-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MtlKmEyrLCnoZsclVmpkqCSVI4PLPUeyMHne0vwXB/nXQ3mfgtQBoHdH+rENwbDy 9iGc79229FAEOYApEEw3rg== 0000898432-98-000772.txt : 19981118 0000898432-98-000772.hdr.sgml : 19981118 ACCESSION NUMBER: 0000898432-98-000772 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILMINGTON TRUST CORP CENTRAL INDEX KEY: 0000872821 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 510328154 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25442 FILM NUMBER: 98750499 BUSINESS ADDRESS: STREET 1: RODNEY SQUARE NORTH STREET 2: 1100 NORTH MARKET ST CITY: WILMINGTON STATE: DE ZIP: 19890 BUSINESS PHONE: 3026511000 10-Q 1 United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended September 30, 1998 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: 0-25442 WILMINGTON TRUST CORPORATION ----------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 51-0328154 - ------------------------------------------- ------------------------------ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890 --------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (302) 651-1000 ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [ X] Yes [ ] No Number of shares of issuer's common stock ($1.00 par value) outstanding at September 30, 1998 - 33,450,834 shares Wilmington Trust Corporation and Subsidiaries Form 10-Q Index Page ----- Part I. Financial Information Item 1 - Financial Statements Consolidated Statements of Condition 3 Consolidated Statements of Income 5 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 25 Part II. Other Information Item 1 - Legal Proceedings 27 Item 2 - Changes in Securities and Use of Proceeds 27 Item 3 - Defaults Upon Senior Securities 27 Item 4 - Submission of Matters to a Vote of Security Holders 27 Item 5 - Other Information 27 Item 6 - Exhibits and Reports on Form 8-K 27 Exhibit 11 Exhibit 27 2
CONSOLIDATED STATEMENTS OF CONDITION (unaudited) Wilmington Trust Corporation and Subsidiaries ------------------------------- September 30, December 31, (in thousands) 1998 1997 - -------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 194,276 $ 239,392 ------------------------------- Interest-bearing time deposits in other banks ---- ---- ------------------------------- Federal funds sold and securities purchased under agreements to resell 107,000 50,000 ------------------------------- Investment securities available for sale: U.S. Treasury and government agencies 736,012 790,519 Obligations of state and political subdivisions 7,749 8,007 Other securities 534,081 517,877 - -------------------------------------------------------------------------------- Total investment securities available for sale 1,277,842 1,316,403 ------------------------------- Investment securities held to maturity: U.S. Treasury and government agencies 84,400 219,136 Obligations of state and political subdivisions 8,148 12,743 Other securities 55,981 101,128 - -------------------------------------------------------------------------------- Total investment securities held to maturity (market values were $149,682 and $333,812, respectively) 148,529 333,007 ------------------------------- Loans: Commercial, financial and agricultural 1,293,853 1,207,930 Real estate-construction 193,813 145,097 Mortgage-commercial 889,647 884,146 Mortgage-residential 857,875 813,116 Consumer 1,000,624 954,486 Unearned income (6,054) (10,840) - -------------------------------------------------------------------------------- Total loans net of unearned income 4,229,758 3,993,935 Reserve for loan losses (69,896) (63,805) - -------------------------------------------------------------------------------- Net loans 4,159,862 3,930,130 ------------------------------- Premises and equipment, net 143,707 135,129 Other assets 217,578 118,290 - -------------------------------------------------------------------------------- Total assets $6,248,794 $6,122,351 =============================== 3 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 802,361 $ 792,513 Interest-bearing: Savings 399,960 393,539 Interest-bearing demand 1,249,888 1,134,996 Certificates under $100,000 1,214,849 1,211,771 Certificates $100,000 and over 860,049 636,211 - -------------------------------------------------------------------------------- Total deposits 4,527,107 4,169,030 ------------------------------- Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 839,017 1,246,287 U.S. Treasury demand 74,347 61,290 - -------------------------------------------------------------------------------- Total short-term borrowings 913,364 1,307,577 ------------------------------- Other liabilities 95,584 99,737 Long-term debt 168,000 43,000 - -------------------------------------------------------------------------------- Total liabilities 5,704,055 5,619,344 ------------------------------- Stockholders' equity: Common stock ($1.00 par value) authorized 150,000,000 shares; issued 39,264,173 and 39,191,848 shares, respectively 39,264 39,192 Capital surplus 66,734 62,511 Retained earnings 620,204 573,570 Accumulated other comprehensive income 13,752 7,504 - -------------------------------------------------------------------------------- Total contributed capital and retained earnings 739,954 682,777 Less: Treasury stock, at cost, 5,813,339 and 5,713,735 shares, respectively (195,215) (179,770) - -------------------------------------------------------------------------------- Total stockholders' equity 544,739 503,007 ------------------------------- Total liabilities and stockholders' equity $6,248,794 $6,122,351 =============================== See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF INCOME (unaudited) Wilmington Trust Corporation and Subsidiaries --------------------------------------------- For the three months For the nine months ended September 30, ended September 30, --------------------------------------------- (in thousands; except per share data) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- NET INTEREST INCOME Interest and fees on loans $ 90,333 $ 87,183 $ 268,018 $ 255,182 Interest and dividends on investment securities: Taxable interest 22,272 20,068 69,764 54,453 Tax-exempt interest 204 335 654 1,147 Dividends 2,147 2,191 6,514 6,061 Interest on time deposits in other ---- ---- ---- ---- banks Interest on federal funds sold and securities purchased under agreements to resell 655 249 1,303 961 - -------------------------------------------------------------------------------- Total interest income 115,611 110,026 346,253 317,804 ----------------------------------------------- Interest on deposits 41,035 35,024 116,727 97,681 Interest on short-term borrowings 12,887 17,023 46,179 48,831 Interest on long-term debt 2,771 189 4,798 838 - -------------------------------------------------------------------------------- Total interest expense 56,693 52,236 167,704 147,350 ----------------------------------------------- Net interest income 58,918 57,790 178,549 170,454 Provision for loan losses (5,000) (5,000) (15,000) (14,500) - -------------------------------------------------------------------------------- Net interest income after provision for loan losses 53,918 52,790 163,549 155,954 ----------------------------------------------- OTHER INCOME Trust and asset management fees 32,203 29,071 94,355 82,852 Service charges on deposit accounts 5,659 5,602 16,266 15,562 Gain on business disposition ---- ---- 5,503 ---- Other operating income 4,707 5,574 15,029 15,199 Securities gains 4,745 1 4,747 13 - -------------------------------------------------------------------------------- Total other income 47,314 40,248 135,900 113,626 ----------------------------------------------- Net interest and other income 101,232 93,038 299,449 269,580 ----------------------------------------------- OTHER EXPENSE Salaries and employment benefits 34,855 31,605 103,313 95,653 Net occupancy 3,391 3,656 9,405 9,094 Furniture and equipment 4,899 4,516 13,842 12,095 Stationery and supplies 1,483 1,541 4,182 4,273 5 Provision for litigation settlement ---- ---- 5,500 ---- Servicing and consulting fees 3,146 1,528 8,432 4,097 Other operating expense 9,435 9,677 27,995 27,811 - -------------------------------------------------------------------------------- Total other expense 57,209 52,523 172,669 153,023 ----------------------------------------------- NET INCOME Income before income taxes 44,023 40,515 126,780 116,557 Applicable income taxes 14,792 13,252 41,948 38,089 - -------------------------------------------------------------------------------- Net income $ 29,231 $ 27,263 $ 84,832 $ 78,468 =============================================== Net income per share: Basic $ 0.87 $ 0.81 $ 2.53 $ 2.33 =============================================== Diluted $ 0.86 $ 0.79 $ 2.47 $ 2.28 =============================================== Weighted average shares outstanding: Basic 33,476 33,662 33,519 33,739 Diluted 34,140 34,504 34,335 34,453 Cash dividends per share $ 0.39 $ 0.36 $ 1.14 $ 1.05 See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Wilmington Trust Corporation and Subsidiaries -------------------------------- For the nine months ended September 30, (in thousands) 1998 1997 - -------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 84,832 $ 78,468 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 15,000 14,500 Provision for depreciation 9,970 7,640 (Accretion)/amortization of investment securities available for sale discounts and premiums (1,359) 2,028 Accretion of investment securities held to maturity discounts and premiums (194) (34) Deferred income taxes (3,521) (2,684) Losses on sales of loans 912 171 Securities gains (4,747) (13) Decrease in other assets 19,875 21,415 Decrease in other liabilities (4,147) (11,155) - -------------------------------------------------------------------------------- Net cash provided by operating activities 116,621 110,336 -------------------------------- INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 658,114 3,956 Proceeds from maturities of investment securities available for sale 494,050 555,043 Proceeds from maturities of investment securities held to maturity 184,741 101,463 Purchases of investment securities available for sale (1,097,803) (840,748) Purchases of investment securities held to maturity ---- ---- Investments in affiliates (119,163) ---- Gross proceeds from sales of loans 79,800 15,043 Purchases of loans (1,095) (67,543) Net increase in loans (324,349) (207,629) Net increase in premises and equipment (18,548) (37,536) - -------------------------------------------------------------------------------- Net cash used for investing activities (144,253) (477,951) -------------------------------- FINANCING ACTIVITIES Net increase in demand, savings and interest-bearing demand deposits 131,161 16,104 Net increase in certificates of deposit 226,916 200,965 Net (decrease)/increase in federal funds purchased and securities sold under agreements to repurchase (407,270) 67,484 Net increase in U.S. Treasury demand 13,057 35,981 Proceeds from issuance of long-term debt 125,000 ---- Cash dividends (38,198) (35,427) 7 Proceeds from common stock issued under employment benefit plans 11,892 6,833 Payments for common stock acquired through buybacks (23,042) (22,681) - -------------------------------------------------------------------------------- Net cash provided by financing activities 39,516 269,259 -------------------------------- Increase/(decrease) in cash and cash equivalents 11,884 (98,356) Cash and cash equivalents at beginning of period 289,392 365,423 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 301,276 $ 267,067 ========================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 165,654 $ 164,560 Taxes 41,273 36,674 Loans transferred during the year: To other real estate owned $ 2,066 $ 3,502 From other real estate owned 3,956 5,576 See Notes to Consolidated Financial Statements
8 Notes to Consolidated Financial Statements Wilmington Trust Corporation and Subsidiaries Note 1 - Accounting and Reporting Policies The accounting and reporting policies of Wilmington Trust Corporation (the "Corporation"), a holding company which owns all of the issued and outstanding shares of capital stock of Wilmington Trust Company, Wilmington Trust of Pennsylvania, Wilmington Trust FSB and WT Investments, Inc., conform to generally accepted accounting principles and practices in the banking industry for interim financial information. The information for the interim periods is unaudited and includes all adjustments which are of a normal recurring nature and which management believes to be necessary for fair presentation. Results of the interim periods are not necessarily indicative of the results that may be expected for the full year. This note is presented and should be read in conjunction with the Notes to the Consolidated Financial Statements included in the Corporation's Annual Report to Stockholders for 1997. Note 2 - Accounting Releases Effective January 1, 1998, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The statement requires, among other things, unrealized gains or losses on the Corporation's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in comprehensive income. The adoption of SFAS No. 130 had no impact on the Corporation's net income or shareholders' equity. For the three months ended September 30, 1998 and 1997, total comprehensive income, net of taxes, was $36,358,000 and $31,033,000, respectively. For the nine months ended September 30, 1998 and 1997, total comprehensive income, net of taxes, was $91,080,000 and $83,713,000, respectively. Note 3 - Contingent Liabilities The Corporation recorded a $5.5 million provision in the first quarter of 1998 in connection with the anticipated settlement of litigation described in Note 9 of the Corporation's Annual Report to Stockholders for 1997. Note 4 - Sale of Mutual Fund Servicing The Corporation's year-to-date results reflect the recognition of a gain of $5.5 million as a result of the transfer by Rodney Square Management Corporation, an indirect subsidiary of the Corporation ("RSMC"), to PFPC, Inc., an indirect subsidiary of PNC Bank, N.A., of its interest in certain agreements under which RSMC provided accounting, administrative, custody, distribution and/or transfer agency services to mutual funds. Note 5 - Acquisition of Interests in Investment Advisors CRAMER ROSENTHAL MCGLYNN, LLC On January 2, 1998, WT Investments, Inc. an indirect subsidiary of the Corporation ("WTI"), consummated a transaction with Cramer, Rosenthal, McGlynn, Inc., an asset management firm with offices in New York City and White Plains, New York ("Cramer"), and its principals. Under this agreement, a new entity, Cramer Rosenthal McGlynn, LLC ("CRM"), assumed Cramer's investment management business. CRM performs investment management services relating to small- to middle-capitalization stocks for institutional and individual clients. 9 As a result of this transaction, WTI acquired a 24% equity interest in CRM, with the balance of the equity interests held by Cramer and CRM's other owners. Options to acquire additional ownership interests in CRM have been distributed to key employees. The Corporation will be able to purchase additional ownership interests in CRM from its other equity owners upon the occurrence of a number of specified events, including the termination of employment, death, disability or retirement of the individual principals. CRM has a staff of more than 50 employees and currently manages over $3.6 billion in assets on a discretionary basis. The firm is managed by a board of five managers. The board currently consists of four people designated by Cramer and its principals and one person designated by WTI. WTI will be entitled to elect a majority of the Board when it acquires a majority of the voting interests in CRM. ROXBURY CAPITAL MANAGEMENT, LLC On July 31, 1998, WTI consummated a transaction with Roxbury Capital Management, an asset management firm headquartered in Santa Monica, California ("Roxbury"), and its principals. Under this agreement, a new entity, Roxbury Capital Management, LLC ("RCM"), assumed Roxbury's investment management business. RCM performs investment management services relating to large-capitalization stocks for institutional and individual clients. As a result of this transaction, WTI has a preferred profits interest in RCM, with the balance of those profits being retained by Roxbury and RCM's other owners. Options to acquire additional ownership interests in RCM will be distributed to key employees. The Corporation will be able to purchase additional ownership interests in RCM from its equity owners upon the occurrence of a number of specified events, including the termination of employment, death, disability or retirement of the individual. RCM has a staff of over 60 employees and currently manages over $4.5 billion in assets on a discretionary basis. The firm is managed by a board of seven managers. The board currently consists of five people designated by Roxbury and its principals and two people designated by WTI. WTI will be entitled to elect a majority of the board when it acquires a majority of the voting interests in RCM. Note 6 - Issuance of Subordinated Debentures On May 4, 1998, the Corporation issued $125 million in subordinated debentures due on May 1, 2008, and bearing interest at a rate of 6.625% per annum payable semi-annually on May 1 and November 1. 10 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 1998 was $29.2 million, or $.87 per share, a 7% increase over the $27.3 million, or $.81 per share, reported for the third quarter of last year. Diluted net income per share for the third quarter of 1998 was $.86, compared with $.79 for the third quarter last year. Total revenues for the third quarter of 1998 reached $106.2 million, an 8% increase over the $98.0 million reported for the third quarter of 1997. Net interest income for the third quarter of 1998 reached $58.9 million, a 2% increase over the $57.8 million reported for the third quarter of last year. The quarterly provision for loan losses of $5.0 million was unchanged from that for the third quarter of 1997. The reserve for loan losses at quarter-end stood at $69.9 million, up $6.1 million, or 10%, over the $63.8 million reported at December 31, 1997. Noninterest income for the third quarter of 1998 was $47.3 million, an 18% increase over the $40.2 million reported for the corresponding period last year. Operating expenses for the third quarter of 1998 were $57.2 million, a 9% increase over the $52.5 million reported for the third quarter of last year. Return on assets for the nine months ended September 30, 1998, on an annualized basis, was 1.81%, slightly below the 1.87% reported for the corresponding period a year ago. Return on stockholders' equity, also on an annualized basis, was 21.76%, slightly below the 22.23% reported for the first nine months of 1997. STATEMENT OF CONDITION - ---------------------- Total assets at September 30, 1998 were $6.25 billion, up $126.4 million, or 2%, over the $6.12 billion reported at December 31, 1997. Total earning assets increased $69.8 million, or 1%, to $5.69 billion over the same period of time. Growth in the loan portfolios contributed to these increases. Total loans at September 30, 1998 were $4.23 billion, an increase of $235.8 million, or 6%, over the December 31, 1997 level of $3.99 billion. Contributing to this increase were commercial loans of $1.29 billion, which rose $85.9 million, or 7%, over their December 31, 1997 levels; commercial construction loans of $193.8 million, which rose $48.7 million, or 34%; residential mortgage loans of $857.9 million, which rose $44.8 million, or 6%, and consumer loans of $1 billion, which rose $46.1 million, or 5%, over their prior year-end levels. The investment portfolio at September 30, 1998 was $1.43 billion, a decrease of $223 million, or 14%, from the December 31, 1997 level of $1.65 billion. Contributing to this decrease were U.S. Treasury and government agency securities, which fell $189.2 million, or 19%, to $820.4 million, and asset-backed securities, which fell $44.8 million, or 12%, to $335 million. These decreases reflect the sale in the third quarter of $335.3 million of securities from the Corporation's investment portfolio. Interest-bearing liabilities at quarter-end were $4.81 billion, up $79 million, or 2%, over the year-end level of $4.73 billion. Total deposits during the first nine months of 1998 rose $358.1 million, while short-term borrowings declined 11 $394.2 million. A $223.8 million increase in certificates of deposit $100,000 and over was primarily responsible for this increase, as the Corporation moved into the national market in an effort to diversify its sources of funds. Interest-bearing demand account balances rose $114.9 million, or 10%, over this same period of time. Offsetting this growth, in part, was a $32.5 million, or 3%, decline in certificates of deposit under $100,000. In May, the Corporation issued $125 million of subordinated debentures. The debentures mature May 1, 2008 and carry an interest rate of 6.625% payable semiannually on November 1 and May 1. The Corporation used the net proceeds to acquire the interests in CRM and RCM described in Note 5 to the Consolidated Financial Statements. Stockholders' equity at September 30, 1998 was $544.7 million, up $41.7 million, or 8%, over the year-end level as earnings of $84.8 million, $11.9 million in new stock issued and a $6.2 million valuation reserve adjustment for the investment portfolio, were offset, in part, by $38.2 million in cash dividends and $23 million for the stock buyback program. NET INTEREST INCOME - ------------------- Net interest income for the third quarter of 1998 on a fully tax-equivalent ("FTE") basis was $61.0 million. This was an $800,000, or 1%, increase over the $60.2 million reported for the third quarter of 1997. For the first nine months of 1998, net interest income (FTE) was $184.8 million, up $7.3 million, or 4%, over the $177.5 million reported for the first nine months of 1997. Interest income (FTE) for the third quarter of 1998 rose $5.3 million, or 5%, to $117.7 million from $112.4 million for the third quarter of 1997. Contributing to this increase was a $433.6 million increase in the average level of earning assets for the third quarter of 1998 compared to the same period last year. Interest revenues rose $8.1 million as a result of this increase in earning assets. Partially offsetting this increase was a $2.8 million decrease in interest revenues associated with lower interest rates. The average rate earned on these assets during the third quarter of 1998 declined 23 basis points, from 8.18% to 7.95%. For the first nine months of 1998, the average level of earning assets rose $566.1 million, or 11%, resulting in increased interest revenues of $30.2 million. Partially offsetting this increase was a $2.5 million decrease in interest revenues associated with lower interest rates. The average rate earned on these assets during the first nine months of 1998 declined 15 basis points, from 8.21% to 8.06%. Interest expense for the third quarter of 1998 rose $4.5 million, or 9%, to $56.7 million from the $52.2 million reported for the third quarter of last year. Contributing to this increase in interest expense was a $444.1 million increase in the average level of interest-bearing liabilities, which resulted in a $3.7 million increase in interest expense. Complementing this increase was an $800,000 increase in interest expense attributable to a two basis point increase in the rate paid for those funds. The average rate the Corporation paid for its funds during the third quarter of 1998 was 3.83%, compared to 3.81% for the third quarter of 1997. For the first nine months of 1998, the average level of interest-bearing liabilities was $563.2 million higher than that for the same period of 1997, resulting in increased interest expense of $17.7 million. Complementing this increase was a $2.7 million increase in interest expense attributable to a 10 basis point increase in the rate paid for those funds. For the first nine months of 1998, the average rate the Corporation paid for its funds was 3.84%, compared to 3.74% for the first nine months of 1997. The Corporation's net interest margin for the third quarter of 1998 was 4.12%, down 25 basis points from the 4.37% reported for the third quarter a year ago. For the first nine months of 1998, the margin was 4.22%, down 25 basis points from the 4.47% for the first nine months of 1997. The compression of the Corporation's net interest margin is likely to continue and could increase even further over the near term. Contributing to this effect were several one-time events, compounded by several broader trends. In the second quarter of this year the Corporation issued $125 million of subordinated debt, which has raised the 12 Corporation's cost of funds without a corresponding increase in asset yields. The Corporation used these funds to acquire interests in two asset management firms, resulting in additional fee income but no additional interest income. The current trend of converting adjustable-rate commercial loans to fixed rates has further contributed to a decline in asset yields. The flattening of the Treasury and related yield curves has driven fixed-rate loan pricing lower without a commensurate reduction in the Corporation's cost of funds. Reductions in the National Commercial Rate the Corporation offers on certain loans that have occurred since September 30,1998, coupled with a core deposit base that may be difficult to reprice in light of the proximity of current deposit rates to historic lows, could lead to some additional compression in the Corporation's net interest margin. The following three tables present comparative net interest income data and a rate-volume analysis of changes in net interest income for the third quarters and first nine months of 1998 and 1997, respectively. 13
QUARTERLY ANALYSIS OF EARNINGS 1998 Third Quarter 1997 Third Quarter ----------------------------------------- -------------------------------- (in thousands; rates on Average Income/ Average Average Income/ Average tax-equivalent basis) Balance expense rate balance expense rate - --------------------------------------------------------------------------------------------------------------------- Earning assets Time deposits in other banks $ ---- $ ---- ----% $ ---- $ ---- ----% Federal funds sold and securities purchased under agreements to resell 46,369 655 5.51 17,252 249 5.65 - ------------------------------------------------------------------- ------------------------- Total short-term investments 46,369 655 5.51 17,252 249 5.65 ------------------------------------------------------------------------------ U.S. Treasury and government agencies 972,268 14,943 6.20 876,875 13,941 6.38 State and municipal 16,098 309 7.76 26,977 524 7.78 Preferred stock 140,846 2,503 7.24 128,777 2,630 8.13 Asset-backed securities 375,452 6,178 6.63 314,262 5,180 6.61 Other 109,118 1,573 5.80 83,251 1,292 6.24 - ------------------------------------------------------------------- ------------------------- Total investment securities 1,613,782 25,506 6.38 1,430,142 23,567 6.60 ------------------------------------------------------------------------------ Commercial, financial and agricultural 1,285,342 27,355 8.35 1,209,106 26,575 8.63 Real estate-construction 198,006 4,780 9.45 132,816 3,308 9.74 Mortgage-commercial 882,862 20,551 9.11 935,487 22,028 9.21 Mortgage-residential 847,030 16,211 7.65 792,442 15,133 7.63 Consumer 998,178 22,662 8.98 920,700 21,575 9.28 - ------------------------------------------------------------------- ------------------------- Total loans 4,211,418 91,559 8.57 3,990,551 88,619 8.75 ------------------------------------------------------------------------------ Total earning assets $5,871,569 117,720 7.95 $5,437,945 112,435 8.18 ============================================================================== Funds supporting earning assets Savings $ 411,756 2,350 2.26 $ 361,885 2,138 2.34 Interest-bearing demand 1,246,393 8,000 2.55 1,096,706 7,075 2.56 Certificates under $100,000 1,216,805 16,812 5.48 1,238,341 17,460 5.59 Certificates $100,000 and over 966,967 13,873 5.61 577,031 8,351 5.66 - ------------------------------------------------------------------- ------------------------- Total interest-bearing deposits 3,841,921 41,035 4.22 3,273,963 35,024 4.23 ------------------------------------------------------------------------------ Federal funds purchased and securities sold under agreements to repurchase 896,347 12,182 5.39 1,156,676 16,381 5.63 U.S. Treasury demand 53,563 705 5.15 42,045 642 5.97 - ------------------------------------------------------------------- ------------------------- 14 Total short-term borrowings 949,910 12,887 5.38 1,198,721 17,023 5.64 ------------------------------------------------------------------------------ Long-term debt 168,000 2,771 6.55 43,000 189 1.74 - ------------------------------------------------------------------- ------------------------- Total interest-bearing liabilities 4,959,831 56,693 4.52 4,515,684 52,236 4.58 ------------------------------------------------------------------------------ Other noninterest funds 911,738 ---- ---- 922,261 ---- ---- - ------------------------------------------------------------------- ------------------------- Total funds used to support earning assets $5,871,569 56,693 3.83 $5,437,945 52,236 3.81 ============================================================================== Net interest income/yield 61,027 4.12 60,199 4.37 Tax-equivalent adjustment (2,109) (2,409) ------------ ----------- Net interest income $ 58,918 $ 57,790 ============ ===========
Average rates are calculated using average balances based on historical cost and do not reflect the market valuation adjustment required by Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. 15
YEAR-TO-DATE ANALYSIS OF EARNINGS Year-to-Date 1998 Year-to-Date 1997 ------------------------------------------- ------------------------------------- (in thousands; rates on Average Income/ Average Average Income/ Average tax-equivalent basis) balance expense rate balance expense rate - ------------------------------------------------------------------------------------------------------------------------------- Earning assets Time deposits in other banks $ ---- $ ---- ----% $ ---- $ ---- ----% Federal funds sold and securities purchased under agreements to resell 31,418 1,303 5.44 22,221 961 5.70 - --------------------------------------------------------------------- ---------------------------- Total short-term investments 31,418 1,303 5.44 22,221 961 5.70 ------------------------------------------------------------------------------------- U.S. Treasury and government agencies 1,020,116 47,683 6.28 843,752 40,452 6.38 State and municipal 17,000 984 7.76 30,097 1,796 7.99 Preferred stock 137,753 7,793 7.73 131,883 7,269 7.35 Asset-backed securities 380,461 18,840 6.64 237,860 11,290 6.33 Other 103,146 4,377 5.69 85,676 3,725 5.81 - --------------------------------------------------------------------- ---------------------------- Total investment securities 1,658,476 79,677 6.49 1,329,268 64,532 6.47 ------------------------------------------------------------------------------------- Commercial, financial and agricultural 1,250,217 80,264 8.49 1,225,095 79,913 8.62 Real estate-construction 172,504 12,239 9.35 127,533 9,168 9.47 Mortgage-commercial 897,096 63,172 9.29 901,747 63,658 9.31 Mortgage-residential 831,902 49,435 7.93 748,386 43,167 7.70 Consumer 976,247 66,457 9.08 897,491 63,500 9.44 - --------------------------------------------------------------------- ---------------------------- Total loans 4,127,966 271,567 8.79 3,900,252 259,406 8.82 ------------------------------------------------------------------------------------- Total earning assets $5,817,860 352,547 8.06 $5,251,741 324,899 8.21 ===================================================================================== Funds supporting earning assets Savings $ 407,881 7,073 2.32 $ 362,255 6,347 2.34 Interest-bearing demand 1,205,585 23,203 2.57 1,068,902 20,209 2.53 Certificates under $100,000 1,212,559 50,078 5.52 1,243,198 52,142 5.61 Certificates $100,000 and over 853,768 36,373 5.62 452,098 18,983 5.54 - --------------------------------------------------------------------- ------------------------ Total interest-bearing deposits 3,679,793 116,727 4.25 3,126,453 97,681 4.17 ------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 1,077,210 44,157 5.47 1,137,216 46,846 5.47 U.S. Treasury demand 51,197 2,022 5.21 49,993 1,985 5.24 - --------------------------------------------------------------------- ------------------------ 16 Total short-term borrowings 1,128,407 46,179 5.46 1,187,209 48,831 5.46 ------------------------------------------------------------------------------------- Long-term debt 111,681 4,798 5.44 43,000 838 2.61 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 4,919,881 167,704 4.53 4,356,662 147,350 4.50 ------------------------------------------------------------------------------------- Other noninterest funds 897,979 ---- ---- 895,079 ---- ---- - --------------------------------------------------------------------- ------------------------ Total funds used to support earning assets $5,817,860 167,704 3.84 $5,251,741 147,350 3.74 ===================================================================================== Net interest income/yield 184,843 4.22 177,549 4.47 Tax-equivalent adjustment (6,294) (7,095) ------------- ----------- Net interest income $ 178,549 $ 170,454 ============= ===========
Average rates are calculated using average balances based on historical cost and do not reflect the market valuation adjustment required by Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. 17
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME ---------------------------------------- --------------------------------------- For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- --------------------------------------- 1998/1997 1997/1996 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: Time deposits in other banks $ ---- $ ---- $ ---- $ ---- $ ---- $ ---- Federal funds sold and securities purchased under agreements to resell 420 (14) 406 398 (56) 342 - --------------------------------------------------------------------------------------------------------------------------- Total short-term investments 420 (14) 406 398 (56) 342 ------------------------------------------------------------------------------------ U.S. Treasury and government agencies 1,422 (420) 1,002 8,044 (813) 7,231 State and municipal * (214) (1) (215) (782) (30) (812) Preferred stock * 241 (368) (127) 215 309 524 Asset-backed securities 979 19 998 6,687 863 7,550 Other * 401 (120) 281 748 (96) 652 - --------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,829 (890) 1,939 14,912 233 15,145 ------------------------------------------------------------------------------------ Commercial, financial and agricultural * 1,658 (878) 780 1,620 (1,269) 351 Real estate-construction 1,600 (128) 1,472 3,185 (114) 3,071 Mortgage-commercial * (1,222) (255) (1,477) (324) (162) (486) Mortgage-residential 1,050 28 1,078 4,810 1,458 6,268 Consumer 1,812 (725) 1,087 5,561 (2,604) 2,957 - --------------------------------------------------------------------------------------------------------------------------- Total loans 4,898 (1,958) 2,940 14,852 (2,691) 12,161 - --------------------------------------------------------------------------------------------------------------------------- Total interest income $ 8,147 $(2,862) $ 5,285 $30,162 $(2,514) $ 27,648 ==================================================================================== Interest expense: Savings $ 294 $ (82) $ 212 $ 799 $ (73) $ 726 Interest-bearing demand 966 (41) 925 2,586 408 2,994 Certificates under $100,000 (303) (345) (648) (1,286) (778) (2,064) 18 Certificates $100,000 and over 5,640 (118) 5,522 16,875 515 17,390 - --------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 6,597 (586) 6,011 18,974 72 19,046 ------------------------------------------------------------------------------------ Federal funds purchased and secruities sold under agreements to repurchase (3,664) (535) (4,199) (2,689) ---- (2,689) U.S. Treasury demand 176 (113) 63 48 (11) 37 - --------------------------------------------------------------------------------------------------------------------------- Total short-term borrowings (3,488) (648) (4,136) (2,641) (11) (2,652) ------------------------------------------------------------------------------------ Long-term debt 548 2,034 2,582 1,341 2,619 3,960 - --------------------------------------------------------------------------------------------------------------------------- Total interest expense $ 3,657 $ 800 $ 4,457 $17,674 $ 2,680 $ 20,354 ==================================================================================== Changes in net interest income $ 828 $ 7,294 ======== ========
* 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. 19 Noninterest Revenues and Operating Expenses - -------------------------------------------- Noninterest revenues for the third quarter of 1998 rose $7.1 million, or 18%, to $47.3 million. For the first nine months of 1998, noninterest revenues rose $22.3 million, or 20%, to $135.9 million. Higher levels of personal trust, corporate trust and asset management fees were responsible for the majority of both the quarterly and year-to-date increases. Personal trust fees for the third quarter rose $700,000, or 5%, to $14.5 million. For the first nine months of 1998, personal trust fees rose $5 million, or 13%, to $44.3 million. Corporate trust fees for the third quarter of 1998 rose $1.3 million, or 14%, to $10.7 million. For the first nine months of 1998, corporate trust fees rose $4.6 million, or 17%, to $31.7 million. Asset management fees for the third quarter of 1998 rose $1.1 million, or 20%, to $7 million. For the first nine months of 1998, asset management fees rose $1.9 million, or 12%, to $18.3 million. The Corporation sold its mutual fund processing business in the second quarter of 1998, which had contributed $1.7 million and $4.6 million, respectively, to 1997 third quarter and year-to-date asset management fees. Disregarding those fees, asset management fees for the third quarter and first nine months of 1998 rose $2.9 million, or 69%, and $5.4 million, or 46%, respectively. These gains reflect increases in assets under management as well as the Corporation's investments in CRM and RCM. A $5.5 million gain from the sale of the Corporation's mutual fund servicing business further contributed to the increase in the Corporation's noninterest revenues in 1998. Service charges on deposit accounts of $5.7 million for the third quarter of 1998 were unchanged from a year ago. For the first nine months of 1998, service charges rose $700,000, or 5%, to $16.3 million. Increased transaction fees associated with automated teller machine usage, overdrafts and returned items contributed to this increase. Securities gains for the third quarter of 1998 of $4.7 million were realized as the Corporation sold $335.3 million in securities available for sale, primarily U.S. Government agencies, to realign its investment portfolio. Operating expenses for the third quarter of 1998 rose $4.7 million, or 9%, to $57.2 million. For the first nine months of 1998, operating expenses rose $19.6 million, or 13%, to $172.7 million. Personnel expenses for the third quarter rose $3.3 million, or 10%, to $34.9 million, and $7.7 million, or 8%, to $103.3 million for the first nine months of 1998. Contributing to these increases were higher base compensation, bonuses and sales incentives. Furniture and equipment expenses for the third quarter rose $400,000, or 8%, and $1.7 million, or 14%, for the year. Higher maintainence costs and depreciation expense associated with the Corporation's new trust system and operations facility contributed to these increases. Other operating expense for the third quarter rose $1.4 million, or 12%, to $12.6 million and $10 million, or 31%, to $41.9 million for the first nine months of 1998. Service and consulting expense contributed $1.6 million to this quarterly increase and $4.3 million to the annual increase. These increases include Year 2000 expenditures, outsourced mortgage servicing costs and systems and information consulting expenses. Also contributing to the year-to-date increase was a $5.5 million charge to earnings taken in the first quarter of 1998 to settle outstanding litigation. The Corporation's efforts in readying for the Year 2000 date change are more fully discussed on pages 22 through 24. Liquidity - --------- A financial institution's liquidity represents its ability to meet, in a timely manner, cash flow requirements that may arise. Liquidity of the asset side of the balance sheet is provided by the maturity and marketability of loans, money market assets and investments. Liquidity of the liability side of the balance sheet is usually provided through a stable base of core deposits. 20 The Corporation's quarter-end liquidity ratio, calculated in accordance with regulatory requirements of the FDIC, was 24.62%. Management believes that maturities of the Corporation's investment securities, other readily marketable assets and external sources of funds offer more than adequate liquidity to meet any cash flow requirements that may arise. Sources of funds have historically consisted of deposits, amortization and prepayments of outstanding loans, maturities of investment securities, borrowings, and interest income. Management monitors the Corporation's existing and projected liquidity requirements on an ongoing basis and implements appropriate strategies when deemed necessary. Asset Quality and Loan Loss Provision - ------------------------------------- The Corporation's provision for loan losses for the third quarter of 1998 was $5.0 million, unchanged from the amount provided for the third quarter of 1997. For the first nine months of 1998, the provision was $15.0 million, an increase of $500,000, or 3%, over the $14.5 million provided for the first nine months of 1997. The reserve for loan losses at September 30, 1998 was $69.9 million, an increase of $6.1 million, or 10%, over the $63.8 million reported at December 31, 1997. The reserve as a percentage of total period-end loans outstanding was 1.65%, up slightly over the year-end level of 1.60%. Net chargeoffs for the first nine months of 1998 were $8.9 million, unchanged from the corresponding period of 1997. The following table presents the risk elements in the Corporation's loan portfolio: Risk Elements (in September 30, December 31, September 30, thousands) 1998 1997 1997 - --------------------------------------------------------------------------- Nonaccruing $30,848 $28,669 $39,483 Restructured --- --- --- Past due 90 days or more 14,097 15,523 15,183 - --------------------------------------------------------------------------- Total $44,945 $44,192 $54,666 =============================================== Percent of total loans at period-end 1.06% 1.11% 1.36% Other real estate owned $1,848 $3,738 $3,057 Nonaccruing loans at September 30, 1998 were $30.8 million, an increase of $2.1 million over the $28.7 million reported at December 31, 1997. Other real estate owned, which is reported as a component of other assets in the Consolidated Statements of Condition, consists of assets that have been acquired through foreclosure. These assets are recorded on the books of the Corporation at the lower of their cost or the estimated fair value less cost to sell, adjusted periodically based upon current appraisals. Other real estate owned at September 30, 1998 was $1.8 million, a decrease of $1.9 million, or 51%, from the December 31, 1997 level of $3.7 million. Nonperforming assets (other real estate owned plus nonaccrual loans) at September 30, 1998 totaled $32.7 million, or .77% of period-end loans outstanding. This was an increase of $300,000, or 1%, over the $32.4 million, or .81% of period-end loans outstanding, reported at December 31, 1997. As a result of the Corporation's ongoing monitoring of its loan portfolio, at September 30, 1998, approximately $13.3 million of its loans were identified which are either currently performing in accordance with their terms or are less than 90 days past due but for which, in management's opinion, serious doubt exists as to the borrowers' ability to continue to repay their loans in full on a timely basis. The reserve for loan losses at quarter-end was 2.26 times the level of nonaccrual loans. Management believes the reserve is adequate, based upon currently available information. The Corporation's determination of the adequacy of its reserve is based upon an evaluation of its classified loans and other assets, past loss experience, current economic and real estate market conditions and any regulatory recommendations. 21 Capital Resources - ----------------- A strong capital position provides a margin of safety for both depositors and stockholders, enables a financial institution to take advantage of profitable opportunities and provides for future growth. The Corporation's total risk-based capital ratio at the end of the third quarter of 1998 was 12.89%, and its core (Tier 1) leveraged capital ratio was 6.63%. The corresponding ratios at year-end 1997 were 12.38% and 8.58%, respectively. Both of these ratios are well in excess of the current regulatory minimums of 8.00% and 4.00%, respectively. Management monitors the Corporation's capital position and will make adjustments as needed to insure that the capital base will satisfy existing and impending regulatory requirements, as well as meet appropriate standards of safety and provide for future growth. Other Information - ----------------- YEAR 2000 ISSUE Some computer hardware and software and other equipment include computer code in which calendar year data is abbreviated to only two digits. Some of these systems could fail to operate or produce correct results if "00" is interpreted to mean 1900, rather than 2000. As a result, many calculations that rely on data field information, such as interest, payment or due dates and other operating functions, may generate results which could be significantly misstated. These problems are sometimes referred to as the "Year 2000 Issue." ASSESSMENT. The Corporation has established a company-wide task force that reviewed all mission-critical computer-based and business systems and applications, and developed a company-wide action plan for the Year 2000 date change. This action plan includes modifying existing software, acquiring new software and/or acquiring new hardware. The task force evaluates the impact of the Year 2000 across the following disciplines: . Information technology . Business risk impact analysis . Credit risk . Investment risk . Vendor management . Communications . Contingency planning The task force reviews the project plans each of the Corporation's business units have prepared. The task force, together with the Corporation's executive management, monitors each unit's methods and progress against those plans bi-weekly. The task force has previously provided status reports to the Audit Committee of the Board of Directors quarterly, and currently provides quarterly status reports to the entire Board of Directors. INFORMATION TECHNOLOGY SYSTEMS. The Corporation believes it has identified the mission-critical software applications and related equipment it uses which must be modified, upgraded or replaced. The Corporation has begun modifying, upgrading and replacing such systems. The Corporation expects to complete those modifications by December 31, 1998 and complete testing of them against other interfacing applications by June 30, 1999. 22 The Corporation has begun identifying other, non-mission-critical computer software and equipment which may be affected by the Year 2000 date change, and determining whether remedial action is needed. SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computer software and related systems, the Corporation operates office and facilities equipment such as fax machines, photocopiers, automated teller machines, telephone switches, security systems, elevators and other common devices that may be affected by the Year 2000 date change. The Corporation is assessing the potential effect and cost of remediating the Year 2000 Issue on its office and facilities equipment. The Corporation expects to complete remediation and testing of mission-critical office and facilities equipment by December 31, 1998. The Corporation engaged a third-party vendor to assist it in establishing its Program Management Office and in developing and implementing certain of its Year 2000 strategies. However, the Corporation has used and anticipates continuing to use primarily internal resources to reprogram and test its software and office and facilities equipment for required Year 2000 modifications. The Corporation estimates that, through September 30, 1998, it has spent 73,000 in internal workhours, $1.8 million in third-party programming costs and $4.8 million for hardware, software and other expenses to address the Year 2000 date change. Experts within each of the Corporation's business areas have provided further assistance in testing and quality assurance in the Corporation's Year 2000 compliance efforts. The substantial majority of internal workhours and external costs have been spent to repair existing software. The Corporation estimates that, at September 30, 1998, it was 84% complete in remediating its mission-critical systems and 31% complete in stand-alone testing of those systems. Stand-alone testing examines and tests the business functionality of an application using future dates with limited application interface testing, but does not include testing the application interfacing with all other applications in a "real-time" environment. Accordingly, the Corporation also intends to devote additional internal resources to test these applications interfacing in a "real time" environment, assist in contingency planning and production support for critical dates and assure that future modifications and vendor releases do not introduce new date-related problems. The Corporation estimates that, to complete required modifications, upgrades and replacements of its internal systems and testing, it will expend 98,500 additional internal workhours, including approximately 18,500 hours in the fourth quarter of 1998 and 73,000 hours in 1999, as well as approximately 7,000 hours in 2000 for production support. In addition, the Corporation expects that it will incur an additional $1.7 million in third-party programming costs and $7.8 million for hardware, software and other expenses (including $5.5 million to upgrade and provide a standard platform for the Corporation's personal computers). The Corporation has devoted approximately 34% of its available application programming and 16% of its total internal information technology resources to the Year 2000 Issue in 1998. Accordingly, it has deferred some other information technology projects pending resolution of the Year 2000 Issue. However, the Corporation does not believe that such deferrals will have a material adverse impact on its financial performance or results of operations. VENDORS AND CUSTOMERS. During 1998, the Corporation initiated formal communications with its significant customers and vendors, including power and utility suppliers, and customers to determine the extent to which those entities could impact the Corporation by failing to remediate the Year 2000 Issue. During the fourth quarter of 1998, the Corporation anticipates conducting face-to-face meetings with critical vendors that have not responded to its information requests previously. The FDIC also has examined the Year 2000 compliance programs of many of the Corporation's larger vendors. The Corporation has limited control over the actions of these third parties, and there can be no assurance that they will resolve all Year 2000 Issues. Any failure of theirs to do so could have an adverse impact on the Corporation. 23 MOST LIKELY CONSEQUENCES OF YEAR 2000 ISSUE. The Corporation believes it is addressing all key components necessary to resolve the Year 2000 Issue and, based upon current information, expects to identify and resolve in a timely manner all Year 2000 Issues which could adversely affect its business operations. Nevertheless, it is not possible to determine with complete certainty that all Year 2000 Issues affecting the Corporation or its vendors or customers are identified and corrected, or the duration, severity or financial consequences of any failure. The Corporation anticipates that it is possible that it may experience certain operational inconsistencies and inefficiencies, which may result in, among other things, temporary delays in processing customers' checks and payments and other transactions. This could divert the Corporation's time and attention and financial resources from ordinary business activities. The Corporation also could experience the possible failure of certain systems, which may require significant efforts to prevent or alleviate material business disruptions. CONTINGENCY PLANS. The Corporation is developing contingency plans which it may implement if its efforts to identify and correct Year 2000 Issues are not completely effective. Depending on the systems affected, those plans could include accelerated replacement of affected hardware or software, short- to medium-term use of back-up sites, equipment and software, increased workhours for the Corporation's personnel and/or use of contract personnel to remedy any Year 2000 Issues or provide manual workarounds for information systems. If the Corporation implements any of these contingency plans, it could have an adverse effect on the Corporation's financial position and results of operations. The Corporation expects to complete contingency plans for its mission-critical business functions by January 31, 1999. The Corporation expects to complete testing of those plans and finalize any necessary revisions to those plans by June 30, 1999. DISCLAIMER. The discussion above of the Corporation's efforts and expectations relating to Year 2000 compliance are forward-looking statements. The Corporation's ability to achieve Year 2000 compliance and the level of incremental costs associated with that compliance could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' and customers' ability to modify proprietary software and unanticipated problems identified in the ongoing compliance review. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Standards Accounting Board ("FASB") issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires financial disclosure and descriptive information about reportable operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. This statement is effective for periods beginning after December 15, 1997 and requires the restatement of all prior periods presented. However, it is not required to be applied for interim reporting in the initial year of application. Upon adoption, this statement will result in additional financial statement disclosures. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is required to be adopted in all fiscal quarters of fiscal years beginning after June 15, 1999. The Statement will require the Corporation to recognize all derivatives on its balance sheet at their fair value. Derivatives which are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative either will be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be recognized in earnings immediately. The Corporation has not yet determined what effect SFAS No. 133 will have on the Corporation's earnings or financial position. 24 ACQUISITION OF INTEREST IN INVESTMENT ADVISOR On July 31, 1998, WTI acquired an interest in RCM. See Note 5 to the Corporation's Consolidated Financial Statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Net interest income is an important determinant of the Corporation's financial performance. Through interest rate sensitivity management, the Corporation seeks to maximize the growth of net interest income on a consistent basis by minimizing the effects of fluctuations associated with changing market interest rates. The Corporation employs simulation models to measure the effect of variations in interest rates on net interest income. The composition of assets, liabilities and off-balance-sheet instruments and their respective repricing and maturity characteristics are evaluated in assessing the Corporation's exposure to changes in interest rates. Net interest income is projected over a two-year period using multiple interest rate scenarios. The results are compared to net interest income projected for the same time period based on stable interest rates. The Corporation's model employs interest rate scenarios in which interest rates gradually move up or down 250 basis points. The simulation model projects, as of September 30, 1998, that a gradual 250-basis point increase in market interest rates would reduce net interest income by 1.3% in the first year. This figure compares to a projected decrease at December 31, 1997 of 2.6%. If interest rates were to gradually decrease 250 basis points, the simulation model projects, as of September 30, 1998, that net interest income would decrease 1.3% in the first year. This compares to a projected increase at December 31, 1997 of 1.1% in the first year. The Corporation's policy limits the permitted reduction in projected net interest income to 10% in the first one-year period given a change in interest rates. The preceding paragraph contains certain forward-looking statements regarding the anticipated effects on the Corporation's net interest income resulting from hypothetical changes in market interest rates. The assumptions that the Corporation uses regarding the effects of changes in interest rates on the adjustment of retail deposit rates and the balances of residential mortgages, asset-backed securities and collateralized mortgage obligations (CMOs) play a significant role in the results the simulation model projects. The adjustment paths are not assumed to be symmetrical. The Corporation's model employs assumptions that reflect the historical adjustment paths of the Corporation's retail deposit rates to changes in the level of market interest rates. In addition, some of the Corporation's retail deposit rates reach historic lows within the 250-basis point decline scenario. The Corporation's model freezes the rates for these deposit products when they equal their historic lows. These model assumptions (asymmetrical adjustments and rate floors based on historic lows) limit the extent to which deposit rates are expected to adjust in a declining rate scenario and contribute to the projected simulation results. Changes in the balances of residential mortgages, CMOs and asset-backed securities are driven by contractual obligations and prepayments. While contractual obligations are not typically influenced by changes in interest rates, prepayment activity (including refinancing) can shift dramatically with changes in interest rates. The Corporation's prepayment assumptions are based on industry estimates for loans with similar coupons and remaining maturities. A 250-basis point decline in interest rates can lead to a significant increase in prepayments when available reinvestment opportunities of similar risk carry lower returns. Conversely, should interest rates rise 250 basis points, the same balances are not likely to prepay at the same rate, but instead are likely to lengthen in effective maturity as debtors elect not to prepay and to retain 25 these now below-market credit terms as long as possible. Holders of mortgages, asset-backed securities and CMOs are left with returns below those prevailing in the current environment. This prepayment-driven effect also contributes to the projected simulation results. During the first nine months of 1998, the Corporation sold certain fixed-rate residential mortgage loans into the secondary market. The primary goal of this program was to eliminate the risk that the average lives of these fixed-rate residential mortgage loans would extend beyond their anticipated durations, as frequently occurs during periods of rising interest rates. Total mortgage loans sold during the first nine months of 1998 were $80.7 million. Management reviews the Corporation's rate sensitivity regularly, and uses a variety of strategies as needed to adjust that sensitivity. These include changing the relative proportions of fixed-rate and floating-rate assets and liabilities, as well as utilizing off-balance-sheet measures such as interest rate swaps and interest rate floors. At September 30, 1998, the Corporation was committed to interest rate swaps with a total notional amount of $75 million, down from the $275 million at year-end 1997. The swaps have remaining maturities of between 0 and 5 months, with a weighted average maturity of 3 months. During the second quarter of 1998, the Corporation sold interest rate swaps with a total notional amount of $100 million. These swaps were sold as part of the Corporation's management of its interest rate risk. Shifts in the mix of assets on the Corporation's balance sheet eliminated the need for those interest rate swaps. At September 30, 1998, the Corporation was committed to interest rate floors with a total notional amount of $325 million, unchanged from year-end 1997. The floors have remaining maturities of between 10 and 45 months, with a weighted average maturity of 21 months. The net interest differential, and the amortization of the initial fees associated with the purchase of the floors and any gains recorded on sale, are reported under the caption "Interest and fees on loans" and are recognized over the lives of the respective instruments. See "Net Interest Income." 26 Part II. Other Information Item 1 - Legal Proceedings Not Applicable Item 2 - Change In Securities and Use of Proceeds Not Applicable Item 3 - Defaults Upon Senior Securities Not Applicable Item 4 - Submission of Matters to a Vote of Security Holders Not Applicable Item 5 - Other Information Not Applicable Item 6 - Exhibits and Reports on Form 8-K The exhibits listed below are being filed as part of this report. These exhibits will be made available to any shareholder upon receipt of a written request therefor, together with payment of $.20 per page for duplicating costs. Exhibit Number Exhibit - -------------- -------------------------------------------------------- 11 Statement re computation of per share earnings 27 Financial data schedule 27 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, 1998 /s/ Ted T. Cecala ---------------------------------------------- Name: Ted T. Cecala Title: Chairman of the Board and Chief Executive Officer /s/ David R. Gibson ---------------------------------------------- Name: David R. Gibson Title: Senior Vice President and Chief Financial Officer 28 EX-11 2 Exhibit 11 Statement Re Computation of Per Share Earnings - ---------------------------------------------- Basic earnings per share of $.87 for the third quarter of 1998 were computed by dividing net income of $29,231,125 by the weighted average number of shares of common stock outstanding during the quarter of 33,476,116. EX-27 3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CORPORATION'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1998 194,276 0 107,000 0 1,277,842 148,529 149,682 4,229,758 69,896 6,248,794 4,527,107 913,364 95,584 168,000 0 0 39,264 505,475 6,248,794 268,018 76,932 1,303 346,253 116,727 167,704 178,549 15,000 4,747 172,669 126,780 84,832 0 0 84,832 2.53 2.47 4.22 30,958 14,139 0 13,298 63,805 12,128 3,219 69,896 60,247 0 9,649
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