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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
-------------------------------
September 30, December 31,
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
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
<PAGE>
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
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
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
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
<PAGE>
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
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
--------------------------------
For the nine months ended
September 30,
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
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
<PAGE>
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
</TABLE>
8
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
$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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
<PAGE>
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
============ ===========
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
<PAGE>
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
============= ===========
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
<PAGE>
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
======== ========
</TABLE>
* 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 194,276
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 107,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,277,842
<INVESTMENTS-CARRYING> 148,529
<INVESTMENTS-MARKET> 149,682
<LOANS> 4,229,758
<ALLOWANCE> 69,896
<TOTAL-ASSETS> 6,248,794
<DEPOSITS> 4,527,107
<SHORT-TERM> 913,364
<LIABILITIES-OTHER> 95,584
<LONG-TERM> 168,000
0
0
<COMMON> 39,264
<OTHER-SE> 505,475
<TOTAL-LIABILITIES-AND-EQUITY> 6,248,794
<INTEREST-LOAN> 268,018
<INTEREST-INVEST> 76,932
<INTEREST-OTHER> 1,303
<INTEREST-TOTAL> 346,253
<INTEREST-DEPOSIT> 116,727
<INTEREST-EXPENSE> 167,704
<INTEREST-INCOME-NET> 178,549
<LOAN-LOSSES> 15,000
<SECURITIES-GAINS> 4,747
<EXPENSE-OTHER> 172,669
<INCOME-PRETAX> 126,780
<INCOME-PRE-EXTRAORDINARY> 84,832
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,832
<EPS-PRIMARY> 2.53
<EPS-DILUTED> 2.47
<YIELD-ACTUAL> 4.22
<LOANS-NON> 30,958
<LOANS-PAST> 14,139
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13,298
<ALLOWANCE-OPEN> 63,805
<CHARGE-OFFS> 12,128
<RECOVERIES> 3,219
<ALLOWANCE-CLOSE> 69,896
<ALLOWANCE-DOMESTIC> 60,247
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,649
</TABLE>
