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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 March 31, 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
incorporation or organization) Identification No.)
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
2
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 March 31, 2001 - 32,485,269 shares
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Wilmington Trust Corporation and Subsidiaries
Form 10-Q
Index
Page
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Part I. Financial Information
Item 1 - Financial Statements (unaudited)
Consolidated Statements of Condition 4
Consolidated Statements of Income 6
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23
Part II. Other Information
Item 1 - Legal Proceedings 26
Item 2 - Changes in Securities and Use of Proceeds 26
Item 3 - Defaults Upon Senior Securities 26
Item 4 - Submission of Matters to a Vote of Security Holders 26
Item 5 - Other Information 26
Item 6 - Exhibits and Reports on Form 8-K 26
Exhibit 11
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CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
-----------------------------
March 31, December 31,
(in thousands) 2001 2000
----------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 207,978 $ 223,819
---------------------------
Federal funds sold and securities purchased
under agreements to resell 54,900 50,175
---------------------------
Investment securities available for sale:
U.S. Treasury and government agencies 833,375 878,932
Obligations of state and political subdivisions 11,999 11,776
Other securities 544,574 549,357
--------------------------------------------------------------------------------------------------------
Total investment securities available for sale 1,389,948 1,440,065
---------------------------
Investment securities held to maturity:
U.S. Treasury and government agencies 10,952 11,003
Obligations of state and political subdivisions 5,275 6,640
Other securities 2,554 3,095
--------------------------------------------------------------------------------------------------------
Total investment securities held to maturity (market values
were $19,344 and $20,984, respectively) 18,781 20,738
---------------------------
Loans:
Commercial, financial and agricultural 1,619,114 1,622,654
Real estate-construction 390,437 372,702
Mortgage-commercial 997,001 990,433
Mortgage-residential 920,435 925,938
Consumer 1,245,317 1,277,291
Unearned income (1,413) (609)
--------------------------------------------------------------------------------------------------------
Total loans net of unearned income 5,170,891 5,188,409
Reserve for loan losses (77,862) (76,739)
--------------------------------------------------------------------------------------------------------
Net loans 5,093,029 5,111,670
---------------------------
Premises and equipment, net 133,685 130,910
Goodwill and other intangible assets, net of accumulated amortization
of $19,188 in 2001 and $17,187 in 2000 170,015 172,015
Accrued interest receivable 48,926 49,200
Other assets 125,187 123,024
--------------------------------------------------------------------------------------------------------
Total assets $7,242,449 $7,321,616
===========================
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March 31, December 31,
(in thousands) 2001 2000
----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 968,079 $ 955,651
Interest-bearing:
Savings 359,229 350,213
Interest-bearing demand 1,315,653 1,413,173
Certificates under $100,000 914,181 927,500
Certificates $100,000 and over 1,906,463 1,639,479
--------------------------------------------------------------------------------------------------------
Total deposits 5,463,605 5,286,016
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Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 782,812 1,099,445
U.S. Treasury demand 61,250 30,757
Line of credit 12,500 17,000
--------------------------------------------------------------------------------------------------------
Total short-term borrowings 856,562 1,147,202
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Accrued interest payable 58,954 51,655
Other liabilities 71,534 76,843
Long-term debt 168,000 168,000
--------------------------------------------------------------------------------------------------------
Total liabilities 6,618,655 6,729,716
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Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 39,264,173 39,264 39,264
Capital surplus 73,989 72,817
Retained earnings 769,980 753,373
Accumulated other comprehensive income/(loss) 7,413 (4,429)
--------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 890,646 861,025
Less: Treasury stock, at cost, 6,778,904 and
6,870,855 shares, respectively (266,852) (269,125)
--------------------------------------------------------------------------------------------------------
Total stockholders' equity 623,794 591,900
---------------------------
Total liabilities and stockholders' equity $7,242,449 $7,321,616
===========================
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
----------------------------
For the three months ended
March 31,
----------------------------
(in thousands; except per share data) 2001 2000
---------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $ 105,938 $ 99,722
Interest and dividends on investment securities:
Taxable interest 19,352 22,986
Tax-exempt interest 229 152
Dividends 2,000 2,508
Interest on federal funds sold and securities
purchased under agreements to resell 246 650
-------------------------------------------------------------------------------------------------------
Total interest income 127,765 126,018
--------------------------
Interest on deposits 47,432 44,563
Interest on short-term borrowings 15,376 15,004
Interest on long-term debt 2,756 2,761
-------------------------------------------------------------------------------------------------------
Total interest expense 65,564 62,328
--------------------------
Net interest income 62,201 63,690
Provision for loan losses (5,250) (5,500)
-------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 56,951 58,190
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OTHER INCOME
Advisory fees 42,889 40,330
Service charges on deposit accounts 6,162 6,225
Card fees 2,345 2,235
Other operating income 4,570 1,937
Securities gains 711 1,475
-------------------------------------------------------------------------------------------------------
Total other income 56,677 52,202
--------------------------
Net interest and other income 113,628 110,392
--------------------------
OTHER EXPENSE
Salaries and employment benefits 42,893 41,690
Net occupancy 3,763 3,617
Furniture and equipment 5,729 5,595
Stationery and supplies 1,418 1,633
Servicing and consulting fees 2,089 1,762
Other operating expense 12,172 10,266
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Total other expense 68,064 64,563
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NET INCOME
Income before income taxes and cumulative
effect of change in accounting principle 45,564 45,829
Applicable income taxes 15,497 15,228
-------------------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle 30,067 $ 30,601
Cumulative effect of change in accounting
principle (net of income taxes of $584) 1,130 ----
-------------------------------------------------------------------------------------------------------
Net income $ 31,197 $ 30,601
==========================
Net income per share - basic:
Before cumulative effect of change in
accounting principle $ 0.93 $ 0.95
Cumulative effect of change in
accounting principle 0.03 --
-------------------------------------------------------------------------------------------------------
Net income per share - basic $ 0.96 $ 0.95
==========================
Net income per share - diluted:
Before cumulative effect of change in
accounting principle 0.92 0.94
Cumulative effect of change in
accounting principle 0.03 ----
-------------------------------------------------------------------------------------------------------
Net income per share - diluted $ 0.95 $ 0.94
==========================
Weighted average shares outstanding:
basic 32,447 32,227
diluted 32,875 32,544
Cash dividends per share $ 0.45 $ 0.42
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
--------------------------
For the three months ended
March 31,
(in thousands) 2001 2000
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OPERATING ACTIVITIES
Net income $ 31,197 $ 30,601
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 5,250 5,500
Provision for depreciation 4,452 4,583
Amortization of investment securities available for sale
discounts and premiums 2,212 1,453
Amortization/(accretion) of investment securities held to maturity
discounts and premiums 1 (3)
Deferred income taxes 7 122
Gains on sales of loans (155) (45)
Securities gains (711) (1,475)
Decrease/(increase) in other assets 2,159 (42,101)
(Decrease)/increase in other liabilities (3,814) 22,422
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 40,598 21,057
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INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 735 145,736
Proceeds from maturities of investment securities available for sale 74,856 120,658
Proceeds from maturities of investment securities held to maturity 1,956 2,996
Purchases of investment securities available for sale (10,781) (178,007)
Gross proceeds from sales of loans 11,127 6,858
Purchases of loans (872) (2,913)
Net decrease/(increase) in loans 3,291 (159,969)
Net increase in premises and equipment (7,227) (2,794)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used for) investing activities 73,085 (67,435)
--------------------------
FINANCING ACTIVITIES
Net decrease in demand, savings and interest-bearing
demand deposits (76,076) (5,661)
Net increase in certificates of deposit 253,665 187,322
Net decrease in federal funds purchased and securities sold
under agreements to repurchase (316,633) (151,687)
Net increase/(decrease) in U.S. Treasury demand 30,493 (42,733)
Net decrease in line of credit (4,500) ----
Cash dividends (14,590) (13,535)
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Proceeds from common stock issued under employment benefit
plans, net of income taxes 3,877 1,659
Payments for common stock acquired through buybacks (1,035) (8,582)
---------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (124,799) (33,217)
--------------------------
Decrease in cash and cash equivalents (11,116) (79,595)
Cash and cash equivalents at beginning of period 273,994 354,905
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 262,878 $ 275,310
===========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 55,029 $ 67,704
Taxes 970 1,014
Loans transferred during the period:
To other real estate owned $ 18 $ 1,024
From other real estate owned 157 1,020
See Notes to Consolidated Financial Statements
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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. 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:
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For the three months ended
March 31,
(Unaudited) ---------------------------
(in thousands) 2001 2000
---------------------------------------------------------------------------------------------------------
Net income $ 31,197 $ 30,601
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities 10,819 (1,489)
Reclassification adjustment for securities gains included in net income (455) (944)
Net unrealized holding gains arising during the period on derivatives
used for cash flow hedge 1,478 --
------------------------
Total comprehensive income $ 43,039 $ 28,168
========================
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
March 31,
--------------------------
(in thousands; except per share data) 2001 2000
------------------------------------------------------------------------------------------------------
Numerator:
Net income before cumulative effect of change in accounting principle $30,067 $30,601
Cumulative effect of change in accounting principle
(net of income taxes of $584) 1,130 --
------------------------------------------------------------------------------------------------------
Net income $31,197 $30,601
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Denominator:
Denominator for basic earnings per share - weighted-average shares 32,447 32,227
-----------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 428 317
-----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted weighted-average
shares and assumed conversions 32,875 32,544
-----------------------------------------------------------------------------------------------------------
Basic earnings per share
Before cumulative effect of change in accounting principle $ 0.93 $ 0.95
Cumulative effect of change in accounting principle 0.03 --
-----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.96 $ 0.95
===========================================================================================================
Diluted earnings per share
Before cumulative effect of change in accounting principle $ 0.92 $ 0.94
Cumulative effect of change in accounting principle 0.03 --
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Diluted earnings per share $ 0.95 $ 0.94
===========================================================================================================
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 allow 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 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 personal trust, asset management, mutual
fund, corporate trust and employee benefit plan services to individuals and
corporations in the United States and some 50 other countries. Personal trust
activities include trust services, private banking, estate settlement 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
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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 March 31, 2001 vs March 31, 2000 is as follows:
--------------------------------------------------------------------------------------------------
Banking Advisory Fee
Year-to-Date March 31, 2001 (in thousands) Business Business Totals
--------------------------------------------------------------------------------------------------
Net interest income $ 52,747 $ 9,454 $ 62,201
Provision for loan losses (4,883) (367) (5,250)
--------------------------------------------------------------------------------------------------
Net interest income after provision 47,864 9,087 56,951
Total advisory fees:
Private client advisory services 1,225 25,219 26,444
Corporate financial services 362 11,908 12,270
Affiliate managers -- 6,176 6,176
Amortization of goodwill -- (2,001) (2,001)
Other operating income 11,566 1,511 13,077
Securities gains 569 142 711
--------------------------------------------------------------------------------------------------
Net interest and other income 61,586 52,042 113,628
Other expense (35,963) (32,101) (68,064)
--------------------------------------------------------------------------------------------------
Segment profit from operations 25,623 19,941 45,564
--------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 25,623 $ 19,941 $ 45,564
==================================================================================================
Intersegment revenue -- -- --
Depreciation and amortization 3,015 1,742 4,757
Investment in equity method investees -- 185,458 185,458
Segment average total assets 5,785,309 1,434,934 7,220,243
Year-to-Date March 31, 2000 (in thousands)
--------------------------------------------------------------------------------------------------
Net interest income $ 55,442 $ 8,248 $ 63,690
Provision for loan losses (5,387) (113) (5,500)
--------------------------------------------------------------------------------------------------
Net interest income after provision 50,055 8,135 58,190
Total advisory fees:
Private client advisory services 1,115 24,234 25,349
Corporate financial services 859 11,462 12,321
Affiliate managers -- 4,306 4,306
Amortization of goodwill -- (1,646) (1,646)
Other operating income 9,992 405 10,397
Securities gains 1,180 295 1,475
--------------------------------------------------------------------------------------------------
Net interest and other income 63,201 47,191 110,392
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Other expense (35,650) (28,913) (64,563)
--------------------------------------------------------------------------------------------------
Segment profit from operations 27,551 18,278 45,829
--------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 27,551 $ 18,278 $ 45,829
==================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 3,121 1,749 4,870
Investment in equity method investees -- 158,741 158,741
Segment average total assets 5,810,576 1,269,938 7,080,514
A reconciliation of reportable segment amounts to the Corporation's consolidated
balances is as follows:
------------------------------------------------------------------------
Year-to-Date March 31 (in thousands) 2001 2000
------------------------------------------------------------------------
Assets:
Total assets for reportable segments $7,220,243 $7,080,514
Other assets -- --
Elimination of intersegment assets -- --
------------------------------------------------------------------------
Consolidated total average assets $7,220,243 $7,080,514
===========================
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Note 5 - Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This Statement
requires the Corporation to recognize all derivatives on its the 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
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.
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.
Floors are contracts which 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 ending March 31, 2001 includes net gains
of $646,239 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. During
the year ended December 31, 2001, approximately $290,000 of gains in
"accumulated other comprehensive income" are expected to be reclassified to
"interest and fees on loans" as a yield adjustment to the hedged loans. As of
March 31, 2001, the maximum length of time over which the Corporation is hedging
its exposure to the variability in future cash flows associated with floating
rate commercial loans is 52 months.
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Wilmington Trust Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Summary
Net income for the first quarter of 2001 was $31.2 million, or $.95 per share on
a diluted basis and included $1.1 million, or $.03 per share, of income net of
tax associated with SFAS No. 133. This was a 2% increase over the $30.6 million,
or $.94 per share on a diluted basis, reported for the first quarter of 2000.
Total revenues for the first quarter of 2001 reached $118.9 million, a 3%
increase over the $115.9 million reported for the first quarter of 2000.
Net interest income for the first quarter of 2001 was $62.2 million, a 2%
decrease from the $63.7 million reported for the first quarter of last year.
The quarterly provision for loan losses of $5.25 million was 5% lower than the
$5.5 million for the first quarter of 2000. The reserve for loan losses at
quarter-end was $77.9 million, $1.1 million, or 1.5%, above the $76.7 million
reported at December 31, 2000.
Noninterest income for the first quarter of 2001 was $56.7 million, a 9%
increase over the $52.2 million reported for the same quarter of last year.
Operating expenses for the first quarter of 2001 were $68.1 million, a 5%
increase above the $64.6 million reported for the first quarter of last year.
Return on assets for the three months ended March 31, 2001, on an annualized
basis, was 1.75%, above the 1.74% reported for the corresponding period a year
ago. Return on stockholders' equity, also on an annualized basis, was 20.99%,
compared with 24.57% for the first three months of 2000.
Statement of Condition
Total assets at March 31, 2001 were $7.24 billion, $79.2 million under the $7.32
billion reported at December 31, 2000. Total earning assets decreased $64.9
million over that period, to $6.63 billion, as decreases due to calls and
maturities occurred in both the investment and loan portfolios.
While loan balances increased $203.5 million, or 4%, over first quarter 2000
levels, balances were down from their year-end 2000 levels. At March 31, 2001,
total loans were $5.17 billion, a decrease of $17.5 million, or .3%, from the
December 31, 2000 level of $5.19 billion. Contributing to this decrease were
consumer loans, which declined $32.0 million, or 2.5%, to $1.25 billion,
commercial loans, which declined $3.5 million, or .2%, to $1.62 billion, and
residential mortgage loans, which declined $5.5 million, or .6%, to $920.4
million. Partially offsetting these decreases were increased real estate
construction loans, up $17.7 million, or 4.8%, to $390.4 million and commercial
mortgage loans, up $6.6 million, or .7%, to $997.0 million. Year-over-year loan
growth continued in both Pennsylvania and Delaware, reflecting the strength of
the Delaware Valley's diversified economy and new business momentum in the
Philadelphia region.
The investment portfolio at March 31, 2001 was $1.41 billion, a decrease of
$52.1 million, or 4%, from the December 31, 2000 level of $1.46 billion.
Contributing to this decrease were U.S. Treasury and government agency
securities, which decreased $45.6 million, or 5%, to $844.3 million and
preferred
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stocks, which decreased $9.1 million, or 9%, to $91.4 million, partially offset
by asset-backed and other securities, which increased $3.8 million, or 1%, to
$455.8 million.
Interest-bearing liabilities at quarter-end were $5.52 billion, $125.5 million,
or 2%, below the year-end 2000 level of $5.65 billion. Total deposits during the
first three months of 2001 increased $177.6 million, or 3%, while short-term
borrowings decreased $290.6 million, or 25%. An increase of $267.0 million, or
16%, in certificates of deposit $100,000 and over offset decreases in
interest-bearing demand account balances, certificates of deposit under $100,000
and other short-term borrowings. Overnight Federal funds purchased and
securities sold under agreements to repurchase decreased $316.6 million, or 29%,
from the prior year-end level, to $782.8 million.
Shareholders' equity at March 31, 2001 was $623.8 million, $31.9 million, or 5%,
over the 2000 year-end level. Earnings of $31.2 million, an $11.8 million change
in unrealized gains/(losses) net of tax for the investment portfolio and
derivative floor contracts and $4.5 million in new stock issued during the first
quarter were offset, in part, with $14.6 million in cash dividends and the
repurchase of $1 million of treasury stock.
Net Interest Income
Net interest income for the first quarter of 2001 on a fully tax-equivalent
("FTE") basis was $63.9 million. This was a $1.7 million, or 3%, decrease from
the $65.6 million reported for the first quarter of 2000.
Interest income (FTE) for the first quarter of 2001 increased $1.5 million, or
1%, to $129.4 million from $127.9 million for the first quarter of 2000.
Contributing to this improvement was a $76.6 million increase in the average
level of earning assets, which added $2.5 million to interest revenues. This was
offset in part by the lower interest rate environment, which lowered interest
revenues for the quarter by $974,000. The average rate earned on the
Corporation's earning assets during the first quarter of 2001 increased 12 basis
points, from 7.70% to 7.82%.
Interest expense for the quarter also increased, rising $3.2 million, or 5%, to
$65.6 million. Total interest-bearing liabilities, on average, were virtually
unchanged from their $5.61 billion level of a year ago. The mixture of these
liabilities, however, did change, as greater use of institutional brokered
certificates of deposit supplemented declines in core deposits and overnight
Federal funds purchased. This change in funding mix contributed an additional
$1.3 million to interest expense, while the higher rate environment added
another $1.9 million to interest expense. The average rate the Corporation paid
for its funds during the quarter was 4.69%, compared to 4.43% for the first
quarter of 2000.
The Corporation's net interest margin for the quarter was 3.85%, nine basis
points below the 3.94% reported for the first quarter of a year ago. This
decline was driven, in part, by a higher percentage of the Corporation's assets
repricing faster than its liabilities. The following two tables present
comparative net interest income data and a rate-volume analysis of changes in
net interest income for the first quarters of 2001 and 2000, respectively.
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QUARTERLY ANALYSIS OF EARNINGS
2001 2000
First Quarter First 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 $ 17,075 $ 246 5.76% $ 47,489 $ 650 5.41 %
---------------------------------------------------------------------------------------------------------------------------
Total short-term investments 17,075 246 5.76 47,489 650 5.41
------------------------------------------------------------------------------
U.S. Treasury and government
agencies 865,560 12,692 5.89 956,978 14,711 5.93
State and municipal 20,247 338 6.83 11,965 229 7.76
Preferred stock 95,491 2,127 8.23 133,518 2,783 7.79
Asset-backed securities 292,969 4,498 6.15 353,671 5,680 6.20
Other 156,483 2,680 6.79 194,636 3,179 6.56
---------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,430,750 22,335 6.22 1,650,768 26,582 6.23
------------------------------------------------------------------------------
Commercial, financial and
agricultural 1,612,482 32,941 8.18 1,513,683 31,062 8.14
Real estate-construction 396,462 8,759 8.85 327,134 7,528 9.10
Mortgage-commercial 992,384 21,257 8.57 917,751 19,695 8.49
Mortgage-residential 921,712 16,469 7.15 976,489 17,301 7.09
Consumer 1,262,113 27,411 8.77 1,123,085 25,063 8.94
---------------------------------------------------------------------------------------------------------------------------
Total loans 5,185,153 106,837 8.27 4,858,142 100,649 8.24
------------------------------------------------------------------------------
Total earning assets $ 6,632,978 129,418 7.82 $ 6,556,399 127,881 7.70
=============================================================================
Funds supporting earning assets
Savings $ 350,359 1,236 1.43 $ 397,069 1,552 1.57
Interest-bearing demand 1,305,415 6,585 2.05 1,364,286 6,962 2.05
Certificates under $100,000 919,517 11,754 5.18 1,044,662 12,561 4.84
Certificates $100,000 and over 1,837,922 27,857 6.06 1,587,167 23,488 5.85
---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 4,413,213 47,432 4.32 4,393,184 44,563 4.04
------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 993,973 14,877 5.99 1,004,990 14,401 5.71
U.S. Treasury demand 36,288 499 5.50 45,469 603 5.25
---------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 1,030,261 15,376 5.97 1,050,459 15,004 5.69
------------------------------------------------------------------------------
Long-term debt 168,000 2,756 6.56 168,000 2,761 6.57
---------------------------------------------------------------------------------------------------------------------------
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Total interest-bearing
liabilities 5,611,474 65,564 4.69 5,611,643 62,328 4.43
------------------------------------------------------------------------------
Other noninterest funds 1,021,504 -- -- 944,756 -- --
---------------------------------------------------------------------------------------------------------------------------
----
Total funds used to support
earning assets $ 6,632,978 65,564 3.97 $ 6,556,399 62,328 3.76
==========================================================================================================================
Net interest income/yield 63,854 3.85 65,553 3.94
Tax-equivalent adjustment (1,653) (1,863)
----------- -----------
Net interest income $ 62,201 $ 63,690
=========== ===========
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," effective January 1, 1994.
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RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
----------------------------------------
For the three months ended March 31,
----------------------------------------
2001/2000
Increase (Decrease)
due to change in
----------------------------------------
1 2
(in thousands) Volume Rate Total
-----------------------------------------------------------------------------------
Interest income:
Federal funds sold and
securities purchased under
agreements to resell $ (411) $ 7 $ (404)
-----------------------------------------------------------------------------------
Total short-term
investments (411) 7 (404)
----------------------------------------
U.S. Treasury and
government agencies (1,929) (90) (2,019)
State and municipal * 155 (46) 109
Preferred stock * (770) 114 (656)
Asset-backed securities (1,151) (31) (1,182)
Other * (591) 92 (499)
-----------------------------------------------------------------------------------
Total investment
securities (4,286) 39 (4,247)
----------------------------------------
Commercial, financial and
agricultural * 1,983 (104) 1,879
Real estate-construction 1,556 (325) 1,231
Mortgage-commercial * 1,562 0 1,562
Mortgage-residential (958) 126 (832)
Consumer 3,065 (717) 2,348
-----------------------------------------------------------------------------------
Total loans 7,208 (1,020) 6,188
-----------------------------------------------------------------------------------
Total interest income $ 2,511 $ (974) $ 1,537
=====================================
Interest expense:
Savings $ (181) $ (135) $ (316)
Interest-bearing demand (377) 0 (377)
Certificates under $100,000 (1,494) 687 (807)
Certificates $100,000 and over 3,667 702 4,369
-----------------------------------------------------------------------------------
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Total interest-bearing
deposits 1,615 1,254 2,869
----------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase (157) 633 476
U.S. Treasury demand (121) 17 (104)
-----------------------------------------------------------------------------------
Total short-term
borrowings (278) 650 372
----------------------------------------
Long-term debt 0 (5) (5)
-----------------------------------------------------------------------------------
Total interest expense $ 1,337 $ 1,899 $ 3,236
=====================================
Changes in net interest income $(1,699)
=======
* 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.
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Non-interest Revenues and Operating Expenses
Non-interest revenues for the first quarter of 2001 were $56.7 million, an
increase of $4.5 million, or 9%, over those for the first quarter of a year ago,
due primarily to higher advisory fees.
Total advisory fees for the first quarter of 2001 increased to $44.9 million,
$2.9 million, or 7%, over those for the first quarter of 2000. These fees
represented 48% of the Corporation's operating revenues for the quarter,
compared to 45% for the first quarter of 2000. Private client advisory fees for
the first quarter rose $1.1 million, or 4%, to $26.4 million. Sales of private
client advisory services were strong, particularly in New York, and totaled $3.3
million for the quarter on an annualized basis, up 5% from the first quarter of
2000. This growth occurred notwithstanding declines in the market value of
securities held for clients, as benchmarked by the three market indices over
both the 3-month and 12-month periods ended March 31, 2001. The Dow Jones index
was down 8.1% for the year and 8% for the quarter; the S&P 500 declined 21.7%
for the year and 11.9% for the quarter, and the Nasdaq composite index dropped
59.7% for the year and 25.5% for the quarter. Approximately 70% of the
Corporation's private client advisory fees are tied to market valuations. Fees
from corporate financial services for the first quarter declined $49,000, or
.4%, to $12.3 million. Fees from nexus and holding company services posted
double digit increases and demand for capital markets trust services remained
strong. Levels of new business development were comparable to those for the
first quarter of 2000, but were muted by a decrease in custody and transaction
fees related to market valuations and a decrease in market activity.
Approximately 25% of corporate financial services fees are tied to asset
valuations. Fees from affiliated asset managers rose $1.9 million, or 43%, to
$6.2 million, due primarily to larger ownership positions in Cramer Rosenthal
McGlynn and Roxbury Capital Management since March 31, 2000. The increase in
goodwill amortization expense was also attributable to these increases in
ownership. Assets under management with these affiliates at March 31, 2001 were
$12.6 billion. This was down from $16.2 billion at March 31, 2000 and $14.7
billion at December 31, 2000.
Other operating income for first quarter was $4.6 million. This was an increase
of $2.6 million, or 136%, over the $1.9 million reported for the first quarter
of 2000. The Corporation recorded a non-operating gain of $1.6 million for asset
dispositions in the first quarter of 2001.
Operating expenses for the quarter increased $3.5 million, or 5%, to $68.1
million. Total personnel expenses for the quarter increased $1.2 million, or 3%,
over those for the first quarter of 2000, to $42.9 million. Contributing to this
increase were higher compensation costs, as salaries were up 1.5% over year-ago
levels, and incentive payments, which were up $1.7 million, reflecting strong
sales results for the prior year. Partially offsetting these increases was a
lower profit-sharing bonus accrual, down $1.1 million from its year-ago level,
as the rate of net income growth and a lower return on equity dropped the bonus
accrual percentage. Occupancy and furniture and equipment expenses were 4% and
2% higher, respectively, and reflect costs associated with the Corporation's
expansion markets. Other operating expense increased $1.9 million, or 19%, to
$12.2 million as higher expenses were incurred in advertising, debit and credit
card expense, staff training expense for asset allocation and armored car
expense.
Income tax expense for the first quarter of 2001 increased $853,000, or 6%, to
$16.1 million. The Corporation's effective tax rate for the first quarter of
2001 was 34.01%, compared to 33.23% for the first quarter of 2000. 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
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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 quarter-end liquidity ratio, calculated in accordance with
regulatory requirements of the FDIC, was 18.79%. 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 first quarter of 2001 was
$5.25 million, $250,000, or 4.5%, lower than the amount provided for in the
first quarter of 2000. The reserve for loan losses at March 31, 2001 was $77.9
million, an increase of $1.1 million, or 1%, over the $76.7 million reported at
December 31, 2000. The reserve as a percentage of total period-end loans
outstanding was 1.51%, up from the year-end level of 1.48%. Net chargeoffs for
the first quarter of 2001 were $4.1 million, a decrease of $4.7 million, or 53%,
from those for the first quarter of 2000.
The following table presents the risk elements in the Corporation's loan
portfolio:
Risk Elements (in thousands) March 31, 2001 December 31, 2000 March 31, 2000
-------------------------------------------------------------------------------------------------------------------
Nonaccruing $40,015 $40,161 $41,703
Past due 90 days or more 8,476 13,500 20,138
----------------------------------------------------------------------------------------------------------------
Total $48,491 $53,661 $61,841
=======================================================
Percent of total loans at period-end 0.93% 1.03% 1.24%
Other real estate owned $ 578 $ 717 $ 580
Nonaccruing loans at March 31, 2001 were $40.0 million, a decrease of $146,000,
or .4%, 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 March 31,
2001 was $578,000, a decrease of $139,000, or 19%, from the December 31, 2000
level of $717,000. Nonperforming assets (other real estate owned plus nonaccrual
loans) at March 31, 2001 totaled $40.6 million, or .79% of period-end loans
outstanding. This was a decrease of $285,000, or .7%, 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 March 31,
2001, approximately $40.1 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 reported at December 31, 2000.
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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
potential shifts in current market conditions, loan growth in new markets, the
average loan size and complexity within the portfolio, trends in delinquent
payment performance, the direction of risk rating migration within the
portfolio, the level of serious doubt loans, the impact of litigation and trends
in bankruptcy filings. Management has established a range of between 5% and 20%
as an acceptable percentage of the unallocated reserve as a proportion of the
total reserve. This range is based on historic unallocated levels in conjunction
the assessment of the business conditions mentioned above. The unallocated and
allocated portions of the reserve are reassessed quarterly. At March 31, 2001,
approximately $6.4 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. The first quarter loan loss
provision adequately supported loan growth and a reduced level of net chargeoffs
for the period. Delinquency trends and serious doubt levels both declined from
prior year levels. 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 first quarter of 2001 was 11.22%, and its core
(Tier 1) leveraged capital ratio was 6.16%. 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
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 March 31, 2001, that a gradual 250-basis-point increase in market interest
rates would increase net interest income by 1.25% over a one-year period. If
interest rates were to gradually decrease
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250 basis points, the simulation model projects, as of March 31, 2001, that net
interest income would decrease 4.5% 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 the balances of residential mortgages,
asset-backed securities and collateralized mortgage obligations ("CMOs") play a
significant role in the results the simulation model projects. The adjustment
paths are not assumed to be symmetrical.
The Corporation's model employs assumptions that reflect the historical
adjustment paths of the Corporation's retail deposit rates to changes in the
level of market interest rates. In addition, some of the Corporation's retail
deposit rates reach historic lows within the 250-basis-point decline scenario.
The Corporation's model freezes the rates for these deposit products when they
equal their historic lows. These model assumptions (asymmetrical adjustments and
rate floors based on new historic lows) limit the extent to which deposit rates
are expected to adjust in a declining rate scenario and contribute to the
projected simulation results.
Changes in residential mortgage loan, CMO and asset-backed security balances are
driven by their contractual obligations and prepayments. While contractual
obligations are not typically influenced by changes in interest rates,
prepayment activity (including refinancing) can shift dramatically with changes
in interest rates. The Corporation's prepayment assumptions are based on
industry estimates for loans with similar coupons and remaining maturities. A
250-basis-point decline in interest rates can lead to a significant increase in
prepayments when available reinvestment opportunities of similar risk carry
lower returns. Conversely, should interest rates rise 250 basis points, the same
balances are not likely to prepay at the same rate, but instead are likely to
lengthen in effective maturity as debtors elect not to prepay and to retain
these now below-market credit terms for as long as possible. Holders of
mortgages, asset-backed securities and CMOs are left with returns below those
prevailing in the current environment. This prepayment-driven effect also
contributes to the projected simulation results.
During the first 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 first quarter of 2001 totaled
$11.0 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, 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 March 31, 2001, the Corporation was committed to
interest rate swaps with a total notional amount of $14.8 million, compared to a
total notional amount of $10.2 million at year-end 2000. The swaps have
remaining maturities of between 11 and 63 months, with a weighted average
maturity of 39 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 are 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
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change in "time value" are excluded in assessing hedge 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. 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. When
the floors are terminated or sold, net gains and/or losses remaining in
"accumulated other comprehensive income" will be amortized over the remaining
lives of the floors and recorded to "interest and fees on loans" in the
Consolidated Statements of Income. At March 31, 2001, the Corporation was
committed to interest rate floors with a total notional amount of $175 million,
the same amount to which it was committed at year-end 2000. The floors have
remaining maturities of between 12 and 52 months, with a weighted average
maturity of 35 months.
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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
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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: May 11, 2001 /s/ David R. Gibson
----------------------------------------
Name: David R. Gibson
Title: Senior Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
27