FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From ____________ to ___________
Commission File Number: 1-14659
WILMINGTON TRUST CORPORATION
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0328154
--------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890
---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(302) 651-1000
----------------------------------------------------------------
(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 Sections 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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of issuer's common stock ($1.00 par value) outstanding
at September 30, 2001 - 32,660,627 shares
Wilmington Trust Corporation and Subsidiaries
Form 10-Q
Index
Page
----
Part I. Financial Information
Item 1 - Financial Statements (unaudited)
Consolidated Statements of Condition 1
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
Part II. Other Information
Item 1 - Legal Proceedings 29
Item 2 - Changes in Securities and Use of Proceeds 29
Item 3 - Defaults Upon Senior Securities 29
Item 4 - Submission of Matters to a Vote of Security Holders 29
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8-K 29
Exhibit 11
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
--------------------------------
September 30, December 31,
(in thousands) 2001 2000
-----------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 282,491 $ 223,819
--------------------------------
Federal funds sold and securities purchased
under agreements to resell 128,981 50,175
--------------------------------
Investment securities available for sale:
U.S. Treasury and government agencies 733,747 878,932
Obligations of state and political subdivisions 13,073 11,776
Other securities 509,132 549,357
-----------------------------------------------------------------------------------------------------------
Total investment securities available for sale 1,255,952 1,440,065
--------------------------------
Investment securities held to maturity:
U.S. Treasury and government agencies 10,706 11,003
Obligations of state and political subdivisions 4,985 6,640
Other securities 1,165 3,095
-----------------------------------------------------------------------------------------------------------
Total investment securities held to maturity (market values
of $17,612 and $20,984, respectively) 16,856 20,738
--------------------------------
Loans:
Commercial, financial and agricultural 1,643,650 1,622,654
Real estate-construction 384,168 372,702
Mortgage-commercial 1,035,943 990,433
Mortgage-residential 896,711 925,938
Consumer 1,302,218 1,277,291
Unearned income (1,000) (609)
-----------------------------------------------------------------------------------------------------------
Total loans net of unearned income 5,261,690 5,188,409
Reserve for loan losses (81,336) (76,739)
-----------------------------------------------------------------------------------------------------------
Net loans 5,180,354 5,111,670
--------------------------------
Premises and equipment, net 141,036 130,910
Goodwill and other intangible assets, net of accumulated amortization
of $23,383 in 2001 and $17,187 in 2000 202,099 172,015
Accrued interest receivable 46,950 49,200
Other assets 145,100 123,024
-----------------------------------------------------------------------------------------------------------
Total assets $ 7,399,819 $ 7,321,616
================================
1
-----------------------------------
September 30, December 31,
(in thousands) 2001 2000
-----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 1,016,832 $ 955,651
Interest-bearing:
Savings 338,217 350,213
Interest-bearing demand 1,340,681 1,413,173
Certificates under $100,000 921,983 927,500
Certificates $100,000 and over 1,847,565 1,639,479
-----------------------------------------------------------------------------------------------------
Total deposits 5,465,278 5,286,016
-----------------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 855,701 1,099,445
U.S. Treasury demand 80,910 30,757
Line of credit 23,500 17,000
-----------------------------------------------------------------------------------------------------
Total short-term borrowings 960,111 1,147,202
-----------------------------------
Accrued interest payable 52,718 51,655
Other liabilities 81,988 76,843
Long-term debt 168,000 168,000
-----------------------------------------------------------------------------------------------------
Total liabilities 6,728,095 6,729,716
-----------------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 39,264,173 39,264 39,264
Capital surplus 77,181 72,817
Retained earnings 800,958 753,373
Accumulated other comprehensive income/(loss) 16,770 (4,429)
-----------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 934,173 861,025
Less: Treasury stock, at cost, 6,603,546 and
6,870,855 shares, respectively (262,449) (269,125)
-----------------------------------------------------------------------------------------------------
Total stockholders' equity 671,724 591,900
-----------------------------------
Total liabilities and stockholders' equity $ 7,399,819 $ 7,321,616
===================================
See Notes to Consolidated Financial Statements
2
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
----------------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
----------------------------------------------------------------
(in thousands; except per share data) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $ 96,350 $ 110,604 $ 303,162 $ 317,120
Interest and dividends on investment securities:
Taxable interest 16,562 21,839 53,766 67,689
Tax-exempt interest 255 175 1,608 470
Dividends 1,673 2,234 5,418 7,058
Interest on federal funds sold and securities
purchased under agreements to resell 356 351 841 1,466
--------------------------------------------------------------------------------------------------------------------
Total interest income 115,196 135,203 364,795 393,803
----------------------------------------------------------------
Interest on deposits 35,510 47,982 123,323 140,444
Interest on short-term borrowings 11,039 21,836 40,099 54,136
Interest on long-term debt 2,771 2,769 8,290 8,292
--------------------------------------------------------------------------------------------------------------------
Total interest expense 49,320 72,587 171,712 202,872
----------------------------------------------------------------
Net interest income 65,876 62,616 193,083 190,931
Provision for loan losses (5,300) (6,400) (15,250) (16,900)
--------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 60,576 56,216 177,833 174,031
----------------------------------------------------------------
OTHER INCOME
Advisory fees 43,804 41,301 129,849 121,818
Service charges on deposit accounts 6,975 6,459 20,004 18,891
Card fees 2,572 2,416 7,519 7,141
Sale of branch locations -- 6,082 -- 7,282
Securities gains/(losses) 2 (3,436) 784 (1,776)
Other operating income 2,487 2,565 9,237 5,455
--------------------------------------------------------------------------------------------------------------------
Total other income 55,840 55,387 167,393 158,811
----------------------------------------------------------------
Net interest and other income 116,416 111,603 345,226 332,842
----------------------------------------------------------------
OTHER EXPENSE
Salaries and employment benefits 40,724 38,861 123,966 119,383
Net occupancy 4,092 4,096 12,177 11,900
Furniture and equipment 5,811 6,033 17,269 17,280
Stationery and supplies 1,534 1,499 4,220 4,671
Advertising and contributions 2,438 2,080 6,766 5,787
3
Servicing and consulting fees 1,981 2,025 6,447 5,579
Other operating expense 12,278 9,933 34,211 29,517
--------------------------------------------------------------------------------------------------------------------
Total other expense 68,858 64,527 205,056 194,117
----------------------------------------------------------------
NET INCOME
Income before income taxes and cumulative
effect of change in accounting principle 47,558 47,076 140,170 138,725
Applicable income taxes 16,305 15,986 47,868 46,591
--------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle 31,253 $ 31,090 $ 92,302 $ 92,134
Cumulative effect of change in accounting
principle (net of income taxes of $584) -- -- 1,130 --
--------------------------------------------------------------------------------------------------------------------
Net income $ 31,253 $ 31,090 $ 93,432 $ 92,134
================================================================
Net income per share - basic:
Before cumulative effect of change in
accounting principle $ 0.96 $ 0.96 $ 2.84 $ 2.85
Cumulative effect of change in
accounting principle -- -- 0.03 --
--------------------------------------------------------------------------------------------------------------------
Net income per share - basic $ 0.96 $ 0.96 $ 2.87 $ 2.85
================================================================
Net income per share - diluted:
Before cumulative effect of change in
accounting principle 0.95 0.95 $ 2.81 $ 2.83
Cumulative effect of change in
accounting principle -- -- 0.03 --
--------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $ 0.95 $ 0.95 $ 2.84 $ 2.83
================================================================
Weighted average shares outstanding:
basic 32,634 32,342 32,538 32,282
diluted 33,038 32,712 32,956 32,607
Cash dividends per share $ 0.48 $ 0.45 $ 1.41 $ 1.32
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
------------------------------
For the nine months ended
September 30,
(in thousands) 2001 2000
-------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 93,432 $ 92,134
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 15,250 16,900
Provision for depreciation 13,494 13,904
Amortization of investment securities available for sale
discounts and premiums 7,890 4,692
Amortization/(accretion) of investment securities held to
maturity discounts and premiums 5 (11)
Deferred income taxes 2,506 284
Gross proceeds from sales of loans 66,326 41,415
Gains on sales of loans (640) (384)
Securities (gains)/losses (784) 1,776
(Increase)/decrease in other assets (14,964) 11,973
(Decrease)/increase in other liabilities (4,186) 9,292
-------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 178,329 191,975
------------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 38,191 331,280
Proceeds from maturities of investment securities available for sale 329,399 213,852
Proceeds from maturities of investment securities held to maturity 3,877 9,051
Purchases of investment securities available for sale (158,725) (307,614)
Investments in affiliates (36,279) (33,017)
Purchases of loans (10,093) (6,851)
Net increase in loans (139,527) (519,654)
Net increase in premises and equipment (23,620) (9,829)
-------------------------------------------------------------------------------------------------------------
Net cash provided by/(used for) investing activities 3,223 (322,782)
------------------------------
FINANCING ACTIVITIES
Net decrease in demand, savings and interest-bearing
demand deposits (23,307) (138,025)
Net increase in certificates of deposit 202,569 63,082
Net (decrease)/increase in federal funds purchased and securities sold
under agreements to repurchase (243,744) 124,528
Net increase/(decrease) in U.S. Treasury demand 50,153 (17,773)
Net increase/(decrease) in line of credit 6,500 (7,000)
Cash dividends (45,847) (42,600)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 11,825 6,267
5
Payments for common stock acquired through buybacks (2,223) (8,669)
-------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (44,074) (20,190)
------------------------------
Increase/(decrease) in cash and cash equivalents 137,478 (150,997)
Cash and cash equivalents at beginning of period 273,994 354,905
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 411,472 $ 203,908
==============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 170,649 $ 205,034
Taxes 49,135 51,420
Loans transferred during the period:
To other real estate owned $ 929 $ 1,770
From other real estate owned 939 1,690
See Notes to Consolidated Financial Statements
6
Notes to Unaudited Consolidated Financial Statements
Note 1 - Accounting and Reporting Policies
The accounting and reporting policies of Wilmington Trust Corporation
(the "Corporation"), a holding company that owns all of the issued and
outstanding shares of capital stock of Wilmington Trust Company, Wilmington
Trust of Pennsylvania, Wilmington Trust FSB, WT Investments, Inc. ("WTI") and
Rodney Square Management Corporation, conform to accounting principles generally
accepted in the United States of America and practices in the banking industry
for interim financial information. The information for the interim periods is
unaudited and includes all adjustments that are of a normal recurring nature and
that management believes to be necessary for fair presentation. Results for the
interim periods are not necessarily indicative of the results that may be
expected for the full year. The consolidated financial statements presented
herein should be read in conjunction with the notes to the consolidated
financial statements included in the Corporation's Annual Report to Shareholders
for 2000.
Note 2 - Comprehensive Income
The following table depicts other comprehensive income as required by
SFAS No. 130:
-----------------------------
For the nine months ended
September 30,
(Unaudited) -----------------------------
(in thousands) 2001 2000
--------------------------------------------------------------------------------------------------------
Net income $ 93,432 $ 92,134
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities 20,890 11,559
Reclassification adjustment for securities gains included in net income (502) 1,137
Net unrealized holding gains arising during the period on derivatives
used for cash flow hedge 870 --
Reclassification adjustment for derivative gains included in net income (59) --
-----------------------------
Total comprehensive income $ 114,631 $ 104,830
=============================
7
Note 3 - Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings
per share:
---------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
---------------------------------------------------------
(in thousands; except per share data) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------
Numerator:
Net income before cumulative effect of
change in accounting principle $31,253 $31,090 $ 92,302 $92,134
Cumulative effect of change in accounting
principle (net of income taxes of $584) -- -- 1,130 --
-----------------------------------------------------------------------------------------------------------
Net income $31,253 $31,090 $ 93,432 $92,134
-----------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 32,634 32,342 32,538 32,282
-----------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 404 370 418 325
-----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 33,038 32,712 32,956 32,607
-----------------------------------------------------------------------------------------------------------
Basic earnings per share
Before cumulative effect of change in
accounting principle $ 0.96 $ 0.96 $ 2.84 $ 2.85
Cumulative effect of change in
accounting principle -- -- 0.03 --
-----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.96 $ 0.96 $ 2.87 $ 2.85
===========================================================================================================
Diluted earnings per share
Before cumulative effect of change in $ 0.95 $ 0.95 $ 2.81 $ 2.83
accounting principle
Cumulative effect of change in
accounting principle -- -- 0.03 --
-----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.95 $ 0.95 $ 2.84 $ 2.83
===========================================================================================================
8
Note 4 - Segment Reporting
For the purposes of reporting our results, we divide our business activities
into two segments. Our banking and advisory fee-based segments comprise the
services we provide to customers. Previously we also reported a funds management
segment, which included activities not directly customer-related, but which were
undertaken primarily for the Corporation's general purposes. Those activities
included management of the investment portfolio, funding and interest rate risk
management. Those activities now are reflected in the banking and advisory
fee-based segments, and the 2000 amounts have been restated to reflect this
change.
The banking and advisory fee-based segments are managed separately but have
overlapping markets, customers and systems. The Corporation's strategy to
develop full relationships across a broad product array allows these two
segments to market separate products and services to a common base of customers.
The banking segment includes lending, deposit-taking and branch banking in our
primary banking markets of Delaware, Pennsylvania and Maryland, along with
institutional deposit-taking on a national basis. Lending activities include
commercial loans, commercial and residential mortgages and construction and
consumer loans. Deposit products include demand checking, certificates of
deposit, negotiable order of withdrawal accounts and various savings and money
market accounts.
The advisory fee-based segment includes private client advisory services, asset
management, mutual fund, corporate trust and corporate retirement plan services
to individuals and corporations in the United States and more than 50 other
countries. Private client advisory service activities include investment
management, trust services, private banking, estate settlement, financial
planning and tax preparation. Asset management activities include a broad range
of portfolio management services, including fixed-income, short-term cash
management and contributions resulting from affiliations with Cramer Rosenthal
McGlynn, LLC and Roxbury Capital Management, LLC. Corporate trust activities
include custody services, trusteeships for capital leases, collateralized
securities, corporate restructurings and bankruptcies.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Corporation evaluates
performance based on profit or loss from operations before income taxes and
without including nonrecurring gains and losses. The Corporation generally
records intersegment sales and transfers as if the sales or transfers were to
third parties (i.e., at current market prices). Profit or loss from infrequent
events such as the sale of a business are reported separately for each segment.
Financial data by segment for the third quarter and year-to-date September 30,
2001 vs. September 30, 2000 is as follows:
Banking Advisory Fee
Quarter ended September 30, 2001 (in thousands) Business Business Totals
--------------------------------------------------------------------------------------------------------
Net interest income $ 57,546 $ 8,330 $ 65,876
Provision for loan losses 5,054 246 5,300
--------------------------------------------------------------------------------------------------------
Net interest income after provision 52,492 8,084 60,576
Total advisory fees:
Private client advisory services 1,429 24,155 25,584
Corporate financial services 822 13,980 14,802
Affiliate managers -- 5,550 5,550
Amortization of goodwill -- (2,132) (2,132)
Other operating income 12,170 (136) 12,034
Securities gains 2 -- 2
--------------------------------------------------------------------------------------------------------
Net interest and other income 66,915 49,501 116,416
9
Other expense 37,285 31,573 68,858
--------------------------------------------------------------------------------------------------------
Segment profit from operations $ 29,630 $ 17,928 $ 47,558
========================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 3,088 1,832 4,920
Investment in equity method investees -- 215,744 215,744
Segment average assets 5,816,388 1,381,843 7,198,231
Banking Advisory Fee
Quarter ended September 30, 2000 (in thousands) Business Business Totals
--------------------------------------------------------------------------------------------------------
Net interest income $ 53,050 $ 9,566 $ 62,616
Provision for loan losses 6,383 17 6,400
--------------------------------------------------------------------------------------------------------
Net interest income after provision 46,667 9,549 56,216
Total advisory fees:
Private client advisory services 1,081 23,726 24,807
Corporate financial services 345 12,192 12,537
Affiliate managers -- 5,932 5,932
Amortization of goodwill -- (1,975) (1,975)
Other operating income 17,619 (97) 17,522
Securities gains / (losses) (3,436) -- (3,436)
--------------------------------------------------------------------------------------------------------
Net interest and other income 62,276 49,327 111,603
Other expense 35,492 29,035 64,527
--------------------------------------------------------------------------------------------------------
Segment profit from operations $ 26,784 $ 20,292 $ 47,076
========================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 3,170 1,816 4,986
Investment in equity method investees -- 189,186 189,186
Segment average assets 5,826,710 1,367,227 7,193,937
--------------------------------------------------------------------------------------------------------
Banking Advisory Fee
Year-to-Date September 30, 2001 (in thousands) Business Business Totals
--------------------------------------------------------------------------------------------------------
Net interest income $ 169,205 $ 23,878 $ 193,083
Provision for loan losses 14,901 349 15,250
--------------------------------------------------------------------------------------------------------
Net interest income after provision 154,304 23,529 177,833
Total advisory fees:
Private client advisory services 4,701 73,437 78,138
Corporate financial services 1,773 39,664 41,437
Affiliate managers -- 16,469 16,469
Amortization of goodwill -- (6,195) (6,195)
10
Other operating income* 36,410 2,063 38,473
Securities gains 784 -- 784
--------------------------------------------------------------------------------------------------------
Net interest and other income 197,972 148,967 346,939
Other expense 109,668 95,388 205,056
--------------------------------------------------------------------------------------------------------
Segment profit from operations 88,304 53,579 141,883
--------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 88,304 $ 53,579 $ 141,883
========================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 9,098 5,302 14,400
Investment in equity method investees -- 215,744 215,744
Segment average assets 5,816,388 1,381,843 7,198,231
* Includes cumulative effect of change in accounting principle
Year-to-Date September 30, 2000 (in thousands)
--------------------------------------------------------------------------------------------------------
Net interest income $ 169,541 $ 21,390 $ 190,931
Provision for loan losses 16,598 302 16,900
--------------------------------------------------------------------------------------------------------
Net interest income after provision 152,943 21,088 174,031
Total advisory fees:
Private client advisory services 3,277 70,683 73,960
Corporate financial services 1,664 35,894 37,558
Affiliate managers -- 15,780 15,780
Amortization of goodwill -- (5,480) (5,480)
Other operating income 37,591 1,178 38,769
Securities gains / (losses) (1,776) -- (1,776)
--------------------------------------------------------------------------------------------------------
Net interest and other income 193,689 139,153 332,842
Other expense 107,188 86,929 194,117
--------------------------------------------------------------------------------------------------------
Segment profit from operations $ 86,501 $ 52,224 $ 138,725
========================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 9,299 5,399 14,698
Investment in equity method investees -- 189,186 189,186
Segment average assets 5,826,710 1,367,227 7,193,937
Note 5 - Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires the Corporation to
recognize all derivatives on its balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the
11
hedge, changes in the fair value of the derivative are either offset against the
change in fair value of assets, liabilities or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings. The adoption of Statement No. 133 on
January 1, 2001 resulted in the cumulative effect of the accounting change of
$1.1 million after-tax being recognized as income in the Consolidated Statements
of Income.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement supersedes and replaces the guidance in Statement 125. It revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, although it carries over
most of Statement 125's provisions without reconsideration.
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001 and recognition
and reclassification of collateral and disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This Statement is to be applied prospectively with certain exceptions. Other
than those exceptions, earlier or retroactive application of its accounting
provisions is not permitted. The adoption of this Statement did not have an
impact on the Corporation's earnings, financial condition or equity.
Business Combinations
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
Statement addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations within the scope of this Statement are to be accounted for
using the purchase method, thereby eliminating use of the pooling-of-interests
method.
The provisions of this Statement apply to all business combinations initiated
after June 30, 2001. This Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. The Corporation expects no impact on earnings, financial
condition or equity upon adoption.
Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
The provisions of the Statement are required to be applied starting with fiscal
years beginning after December 15, 2001, except that goodwill and intangible
assets acquired after June 30, 2001 will be subject immediately to the
nonamortization and amortization provisions of this Statement. Early application
is permitted for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not previously been
issued. This Statement is required to be applied at the beginning of an entity's
fiscal year and to all goodwill and other intangible assets recognized in
financial statements at that date. Beginning January 1, 2002, annual
amortization expense will be reduced by $8.8 million, resulting in after-tax
income of $5.8 million for the foreseeable future. Other than the cessation of
amortization, the Corporation does not anticipate an impact on earnings,
financial condition or equity upon adoption.
12
Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. The Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset.
This Statement amends FASB Statement No. 19, Financial Accounting and Reporting
by Oil and Gas Producing Companies, and it applies to all entities. It is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Earlier application is encouraged. The Corporation does not expect the
adoption of the Statement to have an impact on its earnings, financial condition
or equity.
Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. However, the Statement retains the
fundamental provisions of Statement 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale.
This Statement supersedes the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
However, this Statement retains the requirement of Opinion 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
by abandonment or in distribution to owners) or is classified as held for sale.
This Statement also amends ARB No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a temporarily controlled
subsidiary.
The provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years, with earlier application encouraged. The provisions of this
Statement generally are to be applied prospectively. The Corporation does not
expect the adoption of the Statement to have an impact on its earnings,
financial condition or equity.
Note 6 - Derivative and Hedging Activities
The Corporation enters into interest rate swap and interest rate floor contracts
in managing interest rate risk to reduce the impact of fluctuations in interest
rates of identifiable asset categories, principally floating-rate commercial
loans and commercial mortgage loans.
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts. The Corporation has entered into swaps in which it pays a
fixed rate and it receives a floating rate. The net interest differential
associated with the swaps is reported in "Interest and Fees on Loans" in the
Consolidated Statements of Income. The net gains or losses resulting from the
changes in fair value of the swaps are recorded to "Other Operating Income" in
the Consolidated Statements of Income.
13
Floors are contracts that generate interest payments to the Corporation based on
the difference between the floating-rate index and a predetermined strike rate
of the specific floor when the index is below the strike rate. When the index is
equal to or above the strike rate, no payments are made or received by the
Corporation. The Corporation enters into these contracts to hedge against the
impact of adverse market interest rate changes on the cash flows of floating
rate commercial loans. Hedge effectiveness is assessed by comparing the changes
in intrinsic value of the interest rate floors with the changes in the variable
interest rates for the commercial loans.
Changes in the fair value of the floors attributed to the change in "time value"
are excluded in assessing the hedge's effectiveness and are recorded to "Other
Operating Income" in the Consolidated Statements of Income. Changes in the fair
value that are determined to be ineffective are also recorded to "Other
Operating Income" in the Consolidated Statements of Income. The effective
portion of the change in fair value is recorded in "Other Comprehensive Income"
in the Consolidated Statements of Condition.
The Corporation does not hold or issue derivative financial instruments for
trading purposes.
Other operating income for the period ended September 30, 2001 includes net
gains of $596,048 resulting from the change in fair value of the floors that was
excluded in assessing hedge effectiveness. Net gains or losses resulting from
the cash flow hedges' ineffectiveness were immaterial. The amounts recorded to
"Other Comprehensive Income" are subsequently reclassified to "Interest and Fees
on Loans" in the Consolidated Statements of Income as a yield adjustment in the
same period in which the hedged forecasted transaction affects earnings. On
April 17, 2001, the Corporation sold all of its floors. The gain from the sale
was $32,682 and was included in other operating income. For the third quarter of
2001, approximately $72,000 of gains in "Accumulated Other Comprehensive Income"
were reclassified to earnings. For the nine months ended September 30, 2001,
approximately $145,000 of gains in "Accumulated Other Comprehensive Income" were
reclassified to earnings. During the 12 months ending September 30, 2002,
approximately $295,000 of gains in "Accumulated Other Comprehensive Income" are
expected to be reclassified to earnings.
14
Wilmington Trust Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SUMMARY
Net income for the third quarter of 2001 was $31.3 million, or $.95 per share on
a diluted basis, and for the first nine months of 2001 was $93.4 million, or
$2.84 per share on a diluted basis. This was a .5% increase over the $31.1
million, or $.95 per share, for the third quarter of last year, and a 1.4%
increase over the $92.1 million, or $2.83 per share, on a diluted basis,
reported for the first nine months of 2000.
Total revenues for the third quarter of 2001 reached $121.7 million, a 3%
increase over the $118.0 million reported for the third quarter of 2000. For the
first nine months of 2001, revenues reached $360.5 million, a 3% increase over
the $349.7 million reported for the corresponding period in 2000.
Net interest income for the third quarter of 2001 was $65.9 million, a 5%
increase over the $62.6 million reported for the third quarter of last year. For
the first nine months, net interest income was $193.1 million, an increase of 1%
over the $190.9 million reported for the corresponding period of last year.
The quarterly provision for loan losses of $5.3 million was 17% lower than the
$6.4 million for the third quarter of 2000. Year-to-date, the provision was
$15.3 million, $1.6 million, or 10%, below the $16.9 million reported for the
first nine months of 2000. The reserve for loan losses at quarter-end was $81.3
million, $4.6 million, or 6%, above the $76.7 million reported at December 31,
2000.
Noninterest income for the third quarter of 2001 was $55.8 million, a .8%
increase over the $55.4 million reported for the third quarter of last year. For
the first nine months of 2001, noninterest income reached $167.4 million, a 5%
increase over the $158.8 million reported for the first nine months of 2000.
Operating expenses for the third quarter and first nine months of 2001 were
$68.9 million and $205.1 million, respectively, a 7% increase above the $64.5
million for the third quarter of 2000 and a 6% increase over the $194.1 million
reported for the first nine months of last year.
Return on assets for the nine months ended September 30, 2001, on an annualized
basis, was 1.74%, above the 1.71% reported for the corresponding period a year
ago. Return on stockholders' equity, also on an annualized basis, was 19.87%,
compared with 23.71% for the first nine months of 2000.
STATEMENT OF CONDITION
Total assets at September 30, 2001 were $7.40 billion, $78.2 million, or 1%,
above the $7.32 billion reported at December 31, 2000. Total earning assets
decreased $35.9 million over this period, to $6.66 billion, as lower levels of
investment securities were offset in part by higher levels of short-term
investments and loans outstanding.
Loan balances over the first nine months of 2001 increased $73.2 million, or 1%,
over their year-end 2000 levels. Paydowns, refinancings and the sale of
residential mortgage loans into the secondary market slowed the rate of loan
growth. At September 30, 2001, total loans were $5.26 billion, above the $5.19
billion reported at year-end 2000. Contributing to this increase were commercial
mortgage loans, which increased $45.5 million, or 5%, to $1.04 billion,
commercial loans, which increased $21.0 million, or 1%, to $1.64 billion,
consumer loans, up $24.9 million, or 2%, to $1.30 billion and real estate
construction loans, up $11.5 million, or 3%, to $384.2 million. Partially
offsetting these increases were residential mortgage loans of $896.7 million,
down $29.2 million, or 3%. Approximately $25 million of residential mortgage
loans were sold during the third quarter of 2001 and approximately $66 million
of residential mortgage loans were sold during the first nine months of 2001.
While
15
these period-end balances reflected only a 1% growth in loans, the average
balance of total loans outstanding during the first nine months of 2001 was
$5.22 billion, a $209.9 million, or 4%, increase over the $5.01 billion for the
corresponding period a year ago. Year-over-year loan growth continued in
Pennsylvania, reflecting the strength of the Delaware Valley's diversified
economy and new business momentum in the Philadelphia region.
The investment portfolio at September 30, 2001 was $1.27 billion, a decrease of
$188.0 million, or 13%, from the December 31, 2000 level of $1.46 billion.
Contributing to this decrease were U.S. Treasury and government agency
securities, which decreased $145.5 million, or 16%, to $744.5 million, preferred
stocks, which decreased $16.8 million, or 17%, to $83.6 million, and
asset-backed securities, which decreased $16.7 million, or 6%, to $278.6
million. These declines are a reflection of the current interest rate
environment and the use of assets to fund loan growth.
Interest-bearing liabilities at quarter-end were $5.58 billion, $69.0 million,
or 1%, below the year-end 2000 level of $5.65 billion. Total deposits during the
first nine months of 2001 increased $179.3 million, or 3%, while short-term
borrowings decreased $187.1 million, or 16%. An increase of $208.1 million, or
13%, in certificates of deposit $100,000 and over and a $61.2 million, or 6%,
increase in non-interest-bearing demand account balances were offset in part by
lower levels of interest-bearing demand account balances, down $72.5 million, or
5%. Short-term borrowings decreased $187.1 million, or 16%, to $960.1 million,
as term Federal funds purchased declined $395.1 million. Offsetting this decline
in part were increased levels of overnight Federal funds purchased, up $94.6
million, or 46%, securities sold under agreements to repurchase, up $56.8
million, or 24%, and U.S. Treasury demand balances, up $50.2 million, or 163%,
over their prior year-end levels.
Shareholders' equity at September 30, 2001 was $671.7 million, $79.8 million, or
13%, over the 2000 year-end level, as the Corporation continued to rebuild its
tangible equity following investments in its affiliate asset managers, Cramer
Rosenthal McGlynn and Roxbury Capital Management. Earnings of $93.4 million for
the first nine months, coupled with a $21.2 million improvement in unrealized
gains/(losses), net of tax, for the investment portfolio and derivative floor
contracts and $13.3 million in new stock issued were responsible for this
increase. Partially offsetting these results were $45.8 million in cash
dividends and the repurchase of $2.2 million of treasury stock.
NET INTEREST INCOME
The net interest margin for the third quarter of 2001 improved to 4.07%, 27
basis points higher than for the third quarter of 2000, and 5 basis points
higher than for the second quarter of 2001, as the cumulative effect of
aggressive interest rate reductions by the Federal Reserve Board over the past
twelve months led to lower funding costs.
Net interest income for the third quarter on a fully tax-equivalent ("FTE")
basis was $67.4 million. This was a $2.9 million, or 5%, increase over the $64.5
million reported for the third quarter of 2000. For the first nine months of
2001, net interest income (FTE) was $198.3 million, a $1.7 million, or 1%,
increase over the $196.6 million reported for the corresponding period of a year
ago. Net interest income was affected by the continued rapid pace of changes in
key interest rates by the Federal Reserve Board, which lowered rates twice
during the quarter by a total of 75 basis points.
Interest income (FTE) for the third quarter of 2001 decreased $20.3 million, or
15%, to $116.7 million from $137.1 million for the third quarter of 2000.
Contributing to this decline was an $80.3 million decrease in the average level
of earning assets, which reduced interest revenues by $911,000. This decline was
compounded by the lower interest rate environment, which lowered interest
revenues for the quarter by $19.4 million. The average rate earned on the
Corporation's earning assets during the quarter declined 105 basis points, from
8.07% to 7.02%. For the first nine months of 2001, interest revenues were down
$29.5 million, also due to the interest rate environment that has seen the rate
earned on the Corporation's earning assets decline 46 basis points to 7.44% from
the 7.90% earned during the first nine months of 2000.
16
Interest expense for the quarter decreased $23.3 million, or 32%, to $49.3
million. Total interest-bearing liabilities, on average, were down $262.7
million, or 5%, from their level of $5.73 billion of a year ago. The reduced
level of interest-bearing liabilities caused interest expense to decrease by
$3.3 million, while the interest rate environment resulted in an additional
decrease to interest expense of $20.0 million. The average rate the Corporation
paid for its funds during the quarter was 2.95%, compared to 4.27% for the third
quarter of 2000. For the year-to-date, interest expense was down $31.2 million,
due primarily to the interest rate environment, which has seen the rate the
Corporation paid on interest-bearing liabilities decline 60 basis points to
4.11% from the 4.71% paid during the first nine months of 2000.
The Corporation's net interest margin for the quarter was 4.07%, 27 basis points
above the 3.80% reported for the third quarter of a year ago. For the first nine
months of this year, the margin was 3.99%, up ten basis points over the margin
for the corresponding period of last year. The following three tables present
comparative net interest income data and a rate-volume analysis of changes in
net interest income for the third quarters and first nine months of 2001 and
2000, respectively.
17
QUARTERLY ANALYSIS OF EARNINGS
2001 Third Quarter 2000 Third Quarter
------------------------------------------ ------------------------------------
(in thousands; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
-------------------------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 44,245 $ 356 3.15% $ 20,989 $ 351 6.54%
U.S. Treasury and government
agencies 746,711 10,579 5.76 905,187 13,992 6.00
State and municipal 17,988 390 9.01 13,622 243 7.22
Preferred stock 83,743 1,848 8.38 104,693 2,375 8.33
Asset-backed securities 277,895 4,154 6.09 311,663 4,988 6.18
Other 156,167 2,216 5.65 194,594 3,514 7.14
--------------------------------------------------------------------------- ---------------------------
Total investment securities 1,282,504 19,187 6.05 1,529,759 25,112 6.36
--------------------------------------------------------------------------------
Commercial, financial and
agricultural 1,632,598 29,080 6.98 1,586,943 35,476 8.77
Real estate-construction 429,469 7,618 6.94 385,514 9,457 9.60
Mortgage-commercial 1,012,506 20,007 7.74 940,322 20,888 8.69
Mortgage-residential 903,088 15,978 7.08 983,218 17,680 7.19
Consumer 1,281,705 24,523 7.57 1,219,631 28,129 9.14
--------------------------------------------------------------------------- ---------------------------
Total loans 5,259,366 97,206 7.28 5,115,628 111,630 8.60
--------------------------------------------------------------------------------
Total earning assets $ 6,586,115 116,749 7.02 $ 6,666,376 137,093 8.07
================================================================================
Funds supporting earning assets
Savings $ 345,377 572 0.66 $ 374,342 1,430 1.52
Interest-bearing demand 1,264,220 4,089 1.28 1,306,118 7,481 2.28
Certificates under $100,000 919,673 11,399 4.92 964,535 12,164 5.02
Certificates $100,000 and over 1,729,298 19,450 4.40 1,602,632 26,907 6.57
--------------------------------------------------------------------------- ---------------------------
Total interest-bearing
deposits 4,258,568 35,510 3.28 4,247,627 47,982 4.45
--------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 995,727 10,666 4.19 1,273,912 21,138 6.59
U.S. Treasury demand 46,609 373 3.13 42,103 698 6.49
--------------------------------------------------------------------------- ---------------------------
Total short-term borrowings 1,042,336 11,039 4.14 1,316,015 21,836 6.59
--------------------------------------------------------------------------------
Long-term debt 168,000 2,771 6.60 168,000 2,769 6.59
--------------------------------------------------------------------------- ---------------------------
Total interest-bearing
liabilities 5,468,904 49,320 3.55 5,731,642 72,587 5.01
--------------------------------------------------------------------------------
18
Other noninterest funds 1,117,211 -- -- 934,734 -- --
--------------------------------------------------------------------------- ---------------------------
Total funds used to support
earning assets $ 6,586,115 49,320 2.95 $ 6,666,376 72,587 4.27
================================================================================
Net interest income/yield 67,429 4.07 64,506 3.80
Tax-equivalent adjustment (1,553) (1,890)
----------- -----------
Net interest income $ 65,876 $ 62,616
=========== ===========
Average rates are calculated using average balances based on historical cost and
do not reflect the market valuation adjustment required by Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
19
YEAR-TO-DATE ANALYSIS OF EARNINGS
Year-to-Date 2001 Year-to-Date 2000
--------------------------------------- -------------------------------------
(in thousands; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense Rate balance expense rate
---------------------------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 27,345 $ 841 4.06% $ 32,419 $ 1,466 5.94%
U.S. Treasury and government
agencies 800,958 34,833 5.86 935,912 43,382 5.97
State and municipal 18,459 2,468 11.10 12,256 687 7.57
Preferred stock 88,082 5,813 8.25 117,366 7,690 8.07
Asset-backed securities 285,722 12,972 6.11 335,669 16,170 6.19
Other 156,187 7,333 6.22 197,634 10,039 6.74
--------------------------------------------------------------------------- ---------------------------
Total investment securities 1,349,408 63,419 6.19 1,598,837 77,968 6.28
----------------------------------------------------------------------------------
Commercial, financial and
agricultural 1,622,025 92,860 7.56 1,568,196 101,341 8.50
Real estate-construction 410,639 24,258 7.82 355,389 25,452 9.40
Mortgage-commercial 1,002,516 62,107 8.17 929,277 60,982 8.62
Mortgage-residential 913,772 48,973 7.15 981,951 52,572 7.14
Consumer 1,266,591 77,551 8.16 1,170,830 79,723 9.06
--------------------------------------------------------------------------- ---------------------------
Total loans 5,215,543 305,749 7.77 5,005,643 320,070 8.45
----------------------------------------------------------------------------------
Total earning assets $ 6,592,296 370,009 7.44 $ 6,636,899 399,504 7.90
==================================================================================
Funds supporting earning assets
Savings $ 348,967 2,431 0.93 $ 389,072 4,471 1.53
Interest-bearing demand 1,283,679 15,491 1.61 1,338,460 21,780 2.17
Certificates under $100,000 916,298 34,653 5.06 995,722 36,469 4.89
Certificates $100,000 and over 1,760,880 70,748 5.30 1,647,856 77,724 6.20
--------------------------------------------------------------------------- ---------------------------
Total interest-bearing
deposits 4,309,824 123,323 3.80 4,371,110 140,444 4.25
----------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,014,367 38,833 5.05 1,113,346 51,860 6.18
U.S. Treasury demand 40,484 1,266 4.12 50,561 2,276 5.91
--------------------------------------------------------------------------- ---------------------------
Total short-term borrowings 1,054,851 40,099 5.01 1,163,907 54,136 6.17
----------------------------------------------------------------------------------
Long-term debt 168,000 8,290 6.58 168,000 8,292 6.58
--------------------------------------------------------------------------- ---------------------------
Total interest-bearing
liabilities 5,532,675 171,712 4.11 5,703,017 202,872 4.71
----------------------------------------------------------------------------------
20
Other noninterest funds 1,059,621 -- -- 933,882 -- --
--------------------------------------------------------------------------- ---------------------------
Total funds used to support
earning assets $ 6,592,296 171,712 3.45 $ 6,636,899 202,872 4.01
==================================================================================
Net interest income/yield 198,297 3.99 196,632 3.89
Tax-equivalent adjustment (5,214) (5,701)
----------- -----------
Net interest income $ 193,083 $ 190,931
=========== ===========
Average rates are calculated using average balances based on historical cost and
do not reflect the market valuation adjustment required by Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
21
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
---------------------------------------- -----------------------------------------
For the three months ended September 30, For the nine months ended September 30,
---------------------------------------- -----------------------------------------
2001/2000 2001/2000
Increase (Decrease) Increase (Decrease)
due to change in due to change in
---------------------------------------- -----------------------------------------
1 2 1 2
(in thousands) Volume Rate Total Volume Rate Total
-----------------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and
securities purchased under
agreements to resell $ 389 $ (384) $ 5 $ (229) $ (396) $ (625)
-------------------------------------------------------------------------------------
U.S. Treasury and
government agencies (2,968) (445) (3,413) (7,890) (659) (8,549)
State and municipal * 70 77 147 332 1,449 1,781
Preferred stock * (550) 23 (527) (2,023) 146 (1,877)
Asset-backed securities (770) (64) (834) (3,037) (161) (3,198)
Other * (714) (584) (1,298) (2,096) (610) (2,706)
-----------------------------------------------------------------------------------------------------------------------------
Total investment
securities (4,932) (993) (5,925) (14,714) 165 (14,549)
-------------------------------------------------------------------------------------
Commercial, financial and
agricultural * 1,009 (7,405) (6,396) 3,422 (11,903) (8,481)
Real estate-construction 1,064 (2,903) (1,839) 3,884 (5,078) (1,194)
Mortgage-commercial * 1,581 (2,462) (881) 4,722 (3,597) 1,125
Mortgage-residential (1,452) (250) (1,702) (3,641) 42 (3,599)
Consumer 1,430 (5,036) (3,606) 6,489 (8,661) (2,172)
-----------------------------------------------------------------------------------------------------------------------------
Total loans 3,632 (18,056) (14,424) 14,876 (29,197) (14,321)
-----------------------------------------------------------------------------------------------------------------------------
Total interest income $ (911) $(19,433) $(20,344) $ (67) $(29,428) $(29,495)
=====================================================================================
Interest expense:
Savings $ (111) $ (747) $ (858) $ (459) $ (1,581) $ (2,040)
Interest-bearing demand (241) (3,151) (3,392) (889) (5,400) (6,289)
Certificates under $100,000 (568) (197) (765) (2,905) 1,089 (1,816)
Certificates $100,000 and over 2,127 (9,584) (7,457) 5,314 (12,290) (6,976)
-----------------------------------------------------------------------------------------------------------------------------
22
Total interest-bearing
deposits 1,207 (13,679) (12,472) 1,061 (18,182) (17,121)
-------------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase (4,583) (5,889) (10,472) (4,588) (8,439) (13,027)
U.S. Treasury demand 75 (400) (325) (452) (558) (1,010)
-----------------------------------------------------------------------------------------------------------------------------
Total short-term
borrowings (4,508) (6,289) (10,797) (5,040) (8,997) (14,037)
-------------------------------------------------------------------------------------
Long-term debt 0 2 2 (2) 0 (2)
-----------------------------------------------------------------------------------------------------------------------------
Total interest expense $(3,301) $(19,966) $(23,267) $ (3,981) $(27,179) $(31,160)
=====================================================================================
Changes in net interest income $ 2,923 $ 1,665
======== ========
* Variances are calculated on a fully tax-equivalent basis, which
includes the effects of any disallowed interest expense.
(1) Changes attributable to volume are defined as change in average balance
multiplied by the prior year's rate.
(2) Changes attributable to rate are defined as a change in rate multiplied
by the average balance in the applicable period of the prior year. A
change in rate/volume (change in rate multiplied by change in volume)
has been allocated to the change in rate.
23
Noninterest Revenues and Operating Expenses
Noninterest revenues for the third quarter of 2001 were $55.8 million, an
increase of $453,000, or 1%, over those for the third quarter of a year ago, due
primarily to higher advisory fee income and gains from securities.
Total advisory fees for the third quarter of 2001, before amortization of
goodwill, increased to $45.9 million, $2.7 million, or 6%, above those for the
third quarter of 2000, in spite of double digit declines in all major market
indices. These fees represented 47% of the Corporation's operating revenues for
the quarter, compared to 49% for the third quarter of 2000. Private client
advisory fees for the third quarter rose $777,000, or 3%, to $25.6 million,
while the S&P 500 index dropped 15% for the quarter. Approximately 70% of the
Corporation's private client advisory services fees are tied to market
valuations. On a year-to-date basis, new private client advisory business is
running 12% higher than year ago levels, with more than half of this new
business being generated by offices in New York, Florida, California and
Pennsylvania. At September 30, 2001, assets under management were $23.7 billion,
a decrease from the levels reported at September 30, 2000 and June 30, 2001 of
$25.5 billion and $24.9 billion, respectively. Expense for the amortization of
acquisition goodwill for the quarter was $2.1 million, $157,000, or 8%, above
the $2.0 million reported for the third quarter of last year, reflecting the
Corporation's increased ownership in its affiliate asset managers.
Fees from corporate financial services for the third quarter increased $2.3
million, or 18%, to $14.8 million. Revenue from specialty corporate and capital
markets trust services continued to show strong growth, and included new fees
from cash management activities. These fees of $7.8 million grew $2.0 million,
or 34%, over those for the third quarter of last year, and at $20.2 million for
the first nine months of 2001 were $4.4 million, or 28%, above those for the
first nine months of last year. Demand for investment holding company and nexus
services also was strong, posting an 18% increase to $3.0 million for the
quarter and an 18% increase to $9.4 million for the year-to-date. The majority
of income from these highly specialized, niche businesses is on a
fee-for-service basis, while the balance, approximately 25%, is tied to asset
valuations.
Fees from the Corporation's affiliated asset managers for the third quarter
declined $382,000, or 6%, to $5.6 million, due primarily to declines in the
equity markets described above. For the first nine months of this year, these
fees were $16.5 million, $689,000, or 4%, ahead of last year. Assets under
management with these affiliates at September 30, 2001 were $11.1 billion. This
was down from both the $17.3 billion reported at September 30, 2000 and the
$13.6 billion reported at June 30, 2001.
Service charge fees for the quarter were $7.0 million, a $516,000, or 8%,
increase over the $6.5 million reported for the third quarter of 2000, due to
increased automated teller machine fees and checking account fees. For the first
nine months of 2001, these fees were $20.0 million, $1.1 million, or 6%, higher
than last year.
Card fees for the quarter were $2.6 million, a 6% increase over the $2.4 million
reported for the third quarter of last year, due primarily to higher interchange
fees.
Results from the third quarter and first nine months of last year included gains
from the sale of a total of seven retail branches in southeastern Pennsylvania
and the eastern shore of Maryland.
Other operating income for the third quarter of 2001 was $2.5 million, $78,000,
or 3%, below that for the third quarter of a year ago. For the nine months
year-to-date, other operating income was $9.2 million, $3.8 million, or 69%,
above the $5.5 million reported for the first nine months of last year due to
increased loan fees and late charges and lower losses from asset dispositions.
Loan fees and late charges for the quarter were $1.9 million, $246,000, or 15%,
higher than for the third quarter of last year. Those fees reached $5.2 million
for the first nine months of this year, a 21% increase over those for the first
nine months of last year. Losses from asset dispositions for the third quarter
were $384,000, an increase of $363,000 over those for the third quarter of 2000,
as losses from leased auto residual values increased $157,000 and losses on the
sale of residential mortgage loans increased $83,000. For the first nine months
of this year, a gain of $76,000 has been recorded on asset dispositions,
compared
24
with $2.0 million of losses reported for the first nine months of last year
related to leased auto residual values, residential mortgage loans and other
real estate owned.
Operating expenses for the third quarter were $68.9 million, $4.3 million, or
7%, above the $64.5 million reported for the third quarter of last year. Total
personnel expenses for the quarter were $40.7 million, $1.9 million, or 5%,
above the $38.9 million reported for the third quarter of last year. For the
first nine months of 2001, personnel expenses were $124.0 million, 4% above
those for the third quarter of last year. Advertising and contributions expense
for the third quarter was $2.4 million, 17% above that for the third quarter of
last year, as a result of the timing of when certain annual expenditures were
incurred. Other operating expense for the third quarter was $12.3 million, an
increase of $2.3 million, or 24%, over that for the third quarter of 2000,
resulting from higher advertising, legal and bank processing expenses. Legal
expense of $1.1 million was 157% higher than for the third quarter of last year,
and reflects activity associated with trust litigation and lending activity.
Processing fees for the quarter were $1.9 million, $465,000, or 32%, higher than
for the third quarter of last year. For the first nine months of 2001,
processing expense was $5.2 million, or 20% higher than for the first nine
months of last year.
Income tax expense for the third quarter of 2001 increased $319,000, or 2%, to
$16.3 million. For the first nine months of this year, income tax expense was
$47.9 million, an increase of $1.3 million, or 3%, from the corresponding period
of 2000. The Corporation's effective tax rate for the third quarter of 2001 was
34.28%, compared to 33.96% for the third quarter of 2000. The effective tax rate
for the first nine months was 34.15%, compared to 33.59% for the first nine
months of last year. This was due in part to lower levels of tax-exempt income
and higher levels of state income taxes.
Liquidity
A financial institution's liquidity represents its ability to meet, in a timely
manner, cash flow requirements that may arise. Liquidity of the asset side of
the balance sheet is provided by the maturity and marketability of loans, money
market assets and investments. Liquidity of the liability side of the balance
sheet is usually provided through deposits.
The Corporation's liquidity ratio at September 30, 2001, calculated in
accordance with regulatory requirements of the FDIC, was 16.12%. This compares
with ratios of 17.44% at June 30, 2001 and 19.88% at December 31, 2000. This
decline in the liquidity ratio is the result of maturities within the
Corporation's investment portfolio over the past nine months and management's
decision not to replace those securities in the current interest rate
environment. Management believes that maturities of the Corporation's investment
securities, other readily marketable assets and external sources of funds offer
more than adequate liquidity to meet any cash flow requirements that may arise.
Sources of funds have historically consisted of deposits, amortization and
prepayments of outstanding loans, maturities of investment securities,
borrowings and interest income. Management monitors the Corporation's existing
and projected liquidity requirements on an ongoing basis, and implements
appropriate strategies when deemed necessary.
Asset Quality and Loan Loss Provision
The Corporation's provision for loan losses for the third quarter was $5.3
million, $1.1 million, or 17%, lower than the $6.4 million provided for in the
third quarter of 2000. The reserve for loan losses at September 30, 2001 was
$81.3 million, an increase of $4.6 million, or 6%, over the $76.7 million
reported at December 31, 2000. The reserve as a percentage of total period-end
loans outstanding was 1.55%, up from the year-end level of 1.48%. Net chargeoffs
for the third quarter of 2001 were $3.3 million, a decrease of $2.4 million, or
42%, from those for the third quarter of 2000.
25
The following table presents the risk elements in the Corporation's loan
portfolio:
Risk Elements (in thousands) September 30, 2001 December 31, 2000 September 30, 2000
----------------------------------------------------------------------------------------------------------------
Nonaccruing $35,932 $40,161 $43,665
Past due 90 days or more 11,224 13,500 19,111
----------------------------------------------------------------------------------------------------------------
Total $47,156 $53,661 $62,776
==================================================================
Percent of total loans at period-end 0.90% 1.03% 1.19%
Other real estate owned $ 707 $ 717 $ 656
Nonaccruing loans at September 30, 2001 were $35.9 million, a decrease of $4.2
million, or 11%, from the $40.2 million reported at December 31, 2000. Other
real estate owned, which is reported as a component of "Other Assets" in the
Consolidated Statements of Condition, consists of assets that have been acquired
through foreclosure. These assets are recorded on the books of the Corporation
at the lower of their cost or the estimated fair value less cost to sell,
adjusted periodically based upon current appraisals. Other real estate owned at
September 30, 2001 was $707,000, a decrease of $10,000, or 1%, from the level at
December 31, 2000 of $717,000. Nonperforming assets (other real estate owned
plus nonaccrual loans) at September 30, 2001 totaled $36.6 million, or .70% of
period-end loans outstanding. This was a decrease of $4.2 million, or 10%, from
the $40.9 million, or .79% of period-end loans outstanding, reported at December
31, 2000. As a result of the Corporation's ongoing monitoring of its loan
portfolio, at September 30, 2001, approximately $60.3 million of its loans were
identified as either currently performing in accordance with their terms or
which are less than 90 days past due but for which, in management's opinion,
serious doubt exists as to the borrowers' ability to continue to repay their
loans in full on a timely basis. This compares with $44.8 million of such loans
reported at December 31, 2000.
The Corporation's loan loss reserve methodology is sound and has provided a high
degree of reserve adequacy over an extended period of time. The Corporation's
reserve is reflective of estimated credit losses for specifically identified
loans, as well as estimated probable losses inherent in the remainder of the
portfolio. The methodology includes an analysis of lending business conditions
and their effect on estimated credit losses, which is the basis for an
unallocated portion of the reserve assessment. These business conditions
include, but are not limited to, shifts in current market conditions, loan
growth, the average loan size and complexity within the portfolio, trends in
delinquent payment performance, the direction of risk rating migration within
the portfolio and the impact of litigation and trends in bankruptcy filings.
Based on recent history, management believes that a reasonable expectation for
the unallocated portion lies within a range of between 5% and 20% of the total
reserve. The unallocated and allocated portions of the reserve are reassessed
quarterly. At September 30, 2001, approximately $6.3 million, or 8%, of the
reserve for loan losses was unallocated. This compares with $5.1 million, or 7%,
of the reserve that was classified as unallocated at year-end 2000. Delinquency
trends have declined from prior year levels and the percentage of loans carrying
an internal "pass" rating remained high, at 95%. As a result, management
believes that the Corporation's reserve for loan losses is adequate based upon
currently available information.
Capital Resources
A strong capital position provides a margin of safety for both depositors and
stockholders, enables a financial institution to take advantage of profitable
opportunities and provides for future growth. The Corporation's total risk-based
capital ratio at the end of the third quarter was 11.25% and its core (Tier 1)
leveraged capital ratio was
26
6.33%. The corresponding ratios at year-end 2000 were 10.80% and 5.87%,
respectively. Both of these ratios are above the current regulatory minimums of
8.00% and 4.00%, respectively.
Management monitors the Corporation's capital position and will make adjustments
as needed to insure that the capital base will satisfy existing and impending
regulatory requirements, as well as meet appropriate standards of safety and
provide for future growth.
Other Information
Agreement to Acquire Interest in Investment Adviser
On October 23, 2001, the Corporation and WTI entered into an agreement with
Balentine Holdings, Inc., an asset management firm headquartered in Atlanta,
Georgia ("Balentine"), and its principals. Under this agreement, a new entity,
Balentine Delaware Holding Company, LLC (the "LLC"), will assume Balentine's
investment management business. Balentine performs investment management
services for institutional and individual clients and specializes in its
"manager of managers" program. The firm has a staff of 43 employees and, as of
September 30, 2001, had nearly $4 billion in assets under management.
Closing is subject to the satisfaction of several customary conditions. At
closing, WTI will become the owner of 100% of the equity interests and 80% of
the profit interests in the LLC, with the balance of the profits interests being
retained by Balentine's current owners. The Corporation will be able to purchase
additional ownership interests in the LLC from the other owners upon the
occurrence of a number of specified events, including the termination of
employment, death, disability or retirement of the individual.
The LLC will be managed by a board of five managers. Initially, the board will
consist of three people designated by Balentine and its principals and two
people designated by WTI. WTI will be entitled to elect a majority on the board
after March 31, 2006.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Net interest income is an important determinant of the Corporation's financial
performance. Through interest rate sensitivity management, the Corporation seeks
to maximize the growth of net interest income on a consistent basis by
minimizing the effects of fluctuations associated with changing market interest
rates.
The Corporation employs simulation models to measure the effect of variations in
interest rates on net interest income. The composition of assets, liabilities
and off-balance-sheet instruments and their respective repricing and maturity
characteristics, as well as certain external factors such as the level of market
interest rates, are evaluated in assessing the Corporation's exposure to changes
in interest rates.
Net interest income is projected using multiple interest rate scenarios. The
results are compared to net interest income projected using stable interest
rates. The Corporation's model employs interest rate scenarios in which interest
rates gradually move up or down 250 basis points. The simulation model projects,
as of September 30, 2001, that a gradual 250-basis-point increase in market
interest rates would increase net interest income by 2.5% over a one-year
period. If interest rates were to gradually decrease 250 basis points, the
simulation model projects, as of September 30, 2001, that net interest income
would decrease 6.3% over a one-year period. The Corporation's policy limits the
permitted reduction in projected net interest income to 10% over a one-year
period given a change in interest rates.
The preceding paragraph contains certain forward-looking statements regarding
the anticipated effects on the Corporation's net interest income resulting from
hypothetical changes in market interest rates. The assumptions that the
Corporation uses regarding the effects of changes in interest rates on the
adjustment of retail deposit rates and
27
the prepayment of residential mortgages, asset-backed securities and
collateralized mortgage obligations ("CMOs") play a significant role in the
results the simulation model projects. Rate and prepayment assumptions used in
the Bank's simulation model differ for both assets and liabilities in rising as
compared to declining interest rate environments. Nevertheless, these
assumptions are inherently uncertain and, as a result, the simulation model
cannot predict the impact of changes in interest rates on net interest income
precisely.
During the third quarter of 2001, the Corporation sold certain fixed-rate
residential mortgage loans into the secondary market. The primary goal of this
program is to reduce the risk that the average duration of these fixed-rate
residential mortgage loans would extend well beyond the duration that was
anticipated at origination, as frequently occurs during periods of rising
interest rates. Mortgage loans sold during the third quarter of 2001 totaled
$25.5 million.
Management reviews the Corporation's rate sensitivity regularly, and may employ
a variety of strategies as needed to adjust that sensitivity. These include
changing the relative proportions of fixed-rate and floating-rate assets and
liabilities and maximizing the number of funding sources and asset
securitizations, as well as utilizing derivative contracts such as interest rate
swaps and interest rate floors.
The Corporation has entered into swaps in which it pays a fixed rate and it
receives a floating rate. The net interest differential associated with the
swaps is recorded to "Interest and Fees on Loans" in the Consolidated Statements
of Income. The net gains or losses resulting from the changes in fair value of
the swaps are recorded to "Other Operating Income" in the Consolidated
Statements of Income. At September 30, 2001, the Corporation was committed to
interest rate swaps with a total notional amount of $31.2 million, compared to a
total notional amount of $10.2 million at year-end 2000. The swaps have
remaining maturities of between 5 and 59 months, with a weighted average
maturity of 44 months.
The Corporation entered into floors to hedge against the impact of adverse
market interest rate changes on the cash flows of floating-rate commercial
loans. Changes in the intrinsic value of the contracts were expected to be
highly effective in offsetting changes in cash flows attributable to
fluctuations in market interest rates below the strike price of the floors.
Changes in the fair value of the floors attributed to the change in "time value"
were excluded in assessing hedge effectiveness and were recorded to "Other
Operating Income" in the Consolidated Statements of Income. Changes in the fair
value that were determined to be ineffective were also recorded to "Other
Operating Income" in the Consolidated Statements of Income. The effective
portion of the change in fair value was recorded in "Other Comprehensive Income"
in the Consolidated Statements of Condition. Amounts in "Accumulated Other
Comprehensive Income" are subsequently reclassified to "Interest and Fees on
Loans" in the Consolidated Statements of Income in the same period in which the
hedged forecasted transaction affects earnings. At September 30, 2001, all
floors had been sold. Net gains and/or losses remaining in "Accumulated Other
Comprehensive Income" are being amortized over the original intended hedge
period and recorded to "Interest and Fees on Loans" in the Consolidated
Statements of Income.
28
Part II. Other Information
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Change In Securities and Use of Proceeds
Not Applicable
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
The exhibits listed below are being filed as part of this
report. These exhibits will be made available to any
shareholder upon receipt of a written request therefor,
together with payment of $.20 per page for duplicating costs.
Exhibit Number Exhibit
-------------- ----------------------------------
11 Statement re computation of per share earnings
The Corporation filed a report on Form 8-K on October 23, 2001
reporting certain developments under Item 5.
29
Signatures
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.
Date: November 13, 2001 /s/ David R. Gibson
---------------------------------------
Name: David R. Gibson
Title: Senior Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
30