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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 June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From to
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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
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(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
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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
June 30, 2001 - 32,593,589 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 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
Part II Other Information
Item 1 - Legal Proceedings 30
Item 2 - Changes in Securities and Use of Proceeds 30
Item 3 - Defaults Upon Senior Securities 30
Item 4 - Submission of Matters to a Vote of Security Holders 30
Item 5 - Other Information 30
Item 6 - Exhibits and Reports on Form 8-K 30
Exhibit 11
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CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
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June 30, December 31,
(in thousands) 2001 2000
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ASSETS
Cash and due from banks $ 278,953 $ 223,819
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Federal funds sold and securities purchased
under agreements to resell 182,506 50,175
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Investment securities available for sale:
U.S. Treasury and government agencies 736,194 878,932
Obligations of state and political subdivisions 12,885 11,776
Other securities 521,595 549,357
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Total investment securities available for sale 1,270,674 1,440,065
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Investment securities held to maturity:
U.S. Treasury and government agencies 10,802 11,003
Obligations of state and political subdivisions 5,220 6,640
Other securities 1,859 3,095
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Total investment securities held to maturity (market values
of $18,471 and $20,984, respectively) 17,881 20,738
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Loans:
Commercial, financial and agricultural 1,649,631 1,622,654
Real estate-construction 425,109 372,702
Mortgage-commercial 1,010,892 990,433
Mortgage-residential 913,884 925,938
Consumer 1,263,320 1,277,291
Unearned income (1,211) (609)
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Total loans net of unearned income 5,261,625 5,188,409
Reserve for loan losses (79,339) (76,739)
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Net loans 5,182,286 5,111,670
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Premises and equipment, net 137,366 130,910
Goodwill and other intangible assets, net of accumulated amortization
of $21,251 in 2001 and $17,187 in 2000 173,788 172,015
Accrued interest receivable 43,486 49,200
Other assets 120,408 123,024
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Total assets $ 7,407,348 $ 7,321,616
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June 30, December 31,
(in thousands) 2001 2000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 1,119,079 $ 955,651
Interest-bearing:
Savings 352,563 350,213
Interest-bearing demand 1,221,852 1,413,173
Certificates under $100,000 913,078 927,500
Certificates $100,000 and over 1,485,852 1,639,479
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Total deposits 5,092,424 5,286,016
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Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,292,810 1,099,445
U.S. Treasury demand 71,082 30,757
Line of credit 17,000 17,000
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Total short-term borrowings 1,380,892 1,147,202
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Accrued interest payable 61,048 51,655
Other liabilities 59,672 76,843
Long-term debt 168,000 168,000
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Total liabilities 6,762,036 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 75,860 72,817
Retained earnings 785,363 753,373
Accumulated other comprehensive income/(loss) 8,811 (4,429)
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Total contributed capital and retained earnings 909,298 861,025
Less: Treasury stock, at cost, 6,670,584 and
6,870,855 shares, respectively (263,986) (269,125)
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Total stockholders' equity 645,312 591,900
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Total liabilities and stockholders' equity $ 7,407,348 $ 7,321,616
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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 For the six months ended
June 30, June 30,
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(in thousands; except per share data) 2001 2000 2001 2000
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NET INTEREST INCOME
Interest and fees on loans $ 100,874 $ 106,794 $ 206,812 $ 206,516
Interest and dividends on investment securities:
Taxable interest 17,852 22,864 37,204 45,850
Tax-exempt interest 1,124 143 1,353 295
Dividends 1,745 2,316 3,745 4,824
Interest on federal funds sold and securities
purchased under agreements to resell 239 465 485 1,115
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Total interest income 121,834 132,582 249,599 258,600
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Interest on deposits 40,381 47,899 87,813 92,462
Interest on short-term borrowings 13,684 17,296 29,060 32,300
Interest on long-term debt 2,763 2,762 5,519 5,523
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Total interest expense 56,828 67,957 122,392 130,285
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Net interest income 65,006 64,625 127,207 128,315
Provision for loan losses (4,700) (5,000) (9,950) (10,500)
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Net interest income after provision
for loan losses 60,306 59,625 117,257 117,815
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OTHER INCOME
Advisory fees 43,156 40,187 86,045 80,517
Service charges on deposit accounts 6,867 6,207 13,029 12,432
Card fees 2,602 2,490 4,947 4,725
Other operating income 2,180 2,153 6,750 4,090
Securities gains 71 185 782 1,660
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Total other income 54,876 51,222 111,553 103,424
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Net interest and other income 115,182 110,847 228,810 221,239
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OTHER EXPENSE
Salaries and employment benefits 40,349 38,832 83,242 80,522
Net occupancy 4,322 4,187 8,085 7,804
Furniture and equipment 5,729 5,652 11,458 11,247
Stationery and supplies 1,268 1,539 2,686 3,172
Advertising and contributions 2,847 2,402 4,328 3,707
Servicing and consulting fees 2,377 1,792 4,466 3,554
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Other operating expense 11,242 10,623 21,933 19,584
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Total other expense 68,134 65,027 136,198 129,590
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NET INCOME
Income before income taxes and cumulative
effect of change in accounting principle 47,048 45,820 92,612 91,649
Applicable income taxes 16,066 15,377 31,563 30,605
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Net income before cumulative effect of
change in accounting principle 30,982 $ 30,443 $ 61,049 $ 61,044
Cumulative effect of change in accounting
principle (net of income taxes of $584) -- -- 1,130 --
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Net income $ 30,982 $ 30,443 $ 62,179 $ 61,044
======================================================
Net income per share - basic:
Before cumulative effect of change in
accounting principle $ 0.95 $ 0.94 $ 1.88 $ 1.89
Cumulative effect of change in
accounting principle -- -- 0.03 --
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Net income per share - basic $ 0.95 $ 0.94 $ 1.91 $ 1.89
======================================================
Net income per share - diluted:
Before cumulative effect of change in
accounting principle $ 0.94 $ 0.94 $ 1.86 $ 1.88
Cumulative effect of change in
accounting principle -- -- 0.03 --
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Net income per share - diluted $ 0.94 $ 0.94 $ 1.89 $ 1.88
======================================================
Weighted average shares outstanding:
basic 32,531 32,275 32,490 32,251
diluted 32,954 32,566 32,915 32,555
Cash dividends per share $ 0.48 $ 0.45 $ 0.93 $ 0.87
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------------------
For the six months ended June 30,
(in thousands) 2001 2000
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OPERATING ACTIVITIES
Net income $ 62,179 $ 61,044
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 9,950 10,500
Provision for depreciation 8,864 9,189
Amortization of investment securities available for sale
discounts and premiums 3,633 3,217
Amortization/(accretion) of investment securities held to
maturity discounts and premiums 3 (6)
Deferred income taxes 10 185
Gains on sales of loans (355) (232)
Securities gains (782) (1,660)
Decrease/(increase) in other assets 13,629 (42,771)
Decrease in other liabilities (14,143) (2,008)
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Net cash provided by operating activities 82,988 37,458
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INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 15,233 211,520
Proceeds from maturities of investment securities available for sale 196,149 148,789
Proceeds from maturities of investment securities held to maturity 2,854 6,366
Purchases of investment securities available for sale (25,563) (218,034)
Investments in affiliates (5,837) (19,383)
Gross proceeds from sales of loans 40,578 27,469
Purchases of loans (6,902) (4,628)
Net increase in loans (113,887) (313,737)
Net increase in premises and equipment (15,320) (6,651)
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Net cash provided by/(used for) investing activities 87,305 (168,289)
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FINANCING ACTIVITIES
Net decrease in demand, savings and interest-bearing
demand deposits (25,543) (76,874)
Net (decrease)/increase in certificates of deposit (168,049) 156,315
Net increase in federal funds purchased and securities sold
under agreements to repurchase 193,365 108,177
Net increase/(decrease) in U.S. Treasury demand 40,325 (47,812)
Cash dividends (30,189) (28,048)
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Proceeds from common stock issued under employment benefit
plans, net of income taxes 8,853 5,255
Payments for common stock acquired through buybacks (1,590) (8,634)
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Net cash provided by financing activities 17,172 108,379
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Increase/(decrease) in cash and cash equivalents 187,465 (22,452)
Cash and cash equivalents at beginning of period 273,994 354,905
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Cash and cash equivalents at end of period $ 461,459 $ 332,453
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 112,999 $ 143,067
Taxes 35,552 35,250
Loans transferred during the period:
To other real estate owned $ 70 $ 1,675
From other real estate owned 296 1,449
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:
For the six months ended
June 30,
(Unaudited) -----------------------
(in thousands) 2001 2000
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Net income $ 62,179 $ 61,044
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities 12,838 (2,173)
Reclassification adjustment for securities gains included in net income (500) (1,062)
Net unrealized holding gains arising during the period on derivatives
used for cash flow hedge 952 --
Reclassification adjustment for derivative gains included in net income (50) --
----------------------
Total comprehensive income $ 75,419 $ 57,809
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Note 3 - Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings
per share:
For the six months ended
June 30,
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(in thousands; except per share data) 2001 2000
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Numerator:
Net income before cumulative effect of change in accounting principle $61,049 $61,044
Cumulative effect of change in accounting principle
(net of income taxes of $584) 1,130 --
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Net income $62,179 $61,044
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Denominator:
Denominator for basic earnings per share - weighted average shares 32,490 32,251
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Effect of dilutive securities:
Employee stock options 425 304
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Denominator for diluted earnings per share - adjusted weighted average
shares and assumed conversions 32,915 32,555
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Basic earnings per share
Before cumulative effect of change in accounting principle $ 1.88 $ 1.89
Cumulative effect of change in accounting principle 0.03 --
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Basic earnings per share $ 1.91 $ 1.89
=========================================================================================================
Diluted earnings per share
Before cumulative effect of change in accounting principle $ 1.86 $ 1.88
Cumulative effect of change in accounting principle 0.03 --
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Diluted earnings per share $ 1.89 $ 1.88
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Note 4 - Segment Reporting
For the purposes of reporting our results, we divide our business activities
into two segments. Our banking and advisory fee-based segments comprise the
services we provide to customers. Previously we also reported a funds management
segment, which included activities not directly customer-related, but which were
undertaken primarily for the Corporation's general purposes. Those activities
included management of the investment portfolio, funding and interest rate risk
management. Those activities now are reflected in the banking and advisory
fee-based segments, and the 2000 amounts have been restated to reflect this
change.
The banking and advisory fee-based segments are managed separately but have
overlapping markets, customers and systems. The Corporation's strategy to
develop full relationships across a broad product array allows these two
segments to market separate products and services to a common base of customers.
The banking segment includes lending, deposit-taking and branch banking in our
primary banking markets of Delaware, Pennsylvania and Maryland, along with
institutional deposit-taking on a national basis. Lending activities include
commercial loans, commercial and residential mortgages and construction and
consumer loans. Deposit products include demand checking, certificates of
deposit, negotiable order of withdrawal accounts and various savings and money
market accounts.
The advisory fee-based segment includes private client advisory services, asset
management, mutual fund, corporate trust and employee benefit plan services to
individuals and corporations in the United States and more than 50 other
countries. Private client advisory service activities include investment
management, trust services, private banking, estate settlement, financial
planning and tax preparation. Asset management activities include a broad range
of portfolio management services, including fixed-income, short-term cash
management and contributions resulting from affiliations with Cramer Rosenthal
McGlynn, LLC and Roxbury Capital Management, LLC. Corporate trust activities
include custody services, trusteeships for capital leases, collateralized
securities, corporate restructurings and bankruptcies.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Corporation evaluates
performance based on profit or loss from operations before income taxes and
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without including nonrecurring gains and losses. The Corporation generally
records intersegment sales and transfers as if the sales or transfers were to
third parties (i.e., at current market prices). Profit or loss from infrequent
events such as the sale of a business are reported separately for each segment.
Financial data by segment for the year-to-date June 30, 2001 vs. June 30, 2000
is as follows:
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Banking Advisory Fee
Year-to-Date June 30, 2001 (in thousands) Business Business Totals
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Net interest income $ 111,659 $ 15,548 $ 127,207
Provision for loan losses (9,847) (103) (9,950)
---------------------------------------------
Net interest income after provision 101,812 15,445 117,257
Total advisory fees:
Private client advisory services 3,272 49,282 52,554
Corporate financial services 952 25,683 26,635
Affiliate managers -- 10,919 10,919
Amortization of goodwill -- (4,063) (4,063)
Other operating income 22,528 2,198 24,726
Securities gains 626 156 782
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Net interest and other income 129,190 99,620 228,810
Other expense (72,383) (63,815) (136,198)
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Segment profit from operations 56,807 35,805 92,612
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Segment profit before income taxes $ 56,807 $ 35,805 $ 92,612
===========================================================================================
Intersegment revenue -- -- --
Depreciation and amortization 6,010 3,470 9,480
Investment in equity method investees -- 188,160 188,160
Segment average assets 5,797,675 1,392,984 7,190,659
Year-to-Date June 30, 2000 (in thousands)
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Net interest income $ 121,341 $ 6,974 $ 128,315
Provision for loan losses (10,216) (284) (10,500)
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Net interest income after provision 111,125 6,690 117,815
Total advisory fees:
Private client advisory services 2,196 46,957 49,153
Corporate financial services 1,319 23,702 25,021
Affiliate managers -- 9,848 9,848
Amortization of goodwill -- (3,505) (3,505)
Other operating income 20,009 1,238 21,247
Securities gains 1,328 332 1,660
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Net interest and other income 135,977 85,262 221,239
Other expense (73,000) (56,590) (129,590)
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Segment profit from operations 62,977 28,672 85,262
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Segment gain from infrequent events -- -- --
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Segment profit before income taxes $ 62,977 $ 28,672 $ 91,649
===========================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 6,129 3,583 9,712
Investment in equity method investees -- 178,069 178,069
Segment average assets 5,799,912 1,367,464 7,167,376
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Note 5 - Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires the Corporation to
recognize all derivatives on its balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the derivative are either offset against the change in fair value of assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The adoption of Statement No. 133 on January 1, 2001
resulted in the cumulative effect of the accounting change of $1.1 million
after-tax being recognized as income in the Consolidated Statements of Income.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement supersedes and replaces the guidance in Statement 125. It revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, although it carries over
most of Statement 125's provisions without reconsideration.
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001, recognition and
reclassification of collateral and disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This Statement is to be applied prospectively with certain exceptions. Other
than those exceptions, earlier or retroactive application of its accounting
provisions is not permitted. The Corporation does not expect this Statement to
have an impact on earnings, financial condition or equity.
Business Combinations
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
Statement addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations within the scope of this Statement are to be accounted for
using the purchase method, thereby eliminating use of the pooling-of-interests
method.
The provisions of this Statement apply to all business combinations initiated
after June 30, 2001. This Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. The Corporation expects no impact on earnings, financial
condition or equity upon adoption.
Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
The provisions of the Statement are required to be applied starting with fiscal
years beginning after December 15, 2001, except that goodwill and intangible
assets acquired after June 30, 2001 will be subject immediately to the
nonamortization and amortization provisions of this Statement. Early application
is permitted for entities with fiscal
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years beginning after March 15, 2001, provided that the first interim financial
statements have not previously been issued. This Statement is required to be
applied at the beginning of an entity's fiscal year and to all goodwill and
other intangible assets recognized in financial statements at that date. The
Corporation has been amortizing goodwill at the rate of approximately $2.1
million per quarter, which will cease upon adoption of this Statement. Other
than the cessation of amortization, the Corporation does not anticipate an
impact on earnings, financial condition or equity upon adoption.
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 that generate interest payments to the Corporation based on
the difference between the floating-rate index and a predetermined strike rate
of the specific floor when the index is below the strike rate. When the index is
equal to or above the strike rate, no payments are made or received by the
Corporation. The Corporation enters into these contracts to hedge against the
impact of adverse market interest rate changes on the cash flows of floating
rate commercial loans. Hedge effectiveness is assessed by comparing the changes
in intrinsic value of the interest rate floors with the changes in the variable
interest rates for the commercial loans.
Changes in the fair value of the floors attributed to the change in "time value"
are excluded in assessing the hedge's effectiveness and are recorded to "Other
Operating Income" in the Consolidated Statements of Income. Changes in the fair
value that are determined to be ineffective are also recorded to "Other
Operating Income" in the Consolidated Statements of Income. The effective
portion of the change in fair value is recorded in "Other Comprehensive Income"
in the Consolidated Statements of Condition.
The Corporation does not hold or issue derivative financial instruments for
trading purposes.
Other operating income for the period ended June 30, 2001 includes net gains of
$596,048 resulting from the change in fair value of the floors that was excluded
in assessing hedge effectiveness. Net gains or losses resulting from the cash
flow hedges' ineffectiveness were immaterial. The amounts recorded to "Other
Comprehensive Income" are subsequently reclassified to "Interest and Fees on
Loans" in the Consolidated Statements of Income as a yield adjustment in the
same period in which the hedged forecasted transaction affects earnings. On
April 17, 2001, the company sold all of its floors. As of June 30, 2001,
approximately $73,000 of gains in "Accumulated Other Comprehensive Income" were
reclassified to earnings as a result of the sale. During the 12 months ending
June 30, 2002, approximately $293,000 of gains in "Accumulated Other
Comprehensive Income" will be reclassified to earnings.
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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 second quarter of 2001 was $31.0 million, or $.94 per share
on a diluted basis, and for the first six months of 2001 was $62.2 million, or
$1.89 per share on a diluted basis. This was a 2% increase over each of the
$30.4 million, or $.94 per share, and the $61.0 million, or $1.88 per share, on
a diluted basis, reported for the second quarter and first six months of 2000.
Total revenues for the second quarter of 2001 reached $119.9 million, a 3%
increase over the $115.8 million reported for the second quarter of 2000. For
the first six months of 2001, revenues reached $238.8 million, a 3% increase
over the $231.7 million for the corresponding period in 2000.
Net interest income for the second quarter of 2001 was $65.0 million, a 1%
increase over the $64.6 million reported for the second quarter of last year.
For the first six months, net interest income was $127.2 million, a 1% decrease
from the $128.3 million reported for the corresponding period last year.
The quarterly provision for loan losses of $4.7 million was 6% lower than the
$5.0 million for the second quarter of 2000. The reserve for loan losses at
quarter-end was $79.3 million, $2.6 million, or 3%, above the $76.7 million
reported at December 31, 2000.
Noninterest income for the second quarter of 2001 was $54.9 million, a 7%
increase over the $51.2 million reported for the corresponding quarter of last
year. For the first six months of 2001, noninterest income reached $111.6
million, an 8% increase over the $103.4 million reported for the first six
months of 2000.
Operating expenses for the second quarter and first six months of 2001 were
$68.1 million and $136.2 million, respectively, a 5% increase above the $65.0
million and $129.6 million reported for the first quarter and first half of last
year.
Return on assets for the six months ended June 30, 2001, on an annualized basis,
was 1.74%, above the 1.71% reported for the corresponding period a year ago.
Return on stockholders' equity, also on an annualized basis, was 20.37%,
compared with 24.21% for the first six months of 2000.
STATEMENT OF CONDITION
Total assets at June 30, 2001 were $7.41 billion, $85.7 million above the $7.32
billion reported at December 31, 2000. Total earning assets increased $33.3
million over this period, to $6.73 billion, as higher levels of short-term
investments and loans outstanding offset decreases due to calls and maturities
in the investment portfolios.
Loan balances increased $73.2 million, or 1%, over the first six months of 2001
from their year-end 2000 levels. Pay-downs, refinancings and the sale of
residential mortgage loans into the secondary market slowed the rate of loan
growth. At June 30, 2001, total loans were $5.26 billion, above the $5.19
billion reported at year-end 2000. Contributing to this increase were real
estate construction loans, which increased $52.4 million, or 14%, to $425.1
million, commercial loans, which increased $27.0 million, or 2%, to $1.65
billion, and commercial mortgage loans, up $20.5 million, or 2%, to $1.01
billion. Partially offsetting these increases were consumer loans, down $14.0
million, or 1%, to $1.26 billion and residential mortgage loans of $913.9
million, down $12.0 million, or 1%. Approximately $70 million of residential
mortgage loans were sold during the fourth quarter of 2000. While these
period-end balances reflected only a 1% growth in loans, the average balance of
total loans outstanding during the
16
17
first six months of 2001 was $5.19 billion, a $243.2 million, or 5%, increase
over the $4.95 billion for the corresponding period a year ago. 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. Approximately half of this loan growth was generated
outside of Delaware.
The investment portfolio at June 30, 2001 was $1.29 billion, a decrease of
$172.2 million, or 12%, from the December 31, 2000 level of $1.46 billion.
Contributing to this decrease were U.S. Treasury and government agency
securities, which decreased $142.9 million, or 16%, to $747.0 million, preferred
stocks, which decreased $16.4 million, or 16%, to $84.1 million, and
asset-backed securities, which decreased $12.1 million, or 4%, to $283.2
million. These declines are a reflection of the interest rate environment and
the use of assets to fund loan growth.
Interest-bearing liabilities at quarter-end were $5.52 billion, $124.0 million,
or 2%, below the year-end 2000 level of $5.65 billion. Total deposits during the
first six months of 2001 decreased $193.6 million, or 4%, while short-term
borrowings increased $233.7 million, or 20%. A decrease of $191.3 million, or
14%, in interest-bearing demand balances and a $153.6 million, or 9%, decrease
in certificates of deposit $100,000 and over were offset in part by a $163.4
million, or 17%, increase in noninterest-bearing demand account balances.
Short-term borrowings increased $233.7 million, or 20%, to $1.38 billion.
Federal funds purchased and securities sold under agreements to repurchase
increased $193.4 million, or 18%, and U.S. Treasury demand balances increased
$40.3 million, or 131%, over their prior year-end levels.
Shareholders' equity at June 30, 2001 was $645.3 million, $53.4 million, or 9%,
over the 2000 year-end level. Earnings of $62.2 million for the first six
months, coupled with a $13.2 million improvement in unrealized gains/(losses),
net of tax, for the investment portfolio and derivative floor contracts and $9.8
million in new stock issued, were responsible for this increase. Partially
offsetting these results were $30.2 million in cash dividends and the repurchase
of $1.6 million of treasury stock.
NET INTEREST INCOME
Net interest income for the second quarter on a fully tax-equivalent ("FTE")
basis was $67.0 million. This was a $441,000, or 1%, increase over the $66.6
million reported for the second quarter of 2000. For the first six months of
2001, net interest income (FTE) was $130.9 million, a $1.3 million, or 1%,
decrease from the $132.1 million reported for the corresponding period a year
ago. Net interest income was affected by the continued rapid pace of change in
key interest rates by the Federal Reserve Board, which lowered rates three times
for a total of 125 basis points during the quarter.
Interest income (FTE) for the second quarter of 2001 decreased $10.7 million,
or 8%, to $123.8 million from $134.5 million for the second quarter of 2000.
Contributing to this decline was a $129.3 million decrease in the average level
of earning assets, which reduced interest revenues by $1.7 million. This
decline was compounded by the lower interest rate environment, which lowered
interest revenues for the quarter by $9.0 million. Also affecting interest
income was the first time recognition of interest accrued on zero coupon
bonds, resulting in an adjustment of $901,000 to interest revenue. The average
rate earned on the Corporation's earning assets during the quarter declined 48
basis points, from 7.94% to 7.46%. For the first six months of 2001, interest
revenues were down $9.2 million, also due to the interest rate environment that
has seen the rate earned on the Corporation's assets decline 18 basis points to
7.64% from the 7.82% earned during the first six months of 2000.
Interest expense for the quarter decreased $11.1 million, or 16%, to $56.8
million. Total interest-bearing liabilities, on average, were down $246.2
million, or 4%, from their $5.77 billion level of a year ago. The reduced level
of interest-bearing liabilities caused interest expense to decrease by $2.4
million, while the interest rate environment resulted in an additional decrease
to interest expense of $8.7 million. The average rate the Corporation paid for
its funds during the quarter was 4.09%, compared to 4.70% for the second quarter
of 2000. For the year-to-date, interest expense is down $7.9 million, due
primarily to the interest rate environment, which has seen the rate the
Corporation paid on interest-bearing liabilities decline 17 basis points to
4.39% from the 4.56% paid during the first six months of 2000.
17
18
The Corporation's net interest margin for the quarter was 4.02%, nine basis
points above the 3.93% reported for the second quarter of a year ago. For the
first six months of this year, the margin was 3.94%, up one basis point over the
corresponding period last year. The following two tables present comparative net
interest income data and a rate-volume analysis of changes in net interest
income for the second quarters and first six months of 2001 and 2000,
respectively.
18
19
QUARTERLY ANALYSIS OF EARNINGS
2001 Second Quarter 2000 Second 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 $ 20,415 $ 239 4.63% $ 28,903 $ 465 6.36%
U.S. Treasury and government
agencies 791,912 11,562 5.92 945,912 14,679 5.98
State and municipal 17,165 1,740 17.44 11,167 215 7.81
Preferred stock 85,142 1,838 8.12 114,025 2,532 8.15
Asset-backed securities 286,470 4,320 6.10 341,938 5,502 6.19
Other 155,912 2,437 6.22 203,704 3,346 6.52
--------------------------------------------------------------------------- ---------------------------
Total investment
securities 1,336,601 21,897 6.28 1,616,746 26,274 6.27
-----------------------------------------------------------------------------------
Commercial, financial and
agricultural 1,620,775 30,839 7.54 1,603,756 34,803 8.60
Real estate-construction 405,622 7,881 7.70 353,187 8,467 9.48
Mortgage-commercial 1,002,435 20,843 8.23 929,637 20,399 8.68
Mortgage-residential 916,722 16,526 7.21 986,132 17,591 7.13
Consumer 1,255,738 25,617 8.16 1,169,238 26,531 9.09
--------------------------------------------------------------------------- ---------------------------
Total loans 5,201,292 101,706 7.78 5,041,950 107,791 8.50
-----------------------------------------------------------------------------------
Total earning assets $ 6,558,308 123,842 7.46 $ 6,687,599 134,530 7.94
===================================================================================
Funds supporting earning assets
Savings $ 351,221 623 0.71 $ 395,967 1,489 1.51
Interest-bearing demand 1,281,853 4,817 1.51 1,345,330 7,337 2.19
Certificates under $100,000 909,701 11,500 5.07 978,312 11,744 4.83
Certificates $100,000 and over 1,716,611 23,441 5.40 1,754,268 27,329 6.16
--------------------------------------------------------------------------- ---------------------------
Total interest-bearing
deposits 4,259,386 40,381 3.77 4,473,877 47,899 4.27
-----------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,053,382 13,290 4.99 1,059,372 16,321 6.14
U.S. Treasury demand 38,442 394 4.05 64,204 975 6.01
--------------------------------------------------------------------------- ---------------------------
Total short-term
borrowings 1,091,824 13,684 4.96 1,123,576 17,296 6.13
-----------------------------------------------------------------------------------
Long-term debt 168,000 2,763 6.58 168,000 2,762 6.58
--------------------------------------------------------------------------- ---------------------------
Total interest-bearing
liabilities 5,519,210 56,828 4.09 5,765,453 67,957 4.70
-----------------------------------------------------------------------------------
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Other noninterest funds 1,039,098 -- -- 922,146 -- --
--------------------------------------------------------------------------- ---------------------------
Total funds used to support
earning assets $ 6,558,308 56,828 3.44 $ 6,687,599 67,957 4.01
==================================================================================
Net interest income/yield 67,014 4.02 66,573 3.93
Tax-equivalent adjustment (2,008) (1,948)
----------- -----------
Net interest income $ 65,006 $ 64,625
=========== ===========
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.
20
21
YEAR-TO-DATE ANALYSIS OF EARNINGS
Year-to-Date 2001 Year-to-Date 2000
--------------------------------------- --------------------------------------
(in thousands; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) Balance expense rate balance expense rate
----------------------------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 18,755 $ 485 5.14% $ 38,196 $ 1,115 5.77%
U.S. Treasury and government
agencies 828,532 24,254 5.90 951,444 29,390 5.96
State and municipal 18,698 2,078 12.16 11,566 444 7.79
Preferred stock 90,288 3,965 8.18 123,772 5,315 7.95
Asset-backed securities 289,701 8,818 6.12 347,804 11,182 6.19
Other 156,196 5,117 6.50 199,170 6,525 6.54
--------------------------------------------------------------------------- ---------------------------
Total investment
securities 1,383,415 44,232 6.26 1,633,756 52,856 6.25
----------------------------------------------------------------------------------
Commercial, financial and
agricultural 1,616,651 63,780 7.86 1,558,720 65,865 8.37
Real estate-construction 401,067 16,640 8.27 340,161 15,995 9.29
Mortgage-commercial 997,438 42,100 8.40 923,694 40,094 8.58
Mortgage-residential 919,203 32,995 7.18 981,310 34,892 7.11
Consumer 1,258,908 53,028 8.46 1,146,161 51,594 9.01
--------------------------------------------------------------------------- ---------------------------
Total loans 5,193,267 208,543 8.02 4,950,046 208,440 8.37
----------------------------------------------------------------------------------
Total earning assets $ 6,595,437 253,260 7.64 $ 6,621,998 262,411 7.82
==================================================================================
Funds supporting earning assets
Savings $ 350,792 1,859 1.07 $ 396,518 3,041 1.54
Interest-bearing demand 1,293,570 11,402 1.78 1,354,807 14,299 2.12
Certificates under $100,000 914,582 23,254 5.13 1,011,487 24,305 4.83
Certificates $100,000 and over 1,776,931 51,298 5.74 1,670,717 50,817 6.02
--------------------------------------------------------------------------- ---------------------------
Total interest-bearing
deposits 4,335,875 87,813 4.05 4,433,529 92,462 4.16
----------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,023,842 28,167 5.47 1,032,180 30,722 5.93
U.S. Treasury demand 37,371 893 4.75 54,837 1,578 5.69
--------------------------------------------------------------------------- ---------------------------
Total short-term
borrowings 1,061,213 29,060 5.45 1,087,017 32,300 5.92
----------------------------------------------------------------------------------
Long-term debt 168,000 5,519 6.57 168,000 5,523 6.58
--------------------------------------------------------------------------- ---------------------------
Total interest-bearing
liabilities 5,565,088 122,392 4.39 5,688,546 130,285 4.56
----------------------------------------------------------------------------------
Other noninterest funds 1,030,349 -- -- 933,452 -- --
--------------------------------------------------------------------------- ---------------------------
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Total funds used to support
earning assets $ 6,595,437 122,392 3.70 $ 6,621,998 130,285 3.89
==================================================================================
Net interest income/yield 130,868 3.94 132,126 3.93
Tax-equivalent adjustment (3,661) (3,811)
----------- -----------
Net interest income $ 127,207 $ 128,315
=========== ===========
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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23
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
For the three months ended For the six months ended
June 30, June 30,
------------------------------------ ------------------------------------
2001/2000 2001/2000
Increase (Decrease) Increase (Decrease)
due to change in due to change in
------------------------------------ ------------------------------------
1 2 1 2
(in thousands) Volume Rate Total Volume Rate Total
------------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and
securities purchased under
agreements to resell $ (136) $ (90) $ (226) $ (564) $ (66) $ (630)
------------------------------------------------------------------------------
U.S. Treasury and
government agencies (2,984) (133) (3,117) (4,920) (216) (5,136)
State and municipal * 111 1,414 1,525 267 1,367 1,634
Preferred stock * (695) 1 (694) (1,467) 117 (1,350)
Asset-backed securities (1,117) (65) (1,182) (2,267) (97) (2,364)
Other * (789) (120) (909) (1,380) (28) (1,408)
------------------------------------------------------------------------------------------------------------------------
Total investment
securities (5,474) 1,097 (4,377) (9,767) 1,143 (8,624)
------------------------------------------------------------------------------
Commercial, financial and
agricultural * 365 (4,329) (3,964) 2,404 (4,489) (2,085)
Real estate-construction 1,239 (1,825) (586) 2,806 (2,161) 645
Mortgage-commercial * 1,575 (1,131) 444 3,138 (1,132) 2,006
Mortgage-residential (1,234) 169 (1,065) (2,190) 293 (1,897)
Consumer 1,960 (2,874) (914) 5,038 (3,604) 1,434
------------------------------------------------------------------------------------------------------------------------
Total loans 3,905 (9,990) (6,085) 11,196 (11,093) 103
------------------------------------------------------------------------------------------------------------------------
Total interest income $ (1,705) $ (8,983) $(10,688) $ 865 $(10,016) $ (9,151)
==============================================================================
Interest expense:
Savings $ (168) $ (698) $ (866) $ (349) $ (833) $ (1,182)
Interest-bearing demand (347) (2,173) (2,520) (644) (2,253) (2,897)
Certificates under $100,000 (826) 582 (244) (2,321) 1,270 (1,051)
Certificates $100,000 and over (586) (3,302) (3,888) 3,215 (2,734) 481
------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits (1,927) (5,591) (7,518) (99) (4,550) (4,649)
------------------------------------------------------------------------------
23
24
Federal funds purchased and
securities sold under
agreements to repurchase (92) (2,939) (3,031) (247) (2,308) (2,555)
U.S. Treasury demand (391) (190) (581) (500) (185) (685)
------------------------------------------------------------------------------------------------------------------------
Total short-term
borrowings (483) (3,129) (3,612) (747) (2,493) (3,240)
------------------------------------------------------------------------------
Long-term debt 1 0 1 0 (4) (4)
------------------------------------------------------------------------------------------------------------------------
Total interest expense ($ 2,409) $ (8,720) $(11,129) $ (846) $ (7,047) $ (7,893)
==============================================================================
Changes in net interest income $ 441 $ (1,258)
======== ========
* 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.
24
25
Noninterest Revenues and Operating Expenses
Noninterest revenues for the second quarter of 2001 were $54.9 million, an
increase of $3.7 million, or 7%, over those for the second quarter of a year
ago, due primarily to higher advisory fee income.
Total advisory fees, before amortization of goodwill, for the second quarter of
2001 increased to $45.2 million, $3.2 million, or 8%, above those for the second
quarter of 2000. These fees represented 47% of the Corporation's operating
revenues for the quarter, compared to 45% for the second quarter of 2000.
Private client advisory fees for the second quarter rose $2.3 million, or 10%,
to $26.1 million. This growth is notable given significant declines in the value
of equity securities, as benchmarked by major market indicies over the 12-month
period ended June 30, 2001. The S&P declined nearly 15%, the Dow Jones
Industrial Average was up just 2% and the Nasdaq Composite Index dropped 45%.
Approximately 70% of the Corporation's private client advisory services fees are
tied to market valuations. On an annualized basis, new private client advisory
business development, especially strong in Florida and Delaware, generated $3.6
million during the second quarter. This was a 9% increase over 2000 results and
7% higher than in the first quarter of 2001. Year-to-date, most locations have
experienced record new business growth in private client advisory sales. Sales
in New York for the first six months of this year are 75% higher than a year
ago, while in Florida they are 13% higher. At June 30, 2001, assets under
management were $24.9 billion, an increase over both the levels reported for
June 30, 2000 and March 31, 2001. Expense for the amortization of acquisition
goodwill was $2.1 million for the quarter, 11% above the $1.9 million reported
for the corresponding quarter of last year, reflecting the Corporation's
increased ownership in its affiliate asset managers.
Fees from corporate financial services for the second quarter increased $1.7
million, or 13%, to $14.4 million. Revenue from specialty corporate and capital
markets trust services continued to show strong growth, and included new fees
from cash management activities. These fees of $7.5 million grew $2.2 million,
or 40%, over those for the second quarter of last year, and at $12.4 million for
the first six months of 2001 are up $2.4 million, or 24%, over those for the
first half of last year. Demand for investment holding company and nexus
services also was strong, posting a 19% increase to $3.1 million for the quarter
and an 18% increase for the year-to-date to $6.4 million. Approximately 25% of
corporate financial services fees are tied to asset valuations.
Fees from the Corporation's affiliated asset managers declined $799,000, or 14%,
to $4.7 million for the second quarter of this year, due primarily to declines
in the equity markets described above. For the first six months of this year,
these fees were $10.9 million, $1.1 million, or 11%, ahead of last year. Assets
under management with these affiliates at June 30, 2001 were $13.6 billion. This
was down from $16.5 billion at June 30, 2000 and $14.7 billion at December 31,
2000, but was up over the $12.6 billion reported at March 31, 2001.
Service charge fees were $6.9 million for the quarter, a $660,000, or 11%,
increase over the $6.2 million reported for the second quarter of 2000, due to
increased automated teller machine fees and checking account fees. For the first
six months of 2001, these fees were $13.0 million, or 5% higher than last year.
Card fees were $2.6 million for the second quarter, 4% above the $2.5 million
for the second quarter of 2000, due to increased merchant discount and card
interchange fees. These fees were $5.0 million for the first six months of this
year, 5% above the corresponding period of last year.
Other operating income for the second quarter was $2.2 million, virtually
unchanged from a year ago. Loan fees and late charges were $1.8 million,
$395,000, or 29%, higher than the second quarter of last year. These fees
reached $3.3 million for the first six months of this year, which was a 24%
increase over last year. Losses from asset dispositions for the second quarter
of $589,000 were down $883,000, or 60%, from the $1.5 million loss reported for
the second quarter of last year. For the year-to-date, a gain of $460,000 was
recorded versus $2.0 million of losses for the corresponding six-month period of
last year. Losses within the auto leasing portfolio were down $1.2 million, or
82%, from the second quarter of last year and were down $1.1 million, or 54%,
for the first six months of this year compared to the corresponding period a
year ago.
Operating expenses for the second quarter were $68.1 million, $3.1 million, or
5%, above the $65.0 million reported for the second quarter of last year. Total
personnel expenses for the quarter were $40.3 million, $1.5 million, or
25
26
4%, above the $38.8 million reported for the second quarter of last year. For
the first six months of 2001, personnel expenses were $83.2 million, 3% above
those for last year. Advertising and contributions expense was $2.8 million for
the second quarter, up 19% over the second quarter of last year as a result of
the timing of paying certain annual expenditures. Servicing and consulting
expense was $2.4 million for the quarter, an increase of $585,000, or 33%, over
the $1.8 million reported for the second quarter of last year. For the first six
months of 2001, servicing and consulting expense was $4.5 million, 26% above
last year. Contract computer programming expenses were primarily responsible for
this increase. Other operating expense for the quarter was $11.2 million, a
$619,000, or 6%, increase over the $10.6 million for the second quarter of last
year. For the first six months of this year, other operating expenses were $21.9
million, a $2.3 million, or 12%, increase over the corresponding period last
year. Higher travel and entertainment, armored car and insurance expense were
primarily responsible for this increase.
Income tax expense for the second quarter of 2001 increased $689,000, or 4%, to
$16.1 million. For the first half of this year, income tax expense was $31.6
million, an increase of $958,000, or 3%. The Corporation's effective tax rate
for the second quarter of 2001 was 34.14%, compared to 33.56% for the second
quarter of 2000. The effective rate for the first six months was 34.08%,
compared to 33.39% for the first half of last year. This was due in part to
lower levels of tax-exempt income and higher levels of state income taxes.
Liquidity
A financial institution's liquidity represents its ability to meet, in a timely
manner, cash flow requirements that may arise. Liquidity of the asset side of
the balance sheet is provided by the maturity and marketability of loans, money
market assets and investments. Liquidity of the liability side of the balance
sheet is usually provided through deposits.
The Corporation's liquidity ratio, calculated in accordance with regulatory
requirements of the FDIC, was 17.44% at June 30, 2001. This compares with ratios
of 18.79% at March 31, 2001 and 19.88% at December 31, 2000. This decline in the
liquidity ratio is the result of maturities within the Corporation's investment
portfolio over the past six months and management's decision to not replace
those securities given the current rate environment. Management believes that
maturities of the Corporation's investment securities, other readily marketable
assets and external sources of funds offer more than adequate liquidity to meet
any cash flow requirements that may arise. Sources of funds have historically
consisted of deposits, amortization and prepayments of outstanding loans,
maturities of investment securities, borrowings and interest income. Management
monitors the Corporation's existing and projected liquidity requirements on an
ongoing basis, and implements appropriate strategies when deemed necessary.
Asset Quality and Loan Loss Provision
The Corporation's provision for loan losses for the second quarter of 2001 was
$4.7 million, $300,000, or 6%, lower than the $5.0 million provided for in the
second quarter of 2000. The reserve for loan losses at June 30, 2001 was $79.3
million, an increase of $2.6 million, or 3%, 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 second quarter of 2001 were $3.2 million, an increase of $78,000, or 2%,
over those for the second quarter of 2000.
26
27
The following table presents the risk elements in the Corporation's loan
portfolio:
Risk Elements (in thousands) June 30, 2001 December 31, 2000 June 30, 2000
------------------------------------------------------------------------------------------
Nonaccruing $36,188 $40,161 $49,476
Past due 90 days or more 8,766 13,500 11,260
---------------------------------------------------------------------------------------
Total $44,954 $53,661 $60,736
==============================================
Percent of total loans at period-end 0.85% 1.03% 1.19%
Other real estate owned $ 491 $ 717 $ 802
Nonaccruing loans at June 30, 2001 were $36.2 million, a decrease of $4.0
million, or 10%, 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
June 30, 2001 was $491,000, a decrease of $226,000, or 32%, from the December
31, 2000 level of $717,000. Nonperforming assets (other real estate owned plus
nonaccrual loans) at June 30, 2001 totaled $36.7 million, or .69% of period-end
loans outstanding. This was a decrease of $4.2 million, or 10%, from the $40.9
million, or .79% of period-end loans outstanding, reported at December 31, 2000.
As a result of the Corporation's ongoing monitoring of its loan portfolio, at
June 30, 2001, approximately $52.0 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.
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 and 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 portion of
the total reserve. This range is based on historic unallocated levels in
conjunction with the assessment of the business conditions mentioned above. The
unallocated and allocated portions of the reserve are reassessed quarterly. At
June 30, 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 second quarter loan loss
provision adequately supported loan growth and a similar level of net chargeoffs
for the period. Delinquency trends have declined from prior year levels while
serious doubt levels have increased. 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 second quarter of 2001 was 11.37% and its core
(Tier 1) leveraged capital
27
28
ratio was 6.48%. 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 June 30, 2001, that a gradual 250-basis-point increase in market interest
rates would increase net interest income by 0.04% over a one-year period. If
interest rates were to gradually decrease 250 basis points, the simulation model
projects, as of June 30, 2001, that net interest income would decrease 4.6%
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.
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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 second 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 second quarter of 2001 totaled
$29.3 million.
Management reviews the Corporation's rate sensitivity regularly, and may employ
a variety of strategies as needed to adjust that sensitivity. These include
changing the relative proportions of fixed-rate and floating-rate assets and
liabilities and maximizing the number of funding sources and asset
securitizations, as well as utilizing derivative contracts such as interest rate
swaps and interest rate floors.
The Corporation has entered into swaps in which it pays a fixed rate and it
receives a floating rate. The net interest differential associated with the
swaps is recorded to "Interest and Fees on Loans" in the Consolidated Statements
of Income. The net gains or losses resulting from the changes in fair value of
the swaps are recorded to "Other Operating Income" in the Consolidated
Statements of Income. At June 30, 2001, the Corporation was committed to
interest rate swaps with a total notional amount of $16.6 million, compared to a
total notional amount of $10.2 million at year-end 2000. The swaps have
remaining maturities of between 8 and 60 months, with a weighted average
maturity of 36 months.
The Corporation entered into floors to hedge against the impact of adverse
market interest rate changes on the cash flows of floating-rate commercial
loans. Changes in the intrinsic value of the contracts were expected to be
highly effective in offsetting changes in cash flows attributable to
fluctuations in market interest rates below the strike price of the floors.
Changes in the fair value of the floors attributed to the change in "time value"
were excluded in assessing hedge effectiveness and were recorded to "Other
Operating Income" in the Consolidated Statements of Income. Changes in the fair
value that were determined to be ineffective were also recorded to "Other
Operating Income" in the Consolidated Statements of Income. The effective
portion of the change in fair value 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. At June 30, 2001, all floors had
been sold. Net gains and/or losses remaining in "Accumulated Other Comprehensive
Income" are being amortized over the original intended hedge period and recorded
to "Interest and Fees on Loans" in the Consolidated Statements of Income.
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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
At the Corporation's Annual Shareholders' Meeting held on May
17, 2001 (the "Annual Meeting"), the nominees for directors of
the Corporation proposed were elected. The votes cast for those
nominees were as follows:
For Withheld
---------- ---------
Charles S. Crompton, Jr. 27,142,272 204,057
Edward B. duPont 24,910,096 2,436,233
R. Keith Elliott 27,093,198 253,131
Stacey J. Mobley 26,653,176 693,153
H. Rodney Sharp 26,549,628 796,701
In addition, at the Annual Meeting, the Corporation's
shareholders approved the Corporation's 2001 Non-Employee
Director Stock Option Plan. That plan, designed to encourage
our directors to increase their ownership of the Corporation's
common stock and to further align their interests with those of
our shareholders, is for a term of two years and authorizes the
issuance of up to 100,000 shares of the Corporation's common
stock. The vote in favor of that plan was as follows:
For Against Abstain
--- ------- -------
24,111,772 3,016,408 218,149
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
The exhibits listed below are being filed as part of this
report. These exhibits will be made available to any
shareholder upon receipt of a written request therefor,
together with payment of $.20 per page for duplicating costs.
Exhibit Number Exhibit
-------------- -------
11 Statement re computation of per share earnings
The Corporation filed a report on Form 8-K/A on April 9, 2001
reporting the engagement of KPMG LLP as the Corporation's
independent accountants for the fiscal year ending December
31, 2001.
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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: August 13, 2001 /s/ David R. Gibson
----------------------------------------
Name: David R. Gibson
Title: Senior Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
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