FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From _________ to ___________
Commission File Number: 1-14659
WILMINGTON TRUST CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0328154
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890
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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 September 30, 2002 - 65,568,355 shares
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 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 17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 33
Item 4 - Controls and Procedures 34
Part II. Other Information
Item 1 - Legal Proceedings 35
Item 2 - Changes in Securities and Use of Proceeds 35
Item 3 - Defaults Upon Senior Securities 35
Item 4 - Submission of Matters to a Vote of Security Holders 35
Item 5 - Other Information 35
Item 6 - Exhibits and Reports on Form 8-K 35
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
-------------------------------
September 30, December 31,
(in thousands) 2002 2001
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ASSETS
Cash and due from banks $ 253,106 $ 210,104
---------------------------
Federal funds sold and securities purchased under agreements to resell 105,381 104,999
---------------------------
Investment securities available for sale:
U.S. Treasury and government agencies 750,685 759,382
Obligations of state and political subdivisions 13,072 12,970
Other securities 575,962 492,496
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Total investment securities available for sale 1,339,719 1,264,848
---------------------------
Investment securities held to maturity:
U.S. Treasury and government agencies 10,297 10,593
Obligations of state and political subdivisions 4,221 4,921
Other securities 905 938
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Total investment securities held to maturity (market values
of $15,885 and $17,086, respectively) 15,423 16,452
---------------------------
Loans:
Commercial, financial and agricultural 2,132,965 1,861,727
Real estate-construction 450,407 400,534
Mortgage-commercial 968,993 1,009,442
Mortgage-residential 740,896 865,305
Consumer 1,568,177 1,351,825
Unearned income (513) (874)
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Total loans net of unearned income 5,860,925 5,487,959
Reserve for loan losses (86,744) (80,784)
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Net loans 5,774,181 5,407,175
---------------------------
Premises and equipment, net 138,188 140,224
Goodwill, net of accumulated amortization
of $29,391 in 2002 and 2001 239,454 212,851
Other intangible assets, net of accumulated amortization
of $7,456 in 2002 and $5,698 in 2001 17,517 6,819
Accrued interest receivable 42,527 40,558
Other assets 115,825 114,432
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Total assets $8,041,321 $7,518,462
===========================
1
------------------------------
September 30, December 31,
(in thousands) 2002 2001
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 919,460 $1,258,322
Interest-bearing:
Savings 343,255 356,182
Interest-bearing demand 1,846,087 1,410,280
Certificates under $100,000 898,554 900,059
Certificates $100,000 and over 2,089,676 1,665,942
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Total deposits 6,097,032 5,590,785
---------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 787,280 828,261
U.S. Treasury demand 91,671 94,871
Line of credit 27,200 33,500
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Total short-term borrowings 906,151 956,632
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Accrued interest payable 38,424 34,540
Other liabilities 99,939 93,475
Long-term debt 160,500 160,500
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Total liabilities 7,302,046 6,835,932
---------------------------
Minority interest 14 --
---------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346* 78,528 39,264
Capital surplus 48,073 78,190
Retained earnings 868,630 817,017
Accumulated other comprehensive income 13,636 10,078
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Total contributed capital and retained earnings 1,008,867 944,549
Less: Treasury stock, at cost, 12,959,991* and
13,127,912* shares, respectively (269,606) (262,019)
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Total stockholders' equity 739,261 682,530
---------------------------
Total liabilities and stockholders' equity $8,041,321 $7,518,462
===========================
*Revised to reflect the two-for-one stock split in the form of a 100% stock
dividend paid on June 17, 2002.
See Notes to Consolidated Financial Statements
2
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
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For the three months ended For the nine months ended
September 30, September 30,
------------------------------------------------------------
(in thousands; except per share data) 2002 2001 2002 2001
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NET INTEREST INCOME
Interest and fees on loans $ 84,470 $ 96,350 $249,590 $303,162
Interest and dividends on investment securities:
Taxable interest 13,828 16,562 40,882 53,766
Tax-exempt interest 242 255 735 1,608
Dividends 1,474 1,673 4,391 5,418
Interest on federal funds sold and securities
purchased under agreements to resell 116 356 336 841
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Total interest income 100,130 115,196 295,934 364,795
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Interest on deposits 22,851 35,510 67,256 123,323
Interest on short-term borrowings 3,782 11,039 14,144 40,099
Interest on long-term debt 2,653 2,771 7,942 8,290
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Total interest expense 29,286 49,320 89,342 171,712
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Net interest income 70,844 65,876 206,592 193,083
Provision for loan losses (5,100) (5,300) (16,457) (15,250)
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Net interest income after provision
for loan losses 65,744 60,576 190,135 177,833
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OTHER INCOME
Advisory fees 51,928 43,804 155,824 129,849
Service charges on deposit accounts 7,833 6,975 22,115 20,004
Loan fees and late charges 2,152 1,865 5,649 5,183
Card fees 2,615 2,572 7,763 7,519
Securities gains -- 2 -- 784
Other operating income 901 622 3,088 4,054
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Total other income 65,429 55,840 194,439 167,393
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Net interest and other income 131,173 116,416 384,574 345,226
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OTHER EXPENSE
Salaries and employment benefits 45,515 40,724 137,056 123,966
Net occupancy 5,361 4,092 14,776 12,177
Furniture and equipment 6,772 5,811 20,132 17,269
Stationery and supplies 1,399 1,534 4,189 4,220
Advertising and contributions 2,074 2,438 6,707 6,766
Servicing and consulting fees 3,255 1,981 8,778 6,447
Travel, entertainment and training 1,955 1,482 5,503 4,432
Originating and processing fees 1,742 1,911 5,300 5,242
3
Other operating expense 9,023 8,885 25,789 24,537
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Total other expense 77,096 68,858 228,230 205,056
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NET INCOME
Income before income taxes, minority
interest and cumulative effect of change
in accounting principle 54,077 47,558 156,344 140,170
Income tax expense 19,369 16,305 55,101 47,868
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Net income before minority interest and
cumulative effect of change in
accounting principle 34,708 31,253 101,243 92,302
Minority interest 182 -- 384 --
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Net income before cumulative effect of
change in accounting principle 34,526 31,253 100,859 92,302
Cumulative effect of change in accounting
principle (net of income taxes of $584) -- -- -- 1,130
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Net income $ 34,526 $ 31,253 $100,859 $ 93,432
=========================================================
Net income per share - basic:
Before cumulative effect of change in
accounting principle $ 0.53 $ 0.48* $ 1.54 $ 1.42*
Cumulative effect of change in
accounting principle -- -- -- 0.02*
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Net income per share - basic $ 0.53 $ 0.48* $ 1.54 $ 1.44*
=========================================================
Net income per share - diluted:
Before cumulative effect of change in
accounting principle $ 0.52 $ 0.48* $ 1.52 $ 1.40*
Cumulative effect of change in
accounting principle -- -- -- 0.02*
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Net income per share - diluted $ 0.52 $ 0.48* $ 1.52 $ 1.42*
=========================================================
Weighted average shares outstanding:
basic 65,631 65,268* 65,628 65,076*
diluted 66,174 66,076* 66,354 65,913*
*Revised to reflect the two-for-one stock split in the form of a 100% stock
dividend paid on June 17, 2002.
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------------
For the nine months ended
September 30,
(in thousands) 2002 2001
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OPERATING ACTIVITIES
Net income $ 100,859 $ 93,432
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 16,457 15,250
Provision for depreciation 16,350 13,494
Amortization of goodwill and other intangible assets 1,760 7,463
Minority interest in net income 14 --
Compensation expense - nonemployee stock options 89 --
Amortization of investment securities available for sale
discounts and premiums 12,978 7,890
Amortization of investment securities held to maturity
discounts and premiums 5 5
Deferred income taxes (1,199) 2,506
Originations of residential mortgages available for sale (90,903) (65,686)
Gross proceeds from sales of loans 92,367 66,326
Gains on sales of loans (1,464) (640)
Securities gains -- (784)
Increase in other assets (9,312) (22,427)
Increase/(decrease) in other liabilities 9,504 (4,186)
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Net cash provided by operating activities 147,505 112,643
--------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 685 38,191
Proceeds from maturities of investment securities available for sale 581,669 329,399
Proceeds from maturities of investment securities held to maturity 1,124 3,877
Purchases of investment securities available for sale (664,578) (158,725)
Purchases of investment securities held to maturity (100) --
Investments in affiliates (16,874) (36,279)
Cash paid for purchase of subsidiary (6,356) --
Purchases of loans (3,314) (10,093)
Net increase in loans (380,149) (73,841)
Net increase in premises and equipment (14,314) (23,620)
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Net cash (used for)/provided by investing activities (502,207) 68,909
--------------------------
FINANCING ACTIVITIES
Net increase/(decrease) in demand, savings and interest-bearing
demand deposits 84,018 (23,307)
Net increase in certificates of deposit 422,229 202,569
Net decrease in federal funds purchased and securities sold
under agreements to repurchase (40,981) (243,744)
Net (decrease)/increase in U.S. Treasury demand (3,200) 50,153
Net (decrease)/increase in line of credit (6,300) 6,500
Cash dividends (49,246) (45,847)
Proceeds from common stock issued under employment benefit
5
plans, net of income taxes 9,268 11,825
Payments for common stock acquired through buybacks (17,740) (2,223)
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Net cash provided by/(used for) financing activities 398,048 (44,074)
--------------------------
Effect of foreign currency translation on cash 38 --
--------------------------
Increase in cash and cash equivalents 43,384 137,478
Cash and cash equivalents at beginning of period 315,103 273,994
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Cash and cash equivalents at end of period $ 358,487 $ 411,472
==========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 85,458 $ 170,649
Taxes 54,104 49,135
Loans transferred during the period:
To other real estate owned $ 373 $ 929
From other real estate owned 437 939
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"), Rodney Square
Management Corporation and Wilmington Trust (UK) Limited, conform to accounting
principles generally accepted in the United States of America ("GAAP") 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 Statement
of Financial Accounting Standards ("SFAS") No. 130:
-------------------------
For the nine months ended
September 30,
-------------------------
(in thousands) 2002 2001
-------------------------------------------------------------------------------------------------------------
Net income $100,859 $ 93,432
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities 3,601 20,890
Reclassification adjustment for securities gains included in net income -- (502)
Net unrealized holding gains arising during the period on derivatives
used for cash flow hedge -- 870
Reclassification adjustment for derivitive gains included in net income (152) (59)
Foreign currency translation adjustments 109 --
-----------------------
Total comprehensive income $104,417 $114,631
=======================
7
Note 3 - Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings
per share:
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For the three months ended For the nine months ended
September 30, September 30,
-----------------------------------------------------------
(in thousands; except per share data) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------
Numerator:
Net income before cumulative effect of
change in accounting principle $34,526 $31,253 $100,859 $92,302
Cumulative effect of change in accounting
principle (net of income taxes of $584) -- -- -- 1,130
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Net income $34,526 $31,253 $100,859 $93,432
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Denominator:
Denominator for basic earnings per
share - weighted-average shares 65,631 65,268 65,628 65,076
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Effect of dilutive securities:
Employee stock options 543 808 726 837
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Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 66,174 66,076 66,354 65,913
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Basic earnings per share
Before cumulative effect of change in
accounting principle $ 0.53 $ 0.48* $ 1.54 $ 1.42*
Cumulative effect of change in
accounting principle -- -- -- 0.02*
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Basic earnings per share $ 0.53 $ 0.48* $ 1.54 $ 1.44*
====================================================================================================================
Diluted earnings per share
Before cumulative effect of change in $ 0.52 $ 0.48* $ 1.52 $ 1.40*
accounting principle
Cumulative effect of change in
accounting principle -- -- -- 0.02*
--------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.52 $ 0.48* $ 1.52 $ 1.42*
====================================================================================================================
Cash dividends per share $ 0.255 $ 0.24* $ 0.75 $ 0.705*
*Revised to reflect the two-for-one stock split in the form of a 100% stock
dividend paid on June 17, 2002.
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 client services to individuals and
corporations in the United States and more than 50 other countries and the
results of Balentine & Company. 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
client services 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 September 30, 2002 vs September 30, 2001 is as
follows:
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Banking Fee-Based
Quarter ended September 30, 2002 (in thousands) Business Business Totals
---------------------------------------------------------------------------------------------------------
Net interest income $ 68,119 $ 2,725 $ 70,844
Provision for loan losses (4,963) (137) (5,100)
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Net interest income after provision 63,156 2,588 65,744
Total advisory fees:
Private client advisory services 2,554 27,875 30,429
Corporate client services 750 17,179 17,929
Affiliate managers -- 4,214 4,214
Amortization of other intangibles -- (644) (644)
Other operating income 13,246 255 13,501
Securities gains -- -- --
---------------------------------------------------------------------------------------------------------
Net interest and other income 79,706 51,467 131,173
Other expense (39,121) (37,975) (77,096)
---------------------------------------------------------------------------------------------------------
Segment profit from operations 40,585 13,492 54,077
Segment gain from infrequent events -- -- --
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Segment profit before income taxes $ 40,585 $ 13,492 $ 54,077
=========================================================================================================
9
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 3,308 3,108 6,416
Investment in equity method investees -- 242,184 242,184
Segment average assets 6,300,703 1,452,597 7,753,300
Quarter ended September 30, 2001 (in thousands)
---------------------------------------------------------------------------------------------------------
Net interest income $ 57,546 $ 8,330 $ 65,876
Provision for loan losses (5,054) (246) (5,300)
---------------------------------------------------------------------------------------------------------
Net interest income after provision 52,492 8,084 60,576
Total advisory fees:
Private client advisory services 1,429 24,155 25,584
Corporate client services 822 13,980 14,802
Affiliate managers -- 5,550 5,550
Amortization of other intangibles and goodwill -- (2,132) (2,132)
Other operating income 12,170 (136) 12,034
Securities gains 2 -- 2
---------------------------------------------------------------------------------------------------------
Net interest and other income 66,915 49,501 116,416
Other expense (37,285) (31,573) (68,858)
---------------------------------------------------------------------------------------------------------
Segment profit from operations 29,630 17,928 47,558
Segment gain from infrequent events -- -- --
---------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 29,630 $ 17,928 $ 47,558
=========================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 3,088 1,832 4,920
Investment in equity method investees -- 215,744 215,744
Segment average assets 5,828,424 1,384,702 7,213,126
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Banking Fee-Based
Year-to-Date September 30, 2002 (in thousands) Business Business Totals
---------------------------------------------------------------------------------------------------------
Net interest income $ 185,509 $ 21,083 $ 206,592
Provision for loan losses (16,075) (382) (16,457)
---------------------------------------------------------------------------------------------------------
Net interest income after provision 169,434 20,701 190,135
Total advisory fees:
Private client advisory services 6,097 85,716 91,813
Corporate client services 2,321 46,079 48,400
Affiliate managers -- 16,496 16,496
Amortization of other intangibles -- (885) (885)
Other operating income 36,895 1,720 38,615
Securities gains -- -- --
---------------------------------------------------------------------------------------------------------
10
Net interest and other income 214,747 169,827 384,574
Other expense (115,163) (113,067) (228,230)
---------------------------------------------------------------------------------------------------------
Segment profit from operations 99,584 56,760 156,344
Segment gain from infrequent events -- -- --
---------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 99,584 $ 56,760 $ 156,344
=========================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 10,168 8,518 18,686
Investment in equity method investees -- 242,184 242,184
Segment average assets 6,135,270 1,414,459 7,549,729
Year-to-Date September 30, 2001 (in thousands)
---------------------------------------------------------------------------------------------------------
Net interest income $ 169,205 $ 23,878 $ 193,083
Provision for loan losses (14,901) (349) (15,250)
---------------------------------------------------------------------------------------------------------
Net interest income after provision 154,304 23,529 177,833
Total advisory fees:
Private client advisory services 4,701 73,437 78,138
Corporate client services 1,773 39,664 41,437
Affiliate managers -- 16,469 16,469
Amortization of other intangibles and goodwill -- (6,195) (6,195)
Other operating income 34,697 2,063 36,760
Securities gains 784 -- 784
---------------------------------------------------------------------------------------------------------
Net interest and other income 196,259 148,967 345,226
Other expense (109,668) (95,388) (205,056)
---------------------------------------------------------------------------------------------------------
Segment profit from operations 86,591 53,579 140,170
Segment gain from infrequent events 1,714 -- 1,714
---------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 88,305 $ 53,579 $ 141,884
=========================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 9,098 5,302 14,400
Investment in equity method investees -- 215,744 215,744
Segment average assets 5,816,388 1,381,843 7,198,231
Note 5 - Accounting Pronouncements
Asset Retirement Obligations
----------------------------
In June 2001, the Financial Accounting Standards Board ("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
11
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 SFAS 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 this Statement to have an impact on its consolidated 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, SFAS No. 144 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.
SFAS No. 144 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 SFAS No. 144 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 consolidated earnings,
financial condition or equity.
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections
----------------------------------------------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," along with
rescinding SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers,"
and amending SFAS No. 13, "Accounting for Leases." SFAS No. 145 (1) eliminates
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions, (2)
eliminates the extraordinary item treatment of reporting gains and losses from
extinguishments of debt and (3) makes certain other technical corrections.
The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 apply in
fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145
related to SFAS No. 13 are effective for transactions occurring after May 15,
2002. All other provisions of SFAS No. 145 are effective for financial
statements issued on or after May 15, 2002. Early application of this Statement
is encouraged. The adoption of this Statement did not have an impact on the
Corporation's consolidated earnings, financial condition or equity.
Costs Associated with Exit or Disposal Activities
-------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and
12
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)."
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The Corporation does not expect the adoption of this Statement to have an impact
on its consolidated earnings, financial condition or equity.
Acquisitions of Certain Financial Institutions, which amends SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, SFAS
No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, and FASB
Interpretation No.9
--------------------------------------------------------------------------------
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions," which amends SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," SFAS No.144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," and FASB Interpretation No. 9.
Except for transactions between two or more mutual institutions, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those transactions be accounted
for in accordance with SFAS No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets." Accordingly, the requirement in
paragraph 5 of SFAS No. 72 to recognize any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions of businesses within the scope of this Statement. In addition, this
Statement amends SFAS No. 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test, impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used.
With some exceptions, the requirements of SFAS No. 147 are effective October 1,
2002. The Corporation does not expect the adoption of this Statement to have an
impact on its consolidated earnings, financial condition or equity.
Note 6 - Derivative and Hedging Activities
The Corporation previously has 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.
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 third quarter of 2002,
approximately $77,000 of gains in "Accumulated Other Comprehensive Income" were
reclassified to earnings. During the 12 months ending September 30, 2003,
approximately $308,000 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.
13
Note 7 - Goodwill and Other Intangible Assets
A summary of goodwill and other intangible assets at September 30, 2002 is as
follows:
-------------------------------------------------------
As of September 30, 2002
-------------------------------------------------------
Gross carrying Accumulated Net carrying
(in thousands) amount amortization amount
------------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $ 268,845 $ 29,391 $ 239,454
====================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 5,366 $ 3,011 $ 2,355
Customer lists 14,780 2,660 12,120
Acquisition costs 1,635 1,382 253
Other intangibles 478 403 75
Nonamortizing
Other intangible assets 2,714 -- 2,714
----------------------------------------------------
Total other intangibles $ 24,973 $ 7,456 $ 17,517
====================================================
Amortization expense of other intangible assets for the nine months ended
September 30, 2002 is as follows:
------------------
For the nine
months ended
(in thousands) September 30, 2002
------------------------------------------------------------------------------------------------------------
Amortization expense $ 1,760
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 $ 2,126
For the year ended December 31, 2004 1,804
For the year ended December 31, 2005 1,740
For the year ended December 31, 2006 1,288
For the year ended December 31, 2007 1,044
14
The changes in the carrying amount of goodwill for the nine months ended
September 30, 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 -- 27,754 27,754
Impairment loss -- (1,151) (1,151)
-------------------------------------------------
Balance as of September 30, 2002 $ 3,752 $ 235,702 $ 239,454
=================================================
The goodwill acquired above includes $4.4 million recorded in connection with
the acquisition of Balentine Holdings, Inc., $2.4 million recorded in connection
with the Corporation's investment in Camden Partners Holdings, LLC and $6.4
million recorded in connection with the acquisition of SPV Management Limited.
During the first nine months of 2002, a goodwill impairment loss of $1,151,165
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."
Other intangible assets acquired in the first nine months of 2002 are as
follows:
-------------------------------------------------
Weighted average
Amount Residual Amortization
(in thousands) Assigned Value period in years
------------------------------------------------------------------------------------------------------------
Mortgage servicing rights $ 827 -- 8
Customer lists 9,984 -- 18
Other intangibles 1,650 -- --
----------------------------
Total $ 12,461 --
============================
15
The following table sets forth the computation of basic and diluted earnings per
share adjusted for the adoption of SFAS No. 142:
------------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
Reported net income $ 34,526 $ 31,253 $ 100,859 $ 93,432
Add back: goodwill amortization -- 2,225 -- 6,475
Tax effect -- (763) -- (2,211)
--------------------------------------------------------
Adjusted net income $ 34,526 $ 32,715 $ 100,859 $ 97,696
========================================================
Basic earnings per share
Reported net income $ 0.53 $ 0.48 $ 1.54 $ 1.44
Goodwill amortization -- 0.02 -- 0.07
--------------------------------------------------------
Adjusted basic earnings per share $ 0.53 $ 0.50 $ 1.54 $ 1.51
========================================================
Diluted earnings per share
Reported net income $ 0.52 $ 0.48 $ 1.52 $ 1.42
Goodwill amortization -- 0.02 -- 0.06
--------------------------------------------------------
Adjusted diluted earnings per share $ 0.52 $ 0.50 $ 1.52 $ 1.48
========================================================
16
Wilmington Trust Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
Net income for the third quarter of 2002 was $34.5 million, or $0.52
per share on a diluted basis, and for the first nine months of 2002 was $100.9
million, or $1.52 per share on a diluted basis. This was an 11% increase over
the $31.3 million, or $0.48 per share, and an 8% increase over the $93.4
million, or $1.42 per share, reported for the third quarter and first nine
months of 2001, respectively. The 2001 results included a $1.1 million
after-tax adjustment, or $0.02 per share, for the cumulative effect of a change
in accounting principle related to the adoption of SFAS No. 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities."
These results reflect the Corporation's continued growth in each of its core
businesses in a quarter during which economic uncertainty escalated and equity
markets reached their lowest levels in more than five years.
Combined assets under management at quarter-end were $29.1 billion, with
approximately two-thirds of those assets managed by the Corporation and the
remainder managed by its affiliate asset managers.
Improvement was realized in the major components of the Corporation's revenue as
net interest income for the third quarter improved $5.0 million, or 8%, to $70.8
million, while noninterest revenues rose $9.6 million, or 17%, to $65.4 million.
For the first three quarters of 2002, net interest income was up $13.5 million,
or 7%, while noninterest revenues were up $27.0 million, or 16%.
The quarterly provision for loan losses was $5.1 million, down 4% from the $5.3
million reported for the third quarter of 2001. The provision for the first
three quarters of 2002 was $16.5 million, 8% above the $15.3 million provision
for the corresponding period last year.
Operating expenses for the third quarter of 2002 increased $8.2 million, or 12%,
over those for the third quarter of 2001, to $77.1 million, and included the
consolidation of the results of Balentine Holdings and SPV Management with the
Corporation.
These results produced an annualized return on average stockholders' equity of
18.93% and a return on average assets of 1.79%. These ratios compare with 19.87%
and 1.74%, respectively, for the first nine months of 2001.
STATEMENT OF CONDITION
Total banking assets at September 30, 2002 were $8.04 billion, up $522.9
million, or 7%, from year-end 2001 due to higher balances in loans and
short-term investments. Loan balances increased $373.0 million, or 7%, while
investments increased $73.8 million, or 6%.
The investment portfolio at September 30, 2002 was $1.36 billion, up $73.8
million, or 6%, from its year-end 2001 level of $1.28 billion, as the portfolio
size was increased to offset the effects of anticipated maturities and calls.
The loan portfolio during the first nine months of 2002 increased $373.0
million, or 7%, to $5.86 billion, as the relative health of the Delaware Valley
economy has produced higher-than-expected growth in the Corporation's regional
banking business. Commercial, financial and agricultural loans increased $271.2
million, or 15%, reaching $2.13 billion. Approximately 97% of this growth
originated in the Delaware Valley markets. Consumer loans increased $216.4
million, or 16%, to $1.57 billion due to increased demand for collateralized
lending, automobile
17
financings and home equity loans. Approximately 74% of this growth originated in
the Delaware Valley markets. Real estate construction loans increased $49.9
million, or 12%, to $450.4 million as low interest rates continue to spark
housing demand. Virtually all of this increase originated in the Delaware Valley
markets. Residential mortgage loans have declined $124.4 million during the
first nine months due to paydowns, refinancings and sales of residential
mortgage loans into the secondary markets. During the first nine months of 2002,
$90.9 million in residential mortgage loans have been originated and sold into
the secondary markets. Commercial mortgage loans over the same nine-month period
have declined $40.4 million, or 4%, due to paydowns and refinancings.
The reserve for loan losses at September 30, 2002 was $86.7 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 and $86.6 million, or 1.51% of
period-end loans outstanding, at June 30, 2002. The third quarter loan loss
provision was $5.1 million, bringing the year-to-date provision to $16.5
million.
The adoption of SFAS 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 September 30, 2002, goodwill was $239.5 million, an
increase of $26.6 million, or 12%, over the reclassified $212.9 million reported
at December 31, 2001. This increase was associated with the Corporation's
investments in Camden Partners Holdings, LLC, a Baltimore-based private equity
firm, Balentine Holdings, Inc., an Atlanta-based investment counseling firm, and
SPV Management Limited, a London-based specialty financial services firm. Other
intangibles, previously reported as a component of other assets, were $17.5
million at September 30, 2002, an increase of $10.7 million, or 157%, over the
$6.8 million at December 31, 2001. This increase over the year-end amount was
attributable to costs associated with the aforementioned investments. Other
intangibles include items such as acquired customer lists, acquisition costs,
mortgage servicing rights and other items, which will continue to be amortized
under the new accounting pronouncement.
Accrued interest receivable at September 30, 2002 was $42.5 million, $2.0
million, or 5%, above the $40.6 million reported at year-end 2001. This increase
was primarily due to interest income recorded but not yet received on investment
securities and commercial loans.
Total deposits at September 30, 2002 were $6.1 billion, $506.2 million, or 9%,
over the 2001 year-end level. Core deposits, excluding certificates $100,000
and over, rose $82.5 million, or 2%, to $4.0 billion. A decline in
noninterest-bearing demand and savings account balances of $338.9 million, or
27%, to $919.5 million was more than offset by an increase in interest-bearing
demand and savings account balances of $422.9 million, or 24%, to $2.19
billion. Certificates of deposit $100,000 and over increased $423.7 million, or
25%, to $2.09 billion.
Short-term borrowings at September 30, 2002 were $906.2 million, a decrease of
$50.5 million, or 5%, from $956.6 million at December 31, 2001. Federal funds
purchased and securities sold under agreements to repurchase at quarter-end were
$787.3 million, a $41.0 million, or 5%, decrease from the $828.3 million at
year-end 2001. U.S. Treasury demand balances declined $3.2 million, or 3%, from
the year-end level of $94.9 million.
Stockholders' equity at September 30, 2002 was $739.3 million, a $56.7 million,
or 8%, increase over the $682.5 million at year-end 2001. Earnings of $100.9
million, coupled with $19.3 million of stock issued and a $3.6 million, net of
tax, improvement in the market value of securities held for sale were partially
offset by cash dividends of $49.2 million and treasury stock acquisitions of
$17.7 million.
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. Changes 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.
18
The Corporation's net interest income for the third quarter of 2002, on an FTE
basis, was $72.1 million, an increase of $4.6 million, or 7%, over that for the
third quarter of 2001. For the first nine months of 2002, net interest income
was $210.4 million, an increase of $12.1 million, or 6%, above that for the
corresponding period of last year. The Corporation's net interest margin for the
third quarter and first nine months of 2002 was 4.02% and 4.05%, respectively.
This was a decrease of 5 basis points from the third quarter of 2001 and an
increase of 6 basis points over the 3.99% reported for the first nine months of
2001. 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. For the first nine months of 2002, the
discount rate averaged 1.25%, 274 basis points below the 3.99% averaged for the
first nine months of 2001. These rate reductions have caused both interest
revenue and interest expense to decline.
Interest revenue (FTE) for the first nine months of 2002 totaled $299.8 million,
a decrease of $70.2 million, or 19%, below the $370.0 million reported for the
first nine months of 2001. Interest revenue declined $90.2 million, as the
average rate earned on the Corporation's assets fell 168 basis points to 5.76%,
while interest revenues increased $19.9 million due to a $321.6 million increase
in the average level of earning assets to $6.91 billion. The Corporation's
average prime lending rate (the rate at which banks lend to their most
creditworthy customers) was 4.75%, 278 basis points below the 7.53% for the
first nine months of 2001.
Interest expense for the first nine months of 2002 was $89.3 million, a decrease
of $82.4 million, or 48%, from the $171.7 million reported for the first nine
months of 2001. Interest expense declined $86.5 million as the average rate the
Corporation paid on its interest-bearing liabilities fell 174 basis points to
1.71%. This reduction in interest expense was offset in part by a $391.8 million
increase in the average level of interest-bearing liabilities that increased
interest expense by $4.1 million. The aforementioned reductions in the discount
rate by the Federal Reserve Board were responsible for this decrease. The
following tables present comparative net interest income data and a rate-volume
analysis of the changes in net interest income for the third quarters and the
first nine months of 2002 and 2001.
19
QUARTERLY ANALYSIS OF EARNINGS
2002 Third Quarter 2001 Third Quarter
------------------------------------ -----------------------------------------
(in thousands; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
---------------------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 16,413 $ 116 2.77% $ 44,245 $ 356 3.15%
U.S. Treasury and government
agencies 764,306 8,543 4.59 746,711 10,579 5.76
State and municipal 17,235 371 8.97 17,988 390 9.01
Preferred stock 85,367 1,809 8.13 83,743 1,848 8.38
Asset-backed securities 275,209 3,785 5.67 277,895 4,154 6.09
Other 188,941 1,711 3.55 156,167 2,216 5.65
---------------------------------------------------------------- -------------------------
Total investment
securities 1,331,058 16,219 4.95 1,282,504 19,187 6.05
-----------------------------------------------------------------------------------
Commercial, financial and
agricultural 2,055,661 27,301 5.20 1,632,598 29,080 6.98
Real estate-construction 448,729 5,998 5.23 429,469 7,618 6.94
Mortgage-commercial 986,085 15,980 6.34 1,012,506 20,007 7.74
Mortgage-residential 759,010 12,947 6.82 903,088 15,978 7.08
Consumer 1,510,788 22,802 5.97 1,281,705 24,523 7.57
---------------------------------------------------------------- -------------------------
Total loans 5,760,273 85,028 5.81 5,259,366 97,206 7.28
-----------------------------------------------------------------------------------
Total earning assets $7,107,744 101,363 5.65 $6,586,115 116,749 7.02
===================================================================================
Funds supporting earning assets
Savings $ 355,825 224 0.25 $ 345,377 572 0.66
Interest-bearing demand 1,767,638 2,673 0.60 1,264,220 4,089 1.28
Certificates under $100,00 891,804 7,776 3.46 919,673 11,399 4.92
Certificates $100,000 and over 2,205,749 12,178 2.16 1,729,298 19,450 4.40
---------------------------------------------------------------- -------------------------
Total interest-bearing
deposits 5,221,016 22,851 1.72 4,258,568 35,510 3.28
-----------------------------------------------------------------------------------
Federal funds purchased an
securities sold under
agreements to repurchase 705,326 3,677 2.04 995,727 10,666 4.19
U.S. Treasury demand 27,296 105 1.51 46,609 373 3.13
---------------------------------------------------------------- -------------------------
Total short-term
borrowings 732,622 3,782 2.02 1,042,336 11,039 4.14
-----------------------------------------------------------------------------------
Long-term debt 160,500 2,653 6.61 168,000 2,771 6.60
---------------------------------------------------------------- -------------------------
Total interest-bearing
liabilities 6,114,138 29,286 1.89 5,468,904 49,320 3.55
-----------------------------------------------------------------------------------
Other noninterest funds 993,606 -- -- 1,117,211 -- --
---------------------------------------------------------------- -------------------------
Total funds used to
support earning
assets $7,107,744 29,286 1.63 $6,586,115 49,320 2.95
===================================================================================
20
Net interest income/yield 72,077 4.02 67,429 4.07
Tax-equivalent adjustment (1,233) (1,553)
------- ---------
Net interest income $ 70,844 $ 65,876
======= =========
Average rates are calculated using average balances based on historical cost and
do not reflect the market valuation adjustment required by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
January 1, 1994.
21
YEAR-TO-DATE ANALYSIS OF EARNINGS
Year-to-Date 2002 Year-to-Date 2001
----------------------------------- -----------------------------------------
(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 $ 16,291 $ 336 2.72% $ 27,345 $ 841 4.06%
U.S. Treasury and government
agencies 752,869 25,977 4.70 800,958 34,833 5.86
State and municipal 17,395 1,127 8.96 18,459 2,468 11.10
Preferred stock 82,078 5,332 8.27 88,082 5,813 8.25
Asset-backed securities 256,374 11,015 5.89 285,722 12,972 6.11
Other 167,301 4,554 3.55 156,187 7,333 6.22
---------------------------------------------------------------- -------------------------
Total investment
securities 1,276,017 48,005 5.08 1,349,408 63,419 6.19
---------------------------------------------------------------------------------
Commercial, financial and
agricultural 1,937,001 76,998 5.24 1,622,025 92,860 7.56
Real estate-construction 440,884 17,272 5.16 410,639 24,258 7.82
Mortgage-commercial 1,004,613 48,917 6.42 1,002,516 62,107 8.17
Mortgage-residential 800,069 41,673 6.93 913,772 48,973 7.15
Consumer 1,439,018 66,583 6.17 1,266,591 77,551 8.16
---------------------------------------------------------------- -------------------------
Total loans 5,621,585 251,443 5.93 5,215,543 305,749 7.77
---------------------------------------------------------------------------------
Total earning assets $6,913,893 299,784 5.76 $6,592,296 370,009 7.44
=================================================================================
Funds supporting earning assets
Savings $ 356,444 669 0.25 $ 348,967 2,431 0.93
Interest-bearing demand 1,709,104 7,768 0.61 1,283,679 15,491 1.61
Certificates under $100,000 891,057 23,843 3.58 916,298 34,653 5.06
Certificates $100,000 and over 1,968,805 34,976 2.34 1,760,880 70,748 5.30
---------------------------------------------------------------- -------------------------
Total interest-bearing
deposits 4,925,410 67,256 1.81 4,309,824 123,323 3.80
---------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 805,261 13,771 2.26 1,014,367 38,833 5.05
U.S. Treasury demand 33,256 373 1.48 40,484 1,266 4.12
---------------------------------------------------------------- -------------------------
Total short-term
borrowings 838,517 14,144 2.22 1,054,851 40,099 5.01
---------------------------------------------------------------------------------
Long-term debt 160,500 7,942 6.60 168,000 8,290 6.58
---------------------------------------------------------------- -------------------------
Total interest-bearing
liabilities 5,924,427 89,342 2.00 5,532,675 171,712 4.11
---------------------------------------------------------------------------------
Other noninterest funds 989,466 -- -- 1,059,621 -- --
---------------------------------------------------------------- -------------------------
Total funds used to
support earning
assets $6,913,893 89,342 1.71 $6,592,296 171,712 3.45
==================================================================================
22
Net interest income/yield 210,442 4.05 198,297 3.99
Tax-equivalent adjustment (3,850) (5,214)
------- -------
Net interest income $206,592 $193,083
======= =======
Average rates are calculated using average balances based on historical cost and
do not reflect the market valuation adjustment required by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
January 1, 1994.
23
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
----------------------------------------- ----------------------------------------
For the three months ended September 30, For the nine months ended September 30,
----------------------------------------- ----------------------------------------
2002/2001 2002/2001
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 $ (224) $ (16) $ (240) $ (342) $ (163) $ (505)
------------------------------------------------------------------------------------
U.S. Treasury and
government agencies 146 (2,182) (2,036) (2,442) (6,414) (8,856)
State and municipal* (17) (2) (19) (98) (1,243) (1,341)
Preferred stock* 17 (56) (39) (504) 23 (481)
Asset-backed securities (88) (281) (369) (1,546) (411) (1,957)
Other* 508 (1,013) (505) 641 (3,420) (2,779)
---------------------------------------------------------------------------------------------------------------------------------
Total investment
securities 566 (3,534) (2,968) (3,949) (11,465) (15,414)
------------------------------------------------------------------------------------
Commercial, financial and
agricultural* 7,443 (9,222) (1,779) 17,875 (33,737) (15,862)
Real estate-construction 337 (1,957) (1,620) 1,775 (8,761) (6,986)
Mortgage-commercial* (515) (3,512) (4,027) 129 (13,319) (13,190)
Mortgage-residential (2,571) (460) (3,031) (6,103) (1,197) (7,300)
Consumer 4,371 (6,092) (1,721) 10,562 (21,530) (10,968)
---------------------------------------------------------------------------------------------------------------------------------
Total loans 9,065 (21,243) (12,178) 24,238 (78,544) (54,306)
---------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 9,407 $(24,793) $(15,386) $ 19,947 $(90,172) $(70,225)
====================================================================================
Interest expense:
Savings $ 17 $ (365) $ (348) $ 52 $ (1,814) $ (1,762)
Interest-bearing demand 1,624 (3,040) (1,416) 5,142 (12,865) (7,723)
Certificates under $100,000 (346) (3,277) (3,623) (959) (9,851) (10,810)
24
Certificates $100,000 and over 5,357 (12,629) (7,272) 8,387 (44,159) (35,772)
---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 6,652 (19,311) (12,659) 12,622 (68,689) (56,067)
------------------------------------------------------------------------------------
Federal funds purchased and
secruities sold under
agreements to repurchase (3,042) (3,947) (6,989) (7,920) (17,142) (25,062)
U.S. Treasury demand (154) (114) (268) (227) (666) (893)
---------------------------------------------------------------------------------------------------------------------------------
Total short-term
borrowings (3,196) (4,061) (7,257) (8,147) (17,808) (25,955)
------------------------------------------------------------------------------------
Long-term debt (125) 7 (118) (370) 22 (348)
---------------------------------------------------------------------------------------------------------------------------------
Total interest $ 3,331 $ (23,365) $(20,034) $ 4,105 $(86,475) $(82,370)
expense
====================================================================================
Changes in net interest income $ 4,648 $ 12,145
======= =======
* 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.
25
NONINTEREST REVENUES AND OPERATING EXPENSES
Advisory fees consists of those fees earned from the Corporation's private
client advisory services business, corporate client services and its affiliate
asset managers. Advisory fees for the third quarter of 2002 were $51.9 million,
an increase of $8.1 million, or 19%, over the $43.8 million reported for the
third quarter of last year. For the first nine months of 2002, advisory fees
were $155.8 million, an increase of $26.0 million, or 20%, over those for the
first nine months of 2001. Advances in private client advisory services and
corporate client services fees offset lower revenues from affiliate money
managers. Revenues from private client advisory services were impacted by equity
markets that reached their lowest levels in more than five years. Approximately
70% of private client advisory fees are tied to securities valuations, and fees
are calculated monthly, using market values on the last day of the previous
month. Based on those averages for the third quarters of 2002 and 2001, the Dow
Jones Industrial Average declined 14%, the S&P 500 fell 21% and the Nasdaq
Composite Index dropped 31%. For the first nine months of 2002, those indices
were down 8%, 15% and 23%, respectively, from the corresponding indices for the
first nine months of 2001. The percentage of operating revenues derived from
these fee-based businesses continued to increase, accounting for 48.3% of
operating revenues for the third quarter of 2002 compared with 46.8% for the
third quarter of 2001.
---------------------------------------------------------------------------------------------------------
% of % of
Operating Operating
(in thousands) Nine Months 2002 Revenues Nine Months 2001 Revenues
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Net interest income $206,592 51% $193,083 53%
---------------------------------------------------------------------------------------------------------
Fee income:
---------------------------------------------------------------------------------------------------------
Advisory fees 156,709 39% 136,044 37%
---------------------------------------------------------------------------------------------------------
Service charges 22,115 6% 20,004 5%
---------------------------------------------------------------------------------------------------------
Other operating income 16,500 4% 16,756 5%
---------------------------------------------------------------------------------------------------------
Total fee income 195,324 49% 172,804 47%
---------------------------------------------------------------------------------------------------------
Total operating revenues $401,916 100% $365,887 100%
---------------------------------------------------------------------------------------------------------
Affiliate manager other
intangibles and goodwill
amortization (885) (6,195)
---------------------------------------------------------------------------------------------------------
Securities gains / (losses) 0 784
---------------------------------------------------------------------------------------------------------
Net interest and other income
before loan loss provision $401,031 $360,476
---------------------------------------------------------------------------------------------------------
Private client advisory services fees for the third quarter were $30.4 million,
an increase of $4.8 million, or 19%, over the $25.6 million for the third
quarter of last year, due to new business development efforts and the
acquisition of Balentine. For the first nine months of 2002, private client
advisory services fees were $91.8 million, an increase of $13.7 million, or
18%, over the $78.1 million reported for the first nine months of last year.
The consolidation of Balentine has added $9.6 million to 2002 revenues. New
business development sales for the nine months totaled $12.7 million, 30%
higher than for the corresponding period of last year. Joint sales activity
with Balentine accounted for much of this increase, as more clients selected
the asset allocation and style diversification that derive from Balentine's
open architecture investment process.
Corporate client services fees for the third quarter of 2002 were $17.9
million, an increase of $3.1 million, or 21%, over the $14.8 million reported
for the third quarter of last year. For the first nine months of 2002, these
fees were $48.4 million, $7.0 million, or 17%, higher than the $41.4 million
reported for the first nine months of last year. The majority of this increase
came from capital markets trust activities, including those performed by SPV
Management, that support trust-preferred securities, asset-backed securities
and project finance transactions. Income from London-based SPV Management,
which was included for the first time in the second quarter of this year,
accounted for $2.4 million of the year-to-date increase. Fees earned from
bankruptcy trustee and agency work also contributed to this increase. The
Corporation is currently the indenture trustee or agent for 25 corporate
issuers who
26
are in bankruptcy proceedings. Thirteen of these assignments have been made
since the start of this year. The majority of corporate client services revenue
is generated on a fee-for-service basis. The remainder, approximately 25%, is
tied to asset valuations.
Fees from our affiliate asset managers were $4.2 million, a $1.3 million, or
24%, decline from the $5.6 million reported for the third quarter of 2001, and
a $198,000, or 4%, decline from the $4.4 million reported for the second
quarter of this year. These fees for the first nine months of 2002 were $16.5
million, unchanged from a year ago. Several factors contributed to the decrease
in the third quarter. Fees from value-style manager Cramer Rosenthal McGlynn
increased 12% over those for the third quarter last year and were up $1.7
million, or 37%, for the first nine months of 2002. This positive contribution
was more than offset by a decline in fees from growth-style manager Roxbury
Capital Management, which was impacted by severe declines in growth-oriented
equity values. Fees from Roxbury for the third quarter of this year declined
$1.5 million, or 39%, and were down $1.7 million, or 15%, for the first nine
months of 2002. Market conditions continue to hamper the Corporation's ability
to grow its assets under management.
-------------------------------------------------------------------------------------------------------
Assets under management (in billions)
-------------------------------------------------------------------------------------------------------
September 30, June 30, September 30,
2002 2002 2001
-------------------------------------------------------------------------------------------------------
Wilmington Trust $21.6 $22.0 $24.4
-------------------------------------------------------------------------------------------------------
Roxbury Capital Management $ 3.8 $ 5.0 $ 7.5
-------------------------------------------------------------------------------------------------------
Cramer Rosenthal McGlynn $ 3.7 $ 4.7 $ 3.6
-------------------------------------------------------------------------------------------------------
Totals $29.1 $31.7 $35.5
-------------------------------------------------------------------------------------------------------
At September 30, 2002, the composition of Wilmington Trust's assets under
management was: equities, 54%; fixed income, 26%; cash and equivalent
instruments, 12%; mutual funds, 5%; and miscellaneous assets, 3%.
Third quarter and year-to-date 2002 net advisory fees reflect a reduction in
goodwill amortization expense from the corresponding periods of 2001 of $1.5
million and $5.3 million, respectively, in accordance with the provisions of
SFAS No. 142, which were adopted at the beginning of 2002.
Service charges on deposit accounts for the third quarter of 2002 were $7.8
million. This was an $858,000, or 12%, increase over the $7.0 million for the
third quarter of last year. These fees for the first nine months of 2002 were
$2.1 million, or 11%, above those for the first nine months of 2001.
Contributing to this increase were higher levels of fee income from business
checking due to a fee increase in May, returned items, overdrafts and ATM fees.
Operating expenses for the quarter were $77.1 million, an increase of $8.2
million, or 12%, over the $68.9 million reported for the third quarter of last
year. For the first nine months of 2002, operating expenses were $228.2
million, $23.2 million, or 11%, higher than the $205.1 million reported for the
first nine months of 2001. The 2002 year-to-date expenses include approximately
$10.5 million relating to the consolidation of Balentine and SPV Management.
Absent the consolidation of these two entities, year-to-date operating expenses
have risen $12.7 million, or 6%.
Personnel expenses for the quarter were $45.5 million, an increase of $4.8
million, or 12%, over the $40.7 million reported for the third quarter of 2001.
For the year-to-date, personnel expenses were $137.1 million, $13.1 million, or
11%, higher than those for the first nine months of 2001. Approximately $5.9
million, or 44%, of this increase was attributable to the newly-consolidated
entities. Absent that consolidation, year-to-date personnel expenses have risen
$7.2 million, or 6%.
Net occupancy expense for the third quarter was $5.4 million, 31% higher than
the $4.1 million for the third quarter of 2001. For the first nine months of
2002, net occupancy expense was $14.8 million, $2.6 million, or 21%, higher than
the $12.2 million reported for the corresponding period of last year.
Approximately $721,000, or 28%, of this increase was attributable to the
newly-consolidated entities. Also contributing to this year-over-year increase
were new private client offices locations opened in Atlanta, Georgia, Baltimore,
Maryland and Costa Mesa, California.
27
Furniture and equipment expense for the third quarter of 2002 was $6.8 million,
$961,000, or 17%, higher than that for the third quarter of a year ago. For the
first nine months of 2002, furniture and equipment expense was $20.1 million,
$2.9 million, or 17%, higher than for the first nine months of 2001. Higher
levels of depreciation expense and equipment maintenance costs were responsible
for this increase. Approximately $378,000, or 13%, of this increase was
attributable to the newly-consolidated entities. Also contributing to the
year-over-year increase were the new private client offices locations opened in
Atlanta, Baltimore and Costa Mesa.
Servicing and consulting expense for the third quarter of 2002 was $3.3 million,
$1.3 million, or 64%, higher than for the third quarter of last year. For the
first nine months of 2002, servicing and consulting expense was $8.8 million,
$2.3 million, or 36%, higher than for the first nine months of 2001.
Approximately $1.4 million, or 59%, of this increase was attributable to the
newly-consolidated entities.
Travel, entertainment and training expense for the third quarter of 2002 was
$2.0 million, 32% higher than for the third quarter of last year. At $5.5
million for the first nine months of 2002, these expenses were 24% higher than
for the corresponding period of last year and reflect the Corporation's
business development efforts to grow fee income in a down equity market
environment.
Other operating expense for the third quarter was $9.0 million and for the
first nine months of 2002 was $25.8 million. These amounts are 2% and 5%,
respectively, above the amounts for the corresponding periods of a year ago.
Virtually all of the $1.3 million increase for the first nine months of 2002
was attributable to the newly-consolidated entities.
The provision for income taxes for the third quarter of 2002 was $19.4 million,
a $3.1 million, or 19%, increase over the provision for the third quarter of
last year. Year-to-date, the provision for income taxes was $55.1 million, $7.2
million, or 15%, higher than that for the first nine months of 2001. U.S. and
U.K. corporate income tax expense was $50.6 million, an increase of $5.8
million, or 13%, over the $44.8 million reported for the first nine months of
2001. State income tax expense for the first nine months of 2002 was $4.5
million, an increase of $1.4 million, or 47%, above that for the first nine
months of 2001. The Corporation's effective tax rate for the first nine months
of 2002 was 35.3%, compared with 34.1% for the first nine months of 2001.
Contributing to this increase were declining levels of tax-exempt income and
increased profits in states with less favorable rate structures than Delaware.
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 third 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 the third quarter of 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 63% - 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 balance of these two lines totaled $3,000,000 at
September 30, 2002. The third credit facility is a $2 million amortizing term
loan, at LIBOR plus 2%, the balance of which was $166,667 at September 30,
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.
28
ASSET QUALITY AND LOAN LOSS PROVISION
The Corporation's provision for loan losses for the third quarter was $5.1
million. This was $200,000 lower than the amount provided for in the third
quarter of 2001. The reserve for loan losses at September 30, 2002 was $86.7
million, an increase of $6.0 million, or 7%, 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 $5.0 million, an increase of $1.7 million,
or 51%, over the $3.3 million reported for the third quarter of 2001. These
included $3.2 million charged off against a credit to a commercial client in
the educational services industry for which the Corporation established a
reserve in the second quarter. Loans past due 90 days or more, nonaccrual loans
and restructured loans at September 30, 2002 totaled $66.6 million. This
represented an increase of $14.7 million, or 28%, over the $51.9 million
reported at year-end 2001. Loans past due 90 days or more at quarter-end
totaled $22.3 million, $8.7 million, or 64%, over year-end 2001. Nonaccrual
loans at quarter-end were $44.4 million, $6.4 million, or 17%, above the $38.0
million of nonaccrual loans at year-end 2001. At September 30, 2002, no loans
were classified as restructured, compared with $375,000 of restructured loans
at year-end 2001. Other real estate owned at quarter-end was $334,000, down
$64,000, or 16%, from the $398,000 at year-end 2001. The overall level of
nonperforming loans at the end of the third quarter of 2002 increased $6.3
million, or 16%, to $44.7 million, from their year-end level of $38.4 million.
The following table presents risk elements in the Corporation's loan portfolio:
------------------------------------------------------------------------------------------------
September 30, December 31, September 30,
(in thousands) 2002 2001 2001
------------------------------------------------------------------------------------------------
Nonaccruing loans $44,388 $38,016 $35,932
------------------------------------------------------------------------------------------------
Past due 90 days or more 22,333 13,524 11,224
------------------------------------------------------------------------------------------------
Restructured loans 0 375 0
------------------------------------------------------------------------------------------------
Total $66,721 $51,915 $47,156
------------------------------------------------------------------------------------------------
Percent of loans at period-end 1.14% .94% .90%
------------------------------------------------------------------------------------------------
Other real estate owned $ 334 $ 398 $ 707
------------------------------------------------------------------------------------------------
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 September 30, 2002, loans past due 90 days
or more totaled $22.3 million, approximately 83% of which were in the
Corporation's commercial loan portfolio, 12% of which were in the residential
mortgage loan portfolio and 5% 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 September 30, 2002, management identified approximately $42.1
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, nonaccrual 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 portfolios.
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
29
size and complexity within the portfolio, trends in delinquent payment
performance, the direction of risk rating migration within the portfolio, the
level of serious doubt loans, the impact of litigation and trends in bankruptcy
filings. The unallocated and allocated portions of the reserve are reassessed
quarterly during the regular application of the reserve methodology. At
September 30, 2002, approximately $6.1 million, or 7%, 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 96%.
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 nine months 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
nine months of this year was 10.11%, a decrease from the 10.75% reported for the
first nine months of 2001. Earnings for the first nine months of 2002 of $100.9
million, net of $49.2 million in cash dividends, added $51.6 million to the
Corporation's capital. An additional $19.3 million was provided by the issuance
of shares under employment benefit plans and for the acquisition of Balentine.
The rise in the market value of the Corporation's available-for-sale investment
portfolio increased equity by $3.5 million, while the acquisition of treasury
stock reduced equity by $17.7 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 calculated its capital position
under the risk-based capital guidelines. At September 30, 2002, the
Corporation's total risk-based capital ratio was 10.57%, compared with 11.16%
reported at year-end 2001. The Corporation's Tier 1 risk-based capital ratio at
that date was 7.36%, compared with 7.78% reported at year-end 2001, and its
Tier 1 leverage capital ratio was 6.25%, 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 declared a two-for-one
stock split in the form of a 100% stock dividend, which was paid on June 17,
2002 to stockholders of record on June 3, 2002. In addition, the Board of
Directors increased the quarterly dividend to $0.255 per share on a post-split
basis. This marked the twenty-first consecutive year of increased cash
dividends.
In April 2002, the Corporation's Board of Directors also authorized a new
8,000,000-share (post-split) buyback program that commenced at the completion of
the previous program. At September 30, 2002, the acquisition of 8,000,000 shares
under the 1996 program was completed at a cost of $200.6 million. At
September 30, 2002, under the new program, 12,196 shares have been acquired at a
cost of $357,331.
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.
30
OTHER INFORMATION
Critical Accounting Policies and Estimates
Discussion and analysis of the Corporation's financial condition and results of
operations are based on its consolidated financial statements, which are
prepared in conformity with GAAP. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities at the date of the financial statements and
during the reporting period. Management evaluates estimates on an ongoing
basis, including those related to the allowance for loan losses, stock-based
employee compensation, consolidation of certain special purpose entities,
affiliate fee income, impairment of goodwill, recognition of corporate trust
fees, loan origination fees and mortgage servicing assets. Management bases its
estimates on historical experience and various other factors and assumptions
that are believed to be reasonable under the circumstances. Actual results may
differ from those estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in preparation of its consolidated
financial statements: allowance for loan losses, stock based employee
compensation, consolidation of certain special purpose entities and impairment
of goodwill.
Allowance for Loan Losses
The Corporation maintains an allowance for loan losses that is management's
best estimate of known and inherent estimated losses based on subjective
judgments regarding the collectibility of loans within the reported portfolios.
The allowance is reduced by actual credit losses and is increased by the
provision for loan losses and recoveries of previous losses. Personnel
independent of the various lending functions evaluate the reserve on a
quarterly basis. The level is determined by assigning specific reserves to
individually identified problem credits and a general reserve to all other
loans. In evaluating the reserve, specific consideration is given to current
micro- and macro-economic factors, historical net loss experience, current
delinquency trends and movement within the internally reported loan quality
classifications. The methodology employed to determine the necessary level of
the reserve has been applied on a basis consistent with prior periods.
A portion of the reserve is not specifically allocated to either the commercial
or the retail portfolio and represents probable or inherent losses caused by
certain business conditions not otherwise accounted for. Typically, business
conditions, including current economic and market conditions, portfolio
complexity, payment performance, loan portfolio risk rating migration, the
level of "serious doubt" loans, litigation and bankruptcy trends are the core
of the unallocated reserve position. The determination of the amount of the
reserve is inherently subjective, and it requires material estimates, including
estimates relating to the amounts and timing of future cash flows expected to
be received on impaired loans, that may be susceptible to significant change.
Because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that increases to the allowance will
not be necessary should the quality of any loans deteriorate as a result of the
factors discussed above.
Management believes that it uses the best information available to make
determinations about the adequacy of the allowance and that it has established
its existing allowance for loan losses in accordance with GAAP. If
circumstances differ substantially from the assumptions used in making these
determinations, future adjustments to the allowance may be necessary and the
results of the Corporation's operations could be affected.
Stock-based Employee Compensation
Since 1996, the Corporation has elected to account for its stock-based employee
compensation plans under the "intrinsic value" approach in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 25 rather than
the "fair value" approach prescribed in SFAS No. 123. The "intrinsic value"
approach limits the
31
compensation expense to the excess of the option's market price on the grant
date over the option's exercise price. Since the Corporation's stock-based
employee compensation plans have exercise prices equal to market values on the
grant date, no compensation expense is recognized in its financial statements.
The "fair value" approach, under SFAS No. 123, takes into account the time value
of the option and will generally result in compensation expense being recorded
currently. Each year since the inception of SFAS No. 123, the Corporation has
disclosed in the notes to the financial statements included in its Annual Report
to Shareholders (Note 14 - Employment Benefit Plans) what the earnings impact
would have been if the Corporation had elected the "fair value" approach under
SFAS No. 123. A change in GAAP limiting the Corporation's continued use of the
"intrinsic value" approach would have an impact on its future earnings.
Consolidation of Certain Special-Purpose Entities ("SPEs")
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
defines a "qualifying SPE" and precludes its consolidation in the financial
statements of a transferor or affiliate. On June 28, 2002, the FASB issued an
exposure draft of its proposed interpretation of "Consolidation of Certain
Special-Purpose Entities" in an interpretation of Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements." This proposed
interpretation would address the consolidation by business enterprises of
special purpose entities to which the normal conditions for consolidation do not
apply due to the enterprise's lack of a voting interest or a lack of control of
the SPE through ownership of a voting interest. Through its corporate client
services business, the Corporation acts as an agent and/or trustee in over
12,000 transactions involving SPEs. The Corporation acts in a fee for service
capacity in each of these transactions. The Corporation believes that, under
existing and proposed generally accepted accounting principles relating to
consolidations, its capacity in relation to these SPEs precludes it from
consolidating them into its financial statements. A change in GAAP relating to
the rules for consolidation that would require consolidation of certain SPEs due
to the Corporation's capacity as service provider or trustee could increase the
assets and liabilities reflected in the consolidated financial statements and
could consequently impact its regulatory capital adequacy.
Impairment of Goodwill
Through a series of acquisitions, the Corporation has accumulated $239 million
of goodwill. Through 2001, this goodwill was subject to periodic amortization
in accordance with the provisions of APB No. 17, "Intangible Assets." This
treatment provided for a gradual reduction in the book value of the assets over
their useful lives. Amortization could be changed if later events and
circumstances warranted a revised estimate of their useful lives. Additionally,
under APB 17, estimations of value and future benefits could indicate that the
unamortized cost should be reduced by a reduction to net income.
The adoption of SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets," in 2002 eliminated the requirement to
amortize goodwill and substituted impairment testing. The purpose of impairment
testing is to insure that an amount presented in the financial statements for
goodwill does not exceed its actual fair value. A methodology consistent with
that employed in the original valuing of the acquired entity or business is to
be utilized in testing for impairment on an annual basis. If this testing
indicates that the fair value of the asset is less than its book value, an
impairment expense must be recorded in the period in which the asset has been
determined to have a permanent reduction in value. There may be more volatility
in reported income than under the previous standard because impairment losses
are likely to occur irregularly and in varying amounts. A major portion of the
goodwill on the Corporation's books is related to its affiliate asset manager
acquisitions. A permanent deterioration in the value of the Corporation's
investment in either of these firms could result in an impairment expense being
recorded.
32
CAUTIONARY STATEMENT
Estimates, predictions, opinions or statements of belief in this report might
be construed to be forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Examples of such statements could
relate to identification of trends, statements about the adequacy of the
allowance for loan losses, credit quality, the impact of FASB pronouncements on
the Corporation and the effects of asset sensitivity, interest rate changes and
information concerning market risk described in Item 3 below. Forward-looking
statements are based on current expectations and assessments of potential
developments. Our ability to achieve the results reflected in those statements
could be affected by, among other things, changes in national or regional
economic conditions, changes in market interest rates and increasing
competition for deposits, loans and assets under management.
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 September 30, 2002, the declining rate scenario gradually moves 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 gradually increases 250 basis points. The
simulation model projects, as of September 30, 2002, that a gradual 250 basis
point increase in market interest rates would increase net interest income by
6.76% over a one-year period. This compares to an increase of 2.57% as measured
at December 31, 2001. If interest rates were to decrease gradually 175 basis
points, the simulation model projects, as of September 30, 2002, that net
interest income would decrease 8.08% over a one-year period. This compares to a
decrease of 5.18% the simulation projected would occur on a gradual
175-basis-point decline in market interest rates measured at December 31, 2001.
The Corporation's objective is to keep any interest rate change from reducing
net interest income by 10% or more within a one-year period, as projected by
the 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 Corporation'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.
33
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, the Chairman of the Board and
Chief Executive Officer of the Corporation and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Corporation's disclosure
controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based
on that evaluation, the Chairman of the Board and Chief Executive Officer and
the Chief Financial Officer concluded that the Corporation's disclosure controls
and procedures are effective in timely alerting them to material information
relating to the Corporation (including its consolidated subsidiaries) required
to be included in the periodic filings it makes with the Securities and Exchange
Commission. There have been no significant changes in the Corporation's internal
controls or in other factors that could significantly affect those controls
subsequent to the date of that evaluation.
34
Part II. Other Information
Item 1 - Legal Proceedings
The Corporation and its subsidiaries are subject to various
legal proceedings that arise from time to time in the
ordinary course of their businesses and operations. Some of
these seek relief or damages in amounts that may be
substantial. Because of the complex nature of some of these
proceedings, it may be a number of years before they are
ultimately resolved. While it is not feasible to predict the
outcome of these proceedings, the Corporation's management
does not believe the ultimate resolution of any of them will
have a material adverse effect on the Corporation's
consolidated financial condition. Further, the Corporation's
management believes that some of the claims may be covered
by insurance, and has advised its insurance carriers of the
proceedings.
Wilmington Trust Company (the "Bank"), acting in its capacity
as collateral trustee, is a defendant in a class action
lawsuit and at least two related claims relating to a failed
aircraft/leasing venture. This suit was brought in the U.S.
District Court for the Middle District of Florida. The
plaintiff claims, among other things, breach of fiduciary
duty, breach of contract and negligence and is seeking damages
in excess of $10 million, together with prejudgment interest
that exceeded $11 million at September 30, 2002. The Bank
is defending itself vigorously.
The Corporation has not accrued any expenses associated with
the outcome of these proceedings as of September 30, 2002.
Item 2 - Change In Securities and Use of Proceeds
Not Applicable
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
Exhibit Exhibit
Number -------
------
3.1 Amended and Restated Certificate of Incorporation of the Corporation(1)
35
3.2 Amended and Restated Bylaws of the Corporation(2)
------------------------------
(1) Incorporated by reference to the corresponding exhibit to the Annual
Report on Form 10-K of Wilmington Trust Corporation filed March 30,
1996.
(2) Incorporated by reference to the corresponding exhibit to the Annual
Report on Form 10-K of Wilmington Trust Corporation filed on March 30,
2000.
36
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2002 /s/ Ted T. Cecala
-----------------------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and Chief Executive
Officer (Authorized Officer)
/s/ David R. Gibson
-----------------------------------------------------
Name: David R. Gibson
Title: Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
CERTIFICATIONS
I, Ted T. Cecala, Chairman of the Board and Chief Executive Officer of
Wilmington Trust Corporation, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wilmington Trust
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
37
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Ted T. Cecala
--------------------------------------------------
Ted T. Cecala
Chairman of the Board and Chief Executive Officer
CERTIFICATIONS
I, David R. Gibson, Executive Vice President and Chief Financial Officer of
Wilmington Trust Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wilmington Trust
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
38
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ David R. Gibson
----------------------------------------------------
David R. Gibson
Executive Vice President and Chief Financial Officer
39
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned certify that, to their knowledge, the Form 10-Q of Wilmington
Trust Corporation (the "Corporation") for the third quarter of 2002 fully
complies with the requirements of section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in that report fairly presents, in
all material respects, the financial condition and results of operation of the
Corporation.
/s/ Ted T. Cecala
----------------------------------------------------
Ted. T. Cecala
Chairman of the Board and Chief Executive Officer
/s/ David R. Gibson
----------------------------------------------------
David R. Gibson
Executive Vice President and Chief Financial Officer
40