
Net income for diluted earnings per share $15,936 $18,522
------- -------
Weighted average shares outstanding for basic earnings per share 18,874 18,564
Dilutive effect of stock based benefit plans 2,785 2,458
------- -------
Total dilutive shares outstanding 21,659 21,022
======= =======
Basic earnings per share $ 0.83 $ 0.99
======= =======
Diluted earnings per share $ 0.74 $ 0.88
======= =======
</TABLE>
5. NET INTEREST REVENUE
The following is an analysis of the composition of net interest revenue:
<TABLE>
<CAPTION>
Three Month Periods
Ended March 31,
-----------------------------------------
Increase
(In Thousands) 2000 1999 (Decrease)
- ----------------------------------- ---------- ---------- ------------
Interest revenue:
<S> <C> <C> <C>
Loans $50,002 $39,551 26.4%
Securities:
Taxable 16,446 14,070 16.9
Tax-exempt 1,293 1,110 16.5
------- ------- -------
17,739 15,180 16.9
Short-term investments and deposits
with banks 3,114 3,762 (17.2)
------- ------- -------
Total interest revenue 70,855 58,493 21.1
------- ------- -------
Interest expense:
Deposits 35,189 26,759 31.5
Short and long-term credit facilities 3,189 2,814 13.3
------- ------- -------
Total interest expense 38,378 29,573 29.8
------- ------- -------
Net interest income 32,477 28,920 12.3
Provision for credit losses -- -- N/A
Securities gains, net 14 1 N/A
------- ------- -------
Net interest revenue $32,491 $28,921 12.3%
------- ------- -------
</TABLE>
6. PLEDGED ASSETS
Financial instruments carried at $287.0 million on March 31, 2000 and
$254.4 million on December 31, 1999 were pledged to secure public deposits as
collateral for borrowings, to qualify for fiduciary powers and for other
permitted purposes.
9
<PAGE> 10
U.S. TRUST CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. CONTINGENCIES
There are various pending and threatened actions and claims against the
Corporation in which the Corporation has denied liability and which it will
vigorously contest. Although there can be no assurance as to the ultimate
outcome, management, after consultation with counsel and based on current
available information, is of the opinion that the ultimate resolution of such
matters, taken in the aggregate, is unlikely to have a material adverse effect
on the Corporation's financial position, results of operations or cash flows.
8. OPERATING SEGMENTS
The Corporation has two lines of business as defined by Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information (FAS 131)", which are: Personal Wealth
Management and Institutional Wealth Management. Personal Wealth Management is
further subdivided into New York and National Wealth Management. Further
financial information by segment is contained within the "Businesses of U.S.
Trust" section of Management's Discussion and Analysis of Financial Condition
and Results of Operations. The following is a summary of the lines of business
operating results for the three-month periods ended March 31, 2000 and
March 31, 1999.
<TABLE>
<CAPTION>
NEW YORK NATIONAL INSTITUTIONAL TOTAL
- ------------------------------------------ ----------------------- ---------------------- --------------------
(DOLLARS IN
MILLIONS) 2000 1999 2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenue $ 88 $ 75 $ 42 $ 30 $ 24 $ 24 $ 154 $ 129
Segment Income Before
Income Tax(1) $ 31 $ 17 $ 4 $ 5 $ 7 $ 8 $ 42 $ 30
Less: Merger-Related
Expenses 10 -
-------- ---------
Consolidated Income
Before Income Tax
Expense $ 32 $ 30
--------- --------- ---------- ---------- --------- -------- -------- ---------
Total Assets $3,534 $2,924 $1,202 $918 $141 $121 $4,877 $3,963
--------- --------- ---------- ---------- --------- -------- -------- ---------
- ------------------------------------------------------------------------------------------------------------------
(1) Merger-related expenses are excluded
</TABLE>
9. SUBSEQUENT EVENTS
On May 1, 2000, the Federal Reserve Board announced its approval of the
Transaction and Schwab's application to become a bank holding company by
acquiring U.S. Trust. The Transaction has also been approved by the bank
regulatory authorities in Connecticut, Delaware, New York and North Carolina,
and the process of obtaining other requisite regulatory approvals is continuing.
10
<PAGE> 11
On May 3, 2000, the Board of Directors of Schwab approved a
three-for-two split of Schwab's common stock, which will be effected in the form
of a 50% stock dividend. The stock dividend is payable May 30, 2000 to Schwab
stockholders of record May 12, 2000.
As a consequence of the stock split, the exchange ratio in the Merger
Agreement will be adjusted such that the holders of common shares of U.S. Trust
will receive 5.1405 shares of Schwab common stock for each common share that
they own. The 5.1405 rate replaces the exchange ratio of 3.427 described in Note
"2 Pending Business Combination of Notes to the Condensed Consolidated Financial
Statements."
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL REPORTING MATTERS
In this Form 10-Q we make certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Corporation. These forward-looking statements may contain words such as
"believes," "expects," "anticipates," "estimates" or similar expressions.
We caution that these statements are not guarantees of future
performance. They involve a number of risks and uncertainties that are difficult
to predict. Factors that may cause actual results to differ materially from
those expressed or implied in the forward-looking statements, include but are
not limited to the following:
- - Competitive pressures in the investment or asset management, corporate
fiduciary or private banking industries may increase significantly.
- - General economic or business conditions, or volatility in the equity,
fixed income and real estate markets, may be unfavorable. Such economic
environments could result in, among other things, a reduced demand for
asset management or other financial services, or a decline in assets
under management over a short or an extended time period. Fee revenues
and net interest revenue could be negatively impacted by such events.
- - Legislative changes, including but not limited to legislation related
to income and estate tax matters, and regulatory changes in banking or
other businesses that the Corporation engages in, may adversely affect
its financial condition.
THE BUSINESSES OF U.S. TRUST
The Corporation has two principal businesses as defined by FAS 131:
Personal Wealth Management Services and Institutional Services. Personal Wealth
Management Services is further delineated into two components - New York Wealth
Management Services ("New York") and National Wealth Management Services
("National").
Personal Wealth Management Services
The Corporation provides a complete array of financial services for
affluent individuals and families. These services, defined as Personal Wealth
Management Services, include: investment management (domestic and international
equity, fixed income and alternative investments, such as private equity and
real estate); investment consulting; trust, financial and estate planning and
private banking. Personal Wealth Management Services are provided through New
York and National. The Corporation has been well established in the New York
Wealth Management business for many years. More recently, the Corporation has
expanded its presence beyond New York through national expansion resulting in
the establishment of its National Wealth Management business. The Corporation
anticipates that its national expansion will continue over the next several
years.
The cornerstone of the Corporation's services to the personal wealth
management market in both its New York and National businesses is investment
management. At March 31, 2000, personal assets under management were
approximately $65.3 billion. A major strategy for the growth of the
12
<PAGE> 13
Corporation's Personal Wealth Management business has been national expansion.
Personal Wealth Management clients usually prefer services to be delivered
locally. The Corporation has established affiliates throughout the United
States: California, Connecticut, Delaware, Florida, New Jersey, New York, North
Carolina, Oregon, Pennsylvania, Texas and Washington D.C.
Institutional Services
Institutional Services includes investment management, corporate trust,
brokerage and special fiduciary services for corporations, endowments,
foundations, pension plans and other institutional clients.
The Corporation's institutional investment management business provides
a wide range of investment options for its clients, including balanced and
specialized domestic and international equity investment styles, structured
investments, alternative investments, fixed-income vehicles and short-term cash
management. At March 31 2000, the Corporation managed approximately $25.0
billion for its institutional clients of which approximately $10.9 billion is
related to the Corporation's special fiduciary services.
Segment Financial Results
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. 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.
Segment results are based upon estimates and judgments. Internal
management accounting reflects the way management views its businesses and may
not be comparable to other financial institutions. Segment comparability between
reporting periods is achieved by periodic restatement to conform to changes in
organizational structure and changes in allocation policies.
Presentation of financial information on a quarterly basis may and most
likely will result in non-recurring transactions (either revenue or expense)
being allocated to a segment which may result in short-term swings in a
segment's profit contribution. Accordingly, while informative, quarterly segment
disclosures may not be indicative of long-term performance and should not
necessarily be used as long-term forecasting benchmarks.
13
<PAGE> 14
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
(Dollars In Thousands) Personal Wealth Management
---------------------------------------- Total
New York National Total Institutional Corporation
---------------------------------------- ------------- -----------
THREE MONTHS ENDED
March 31, 2000
<S> <C> <C> <C> <C> <C>
Fee revenue $ 65,597 $ 34,424 $100,021 $ 21,240 $121,261
Allocated net interest
revenue 22,118 7,160 29,278 3,213 32,491
-------- -------- -------- -------- --------
Total revenue 87,715 41,584 129,299 24,453 153,752
Operating expense 56,716 37,366 94,082 17,244 111,326
-------- -------- -------- -------- --------
Income from operations
before taxes 30,999 4,218 35,217 7,209 42,426
Less: Merger-related
expenses -- -- -- -- 10,533
-------- -------- -------- -------- --------
Income before taxes $ 30,999 $ 4,218 $ 35,217 $ 7,209 $ 31,893
======== ======== ======== ======== ========
Profit margin 35.3% 10.1% 27.2% 29.5% 20.7%
Percentage of income
before taxes (2) 73.1% 9.9% 83.0% 17.0% 100.0%
Assets Managed (1) $ 43,580 $ 21,671 $ 65,251 $ 25,033 $ 90,284
Assets Administered (1) $ 17,746 $ 2,930 $ 20,676 $352,541 $373,217
THREE MONTHS ENDED
March 31, 1999
Fee revenue $ 54,041 $ 24,669 $ 78,710 $ 21,260 $ 99,970
Allocated net interest
revenue 20,546 5,705 26,251 2,670 28,921
-------- -------- -------- -------- --------
Total revenue 74,587 30,374 104,961 23,930 128,891
Operating expense 57,115 25,482 82,597 15,970 98,567
-------- -------- -------- -------- --------
Income before taxes $ 17,472 $ 4,892 $ 22,364 $ 7,960 $ 30,324
======== ======== ======== ======== ========
Profit margin 23.4% 16.1% 21.3% 33.3% 23.5%
Percentage of income
before taxes 57.6% 16.1% 73.8% 26.2% 100.0%
Assets Managed (1) $ 38,322 $ 15,583 $ 53,905 $ 25,550 $ 79,455
Assets Administered (1) $ 13,614 $ 2,015 $ 15,629 $315,270 $330,899
</TABLE>
(1) $ in millions
(2) Expressed as a % of income before merger-related expenses.
Fee revenue for the Personal Wealth Management segment increased 27.1%
from the first quarter of 1999. Fee revenue for the New York component of the
Personal Wealth Management segment grew 21.4% from the first quarter of 1999
whereas the National component's fee revenue growth rate was 39.5%. Fee revenue
growth is attributable to new business, the overall strength in the financial
markets, and acquisitions.
Allocated net interest revenue attributable to the Personal Wealth
Management segment increased 11.5% from the first quarter of 1999. New York and
National's growth rates were
14
<PAGE> 15
7.7% and 25.5%, respectively. The increase in allocated net interest revenue is
principally attributable to the growth in private banking activities.
Personal Wealth Management's profit margin increased to 27.2% in the
first quarter of 2000 from 21.3% in the first quarter of 1999. New York's profit
margin was 35.3% in the first quarter of 2000, and 23.4% in the first quarter of
1999. This increase is attributable to new business and the overall strength in
financial markets. National's profit margin was 10.1% and 16.1% for the
three-month periods ended March 31, 2000 and March 31, 1999, respectively. The
absolute levels and volatility in National's profit margin is reflective of the
Corporation's continuing investment in its national expansion strategy. National
provides each new location with the Corporation's full array of Personal Wealth
Management service capabilities. The personnel and infrastructure costs incurred
to provide these services are charged directly to National. In addition, costs
incurred to acquire investment management firms managed by National, including
the amortization of intangibles, are borne by National.
For the first quarter of 2000, National includes amortization of
intangibles related to the acquisition of NCT Holdings which was acquired in the
second quarter of 1999. The first quarter of 2000 also includes a full three
months of amortization expense related to the January 29, 1999 acquisition of
Radnor Capital Management Inc. National's operating expenses increased by $11.9
Million or 46.7% compared to the first quarter of 1999, reflecting new hires,
staff additions from acquisitions, and continued infrastructure costs.
It is anticipated that the profit margin for National will continue to
fluctuate, reflecting the Corporation's ability to invest in new markets as it
expands its national presence.
Institutional's fee revenue of $21.2 million in the first quarter of
2000 was relatively flat as compared to the first quarter of 1999.
Institutional's allocated net interest revenue has increased 20.3% from the
first quarter of 1999. Institutional receives interest revenue credit
principally from the customer deposits generated from its corporate trust
activities. Institutional's profit margin of 29.5% in the first quarter of 2000
has decreased somewhat from 33.3% compared to the first quarter of 1999, based
on modest revenue growth and higher expenses.
CONSOLIDATED RESULTS OF OPERATIONS
Net income from operations (which excludes merger-related expenses) for
the first quarter of 2000 was $26.1 million, compared to $18.3 million earned in
the first quarter of 1999. Diluted earnings per share from operations were $1.22
in the first quarter of 2000, versus $0.88 in the first quarter of 1999. The
Corporation's annualized return on average stockholders' equity from operations
was 34.3% for the first quarter of 2000, compared to 29.6% for the first quarter
of 1999.
During the first quarter of 2000, the Corporation recorded
merger-related expenses of $10.4 million ($10.5 million of expenses and a
related tax benefit of $0.1 million) in connection with the pending merger with
Schwab. Including the impact of these expenses, net income was $15.7 million.
Diluted earnings per share including these expenses were $0.74. Management
expects the Corporation will incur additional merger-related expenses for
professional fees and change in control related compensation of approximately
$35.0 million after-tax for an aggregate of approximately $45.0 million of
merger-related expenses on an after-tax basis.
15
<PAGE> 16
Fee Revenue
<TABLE>
<CAPTION>
Three Month Periods Ended
-----------------------------------------
March 31, March 31, Increase
(In Thousands) 2000 1999 (Decrease)
- -------------------------- --------- --------- ----------
<S> <C> <C> <C>
Personal wealth management $100,021 $ 78,710 27.1%
Institutional services 21,240 21,260 (0.1)
-------- -------- ----
Fee revenue $121,261 $ 99,970 21.3%
======== ======== ====
Market related fees $ 98,237 $ 81,534 20.5%
Transaction related fees 23,024 18,436 24.9
-------- -------- ----
Fee revenue $121,261 $ 99,970 21.3%
======== ======== ====
</TABLE>
Fee revenue for the first quarter of 2000 increased approximately $21.3
million to $121.3 million from $100.0 million in the first quarter of 1999.
Market related fee revenue increased by $16.7 million to $98.2 million from
$81.5 million in the first quarter of 1999.
Market related fee revenue is based primarily on the market value of
the assets in clients' investment management accounts. In general, fee revenue
is influenced by a variety of factors, including growth or decline of stock,
fixed income and real estate market levels, new business, acquisitions, changes
in fee rate schedules and added services. Fee revenue is negatively impacted by
the outflow of investment management assets due to terminating trusts, client
withdrawals, income and estate taxes and lost business. Fee revenue related to
market conditions is determined on a sliding scale so that as the value of a
client's portfolio grows in size, the Corporation earns a smaller percentage on
the increasing account value. Therefore, market value or other incremental
changes in a portfolio's size may not typically have a proportionate impact on
the level of fee revenue. In general, fee revenue is calculated quarterly based
upon the value of the prior quarters' assets under management. Another important
factor in the determination of fee revenues is the type of assets under
management. Depending on how assets under management are invested, fluctuations
in any one market will not necessarily have a proportionate impact on the
overall level of fee revenue. The following is a comparative analysis of the
composition of assets under management.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
--------- ------------ ---------
<S> <C> <C> <C>
Equity securities 59% 59% 57%
Fixed income securities 26 27 27
Short-term money management, real estate and other 15 14 16
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
16
<PAGE> 17
The following table delineates assets under management and
administration as of March 31, 2000, December 31, 1999 and March 31, 1999. This
analysis is presented on a consolidated and segment basis. Unless otherwise
noted, asset values are measured at their estimated fair value.
<TABLE>
<CAPTION>
March vs. March vs.
Dec. March
March 31, Dec. 31, March 31, Increase Increase
(In Billions) 2000 1999 1999 (Decrease) (Decrease)
- ------------- --------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED ASSETS UNDER MANAGEMENT
AND ADMINISTRATION:
Investment management $ 79.4 $ 73.8 $ 66.1 7.7% 20.2%
Special fiduciary 10.9 12.3 13.4 (12.1) (18.9)
-------- -------- -------- ---- -----
Total assets under management 90.3 86.1 79.5 4.9 13.6
-------- -------- -------- ---- -----
Assets under administration:
Personal custody and other 36.1 31.9 20.3 13.1 77.6
Corporate and municipal trusteeships
and agency relationships at par value 337.1 330.7 310.6 1.9 8.6
-------- -------- -------- ---- -----
Total assets under administration 373.2 362.6 330.9 2.9 12.8
-------- -------- -------- ---- -----
Total assets under management and
administration $ 463.5 $ 448.7 $ 410.4 3.3% 13.0%
======== ======== ======== ==== =====
SEGMENT ASSETS UNDER MANAGEMENT
AND ADMINISTRATION:
Personal wealth management:
Assets under management $ 65.3 $ 59.6 $ 54.0 9.5% 21.0%
Assets under administration 20.7 18.2 15.5 13.3 32.3
-------- -------- -------- ---- -----
Total 86.0 77.8 69.5 10.4 23.6
-------- -------- -------- ---- -----
Institutional:
Assets under management 25.0 26.5 25.5 (5.5) (2.0)
Assets under administration 352.5 344.4 315.4 2.4 11.8
-------- -------- -------- ---- -----
Total 377.5 370.9 340.9 1.8 10.8
-------- -------- -------- ---- -----
Total assets under management and
administration $ 463.5 $ 448.7 $ 410.4 3.3% 13.0%
======== ======== ======== ==== =====
</TABLE>
Investment management assets at March 31, 2000 were $79.4 billion
compared to $73.8 billion at December 31, 1999, and $66.1 billion at March 31,
1999. During 1999, the Corporation acquired Radnor Capital Management, Inc., and
NCT Holdings, Inc., which, in the aggregate, managed approximately $2.8 billion
in personal and institutional assets at the acquisition dates.
Approximately $11.5 billion of assets under management were invested in
the Corporation's Excelsior Funds at March 31, 2000. At December 31, 1999 and
March 31,
17
<PAGE> 18
1999, total assets under management invested in the Excelsior Funds were $9.5
billion and $8.2 billion, respectively.
Net Interest Revenue
Net interest revenue is affected by changes in the absolute levels of
interest rates and shifts in the term structure of interest rates, funding and
hedging strategies, and the impact of changes in the credit quality of interest
earning financial instruments. The net yield on interest earning assets for the
quarter ended March 31, 2000 has decreased to 3.26% from 3.37% for the quarter
ended March 31, 1999. Taxable equivalent net interest revenue for the first
quarter of 2000 was $33.4 million an increase of $3.6 million from the
comparable 1999 period. Average interest earning assets increased by 15.5% to
approximately $4.1 billion as of March 31, 2000 compared to approximately $3.6
billion at March 31, 1999.
The loan portfolio is the largest component of average total assets.
Average loans for the first quarter of 2000 were $2.7 billion, a $514.3 million
or 23.6% increase over average loans for the first quarter of 1999. The
Corporation's loan portfolio is predominantly comprised of loans to private
banking customers. Approximately 74% and 76% of total loans are collateralized
by residential real estate mortgages at March 31, 2000 and March 31, 1999,
respectively.
<TABLE>
<CAPTION>
Three Month Periods Ended March 31,
-----------------------------------------------------
(In Thousands) 2000 Rate 1999 Rate
- -------------- ----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Interest Earning Securities $ 1,424,106 6.16% $ 1,386,386 5.81%
Loans 2,693,514 7.47% 2,179,252 7.36%
----------- ---- ----------- ----
Total Interest Earning Assets $ 4,117,620 7.01% $ 3,565,638 6.73%
=========== ==== =========== ====
Interest Bearing Deposits 3,036,910 4.66% 2,654,175 4.09%
Short-Term Credit Facilities 135,464 5.69% 133,605 4.58%
Long-Term Credit Facilities 63,000 8.08% 64,744 8.06%
----------- ---- ----------- ----
Total Interest Bearing Liabilities $ 3,235,374 4.77% $ 2,852,524 4.20%
=========== ==== =========== ====
Net Free Funds (1) 882,246 713,114
----------- -----------
Total Interest Bearing Liabilities
And Net Free Funds $ 4,117,620 $ 3,565,638
----------- -----------
</TABLE>
(1) Net free funds in the table above includes average stockholders' equity of
$306,255 and $251,354 at March 31, 2000 and March 31, 1999, respectively for the
quarters then ended.
18
<PAGE> 19
Operating Expenses
The following table provides details of operating expenses for the
first quarters of 2000 and 1999.
<TABLE>
<CAPTION>
Three Month Periods Ended
-------------------------------------
March 31, March 31, Increase
(In Thousands) 2000 1999 (Decrease)
- -------------- --------- --------- ----------
<S> <C> <C> <C>
Salaries and other employee benefits $ 45,704 $ 40,641 12.5%
Performance compensation 16,897 16,508 2.4
Sales commissions and incentives 7,983 6,428 24.2
Occupancy 10,802 9,579 12.8
Amortization of Intangibles 1,869 1,222 52.9
Other 28,071 24,189 16.0
Merger-related 10,533 -- N/A
-------- -------- ----
Total operating expenses $121,859 $ 98,567 23.6%
======== ======== ====
</TABLE>
Operating expenses, excluding merger-related expenses, increased by
$12.8 million in the first quarter of 2000, or 12.9% as compared to the first
quarter of 1999. The Corporation's pre-tax margin from operations (excluding
merger-related expenses) was 27.6% for the first quarter of 2000 and 23.5% for
the first quarter of 1999.
Salaries and other employee benefits increased $5.1 million from the
first quarter of 1999. The number of full-time equivalent employees increased
12.7% to 2020 at March 31, 2000, compared to 1,792 at March 31, 1999. The
increase in employees is attributable to acquisitions and internal growth
required to meet an expanding customer base.
Sales commissions and incentives increased $1.6 million in the first
quarter of 2000 compared to the first quarter of 1999. This increase reflects
the Corporation's strong emphasis on sales. The Corporation makes a substantial
commitment to sales, marketing and advertising. As of March 31, 2000,
approximately 166 employees were devoted to these functions compared to 146 as
of March 31, 1999. Direct expenses associated with these functions, including
salary and other employee benefits, performance compensation and sales
commissions and incentives were $16.1 million for the first quarter of 2000, an
increase of 29.9% from the $12.4 million incurred during the corresponding 1999
period. In addition to the aforementioned expenses, occupancy expense directly
allocable to these functions amounted to approximately $842,000 for the first
quarter of 2000 and $638,000 for the first quarter of 1999.
Amortization of intangible expense resulting from business combinations
was $1.9 million in the first quarter of 2000 compared to $1.2 million in the
first quarter of 1999. Amortization of intangibles does not require the use of
cash and therefore, management believes it may be distinguished from other
operating expenses. The impact on net income from operations after consideration
of applicable income tax benefits of these non-cash charges was approximately
$1.6 million in the first quarter of 2000 and approximately $0.9 million in the
first quarter of 1999. Excluding the after-tax impact of amortization of
intangible assets, diluted earnings per share from operations would have been
$1.29 and $0.92 for the three-month periods ended March 31, 2000 and 1999,
respectively.
19
<PAGE> 20
Other operating expenses also include the cost of the outsourcing
agreement with The Chase Manhattan Bank ("Chase"). Pursuant to this agreement,
Chase furnishes necessary securities processing, custodial, data processing and
other operations support services to the Corporation. The initial term of this
agreement expires on August 31, 2000. The Corporation has exercised its option
to extend the term of the agreement for two additional years to August 31, 2002.
During the initial five-year term of the agreement, the Corporation pays Chase
an annual base fee of $10.0 million plus additional volume charges. The base fee
for the two year option period will increase by 10% of total charges (excluding
certain items) incurred in the final year of the initial term of the agreement.
Management is considering various possible alternatives for obtaining
the services currently provided under the agreement after its expiration on
August 31, 2002. These alternatives include obtaining the services from
third-party providers, including Chase, or providing such services itself.
Although the costs of obtaining or providing such services are expected to
increase from the current level, management believes, at this time, that such an
increase will not have a material adverse effect on the Corporation's results of
operations.
Capital and Liquidity Management
Regulatory capital amounts and ratios for the Parent and its wholly
owned subsidiary United States Trust Company of New York (the "Trust Company")
as of March 31, 2000 and 1999 are set forth in the following table.
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
------------------ ------------------
(Dollars In Thousands) Amount Rate Amount Rate
- ---------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Tier 1 Capital:
Parent $304,462 12.3% $251,540 13.1%
Trust Company $201,792 9.9% $169,583 10.6%
Total Capital:
Parent $324,647 13.2% $270,869 14.1%
Trust Company $219,601 10.8% $186,697 11.7%
Tier 1 Leverage:
Parent $304,462 6.6% $251,540 6.3%
Trust Company $201,792 5.7% $169,583 5.5%
</TABLE>
Note: Minimum tier 1 capital, total capital and tier 1 leverage ratios are 4%,
8% and 3%-5%, respectively, for bank holding companies and banks. Minimum "well
capitalized" ratios are tier 1 capital of 6%, total capital of 10% and a
leverage ratio of at 5%.
The objective of liquidity management is to ensure the availability of
financial resources to meet the Corporation's cash flow requirements and to
capitalize on opportunities for business expansion. The Corporation monitors the
liquidity position of the Parent and each of its subsidiaries on an ongoing
basis to ensure that funds are available to meet loan and deposit cash flow
requirements. Liquidity management is also structured to ensure that the capital
needs of the Parent and its subsidiaries are met on a day-to-day basis.
The Parent's liquidity requirements consist mainly of dividend payments
to common stockholders, interest and principal payments to debt holders,
repurchases of its common stock and capital required for acquisitions or for
additions to its subsidiaries.
20
<PAGE> 21
As of March 31, 2000, the Parent could repurchase 1,533,225 common
shares under current authorization. Repurchased shares are available to meet the
Parent's obligations under its stock-based benefit plans and for general capital
management purposes. In January 2000, the Parent suspended the repurchase of any
additional shares due to the pending business combination (see Note 1 of Notes
to the Condensed Consolidated Financial Statements). In January 2000, the Parent
announced its regular quarterly common share dividend of $0.22 per share that
was paid on April 25, 2000. Future dividends declared are subject to approval by
the Parent's Board of Directors and regulatory capital limitations.
The Parent's sources of liquidity are derived primarily from dividends
from its subsidiaries, issuances of common stock and issuances of long and
short-term debt instruments. As of April 1, 2000, the subsidiaries have the
ability to pay dividends of approximately $104.9 million without prior approval
of the regulatory authorities.
The Parent has credit facilities totaling $80.0 million which are based
on LIBOR or Prime and mature on March 31, 2002. As of March 31, 2000 there was
$35.0 million outstanding under these facilities.
The Parent is authorized to issue up to 5.0 million $1.00 par value
preferred shares. As of March 31, 2000, no preferred shares have been issued.
In addition to traditional interest and non-interest bearing deposit
raising capabilities, the banking subsidiaries have established their own
external funding sources. Certain subsidiaries have established credit
facilities with the Federal Home Loan Bank ("FHLB") totaling approximately
$501.5 million. On March 31, 2000, $10.0 million was outstanding under these
credit facilities.
The subsidiaries also generate liquidity from the types of financial
instruments that they carry as investment securities. As of March 31, 2000
approximately $978.2 million or 83% of the investment securities portfolio is
comprised of U.S. Treasury or federal agency obligations. These securities are
readily marketable and may be sold or financed through repurchase agreements, as
appropriate. At March 31, 2000, securities sold under agreements to repurchase
aggregated $95.0 million. The subsidiaries may also pledge these securities to
secure public deposits, to qualify for fiduciary powers and to use as collateral
for FHLB and other borrowings. Pledged assets at March 31, 2000 totaled $287.0
million.
Market Risk and Sensitivity Analysis
The objective of market risk assessment and asset and liability
management is to maximize net interest revenue while maintaining acceptable
levels of interest rate sensitivity, high asset quality and adequate liquidity.
The Corporation does not trade financial instruments nor does the
Corporation invest in financial instruments denominated in foreign currencies.
The Corporation invests in only high quality securities (primarily U.S. Treasury
and federal agency obligations). The Corporation's principal risk is interest
rate related. Interest rate risk results from differences in the maturity and/or
repricing of the Corporation's interest earning assets (which consist primarily
of mortgage loans, mortgage backed securities and other fixed rate investments)
and its interest bearing liabilities, (predominately floating rate deposits).
The Corporation uses interest rate swaps ("Swaps") as hedging vehicles to
mitigate interest rate exposure associated with short-term floating
interest-rate deposits.
The Corporation employs net interest income ("NII") simulation modeling
techniques to evaluate and manage the effect of changing interest rates. The
Corporation's simulation model includes all on-balance sheet and off-balance
sheet financial instruments and measures NII under
21
<PAGE> 22
various interest rate scenarios. Key variables in the NII simulation include
changes to the level and term structure of interest rates, the repricing of
financial instruments, prepayment and reinvestment assumptions, loan and deposit
pricing and volume assumptions. These simulations involve assumptions that are
inherently uncertain and as a result, the simulation models cannot precisely
estimate NII or precisely predict the impact of changes in interest rates on
NII. Actual results may differ from simulated results due to the timing,
magnitude and frequency of interest rate changes as well as changes in market
conditions and management strategies, including changes in asset and liability
mix.
The Corporation's simulation model facilitates the evaluation of a
potential range of net interest revenue, under various interest rate scenarios.
The simulation model as of March 31, 2000 indicates a decrease in net interest
revenue of $0.5 million to $1.2 million over the following three month period
for an immediate 50 to 100 basis points increase in rates. Conversely, if
interest rates immediately decreased by 50 to 100 basis points, the simulation
model indicates a $0.7 million to $1.4 million increase in net interest revenue.
As of March 31, 1999 the simulation model indicated a decrease in net interest
revenue of $0.9 million to $1.9 million over the following three months had an
immediate 50 to 100 basis points increase in rates occurred. Conversely, if
interest rates had immediately decreased by 50 to 100 basis points as of March
31, 1999, the simulation model indicated a $0.9 million to $1.8 million increase
in net interest revenue for the subsequent three-month period.
Each of these simulations assumes that the asset and liability
structure of the balance sheet would not be changed as a result of the simulated
changes in interest rates. As the Corporation actively manages its balance sheet
and interest rate exposure, in all likelihood the Corporation would take steps
to ameliorate any additional interest rate exposure that would result from the
simulated changes in the interest rate environment.
The following table provides details, as of March 31, 2000, of the
notional amounts of Swaps by maturity and the related average interest rates
paid and received. The Corporation is a fixed rate payor on all of its Swaps.
<TABLE>
<CAPTION>
Maturing
----------------------------------------------------------------
Within 1 1 to 5 Over
(Dollars in Thousands) Year Years 5 Years Total
- ---------------------- --------- --------- -------- -----------
<S> <C> <C> <C> <C>
Fixed pay swaps $ 120,000 $ 920,000 $ 50,000 $ 1,090,000
Average rate paid 6.83% 6.31% 7.22% 6.41%
Average rate received (1) 6.06% 6.12% 6.28% 6.12%
</TABLE>
(1) Represents the average variable rate that will be received by the
Corporation based upon the rate in effect at the latest variable rate reset
date of each Swap.
The impact of the Corporation's hedging activities upon net interest
revenue for the quarters ended March 31, 2000 and 1999, are detailed in the
following table.
22
<PAGE> 23
<TABLE>
<CAPTION>
Three Month Periods
Ended March 31,
--------------------------
(Dollars In Thousands) 2000 1999
- ---------------------- -------- --------
<S> <C> <C>
Net Interest revenue:
As reported $ 32,491 $ 28,921
Excluding hedging activities $ 33,197 $ 30,883
Net yield on interest earning assets:
As reported 3.26% 3.37%
Excluding hedging activities 3.34% 3.62%
</TABLE>
The difference between results "As reported" and "Excluding hedging activities"
in each period reflects the cost of using swaps to hedge interest rate risk.
ALLOWANCE FOR CREDIT LOSSES
An analysis of allowance for credit losses follows:
<TABLE>
<CAPTION>
Three Month Periods
Ended March 31,
--------------------------
(Dollars In Thousands) 2000 1999
- ---------------------- -------- --------
<S> <C> <C>
Balance, Beginning of Period $ 20,169 $ 19,414
Provision for Credit Losses -- --
Recoveries 16 165
Charge-offs -- (250)
-------- --------
Net (Charge-Offs) Recoveries 16 (85)
-------- --------
Balance, End of Period $ 20,185 $ 19,329
======== ========
</TABLE>
The level of the allowance for credit losses is based upon management's
judgment as to the current condition of the credit portfolio determined by a
continuing surveillance process. In assessing the adequacy of the allowance for
credit losses, management relies on its ongoing review of specific loans, past
experience, the present loan portfolio composition and other economic and
financial considerations.
As a percentage of average loans, annualized net loan recoveries were
less than one basis point for the first quarter of 2000, compared to annualized
net loan charge-offs of two basis points for the first quarter of 1999. The
allowance for credit losses at March 31, 2000, was 0.75% of average loans for
the quarter ended March 31, 2000. This compares with 0.89% of average loans for
the quarter ended March 31, 1999. Given the current credit quality, management
anticipates that the allowance for credit losses as a percentage of loans will
continue to decrease.
23
<PAGE> 24
Nonperforming assets, which consist of non-accrual ("impaired") loans
for the most recent five quarters are as follows:
<TABLE>
<CAPTION>
March 31, Dec. 31, Sept. 30, June 30, March 31,
2000 1999 1999 1999 1999
--------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Non-accrual loans $ 428 $1,673 $ 435 $ 637 $ 583
====== ====== ====== ====== ======
</TABLE>
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
2 Agreement and Plan of Merger dated as of January 12, 2000, by and among
The Charles Schwab Corporation, Patriot Merger Corporation and the
Registrant, filed as Exhibit 2.1 to the Registrant's Form 8-K dated
January 14, 2000. (1)
3.1 Registrant's Certificate of Incorporation dated June 2, 1999, filed as
Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended June
30, 1999. (1)
3.2 Restated By-Laws of the Corporation dated April 27, 1999, filed as
Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 1999. (1)
4 Note: The exhibits filed herewith do not include the instruments with
respect to long-term debt of the Corporation, inasmuch as the total
amount of debt authorized under any such instrument does not exceed 10%
of the total assets of the Registrant on a consolidated basis. The
Registrant agrees, pursuant to Item 601 (b)(4)(iii) of Regulation S-K,
that it will furnish a copy of any such instrument to the Securities
and Exchange Commission upon request.
27 Financial Data Schedule.
(1) Incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
On January 14, 2000, the Registrant filed a Current Report on Form 8-K,
reporting under Item 5 and Item 7. The Form 8-K was filed to report that the
Registrant had entered into an Agreement and Plan of Merger dated as of January
12, 2000 with The Charles Schwab Corporation.
On February 22, 2000, the Corporation filed a Current Report on Form 8-K,
reporting under Item 5. The Form 8-K presented the following audited financial
statements of the Registrant at December 31, 1999 and 1998 and for the fiscal
years ended December 31, 1999 and 1998 and 1997:
Consolidated Statement of Income
Consolidated Statement of Condition
Consolidated Statement of Changes in Stockholders' Equity
Consolidated Statement of Cash Flows
On April 28, 2000, the Corporation filed amendment number 1 to the Current
Report on Form 8-K filed on February 22, 2000. The amendment added the city in
which the office of the auditors is located.
25
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U. S. Trust Corporation
-----------------------
(Registrant)
Date: May 12, 2000 By: /s/ Richard E. Brinkmann
------------ ------------------------------
Richard E. Brinkmann
Managing Director and
Comptroller
(Principal Accounting Officer)
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF CONDITION AT MARCH 31, 2000 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 357,439
<INT-BEARING-DEPOSITS> 69,165
<FED-FUNDS-SOLD> 24,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,185,073
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,771,539
<ALLOWANCE> 20,185
<TOTAL-ASSETS> 4,876,637
<DEPOSITS> 3,994,479
<SHORT-TERM> 149,626
<LIABILITIES-OTHER> 337,743
<LONG-TERM> 63,000
0
0
<COMMON> 20,628
<OTHER-SE> 311,161
<TOTAL-LIABILITIES-AND-EQUITY> 4,876,637
<INTEREST-LOAN> 50,002
<INTEREST-INVEST> 17,739
<INTEREST-OTHER> 3,114
<INTEREST-TOTAL> 70,855
<INTEREST-DEPOSIT> 35,189
<INTEREST-EXPENSE> 38,378
<INTEREST-INCOME-NET> 32,477
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 121,859
<INCOME-PRETAX> 31,893
<INCOME-PRE-EXTRAORDINARY> 16,183
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,710
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 3.26
<LOANS-NON> 428
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 20,169
<CHARGE-OFFS> 0
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 20,185
<ALLOWANCE-DOMESTIC> 20,185
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 20,185
</TABLE>
