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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From to
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Commission File Number: 1-14659
WILMINGTON TRUST CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0328154
--------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890
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(Address of principal executive offices) (Zip Code)
(302) 651-1000
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(Registrant's telephone number, including area code)
Not Applicable
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(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 March 31, 2002 - 32,817,009 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 26
Part II. Other Information
Item 1 - Legal Proceedings 27
Item 2 - Changes in Securities and Use of Proceeds 27
Item 3 - Defaults Upon Senior Securities 27
Item 4 - Submission of Matters to a Vote of Security Holders 27
Item 5 - Other Information 28
Item 6 - Exhibits and Reports on Form 8-K 28
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
------------------------------
March 31, December 31,
(in thousands) 2002 2001
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ASSETS
Cash and due from banks $ 171,307 $ 210,104
------------------------------
Federal funds sold and securities purchased
under agreements to resell 45,000 104,999
------------------------------
Investment securities available for sale:
U.S. Treasury and government agencies 716,912 759,382
Obligations of state and political subdivisions 12,883 12,970
Other securities 468,193 492,496
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Total investment securities available for sale 1,197,988 1,264,848
------------------------------
Investment securities held to maturity:
U.S. Treasury and government agencies 10,510 10,593
Obligations of state and political subdivisions 4,541 4,921
Other securities 824 938
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Total investment securities held to maturity (market values
of $16,469 and $17,086, respectively) 15,875 16,452
------------------------------
Loans:
Commercial, financial and agricultural 1,858,744 1,861,727
Real estate-construction 444,896 400,534
Mortgage-commercial 1,017,491 1,009,442
Mortgage-residential 822,584 865,305
Consumer 1,394,808 1,351,825
Unearned income (716) (874)
------------------------------------------------------------------------------------------------------------
Total loans net of unearned income 5,537,807 5,487,959
Reserve for loan losses (81,803) (80,784)
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Net loans 5,456,004 5,407,175
------------------------------
Premises and equipment, net 139,287 140,224
Goodwill, net of accumulated amortization
of $29,391 in 2002 and 2001 221,969 212,851
Other intangible assets, net of accumulated amortization
of $6,097 in 2002 and $5,698 in 2001 11,550 6,819
Accrued interest receivable 46,485 40,558
Other assets 115,022 114,432
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Total assets $ 7,420,487 $ 7,518,462
=============================
1
------------------------------
March 31, December 31,
(in thousands) 2002 2001
------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 807,420 $ 1,258,322
Interest-bearing:
Savings 360,286 356,182
Interest-bearing demand 1,818,118 1,410,280
Certificates under $100,000 894,276 900,059
Certificates $100,000 and over 1,538,856 1,665,942
------------------------------------------------------------------------------------------------
Total deposits 5,418,956 5,590,785
------------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 949,291 828,261
U.S. Treasury demand 27,366 94,871
Line of credit 26,600 33,500
------------------------------------------------------------------------------------------------
Total short-term borrowings 1,003,257 956,632
------------------------------
Accrued interest payable 39,519 34,540
Other liabilities 97,700 93,475
Long-term debt 160,500 160,500
------------------------------------------------------------------------------------------------
Total liabilities 6,719,932 6,835,932
------------------------------
Minority interest 59 --
------------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 39,264,173 39,264 39,264
Capital surplus 84,705 78,190
Retained earnings 833,368 817,017
Accumulated other comprehensive income 6,113 10,078
------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 963,450 944,549
Less: Treasury stock, at cost, 6,447,164 and
6,563,956 shares, respectively (262,954) (262,019)
------------------------------------------------------------------------------------------------
Total stockholders' equity 700,496 682,530
------------------------------
Total liabilities and stockholders' equity $ 7,420,487 $ 7,518,462
=============================
See Notes to Consolidated Financial Statements
2
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
--------------------------
For the three months ended
March 31,
--------------------------
(in thousands; except per share data) 2002 2001
--------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $ 80,748 $ 105,938
Interest and dividends on investment securities:
Taxable interest 13,720 19,352
Tax-exempt interest 247 229
Dividends 1,441 2,000
Interest on federal funds sold and securities
purchased under agreements to resell 112 246
--------------------------------------------------------------------------------
Total interest income 96,268 127,765
--------------------------
Interest on deposits 22,547 47,432
Interest on short-term borrowings 5,902 15,376
Interest on long-term debt 2,641 2,756
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Total interest expense 31,090 65,564
--------------------------
Net interest income 65,178 62,201
Provision for loan losses (5,295) (5,250)
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Net interest income after provision
for loan losses 59,883 56,951
--------------------------
OTHER INCOME
Advisory fees 52,655 42,889
Service charges on deposit accounts 6,885 6,162
Loan fees and late charges 1,865 1,550
Card fees 2,420 2,345
Securities gains -- 711
Other operating income 846 3,020
--------------------------------------------------------------------------------
Total other income 64,671 56,677
--------------------------
Net interest and other income 124,554 113,628
--------------------------
OTHER EXPENSE
Salaries and employment benefits 46,974 42,893
Net occupancy 4,639 3,763
Furniture and equipment 6,588 5,729
Stationery and supplies 1,404 1,418
Advertising and contributions 1,656 1,481
3
Servicing and consulting fees 2,624 2,089
Other operating expense 11,395 10,691
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Total other expense 75,280 68,064
--------------------------
NET INCOME
Income before income taxes, minority
interest and cumulative effect of change
in accounting principle 49,274 45,564
Applicable income taxes 17,119 15,497
--------------------------------------------------------------------------------
Net income before minority interest and
cumulative effect of change in
accounting principle 32,155 30,067
Minority interest (59) --
--------------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle 32,096 30,067
Cumulative effect of change in accounting
principle (net of income taxes of $584) -- 1,130
--------------------------------------------------------------------------------
Net income $ 32,096 $ 31,197
=========================
Net income per share - basic:
Before cumulative effect of change in
accounting principle $ 0.98 $ 0.93
Cumulative effect of change in
accounting principle -- 0.03
--------------------------------------------------------------------------------
Net income per share - basic $ 0.98 $ 0.96
=========================
Net income per share - diluted:
Before cumulative effect of change in
accounting principle $ 0.97 $ 0.92
Cumulative effect of change in
accounting principle -- 0.03
--------------------------------------------------------------------------------
Net income per share - diluted $ 0.97 $ 0.95
=========================
Weighted average shares outstanding:
basic 32,810 32,447
diluted 33,255 32,875
Cash dividends per share $ 0.48 $ 0.45
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
--------------------------
For the three months ended
March 31,
(in thousands) 2002 2001
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OPERATING ACTIVITIES
Net income $ 32,096 $ 31,197
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 5,295 5,250
Provision for depreciation 5,444 4,452
Minority interest in net income 59 --
Compensation expense - nonemployee stock options 30 --
Amortization of investment securities available for sale
discounts and premiums 4,041 2,212
Amortization of investment securities held to maturity
discounts and premiums 2 1
Deferred income taxes 4 7
Gross proceeds from sales of loans 40,499 11,127
Gains on sales of loans (519) (155)
Securities gains -- (711)
(Increase)/decrease in other assets (8,080) 2,159
Increase/(decrease) in other liabilities 11,745 (3,814)
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Net cash provided by operating activities 90,616 51,725
------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 13,506 735
Proceeds from maturities of investment securities available for sale 211,937 74,856
Proceeds from maturities of investment securities held to maturity 575 1,956
Purchases of investment securities available for sale (168,797) (10,781)
Investments in affiliates (2,375) --
Cash paid for purchase of subsidiary (1,151) --
Purchases of loans (85) (872)
Net (increase)/decrease in loans (94,019) 3,291
Net increase in premises and equipment (4,507) (7,227)
-----------------------------------------------------------------------------------------------------------
Net cash (used for)/provided by investing activities (44,916) 61,958
------------------------
FINANCING ACTIVITIES
Net decrease in demand, savings and interest-bearing
demand deposits (38,960) (76,076)
Net (decrease)/increase in certificates of deposit (132,869) 253,665
Net increase/(decrease) in federal funds purchased and securities sold
under agreements to repurchase 121,030 (316,633)
Net (decrease)/increase in U.S. Treasury demand (67,505) 30,493
Net decrease in line of credit (6,900) (4,500)
5
Cash dividends (15,745) (14,590)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 3,965 3,877
Payments for common stock acquired through buybacks (7,512) (1,035)
-----------------------------------------------------------------------------------------------------------
Net cash used for financing activities (144,496) (124,799)
-------------------------
Decrease in cash and cash equivalents (98,796) (11,116)
Cash and cash equivalents at beginning of period 315,103 273,994
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 216,307 $ 262,878
=========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 26,111 $ 55,029
Taxes 2,711 970
Loans transferred during the period:
To other real estate owned $ 121 $ 18
From other real estate owned 15 157
Common stock issued for purchase of subsidiary $ 8,836 --
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 2001.
Note 2 - Comprehensive Income
The following table depicts other comprehensive income as required by SFAS No.
130:
--------------------------
For the three months ended
March 31,
--------------------------
(in thousands) 2002 2001
----------------------------------------------------------------------------------------------------
Net income $ 32,096 $ 31,197
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities (3,950) 10,819
Reclassification adjustment for securities gains included in net income -- (455)
Net unrealized holding gains arising during the period on derivatives
used for cash flow hedge -- 1,478
Reclassification adjustment for derivative gains included in net income (15) --
-----------------------
Total comprehensive income $ 28,131 $ 43,039
=======================
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
March 31,
--------------------------
(in thousands; except per share data) 2002 2001
--------------------------------------------------------------------------------
Numerator:
Net income before cumulative effect of
change in accounting principle $ 32,096 $ 30,067
Cumulative effect of change in accounting
principle (net of income taxes of $584) -- 1,130
--------------------------------------------------------------------------------
Net income $ 32,096 $ 31,197
--------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 32,810 32,447
--------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 445 428
--------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 33,255 32,875
--------------------------------------------------------------------------------
Basic earnings per share
Before cumulative effect of change in
accounting principle $ 0.98 $ 0.93
Cumulative effect of change in
accounting principle -- 0.03
--------------------------------------------------------------------------------
Basic earnings per share $ 0.98 $ 0.96
================================================================================
Diluted earnings per share
Before cumulative effect of change in $ 0.97 $ 0.92
accounting principle
Cumulative effect of change in
accounting principle -- 0.03
--------------------------------------------------------------------------------
Diluted earnings per share $ 0.97 $ 0.95
================================================================================
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. 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 and corporate management
services.
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 March 31, 2002 vs March 31, 2001 is as follows:
-----------------------------------------------------------------------------
Banking Fee-Based
Year-to-Date March 31, 2002 (in thousands) Business Business Totals
--------------------------------------------------------------------------------------------------------
Net interest income $ 56,078 $ 9,100 $ 65,178
Provision for loan losses (5,146) (149) (5,295)
--------------------------------------------------------------------------------------------------------
Net interest income after provision 50,932 8,951 59,883
Total advisory fees:
Private client advisory services 1,587 28,821 30,408
Corporate financial services 784 13,675 14,459
Affiliate managers -- 7,870 7,870
Amortization of other intangibles -- (82) (82)
Other operating income 11,401 615 12,016
--------------------------------------------------------------------------------------------------------
Net interest and other income 64,704 59,850 124,554
Other expense (37,660) (37,620) (75,280)
--------------------------------------------------------------------------------------------------------
Segment profit from operations 27,044 22,230 49,274
--------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 27,044 $ 22,230 $ 49,274
========================================================================================================
Depreciation and amortization $ 3,478 $ 2,979 $ 6,457
Investment in equity method investees -- 226,126 226,126
Segment average assets 6,242,005 1,133,757 7,375,762
9
Year-to-Date March 31, 2001 (in thousands)
--------------------------------------------------------------------------------------------------------
Net interest income $ 54,476 $ 7,725 $ 62,201
Provision for loan losses (4,883) (367) (5,250)
--------------------------------------------------------------------------------------------------------
Net interest income after provision 49,593 7,358 56,951
Total advisory fees:
Private client advisory services 1,225 25,218 26,443
Corporate financial services 360 11,911 12,271
Affiliate managers -- 6,176 6,176
Amortization of other intangibles and goodwill -- (2,001) (2,001)
Other operating income 11,566 1,511 13,077
Securities gains 569 142 711
--------------------------------------------------------------------------------------------------------
Net interest and other income 63,313 50,315 113,628
Other expense (35,963) (32,101) (68,064)
--------------------------------------------------------------------------------------------------------
Segment profit from operations 27,350 18,214 45,564
--------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 27,350 $ 18,214 $ 45,564
========================================================================================================
Depreciation and amortization $ 3,108 $ 3,776 $ 6,884
Investment in equity method investees -- 221,195 221,195
Segment average assets 5,785,309 1,434,934 7,220,243
10
Note 5 - Accounting Pronouncements
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 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 adoption of this
Statement did not have an impact on the Corporation's earnings, financial
condition or equity.
Note 6 - Derivative and Hedging Activities
The Corporation previously entered 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.
11
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts.
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.
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. For the first quarter of 2002,
approximately $72,000 of gains in "Accumulated Other Comprehensive Income" were
reclassified to earnings. During the 12 months ending March 31, 2003,
approximately $307,000 of gains in "Accumulated Other Comprehensive Income" are
expected to be reclassified to earnings.
The Corporation does not hold or issue derivative financial instruments for
trading purposes.
Note 7 - Goodwill and Other Intangible Assets
A summary of goodwill and other intangible assets at March 31, 2002 is as
follows:
-----------------------------------------------
As of March 31, 2002
-----------------------------------------------
Gross carrying Accumulated Net carrying
(in thousands) amount amortization amount
-----------------------------------------------------------------------------------------
Goodwill (nonamortizing) $251,360 29,391 $221,969
==========================================
Other intangibles
Amortizing:
Purchased mortgage servicing rights $ 4,915 $ 2,612 $ 2,303
Customer lists 7,904 1,900 6,004
Acquisition costs 1,635 1,218 417
Other intangibles 479 367 112
Nonamortizing
Other intangible assets 2,714 -- 2,714
------------------------------------------
Total other intangibles $ 17,647 $ 6,097 $ 11,550
==========================================
12
Amortization expense of other intangible assets for the three months ended March
31, 2002 is as follows:
--------------------------
For the three months ended
(in thousands) March 31, 2002
--------------------------------------------------------------------------------
Amortization expense $ 399
The estimated amortization expense of other intangible assets for each of the
five succeeding fiscal years is as follows:
Estimated annual amortization expense (in thousands)
--------------------------------------------------------------------------------
For the year ended December 31, 2003 $1,385
For the year ended December 31, 2004 1,124
For the year ended December 31, 2005 517
For the year ended December 31, 2006 433
For the year ended December 31, 2007 422
The changes in the carrying amount of goodwill for the three months ended March
31, 2002 are as follows:
----------------------------------------
Banking Fee-Based
(in thousands) Business Business Total
-------------------------------------------------------------------------
Balance as of January 1, 2002 $ 3,752 $ 209,099 $ 212,851
Goodwill acquired -- 9,694 9,694
Impairment loss -- (576) (576)
----------------------------------------
Balance as of March 31, 2002 $ 3,752 $ 218,217 $ 221,969
========================================
The goodwill acquired above includes $7.3 million recorded on the acquisition of
Balentine Holdings, Inc. and $2.0 million recorded on the Corporation's
investment in Camden Partners Holdings, LLC.
During the first quarter of 2002, a goodwill impairment loss of $575,582 was
recognized due to underperformance of an equity investment. This loss is
recorded in the "Other operating expense" line of the Corporation's Consolidated
Statements of Income and is not considered to be a transitional impairment as of
January 1, 2002, the date of the Corporation's adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets."
13
Other intangible assets acquired in the first three months of 2002 are as
follows:
-----------------------------------------
Weighted average
Amount Residual amortization
(in thousands) assigned value period in years
-----------------------------------------------------------------------------------
Purchased mortgage servicing rights $ 372 -- 7
Customer lists 3,108 -- 20
Other intangibles 1,650 -- --
-----------------------
Total $ 5,130 --
=======================
The following table sets forth the computation of basic and diluted earnings per
share adjusted for the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets":
--------------------------
For the three months ended
March 31,
--------------------------
(in thousands, except per share amounts) 2002 2001
------------------------------------------------------------------------
Reported net income $ 32,096 $ 31,197
Add back: goodwill amortization -- 2,094
Tax effect -- (712)
--------------------------
Adjusted net income $ 32,096 $ 32,579
==========================
Basic earnings per share
Reported net income $ 0.98 $ 0.96
Goodwill amortization -- 0.04
--------------------------
Adjusted basic earnings per share $ 0.98 $ 1.00
==========================
Diluted earnings per share
Reported net income $ 0.97 $ 0.95
Goodwill amortization -- 0.04
--------------------------
Adjusted diluted earnings per share $ 0.97 $ 0.99
==========================
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 first quarter of 2002 was $32.1 million, or $0.98 per share,
an increase of 3% over the $30.1 million, or $0.96 per share, reported for the
first quarter of 2001. On a diluted basis, earnings per share were $0.97,
compared to $0.95 reported for the first quarter of 2001. The 2001 results
included a $1.1 million after-tax adjustment, or $0.03 per share, for the
cumulative effect of a change in accounting principle related to the adoption of
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities."
These results reflect the Corporation's continued revenue growth even as the
financial markets struggle to regain their March 2001 levels and with the
ongoing market uncertainty. Revenues from our private client advisory services
rose in the face of market declines, while corporate financial service fees
continued to grow at double-digit rates and the loan portfolio reflected strong
growth.
First quarter results reflect the consolidation of the operating results of
Balentine Holdings, Inc., which was acquired on January 2, 2002, and the
elimination of $1.9 million of goodwill amortization expense.
Combined assets under management at quarter-end reached $37.0 billion, with
approximately two-thirds of those assets managed by the Corporation and the
remainder managed by the its affiliate asset managers.
Improvement was realized in the major components of the Corporation's revenue as
net interest income improved $3.0 million, or 5%, to $65.2 million, while
noninterest revenues rose $8.0 million, or 14%, to $64.7 million.
The provision for loan losses was $5.3 million, unchanged from the first quarter
of last year.
Operating expenses increased $7.2 million, or 11%, to $75.3 million and include
the consolidation of the results of Balentine Holdings with the Corporation.
These results produced an annualized return on average stockholders' equity of
18.73% and a return on average assets of 1.76%. These ratios compare with 20.99%
and 1.75%, respectively, for the first quarter of 2001.
STATEMENT OF CONDITION
Total assets at March 31, 2002 were $7.4 billion, down $98.0 million from
year-end 2001 due to lower balances in cash, short-term investments and
investment securities. Loan balances increased $49.8 million, partially
offsetting these other declines in asset balances.
The investment portfolio at March 31, 2002 declined $67.5 million, or 5%, since
year-end 2001 to $1.21 billion due to maturities, principal payments and sales.
The loan portfolio increased during the first quarter of 2002 $49.8 million, or
1%, to $5.54 billion. Real estate construction loans increased $44.4 million, or
11%, to $444.9 million, with approximately 78% of this growth in the
Corporation's Delaware market. Commercial mortgage loans increased $8.0 million,
or 1%, to $1.0 billion. Residential mortgage loans declined $42.7 million, or
5%, to $822.6 million, as $40.0 million of newly-originated fixed-rate mortgages
were sold into the secondary markets. Consumer loans grew $43.0 million, or 3%,
to $1.40 billion, as collateralized lending increased $46.3 million.
15
The reserve for loan losses at March 31, 2002 was $81.8 million, or 1.48% of
period-end loans outstanding. This compares with $80.8 million, or 1.47% of
period-end loans outstanding, at year-end 2001.
The adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" has modified the balance sheet presentation of
these items from prior periods. Prior periods have been adjusted to conform to
the presentation requirements of the new pronouncement. At March 31, 2002,
goodwill was $221.9 million, an increase of $9.1 million, or 4%, over the
restated $212.9 million reported for December 31, 2001. This increase was
associated with the Corporation's investments in Camden Partners Holdings, LLC,
a Baltimore-based private equity firm, and Balentine Holdings, an Atlanta-based
investment counseling firm. Other intangibles, previously reported as a
component of other assets, were $11.6 million at March 31, 2002, an increase of
$4.9 million, or 72%, over the $6.7 million at December 31, 2001. This increase
over year-end was attributable to costs associated with the aforementioned
investments during the first quarter. Other intangibles include items such as
acquired customer lists, acquisition costs, purchased mortgage servicing rights
and other items, which will continue to be amortized under the new accounting
pronouncement.
Accrued interest receivable at March 31, 2002 increased $5.9 million, or 15%, to
$46.5 million. This increase over the $40.6 million reported at year-end 2001
was due to interest income recorded but not yet received on U.S. government
bonds and notes that are included in the Corporation's investment portfolio.
Total deposits at March 31, 2002 were $5.42 billion, $171.8 million, or 3%,
below the year-end amount of $5.59 billion. Declines in noninterest bearing
demand account balances and certificates of deposit $100,000 and over were
primarily responsible for this decline. Noninterest-bearing demand account
balances at March 31, 2002 were $807.4 million, $450.9 million, or 36%, below
the year-end balance of $1.26 billion. Money market account balances, however,
were up $409.6 million, or 30%, to $1.77 billion. Certificates of deposit
$100,000 and over declined $127.1 million, or 8%, to $1.54 billion, as the
Corporation shifted its funding to lower cost federal funds purchased.
Short-term borrowings at March 31, 2002 were $1.0 billion, an increase of $46.6
million, or 5%, over the $956.6 million at December 31, 2001. Federal funds
purchased and securities sold under agreements to repurchase at quarter-end were
$949.3 million, a $121.0 million, or 15%, increase over the $828.3 million at
year-end 2001. U.S. Treasury demand balances declined $67.5 million, or 71%,
from the year-end level of $94.9 million.
Stockholders' equity at March 31, 2002 was $700.5 million, a $17.9 million, or
3%, increase over the $682.6 million at year-end 2001. Earnings of $32.1 million
and $13.1 million of stock issued were partially offset by cash dividends of
$15.8 million, treasury stock acquisitions of $7.5 million and a $4.0 million
decline, net of tax, in the market value of securities held for sale.
NET INTEREST INCOME
Net interest income is the difference between interest income received on
earning assets, such as loans and investment securities, and interest expense
paid on liabilities, such as deposits and short-term borrowings. Movements in
interest rates and the relative levels of earning assets and interest-bearing
liabilities held by the Corporation affect its net interest margin and the
resulting net interest income. The net interest margin is determined by dividing
fully tax-equivalent (FTE) net interest income by average total earning assets.
The Corporation's net interest income for the first quarter of 2002, on an FTE
basis, was $66.5 million, an increase of $2.6 million, or 4%, over the first
quarter of 2001. The Corporation's net interest margin for the quarter was
3.97%, an increase of 12 basis points over the 3.85% reported for the first
quarter of last year. The Federal Reserve Board lowered short-term interest
rates 11 times during 2001, reducing the discount rate to 1.25%, 475 basis
points below the 6.00% at which it began the year. These rate reductions have
caused both interest revenue and interest expense to decline.
16
Interest revenue (FTE) for the first quarter of 2002 totaled $97.6 million, a
decrease of $31.8 million, or 25%, from the $129.4 million reported for the
first quarter of 2001. Interest revenue declined $34.7 million as the average
rate earned on the Corporation's assets fell 199 basis points to 5.83%, while
interest revenues increased $2.8 million due to a $71.2 million increase in the
average level of earning assets to $6.7 billion. The Corporation's average prime
lending rate (the rate at which banks lend to their most creditworthy customers)
was 4.75%, 390 basis points below the 8.65% for the first quarter of 2001.
Interest expense for the first quarter of 2002 was $31.1 million, a decrease of
$34.5 million, or 53%, from the $65.6 million for the first quarter of 2001.
Interest expense declined $33.1 million as the average rate the Corporation paid
on its interest-bearing liabilities fell 249 basis points to 2.20%. The
aforementioned reductions in the discount rate by the Federal Reserve Board were
responsible for this decrease. Interest expense declined an additional $1.4
million due to a $59.9 million decrease in the average level of interest-bearing
liabilities to $5.67 billion. The average discount rate (the rate at which the
Federal Reserve Banks lend money to their member banks) was 1.25%, compared with
a corresponding average rate for the first quarter of 2001 of 5.11%. 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
2002 and 2001, respectively.
17
QUARTERLY ANALYSIS OF EARNINGS
2002 First Quarter 2001 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 $ 15,091 $ 112 2.97% $ 17,075 $ 246 5.76%
U.S. Treasury and government agencies 749,269 8,891 4.85 865,560 12,692 5.89
State and municipal 17,515 378 8.95 20,247 338 6.83
Preferred stock 80,394 1,749 8.35 95,491 2,127 8.23
Asset-backed securities 255,142 3,757 6.05 292,969 4,498 6.15
Other 143,263 1,290 3.52 156,483 2,680 6.79
------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,245,583 16,065 5.23 1,430,750 22,335 6.22
----------------------------------------------------------------------------------
Commercial, financial and agricultural 1,811,611 22,935 5.07 1,612,482 32,941 8.18
Real estate-construction 421,034 5,327 5.06 396,462 8,759 8.85
Mortgage-commercial 1,020,595 16,624 6.52 992,384 21,257 8.57
Mortgage-residential 841,819 14,910 7.08 921,712 16,469 7.15
Consumer 1,369,422 21,606 6.38 1,262,113 27,411 8.77
------------------------------------------------------------------------------------------------------------------------------
Total loans 5,464,481 81,402 5.98 5,185,153 106,837 8.27
----------------------------------------------------------------------------------
Total earning assets $ 6,725,155 97,579 5.83 $ 6,632,978 129,418 7.82
==================================================================================
Funds supporting earning assets
Savings $ 348,671 216 0.25 $ 350,359 1,236 1.43
Interest-bearing demand 1,539,153 2,493 0.66 1,305,415 6,585 2.05
Certificates under $100,000 896,695 8,344 3.77 919,517 11,754 5.18
Certificates $100,000 and over 1,751,245 11,494 2.63 1,837,922 27,857 6.06
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 4,535,764 22,547 2.00 4,413,213 47,432 4.32
----------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 918,163 5,694 2.48 993,973 14,877 5.99
U.S. Treasury demand 56,946 208 1.46 36,288 499 5.50
------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 975,109 5,902 2.42 1,030,261 15,376 5.97
----------------------------------------------------------------------------------
Long-term debt 160,500 2,641 6.58 168,000 2,756 6.56
------------------------------------------------------------------------------------------------------------------------------
18
Total interest-bearing Liabilities 5,671,373 31,090 2.20 5,611,474 65,564 4.69
----------------------------------------------------------------------------------
Other noninterest funds 1,053,782 -- -- 1,021,504 -- --
------------------------------------------------------------------------------------------------------------------------------
Total funds used to support
earning assets $ 6,725,155 31,090 1.86 $ 6,632,978 65,564 3.97
==================================================================================
Net interest income/yield 66,489 3.97 63,854 3.85
Tax-equivalent adjustment (1,311) (1,653)
--------- ---------
Net interest income $ 65,178 $ 62,201
========= =========
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.
19
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
--------------------------------------
For the three months ended March 31,
--------------------------------------
2002/2001
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 $ (29) $ (105) $ (134)
--------------------------------------
U.S. Treasury and
government agencies (1,889) (1,912) (3,801)
State and municipal * (50) 90 40
Preferred stock * (404) 26 (378)
Asset-backed securities (675) (66) (741)
Other * (192) (1,198) (1,390)
--------------------------------------------------------------------------------------
Total investment securities (3,210) (3,060) (6,270)
--------------------------------------
Commercial, financial and agricultural * 4,016 (14,022) (10,006)
Real estate-construction 536 (3,968) (3,432)
Mortgage-commercial * 596 (5,229) (4,633)
Mortgage-residential (1,409) (150) (1,559)
Consumer 2,321 (8,126) (5,805)
--------------------------------------------------------------------------------------
Total loans 6,060 (31,495) (25,435)
--------------------------------------------------------------------------------------
Total interest income $ 2,821 $(34,660) $(31,839)
======================================
Interest expense:
Savings $ (6) $ (1,014) $ (1,020)
Interest-bearing demand 1,181 (5,273) (4,092)
Certificates under $100,000 (291) (3,119) (3,410)
Certificates $100,000 and over (1,313) (15,050) (16,363)
--------------------------------------------------------------------------------------
20
Total interest-bearing deposits (429) (24,456) (24,885)
--------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase (1,135) (8,048) (9,183)
U.S. Treasury demand 284 (575) (291)
--------------------------------------------------------------------------------------
Total short-term borrowings (851) (8,623) (9,474)
--------------------------------------
Long-term debt (121) 6 (115)
--------------------------------------------------------------------------------------
Total interest expense ($ 1,401) $(33,073) $(34,474)
======================================
Changes in net interest income $ 2,635
========
* 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.
21
NONINTEREST REVENUES AND OPERATING EXPENSES
-------------------------------------------
Advisory fees for the first quarter of 2002 were $52.7 million, an increase of
$9.8 million, or 18%, over the $42.9 million reported for the first quarter of
last year. Revenues from private client advisory fees rose in the face of market
declines, and corporate financial service fees continued to grow at double-digit
rates. The percentage of operating revenues derived from these fee-based
businesses continued to increase, accounting for 49.8% of operating revenues for
the first quarter of 2002 compared with 48.2% for the first quarter of 2001.
% of % of
Operating Operating
(in thousands) First Quarter 2002 Revenues First Quarter 2001 Revenues
-------------- ------------------ -------- ------------------ --------
Net interest income $65,178 50% $62,201 52%
Fee income:
Advisory fees 52,737 41% 44,890 37%
Service charges 6,885 5% 6,162 5%
Other operating income 5,131 4% 6,915 6%
Total fee income 64,753 50% 57,967 48%
Total operating revenues $129,931 100% $120,168 100%
Affiliate manager other
intangibles and goodwill
amortization (82) (2,001)
Securities gains / (losses) 0 711
Net interest and other income
before loan loss provision $129,849 $118,878
Private client advisory fees for the quarter were $30.4 million, an increase of
$4.0 million, or 15%, over the $26.4 million for the first quarter of last year.
This increase in revenues occurred in the face of declines in the major market
indices that ranged from 6% to 24% lower than the year-ago first quarter. The
Dow Jones Industrial Average was down 6.6%, while the S&P 500 was down 14.9% and
the Nasdaq Composite Index was down 24.06%. Approximately 70% of the private
client advisory fees are tied to securities valuations.
Corporate financial services revenues for the quarter were $14.5 million, an
increase of $2.2 million, or 18%, over the $12.3 million for the first quarter
of last year. Revenues were $6.8 million from the corporate trust business,
which includes capital markets and large equipment leasing trusts. This was an
increase of $1.9 million, or 40%, over the $4.8 million for the first quarter of
last year. The majority of corporate financial services revenue is generated on
a fee-for-service basis. The remainder, approximately 24%, is tied to asset
valuations.
Revenues from our affiliate asset managers reached $7.9 million, a $1.7 million,
or 27%, increase over the $6.2 million for the first quarter of 2001. Several
factors contributed to this increase. Fees from Cramer Rosenthal McGlynn were
$1.7 million, or 94%, higher than for the first quarter of last year, as the
strength of value-style investing generated strong appreciation in the
portfolio. Fees from growth-style affiliate Roxbury Capital Management were $4.3
million, 1% below those for the first quarter of last year, from their year-ago
levels, despite an increase in the Corporation's equity interest in the firm.
These fees included certain annual performance-based fees associated principally
with hedge fund activity that exceeded estimates. Market conditions continue to
hamper the Corporation's ability to grow its assets under management.
22
Assets under management (in billions)
March 31, 2002 December 31, 2001 March 31, 2001
-------------- ----------------- --------------
Wilmington Trust $25.0 $24.6 $25.5
Roxbury Capital Management $6.9 $7.7 $9.0
Cramer Rosenthal McGlynn $5.1 $4.6 $3.6
Totals $37.0 $36.9 $38.1
Service charges on deposit accounts for the quarter were $6.9 million, a
$723,000, or 12%, increase over the $6.2 million for the first quarter of 2001
due to increased rates.
Other operating income for the quarter was $846,000, $2.2 million, or 72%, below
the $3.0 million for the first quarter of 2001. Year-ago income from asset
dispositions included a $1.8 million gain on the disposition of real estate.
Operating expenses for the quarter were $75.3 million, an increase of $7.2
million, or 11%, over the $68.1 million for the first quarter of last year. Each
category of expense includes expenses associated with the consolidation of the
results of Balentine Holdings with the Corporation for the first quarter of
2002. Personnel expenses were $47.0 million, an increase of $4.1 million, or
10%, over the $42.9 million for the first quarter of a year ago. Salaries,
incentives and bonuses of $38.6 million, an increase of 10%, contributed $3.5
million of this increase. Employment benefits expenses increased $627,000, or
8%, due to higher health insurance costs and pension expense. Net occupancy and
furniture and equipment costs were $4.6 million and $6.6 million, respectively.
These reflect the opening of new offices in Atlanta and Baltimore and the
relocation of the Corporation's West Palm Beach office. Other operating expense
for the quarter was $15.7 million, an increase of $1.5 million, or 10%, over the
first quarter of last year. This increase included higher servicing and
consulting expense. First quarter 2002 results also reflect the elimination of
$1.9 million of goodwill amortization expense.
The provision for income taxes for the first quarter of 2002 was $17.1 million,
a $1.6 million, or 11%, increase over the provision for the first quarter of
last year. Federal income tax expense was $15.6 million, an increase of
$827,000, or 6%, over the $14.8 million for the first quarter of a year ago.
State income tax expense was $1.5 million, a increase of $220,000, or 17%. The
Corporation's effective tax rate for the quarter was 34.8%, compared with 34.0%
for the first quarter of 2001 due to an increase in pretax income.
LIQUIDITY
---------
A financial institution's liquidity represents its ability to meet, in a timely
manner, cash flow requirements that may arise from increases in demand for loans
and other assets or from decreases in deposits or other funding sources.
Liquidity management, therefore, contains both asset and liability components.
The maturity and marketability of loans and investments provide liquidity, along
with time deposits at other banks, federal funds sold and securities purchased
under agreements to resell. Liquidity also results from the Corporation's
internally generated capital, core deposits, large certificates of deposit,
federal funds purchased, securities sold under agreements to repurchase and
other credit facilities. In the first quarter of 2002, the proportion of funding
provided by core deposits - demand deposits, interest-bearing demand deposits
and certificates of deposit - was stable when compared to last year. Since
average total assets were stable year-to-year, funding sources also were stable,
with the relative proportions of core deposits and short-term borrowings
(principally federal funds purchased and securities sold under agreements to
repurchase) virtually unchanged. The Corporation is a guarantor of 57% - its
ownership interest - of three obligations of its affiliate, Cramer Rosenthal
McGlynn. The guaranty is for two lines of credit totaling $8 million, at LIBOR
plus 2%, which expire December 8, 2002. The third credit facility is a $2
million amortizing term loan, at LIBOR plus 2%, the balance of which was
$667,000 at March 31, 2002. Management continuously monitors the Corporation's
existing and projected liquidity requirements. The Corporation believes that its
acceptance in the national markets will permit it to obtain additional funding
if the need arises in the future. The Bank is a member of the Federal Home Loan
Bank of Pittsburgh, which provides an additional source of funds.
23
ASSET QUALITY AND LOAN LOSS PROVISION
-------------------------------------
The Corporation's provision for loan losses for the first quarter was $5.3
million. This was unchanged from the amount provided for the first quarter of
2001. The reserve for loan losses at March 31, 2002 was $81.8 million, an
increase of $1.0 million, or 1%, over the $80.8 million at December 31, 2001.
The reserve at quarter-end as a percentage of loans outstanding was 1.48%, an
increase of one basis point over the 1.47% reported at year-end 2001. Net
chargeoffs for the quarter were $4.3 million, an increase of $149,000, or 4%,
over the $4.1 million reported for the first quarter of 2001. Loans past due 90
days or more, nonaccrual loans and restructured loans at March 31, 2002 totaled
$41.3 million. This represented a decrease of $10.6 million, or 20%, from the
$51.9 million reported at year-end 2001. Loans past due 90 days or more at
quarter-end totaled $7.0 million, down $6.5 million, or 48%, from year-end 2001.
Nonaccrual loans at quarter-end were $33.9 million, $4.1 million, or 11%, below
the $38.0 million of nonaccrual loans at year-end 2001. At March 31, 2002,
$369,000 of loans were classified as restructured, compared with $375,000 of
loans at year-end 2001. Other real estate owned (OREO) at quarter-end was
$504,000, up $106,000, or 27%, over the $398,000 at year-end 2001. The overall
level of nonperforming loans at the end of the first quarter of 2002 decreased
$4.0 million, or 10%, to $34.4 million.
The following table presents risk elements in the Corporation's loan portfolio:
(in thousands) March 31, 2002 December 31, 2001 March 31, 2001
-------------- -------------- ----------------- --------------
Nonaccruing loans $33,932 $38,016 $40,015
Past due 90 days or more 6,981 13,524 8,476
Total $40,913 $51,540 $48,491
Percent of loans at period-end .75% .94% .94%
Other real estate owned $504 $398 $578
Continued slow economic conditions or any further deterioration in markets the
Corporation serves may further impair the ability of some borrowers to repay
their loans in full on a timely basis. In that event, management would expect
increased levels of nonperforming assets, credit losses and provisions for loan
losses. To minimize the likelihood and impact of such conditions, management
continually monitors the entire loan portfolio to identify potential problem
loans and avoid disproportionately high concentrations of loans to individual
borrowers and industries. An integral part of this process is a regular analysis
of all past due loans. At March 31, 2002, loans past due 90 days or more totaled
$7.0 million, approximately 58% of which were in the Corporation's commercial
loan portfolio, 27% of which were in the residential mortgage loan portfolio and
15% of which were in the consumer loan portfolio. The corresponding ratios at
December 31, 2001 were 68%, 23% and 9%, respectively. As a result of the
Corporation's ongoing monitoring of its loan portfolios, at March 31, 2002,
management identified approximately $64.6 million of loans about which serious
doubt exists as to the borrowers' ability to continue to repay their loans on a
timely basis. These loans are either currently performing in accordance with
their terms or are less than 90 days past due. This compares with the $60.6
million of loans at year-end 2001 about which the Corporation had serious doubt.
In light of the current levels of past due, non-accrual and problem loans,
management believes that the Corporation's reserve for loan losses is a
reasonable estimate of the known and inherent losses in the loan portfolio. The
Corporation's loan loss reserve methodology is sound and has provided an
appropriate level of reserve adequacy over an extended period of time. The
Corporation's reserve is reflective of estimated credit losses for specifically
identified and estimated probable losses inherent in the remainder of the
portfolio based on loan type and risk rating classification. The methodology
includes an analysis of the business climate and the estimated effect on credit
losses, which is the basis for an unallocated portion of the reserve assessment.
The business climate includes shifts in current market conditions, loan growth
in the Corporation's expansion 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
24
filings. The unallocated and allocated portions of the reserve are reassessed
quarterly during the regular application of the reserve methodology. At March
31, 2002, approximately $6.3 million, or 8%, of the reserve for loan losses was
unallocated. This amount was unchanged from the amount of the reserve that was
unallocated at year-end 2001. Loan growth has been addressed through the
allocation of reserves to the new loans within the parameters of the reserve
methodology. While the serious doubt level has risen, delinquency trends have
declined from year-end. The percentage of loans carrying a pass rating remained
high, at 95%.
CAPITAL RESOURCES
-----------------
Management continues to review the Corporation's capital position and make
adjustments as needed to assure that the Corporation's capital base is
sufficient to satisfy existing and impending regulatory requirements, as well as
to meet appropriate standards of safety and provide for future growth. The
Corporation's capital increased in the first quarter of 2002 due primarily to
increased earnings and the issuance of shares in the acquisition of Balentine
Holdings. The Corporation's annualized capital generation rate for the first
quarter was 9.6%, a decrease from the 10.75% reported for 2001. First quarter
earnings for 2002 of $32.1 million, net of $15.7 million in cash dividends,
added $16.4 million to the Corporation's capital. An additional $8.8 million was
provided by the issuance of shares in the acquisition of Balentine Holdings. The
decline in the market value of the Corporation's available-for-sale investment
portfolio reduced equity by $4.0 million, while the acquisition of treasury
stock reduced equity further by $7.5 million.
The Federal Reserve Board's risk-based capital guidelines establish the minimum
levels of capital for a bank holding company. The guidelines are intended to
reflect the varying degrees of risk associated with different balance sheet and
off-balance-sheet items. The Corporation has reviewed its balance sheet and
off-balance-sheet items and calculated its capital position under the risk-based
capital guidelines. At March 31, 2002, the Corporation's total risk-based
capital ratio was 11.18%, compared with 11.16% reported at year-end 2001. The
Corporation's Tier 1 risk-based capital ratio at that date was 7.83%, compared
with 7.78% reported at year-end 2001, and its Tier 1 leverage capital ratio was
6.50%, compared with 6.49% reported at year-end 2001. Each of these ratios
exceeded the minimum levels required for adequately capitalized institutions of
8%, 4% and 4%, respectively, as well as the levels required for well-capitalized
institutions of 10%, 6% and 5%, respectively.
In April 2002, the Corporation's Board of Directors increased the quarterly
dividend to $0.51 per share. This marked the twenty-first consecutive year of
increased cash dividends. In addition, the Board of Directors declared a
two-for-one stock split in the form of a 100% stock dividend, payable on June
17, 2002 to stockholders of record on June 3, 2002.
In April 2002, the Corporation's Board of Directors also authorized a new
4,000,000-share buyback program that will commence at the completion of its
current program, which has 158,739 shares remaining. At March 31, 2002,
3,841,261 shares had been bought under the current program at a cost of $190.7
million.
INFLATION
---------
The Corporation's asset and liability structure is substantially different from
that of an industrial company, since virtually all assets and liabilities of a
financial institution are monetary in nature. Accordingly, changes in interest
rates may have a significant impact on a bank holding company's performance.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. The impact of inflation on a bank
holding company's financial performance, therefore, is indeterminable.
OTHER INFORMATION
-----------------
On April 23, 2002, the Corporation acquired SPV Management Limited, a leading
European supplier of management services that support structured finance and
asset securitization transactions. Headquartered in London, SPV Management has
offices in Dublin and Milan, and provides services to companies in Luxembourg
and
25
the Netherlands. The acquisition is expected to complement the Corporation's
specialized corporate financial services and strengthen its ability to serve its
international client base.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Net interest income is an important determinant of the Corporation's financial
performance. Through management of its interest rate sensitivity exposure, 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 generally employs interest rate scenarios in
which interest rates gradually move up or down 250 basis points over one year.
As of March 31, 2002, the declining rate scenario would gradually move down 175
basis points until the federal funds rate equals zero. This change ensures that
negative rates are not created within the simulation model. The rising rate
scenario remains unchanged and would gradually increase 250 basis points. The
simulation model projects, as of March 31, 2002, that a gradual 250 basis point
increase in market interest rates would increase net interest income by 3.5%
over a one-year period. This compares to an increase of 2.57% as measured at
March 31, 2001. If interest rates were to decrease gradually 175 basis points,
the simulation model projects, as of March 31, 2002, that net interest income
would decrease 5.38% over a one-year period. This compares to a decrease of
5.18% the simulation projected would occur on a gradual 250-basis-point decline
in market interest rates as measured at March 31, 2001. The movement in the rate
sensitivity measurements over the past year has been driven by several changes.
The relative proportion of fixed-rate and floating-rate assets has shifted, as
loans matured or were repaid and mortgages sold, while new loans were originated
that had a floating interest rate. In addition, the change in the absolute level
of short-term interest rates affects the simulation results. For example, the
rates currently offered on retail deposits are at historically low levels. This
means that they are unlikely to adjust given any additional rate declines. The
Corporation's objective is to keep any interest rate imbalance from reducing net
interest income by 10% or more within a one-year period, as projected by its
simulation model. If it is determined that a course of action is necessary based
on the simulation model, strategies will be developed and presented to the
Corporation's Board of Directors.
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 prepayment of residential mortgages,
asset-backed securities and collateralized mortgage obligations 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 precisely the impact of changes in
interest rates on net interest income. Management reviews the Corporation's
exposure to interest rate risk regularly, and may employ a variety of strategies
as needed to adjust its sensitivity. This includes changing the relative
proportions of fixed-rate and floating-rate assets and liabilities, changing the
number and maturity of funding sources and asset securitizations and utilizing
derivative contracts such as interest rate swaps and interest rate floors.
26
Part II. Other Information
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Change In Securities and Use of Proceeds
On January 2, 2002, the Corporation issued to a total of nine
individuals 141,496 shares of its common stock as the initial
installment of the purchase price for Balentine Holdings.
Additional installments will be payable in 2004, 2005, 2006
and 2007. These shares were issued in reliance on the
exemption provided by Section 4(2) under the Securities Act of
1933, and their resale has subsequently been registered on
Form S-3 filed with the Securities and Exchange Commission
effective January 14, 2002.
On February 11, 2002, the Corporation issued to a total of 13
individuals not full-time employees of the Corporation
non-statutory stock options to acquire a total of 23,500
shares of its stock at an exercise price of $65.97 per share.
These options are first exercisable three years after grant
and terminate ten years after grant, and were issued under the
Corporation's 1999 Long-Term Incentive Plan in reliance on the
exemption provided by Section 4(2) under the Securities Act of
1933. The proceeds from the exercise of these options will be
used for general corporate purposes. The shares underlying the
options are anticipated to be registered on Form S-3 to be
filed with the Securities and Exchange Commission.
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
At the Corporation's Annual Shareholders' Meeting held on
April 18, 2002 (the "Annual Meeting"), the nominees for
directors of the Corporation proposed were elected. The votes
cast for those nominees were as follows:
For Withheld
--- --------
Carolyn S. Burger 26,759,035 447,818
Robert V. A. Harra, Jr. 27,089,967 116,886
Rex L. Mears 26,942,936 263,917
Robert W. Tunnell, Jr. 27,058,287 148,566
In addition, at the Annual Meeting, the Corporation's
shareholders approved the Corporation's 2002 Long-Term
Incentive Plan. That plan, designed primarily to assist the
Corporation in attracting and retaining highly competent
officers, other key employees and directors, is for a term of
three years and authorizes the issuance of up to 2,000,000
shares of the Corporation's common stock. The vote in favor of
that plan was as follows:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
20,208,078 2,262,800 254,220 4,481,755
27
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
The Corporation filed a report on Form 8-K on April 25, 2002
reporting certain developments under Item 5.
28
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 15, 2002 /s/ David R. Gibson
---------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)