FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From ____________ to ___________
Commission File Number: 1-14659
WILMINGTON TRUST CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0328154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890
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(Address of principal executive offices) (Zip Code)
(302) 651-1000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of issuer's common stock ($1.00 par value) outstanding
at September 30, 2003 - 65,991,989 shares
Wilmington Trust Corporation and Subsidiaries
Form 10-Q
Index
Page
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Part I. Financial Information
Item 1 - Financial Statements (unaudited)
Consolidated Statements of Condition 1
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 45
Item 4 - Controls and Procedures 45
Part II. Other Information
Item 1 - Legal Proceedings 47
Item 2 - Changes in Securities and Use of Proceeds 47
Item 3 - Defaults Upon Senior Securities 47
Item 4 - Submission of Matters to a Vote of Security Holders 47
Item 5 - Other Information 47
Item 6 - Exhibits and Reports on Form 8-K 47
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
September 30, December 31,
(in millions) 2003 2002
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ASSETS
Cash and due from banks $ 228.5 $ 248.9
-----------------------------
Federal funds sold and securities purchased
under agreements to resell 477.7 --
-----------------------------
Investment securities available for sale:
U.S. Treasury and government agencies 515.1 489.6
Obligations of state and political subdivisions 12.9 13.0
Other securities 1,264.2 841.3
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Total investment securities available for sale 1,792.2 1,343.9
-----------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions 3.2 3.6
Other securities 1.1 1.2
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Total investment securities held to maturity (market values
of $4.6 and $5.1, respectively) 4.3 4.8
-----------------------------
Loans:
Commercial, financial, and agricultural 2,216.0 2,137.1
Real estate-construction 663.4 591.9
Mortgage-commercial 1,052.6 1,065.9
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Total commercial loans 3,932.0 3,794.9
-----------------------------
Mortgage-residential 545.9 677.2
Consumer 1,055.5 1,046.7
Secured with liquid collateral 565.8 506.3
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Total retail loans 2,167.2 2,230.2
-----------------------------
Total loans net of unearned income 6,099.2 6,025.1
Reserve for loan losses (91.2) (85.2)
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Net loans 6,008.0 5,939.9
-----------------------------
Premises and equipment, net 152.0 155.2
Goodwill, net of accumulated amortization
of $29.8 in 2003 and 2002 242.8 240.2
Other intangible assets, net of accumulated amortization
of $9.9 in 2003 and $8.1, in 2002 24.2 21.7
Accrued interest receivable 40.9 38.6
Other assets 129.3 138.1
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Total assets $ 9,099.9 $ 8,131.3
=============================
1
September 30, December 31,
(in millions) 2003 2002
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 1,440.0 $ 1,189.6
Interest-bearing:
Savings 364.9 349.3
Interest-bearing demand 2,246.9 1,833.6
Certificates under $100,000 805.6 884.1
Local CDs $100,000 and over 129.1 135.3
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Total core deposits 4,986.5 4,391.9
National CDs $100,000 and over 1,784.2 1,945.2
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Total deposits 6,770.7 6,337.1
-----------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 928.3 658.8
U.S. Treasury demand 55.6 41.9
Line of credit 10.5 34.0
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Total short-term borrowings 994.4 734.7
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Accrued interest payable 32.3 29.7
Other liabilities 107.9 128.0
Long-term debt 410.7 160.5
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Total liabilities 8,316.0 7,390.0
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Minority interest 0.3 --
-----------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 53.4 49.2
Retained earnings 928.3 884.2
Accumulated other comprehensive income (11.3) (1.2)
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Total contributed capital and retained earnings 1,048.9 1,010.7
Less: Treasury stock, at cost, 12,536,357 and
12,900,601 shares, respectively (265.3) (269.4)
-------------------------------------------------------------------------------------------------------------
Total stockholders' equity 783.6 741.3
-----------------------------
Total liabilities and stockholders' equity $ 9,099.9 $ 8,131.3
=============================
See Notes to Consolidated Financial Statements
2
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
For the three months ended For the nine months ended
September 30, September 30,
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(in millions; except per share data) 2003 2002 2003 2002
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NET INTEREST INCOME
Interest and fees on loans $ 74.0 $ 84.5 $ 227.9 $ 249.6
Interest and dividends on investment securities:
Taxable interest 14.3 13.5 43.9 40.9
Tax-exempt interest 0.3 0.3 0.7 0.7
Dividends 1.8 1.7 5.3 4.4
Interest on federal funds sold and securities
purchased under agreements to resell 0.1 0.1 0.3 0.3
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Total interest income 90.5 100.1 278.1 295.9
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Interest on deposits 14.7 22.9 50.3 67.2
Interest on short-term borrowings 4.0 3.7 11.1 14.2
Interest on long-term debt 3.7 2.7 10.0 7.9
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Total interest expense 22.4 29.3 71.4 89.3
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Net interest income 68.1 70.8 206.7 206.6
Provision for loan losses (5.7) (5.1) (16.6) (16.5)
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Net interest income after provision
for loan losses 62.4 65.7 190.1 190.1
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NONINTEREST INCOME
Advisory fees
Weatlh advisory services 35.5 31.2 102.3 94.2
Corporate client services 16.4 17.2 47.8 46.0
Cramer Rosenthal McGlynn 1.3 1.8 3.2 6.5
Roxbury Capital Management (0.1) 2.4 (2.3) 10.0
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Advisory fees 53.1 52.6 151.0 156.7
Amortization of other intangibles (0.7) (0.7) (1.4) (0.9)
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Advisory fees after amortization
other intangibles 52.4 51.9 149.6 155.8
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Service charges on deposit accounts 8.6 7.8 23.7 22.1
Loan fees and late charges 2.1 2.2 6.5 5.6
Card fees 2.1 2.6 7.1 7.8
Other noninterest income 1.1 1.0 3.6 3.1
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Total noninterest income 66.3 65.5 190.5 194.4
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Net interest and noninterest income 128.7 131.2 380.6 384.5
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3
NONINTEREST EXPENSE
Salaries and wages 31.5 30.3 92.5 89.2
Incentives and bonuses 5.4 7.4 19.2 23.7
Employment benefits 8.8 7.8 27.3 24.1
Net occupancy 4.8 5.3 15.2 14.8
Furniture, equipment, and supplies 6.6 8.2 21.1 24.3
Advertising and contributions 1.4 2.1 6.1 6.7
Servicing and consulting fees 4.0 3.2 12.0 8.8
Travel, entertainment, and training 1.8 2.0 5.1 5.5
Originating and processing fees 2.1 1.7 5.8 5.3
Other noninterest expense 8.8 9.1 27.6 25.8
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Total noninterest expense 75.2 77.1 231.9 228.2
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NET INCOME
Income before income taxes and minority
interest 53.5 54.1 148.7 156.3
Income tax expense 18.8 19.4 51.5 55.1
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Net income before minority interest 34.7 34.7 97.2 101.2
Minority interest 0.3 0.2 0.8 0.3
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Net income $ 34.4 $ 34.5 $ 96.4 $ 100.9
================================================================
Net income per share:
basic $ 0.52 $ 0.53 $ 1.46 $ 1.54
================================================================
diluted $ 0.52 $ 0.52 $ 1.45 $ 1.52
================================================================
Weighted average shares outstanding:
basic 65,956 65,631 65,814 65,628
diluted 66,670 66,174 66,348 66,354
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
For the nine months ended
September 30,
(in millions) 2003 2002
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OPERATING ACTIVITIES
Net income $ 96.4 $ 100.9
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 16.6 16.5
Provision for depreciation and other amortization 14.0 16.5
Amortization of other intangible assets 2.3 1.8
Minority interest in net income 0.8 0.3
Compensation expense - nonemployee stock options -- 0.1
Amortization of investment securities available for sale
discounts and premiums 11.2 13.0
Amortization of investment securities held to maturity
discounts and premiums -- 0.0
Deferred income taxes 4.3 (1.2)
Originations of residential mortgages available for sale (149.2) (90.9)
Gross proceeds from sales of loans 151.6 92.4
Gains on sales of loans (2.4) (1.5)
Securities losses -- --
Decrease/(increase) in other assets 1.7 (9.6)
(Decrease)/increase in other liabilities (11.8) 9.5
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Net cash provided by operating activities 135.5 147.8
-----------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 0.4 0.7
Proceeds from maturities of investment securities available for sale 890.0 581.7
Proceeds from maturities of investment securities held to maturity 0.5 1.1
Purchases of investment securities available for sale (1,365.7) (664.6)
Purchases of investment securities held to maturity -- (0.1)
Investments in affiliates (7.2) (16.9)
Cash paid for purchase of subsidiary -- (6.4)
Purchases of loans (2.7) (3.3)
Net increase in loans (82.0) (380.1)
Purchases of premises and equipment (19.1) (19.5)
Dispositions of premises and equipment 8.5 5.2
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Net cash used for investing activities (577.3) (502.2)
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5
For the nine months ended
September 30,
(in millions) 2003 2002
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FINANCING ACTIVITIES
Net increase in demand, savings, and interest-bearing
demand deposits 679.3 84.0
Net (decrease)/increase in certificates of deposit (245.7) 422.2
Net increase/(decrease) in federal funds purchased and securities
sold under agreements to repurchase 269.5 (41.0)
Net increase/(decrease) in U.S. Treasury demand 13.7 (3.2)
Proceeds from issuance of long-term debt 250.2 --
Net decrease in line of credit (23.5) (6.3)
Cash dividends (52.3) (49.2)
Distributions to minority shareholders (0.5) (0.3)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 9.1 9.3
Payments for common stock acquired through buybacks (0.8) (17.7)
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Net cash provided by financing activities 899.0 397.8
-----------------------------
Effect of foreign currency translation on cash 0.1 --
-----------------------------
Increase in cash and cash equivalents 457.3 43.4
Cash and cash equivalents at beginning of period 248.9 315.1
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Cash and cash equivalents at end of period $ 706.2 $ 358.5
=============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 68.8 $ 85.4
Taxes 48.0 54.1
In conjunction with the acquisition of Balentine & Company, SPV
Management Limited, Cramer Rosenthal McGlynn, LLC, Roxbury
Capital Management, LLC and Camden Prartners Holdings, LLC
liabilities were assumed as follows:
Fair value of assets acquired $ 7.2 $ 45.3
Common stock issued -- (8.8)
Cash paid (7.2) (29.5)
-------------------------------------------------------------------------------------------------------------
Liabilities assumed $ -- $ 7.0
=============================
See Notes to Consolidated Financial Statements
6
Notes to Unaudited Consolidated Financial Statements
Note 1 - Stock-Based Compensation Plans
At September 30, 2003, the Corporation had three types of stock-based
compensation plans, which are described in Note 15 to the consolidated financial
statements included in the Corporation's Annual Report to Shareholders for 2002.
The Corporation applies Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for these plans.
No stock-based compensation cost has been recognized in the accompanying
consolidated financial statements for those plans.
If compensation cost for the Corporation's three types of stock-based
compensation plans had been determined based on the fair value at the grant
dates for awards under those plans consistent with the methods outlined in
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," the Corporation's net income would have been as
follows:
For the For the
three months ended nine months ended
September 30, September 30,
(in millions, -------------------------------------------
except per share amounts) 2003 2002 2003 2002
--------------------------------------------------------------------------------
Net income:
As reported $ 34.4 $ 34.5 $ 96.4 $ 100.9
Deduct: Total stock-based (1.0) (1.1) (2.8) (3.4)
employee compensation
expense determined
under fair value based
method for all awards,
net of related tax effects
------------------------------------------------------------------------------
Pro forma net income $ 33.4 $ 33.4 $ 93.6 $ 97.5
Basic earnings per share:
As reported $ 0.52 $ 0.53 $ 1.46 $ 1.54
Pro forma 0.51 0.51 1.42 1.49
Diluted earnings per share:
As reported $ 0.52 $ 0.52 $ 1.45 $ 1.52
Pro forma 0.50 0.51 1.41 1.47
7
Note 2 - Accounting and Reporting Policies
The accounting and reporting policies of Wilmington Trust Corporation (the
Corporation), a holding company that owns all of the issued and outstanding
shares of capital stock of Wilmington Trust Company, Wilmington Trust of
Pennsylvania, Wilmington Trust FSB, WT Investments, Inc. (WTI), Rodney Square
Management Corporation, Wilmington Trust (UK) Limited, and Balentine Holdings,
Inc., conform to accounting principles generally accepted in the United States
of America (GAAP) and practices in the banking industry for interim financial
information. The information for the interim periods is unaudited and includes
all adjustments that are of a normal recurring nature and that management
believes to be necessary for fair presentation. Results for the interim periods
are not necessarily indicative of the results that may be expected for the full
year. The consolidated financial statements presented herein should be read in
conjunction with the notes to the consolidated financial statements included in
the Corporation's Annual Report to Shareholders for 2002. Certain prior year
amounts have been reclassified to conform to current year presentation.
Note 3 - Comprehensive Income
The following table depicts other comprehensive income as required by SFAS No.
130:
For the For the
three months nine months
ended ended
September 30, September 30,
----------------------------------
(in millions) 2003 2002 2003 2002
--------------------------------------------------------------------------
Net income $ 34.4 $ 34.5 $ 96.4 $ 100.9
Other comprehensive income, net of
income taxes:
Net unrealized holding gains/(losses)
on securities (16.0) 0.2 (10.2) 3.5
Reclassification adjustment for
securities gains included in net
income -- -- -- --
Net unrealized holding gains arising
during the period on derivatives
used for cash flow hedge -- -- -- --
Reclassification adjustment for
derivitive gains included in net
income -- -- (0.1) (0.1)
Foreign currency translation
adjustments 0.1 -- 0.2 0.1
Minimum pension liability adjustment -- -- -- --
---------------- ----------------
Total comprehensive income $ 18.5 $ 34.7 $ 86.3 $ 104.4
================ ================
8
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings
per share:
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------------------------------
(in millions; except per share data) 2003 2002 2003 2002
-----------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 34.4 $ 34.5 $ 96.4 $ 100.9
-----------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 66.0 65.6 65.8 65.6
-----------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 0.7 0.6 0.5 0.8
-----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 66.7 66.2 66.3 66.4
-----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.52 $ 0.53 $ 1.46 $ 1.54
===========================================================================================================
Diluted earnings per share $ 0.52 $ 0.52 $ 1.45 $ 1.52
===========================================================================================================
Cash dividends per share $ 0.27 $ 0.255 $ 0.525 $ 0.495
The number of anti-dilutive stock options excluded for the three- and nine-month
periods ended September 30, 2003, was 1.1 million and 2.1 million,
respectively. The number of anti-dilutive stock options excluded for the three-
and nine-month periods ended September 30, 2002 was 2.1 million and 1.0
million, respectively.
Note 5 - Segment Reporting
For the purposes of segment reporting, the Corporation discusses its business in
four segments. In addition to a segment for each of the Corporation's three
businesses, which are Regional Banking, Wealth Advisory Services, and Corporate
Client Services, there is a segment for Affiliate Money Managers. The third
quarter of 2003 marks the first time the Corporation has reported four
segments. All prior period amounts have been restated accordingly.
The Regional Banking segment includes lending, deposit-taking, and branch
banking in the Corporation's primary banking markets of Delaware, southeastern
Pennsylvania, and Maryland's Eastern Shore. It also includes institutional
deposit taking on a national basis. Lending activities include commercial loans,
commercial and residential mortgages, and construction and consumer loans.
Deposit products include demand checking, certificates of deposit, negotiable
order of withdrawal accounts, and various savings and money market accounts.
The Wealth Advisory Services segment includes financial planning, asset
management, investment counseling, trust services, estate settlement, private
banking, tax preparation, mutual fund services, broker-dealer services, and
insurance services. Results from Balentine & Company, which the Corporation
acquired in January 2002, are fully consolidated in the Wealth Advisory Services
segment.
The Corporate Client Services segment includes a variety of trust, custody, and
administrative services that support capital markets transactions, entity
management, and retirement plan assets. Results of SPV Management Limited, which
the Corporation acquired in April 2002, are fully consolidated in the Corporate
Client Services segment.
The Affiliate Money Managers segment includes contributions from Cramer
Rosenthal McGlynn (CRM) and Roxbury Capital Management (RCM), which are based on
the Corporation's partial ownership interest in each. Services provided by these
two affiliates include fixed income and equity investing services and investment
portfolio management services. Neither CRM's or RCM's results are fully
consolidated in the Corporations's financial statements.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1 to the consolidated
financial statements in the Corporation's Annual Report to shareholders for
2002. The Corporation evaluates performance based on profit or loss from
operations before income taxes and without including nonrecurring gains and
losses. The Corporation generally records intersegment sales and transfers as if
the sales or transfers were to third parties (e.g., at current market prices).
Profit or loss from infrequent events, such as the sale of a business, is
reported separately for each segment.
Segment reporting for September 30, 2002, has been revised to reflect the
change in methodology implemented for September 30, 2003. This new methodology
employs activity-based costing principles to assign corporate overhead
expenses to each segment. In addition, funds transfer pricing concepts are used
to credit and charge segments for funds provided and funds used.
9
Financial data by segment for the quarters and year-to-date periods ended
September 30, 2003 vs. September 30, 2002 is as follows:
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended September 30, 2003 (in millions) Banking Services Services Managers Totals
-------------------------------------------------------------------------------------------------------------
Net interest income $ 63.5 $ 5.8 $ 2.9 $ (4.1) $ 68.1
Provision for loan losses (5.0) (0.7) -- -- (5.7)
-------------------------------------------------------------------------------------------------------------
Net interest income after provision 58.5 5.1 2.9 (4.1) 62.4
Advisory fees:
Wealth advisory services 0.6 32.4 2.5 -- 35.5
Corporate client services 0.3 -- 16.1 -- 16.4
Affiliate managers -- -- -- 1.2 1.2
-------------------------------------------------------------------------------------------------------------
Advisory fees 0.9 32.4 18.6 1.2 53.1
Amortization of other intangibles -- (0.1) (0.1) (0.5) (0.7)
-------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.9 32.3 18.5 0.7 52.4
Other noninterest income 12.3 1.2 0.4 -- 13.9
-------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 71.7 38.6 21.8 (3.4) 128.7
Noninterest expense (33.6) (28.7) (12.9) -- (75.2)
-------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 38.1 $ 9.9 $ 8.9 $ (3.4) $ 53.5
=============================================================================================================
Depreciation and amortization $ 6.6 $ 2.4 $ 2.1 $ 0.4 $ 11.5
10
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended September 30, 2002 (in millions) Banking Services Services Managers Totals
-------------------------------------------------------------------------------------------------------------
Net interest income $ 66.5 $ 6.2 $ 1.1 $ (3.0) $ 70.8
Provision for loan losses (4.9) (0.2) -- -- (5.1)
-------------------------------------------------------------------------------------------------------------
Net interest income after provision 61.6 6.0 1.1 (3.0) 65.7
Total advisory fees:
Wealth advisory services 0.8 27.8 2.6 -- 31.2
Corporate client services 0.5 -- 16.7 -- 17.2
Affiliate managers -- -- -- 4.2 4.2
-------------------------------------------------------------------------------------------------------------
Advisory fees 1.3 27.8 19.3 4.2 52.6
Amortization of other intangibles -- (0.5) (0.2) -- (0.7)
-------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 1.3 27.3 19.1 4.2 51.9
Other noninterest income 12.1 1.1 0.4 -- 13.6
-------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 75.0 34.4 20.6 1.2 131.2
Noninterest expense (37.6) (25.6) (13.3) (0.6) (77.1)
-------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 37.4 $ 8.8 $ 7.3 $ 0.6 $ 54.1
=============================================================================================================
Depreciation and amortization $ 7.3 $ 2.2 $ 1.6 $ 0.1 $ 11.2
11
Wealth Corporate Affiliate
Regional Advisory Client Money
Year-to-Date September 30, 2003 (in millions) Banking Services Services Managers Totals
-------------------------------------------------------------------------------------------------------------
Net interest income $ 187.3 $ 19.2 $ 10.5 $ (10.3) $ 206.7
Provision for loan losses (15.4) (1.2) -- -- (16.6)
-------------------------------------------------------------------------------------------------------------
Net interest income after provision 171.9 18.0 10.5 (10.3) 190.1
Total advisory fees:
Wealth advisory services 1.9 92.6 7.8 -- 102.3
Corporate client services 1.0 -- 46.8 -- 47.8
Affiliate managers -- -- -- 0.9 0.9
-------------------------------------------------------------------------------------------------------------
Advisory fees 2.9 92.6 54.6 0.9 151.0
Amortization of other intangibles -- (0.4) (0.4) (0.6) (1.4)
-------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 2.9 92.2 54.2 0.3 149.6
Other noninterest income 38.5 1.3 1.1 -- 40.9
-------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 213.3 111.5 65.8 (10.0) 380.6
Noninterest expense (104.4) (86.1) (41.4) -- (231.9)
-------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 108.9 $ 25.4 $ 24.4 $ (10.0) $ 148.7
=============================================================================================================
Depreciation and amortization $ 17.2 $ 5.3 $ 4.4 $ 0.6 $ 27.5
Investment in equity method investees -- -- -- 243.6 243.6
Segment average assets 6,872.8 1,065.5 281.4 243.6 8,463.3
12
Wealth Corporate Affiliate
Regional Advisory Client Money
Year-to-Date September 30, 2002 (in millions) Banking Services Services Managers Totals
-------------------------------------------------------------------------------------------------------------
Net interest income $ 191.5 $ 19.1 $ 6.4 $ (10.4) $ 206.6
Provision for loan losses (15.3) (1.2) -- -- (16.5)
-------------------------------------------------------------------------------------------------------------
Net interest income after provision 176.2 17.9 6.4 (10.4) 190.1
Total advisory fees:
Wealth advisory services 2.3 84.2 7.7 -- 94.2
Corporate client services 1.3 -- 44.7 -- 46.0
Affiliate managers -- -- -- 16.5 16.5
-------------------------------------------------------------------------------------------------------------
Advisory fees 3.6 84.2 52.4 16.5 156.7
Amortization of other intangibles -- (0.5) (0.2) (0.2) (0.9)
-------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 3.6 83.7 52.2 16.3 155.8
Other noninterest income 36.8 1.1 0.7 -- 38.6
-------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 216.6 102.7 59.3 5.9 384.5
Noninterest expense (111.3) (77.0) (38.7) (1.2) (228.2)
-------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 105.3 $ 25.7 $ 20.6 $ 4.7 $ 156.3
=============================================================================================================
Depreciation and amortization $ 21.0 $ 5.8 $ 4.2 $ 0.3 $ 31.3
Investment in equity method investees -- -- -- 231.0 231.0
Segment average assets 6,146.9 999.1 172.7 231.0 7,549.7
Note 6 - Derivative and Hedging Activities
The Corporation previously has entered into interest rate swap and interest rate
floor contracts in managing interest rate risk to reduce the impact of
fluctuations in interest rates of identifiable asset categories, principally
floating-rate commercial loans and commercial mortgage loans.
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts.
Floors are contracts that generate interest payments to the Corporation based on
the difference between the floating-rate index and a predetermined strike rate
of the specific floor when the index is below the strike rate.
When the index is equal to or above the strike rate, no payments are made or
received by the Corporation.
The Corporation also uses swaps to protect against the changes in fair value of
fixed-rate bonds it has issued due to changes in interest rates. In April of
2003, the Corporation entered into five interest rate swaps with notional
values of $50 million each. The Corporation's objective was to protect against
changes in the fair value of its $250 million fixed-rate subordinated debt
issue due to changes in LIBOR. The swaps were designated as fair value hedges
and, since the critical terms of the swaps and the hedged bonds were identical,
the Corporation assumed no ineffectiveness. As a result, gains and losses
attributable to changes in the fair value of the swaps are directly offset by
changes in the fair value of the debt.
Changes in the fair value of the floors attributed to the change in "time value"
are excluded in assessing the hedge's effectiveness and are recorded in "Other
noninterest income" in the Consolidated Statements of Income.
Changes in the fair value that are determined to be ineffective are also
recorded in "Other noninterest income" in the Consolidated Statements of Income.
The effective portion of the change in fair value is recorded in "Other
comprehensive income" in the Consolidated Statements of Condition.
For the third quarter of 2003, approximately $77,100 of gains in "Accumulated
other comprehensive income" were reclassified to earnings.
13
During the 12 months ending September 30, 2004, approximately $308,400 of gains
in "Accumulated other comprehensive income" are expected to be reclassified to
earnings.
The Corporation does not hold or issue derivative financial instruments for
trading purposes.
Note 7 - Goodwill and Other Intangible Assets
A summary of goodwill and other intangible assets at September 30 is as follows:
September 30, 2003 December 31, 2002
-----------------------------------------------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount amortization amount amount amortization amount
---------------------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $ 272.6 $ 29.8 $ 242.8 $ 270.0 $ 29.8 $ 240.2
===================================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 6.6 $ 3.7 $ 2.9 $ 5.4 $ 3.0 $ 2.4
Customer lists 15.3 4.0 11.3 15.2 3.0 12.2
Acquisition costs 1.1 1.1 -- 1.7 1.5 0.2
Other intangibles 4.3 1.1 3.2 0.7 0.6 0.1
Nonamortizing
Other intangible assets 6.8 -- 6.8 6.8 -- 6.8
---------------------------------------------------------------------------------------------------------------------
Total other intangibles $ 34.1 $ 9.9 $ 24.2 $ 29.8 $ 8.1 $ 21.7
===================================================================================
Amortization expense of other intangible assets for the three and nine months
ended September 30 is as follows:
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------------------------------------
(in millions) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------
Amortization expense $ 1.0 $ 0.9 $ 2.3 $ 1.8
The estimated amortization expense of other intangible assets for each of the
five succeeding fiscal years is as follows:
Estimated annual amortization expense (in millions)
--------------------------------------------------------------------------------
For the year ended December 31, 2004 $ 2.4
For the year ended December 31, 2005 2.4
For the year ended December 31, 2006 2.0
For the year ended December 31, 2007 1.3
For the year ended December 31, 2008 1.2
14
The changes in the carrying amount of goodwill for the nine months ended
September 30 are as follows:
2003
--------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(in millions) Banking Services Services Managers Total
-----------------------------------------------------------------------------------------------------
Balance as of January 1, 2003 $ 3.8 $ 4.4 $ 7.2 $ 224.8 $ 240.2
Goodwill acquired -- -- -- 2.4 2.4
Increase in carrying value due to foreign
currency translation adjustments -- -- 0.2 -- 0.2
-----------------------------------------------------------------------------------------------------
Balance as of September 30, 2003 $ 3.8 $ 4.4 $ 7.4 $ 227.2 $ 242.8
========================================================
2002
--------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(in millions) Banking Services Services Managers Total
-----------------------------------------------------------------------------------------------------
Balance as of January 1, 2002 $ 3.8 $ -- $ -- $ 209.1 $ 212.9
Goodwill acquired -- 4.4 6.4 16.9 27.7
Impairment loss -- -- -- (1.1) (1.1)
---------------------------------------------------------------------------------------------------
Balance as of September 30, 2002 $ 3.8 $ 4.4 $ 6.4 $ 224.9 $ 239.5
======================================================
The goodwill acquired in 2003 above includes $1.9 million recorded in connection
with increases in WTI's equity interest in Cramer Rosenthal McGlynn.
The goodwill aquired in 2002 above includes $4.4 million recorded in connection
with the acquisition of Balentine Holdings, Inc., $2.4 million recorded in
connection with WTI's investment in Camden Partners Holdings, LLC, $13.8 million
recorded in connection with WTI's investment in Cramer Rosenthal McGlynn, and
$6.4 million recorded in connection with the acquisition of SPV Management
Limited.
15
Other intangible assets acquired in the first nine months of 2003 are as
follows:
Weighted
average
amortization
Amount Residual period
(in millions) Assigned Value in years
--------------------------------------------------------------------------------
Mortgage servicing rights $ 1.2 -- 8
Other intangibles 3.5 -- 20
---------------------
$ 4.7 --
=====================
Note 8 - Accounting Pronouncements
SFAS No. 146: In June 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of this Statement did not
have an impact on the Corporation's consolidated earnings, financial condition,
or equity.
SFAS No. 148: In December, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This Statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair
value-based method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of that Statement to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. Finally,
this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial information. The
requirements for SFAS No. 148 are effective for financial statements for fiscal
years ended and interim periods beginning after December 15, 2002. The
Corporation uses the "intrinsic value" approach to accounting for stock-based
compensation as permitted under APB Opinion No. 25. The Corporation has adopted
the disclosure provisions of SFAS No. 148. The disclosure provisions had no
impact on the Corporation's consolidated earnings, financial condition, or
equity. On April 22, 2003, the FASB announced its intention to require that all
companies expense the value of employee stock options. The FASB plans to issue a
new exposure draft later this year that could become effective in 2004. Until
the new Statement is issued, the provisions of Statement No. 123 remain in
effect. See "Stock-based employee compensation" under "Critical Accounting
Policies and Estimates."
SFAS No. 149: In April 2003, the FASB issued SFAS No. 149, "Amendments of
Statement 133 on Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including derivatives embedded in other contracts and hedging activities. The
Statement amends Statement No. 133 for decisions made by the FASB as part of its
Derivatives Implementation Group process. The Statement also amends Statement
No. 133 to incorporate clarifications of the definition of a derivative. The
Statement is effective for contracts entered into or modified and hedging
relationships designated after June 30, 2003. The provisions of this Statement
did not have a material impact on the Corporation's consolidated earnings,
financial condition, or equity.
SFAS No. 150: In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify these financial instruments as a liability (or, in
certain circumstances, an asset). Previously these financial instruments would
have been classified entirely as equity, or between the liabilities section and
equity section of the statement of financial condition. This Statement also
addresses questions about the classification of certain financial instruments
16
that embody obligations to issue equity shares. The provisions of this Statement
are effective for interim periods beginning after June 15, 2003. The adoption of
this Statement did not have an impact on the Corporation's consolidated
earnings, financial condition, or equity.
FIN No. 45: In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This is an interpretation of
FASB Nos. 5, 57, and 107, and rescinds FASB Interpretation No. 34. The
Interpretation elaborates on the disclosures a guarantor is required to make in
both its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions are to be applied on a prospective basis
to guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's year-end. Accounting for guarantees issued prior to the date of this
Interpretation's initial application will not be revised or restated to reflect
the effect of the recognition and measurement provisions of the Interpretation.
The application of this Interpretation did not have a material effect on the
Corporation's consolidated earnings, financial condition, or equity.
FIN No. 46: On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," an interpretation of Accounting
Research Bulletin (ARB) No. 51, "Consolidated Financial Statements." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities to which the normal conditions for consolidation do not apply,
due to the entities' lack of a voting interest or lack of control through
ownership of a voting interest. The Interpretation requires that an enterprise
review its degree of involvement in a variable interest entity to determine if
it is the primary beneficiary. Certain disclosures about the variable interest
entity and the enterprise's involvement are required by both the primary
beneficiary and by the enterprise that has a significant interest in a variable
interest entity. This Interpretation has had no material impact on the
Corporation's consolidated earnings, financial condition, or equity, nor has
there been any additional requirement for disclosures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPANY OVERVIEW
The Corporation is a financial services holding company with a diversified mix
of three businesses: Wealth Advisory Services, Corporate Client Services, and
Regional Banking. For the purposes of segment reporting, we consider our
affiliate money managers, Cramer Rosenthal McGlynn and Roxbury Capital
Management, separately. The Corporation delivers these services through its
primary wholly owned subsidiaries:
- Wilmington Trust Company, a Delaware-chartered bank and trust company
that has engaged in commercial and trust banking activities since 1903.
Wilmington Trust Company is the 15th largest personal trust provider in
the United States and the largest full-service bank in Delaware, with
44 branch offices throughout the state.
- Wilmington Trust of Pennsylvania, a Pennsylvania-chartered bank and
trust company. Wilmington Trust of Pennsylvania has four offices
(center city Philadelphia, Doylestown, Villanova, and West Chester).
- Wilmington Trust FSB, which serves as the platform for the
Corporation's activities beyond Delaware and Pennsylvania. Wilmington
Trust FSB offices are located in California, Florida, Georgia,
Maryland, Nevada, and New York.
The Corporation and its affiliates also have offices in Tennessee, the Cayman
Islands, the Channel Islands, and London, and other affiliates in Dublin and
Milan.
Through its subsidiaries, the Corporation engages in fiduciary, wealth
management, investment advisory, financial planning, insurance, broker-dealer
services, deposit taking, and residential, commercial, and construction lending.
The Wealth Advisory Services business provides a variety of financial planning
and asset management services for high-net-worth individuals and families
throughout the United States and in many foreign countries. The Corporate Client
Services business provides a variety of specialty trust and administrative
services for national and multinational institutions. The Regional Banking
business targets consumer and middle-market commercial clients throughout the
Delaware Valley region.
17
SUMMARY OF RESULTS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003
During the 2003 third quarter:
- Loan balances continued to increase, supported by the relative economic
health and stability throughout the Delaware Valley region;
- Wealth Advisory Services income rose on a combination of solid sales
and stabilizing equity markets;
- Results from the affiliate money managers improved;
- Expense reduction continued; and
- Credit quality remained stable.
These achievements were offset by continued compression in the net interest
margin. Earnings per share, on a diluted basis, were $0.52, which was equal to
the 2002 third quarter. Net income was $34.4 million, which was slightly less
than the $34.5 million recorded for the 2002 third quarter.
While 2003 third quarter events suggested the beginnings of an economic
recovery, results for the first nine months of 2003 reflected the challenges of
the lowest interest rates in four decades, volatility in the financial markets,
and general economic sluggishness. For the first nine months of 2003, earnings
per share, on a diluted basis, were $1.45. This was $0.07, or 4.6%, lower than
for the first nine months of 2002. Net income was $96.4 million for the first
nine months of 2003, which was 4.5% less than the $100.9 million recorded for
the first nine months of 2002.
Net interest income and noninterest income, as a percentage of total net
interest and noninterest income, remained balanced and, on a percentage basis,
relatively unchanged for the third quarter and first nine months of 2003 when
compared with the corresponding year-ago periods.
The 2003 third quarter marked the 10th consecutive quarter of increases in loan
balances, which were $6.10 billion at period-end and $6.06 billion on average.
On a period-end basis, this was 3.4% more than the $5.9 billion recorded at
September 30, 2002, and 1.2% more than the $6.03 billion recorded at December
31, 2002.
For the first nine months of 2003, loan balances, on average, were $6.0 billion,
which was 7.1% more than the $5.6 billion reported for the first nine months of
2002. The composition of the loan portfolio remained relatively unchanged from
December 31, 2002, and September 30, 2002.
Although loan balances rose, yields declined, as new loans were added at lower
rates and a high volume of existing loans was refinanced at lower yields. The
third quarter was the first quarter to reflect fully the impact of the action
the Federal Reserve took in June to lower interest rates. Average yields on loan
balances, investments, and total earning assets declined for the sixth
consecutive quarter. The cost of funds used to support earning assets declined,
but to a much lesser extent.
As a result, the net interest margin fell to 3.45%, which was 57 basis points
lower than the 4.02% reported for the 2002 third quarter. For the first nine
months of 2003, the net interest margin was 3.60%, which was 45 basis points
lower than for the first nine months of 2002.
Third quarter advisory income was $53.1 million, which was 1% higher than the
$52.6 million reported for the 2002 third quarter. This increase was due
primarily to higher Wealth Advisory Services income.
For the first nine months of 2003, advisory income totaled $151.0 million, which
was 3.6% less than the $156.7 million reported for the first nine months of
2002. The decrease was due entirely to lower results at the affiliate money
managers, which contributed income of $0.9 million for the first nine months of
2003 versus $16.5 million for the first nine months of 2002.
On a combined basis, assets under management at Wilmington Trust, Cramer
Rosenthal McGlynn, and Roxbury Capital Management totaled $30.7 billion. This
was a 7.0% increase from the $28.7 billion recorded at September 30, 2002, and
an 8.9% increase from the $28.2 billion reported at December 31, 2002.
Careful attention to expense management resulted in lower noninterest expenses
for the quarter and a slowdown in the pace of growth for the year to date. For
the quarter, noninterest expenses were $75.2 million, which was 2.5% less than
the $77.1 million reported for the 2002 third quarter. This decrease reflected
the elimination in January 2003 of the company-wide
18
profit sharing program. For the first nine months of 2003, noninterest expenses
totaled $231.9 million, which was 1.6% higher than the $228.2 million reported
for the first nine months of 2002. The year-to-date increase was due largely to
higher compensation costs in line with increased sales, and higher health
insurance and pension costs.
On an annualized basis, the third quarter 2003 return on average assets was
1.58% and return on average stockholders' equity was 17.64%, compared with 1.77%
and 18.66%, respectively, for the 2002 third quarter. For the first nine months
of 2003, on an annualized basis, the return on average assets was 1.52% and
return on average stockholders' equity was 16.90%, compared with 1.79% and
18.93%, respectively, for the first nine months of 2002.
A regular quarterly dividend of $0.27 per share was declared. This was 5.9%
higher than the $0.255 declared in the 2002 third quarter.
STATEMENT OF CONDITION
This section discusses changes in the balance sheet for the period between
December 31, 2002, and September 30, 2003.
Total assets at September 30, 2003, were $9.1 billion, which was $1.0 billion,
or 12.3%, higher than the $8.1 billion recorded at December 31, 2002. On
average, total assets for the first nine months of 2003 were $8.5 billion, which
was $1.0 billion, or 13.3%, higher than the $7.5 billion reported for the first
nine months of 2003. The increase was due to growth in total earning assets,
including loan balances and investments.
Total earning assets at September 30, 2003, were $8.4 billion, which was $1.0
billion, or 13.5%, higher than at December 31, 2002. For the first nine months
of 2003, total earning assets, on average, were $7.8 billion, which was $0.9
billion, or 13.0%, higher than for the first nine months of 2002. The increases
were due primarily to higher investment balances.
Investment securities
At September 30, 2003, the investment portfolio balance was $1.8 billion. This
was $500.0 million, or 38.4%, higher than the $1.3 billion reported at December
31, 2002. For the first nine months of 2003, investment securities balances, on
average, were $1.7 billion, which was $400.0 million, or 30.7%, higher than the
$1.3 billion reported for the first nine months of 2002.
The size of the investment portfolio was increased to offset the effects of
maturities and calls of securities, the volume of prepayments and refinancings
in the loan portfolio, and lower residential mortgage balances due to the
ongoing sale of new production into the secondary market. Proceeds from the
April 2003 issue of $250 million long-term debt, which were invested mainly in
mortgage-backed securities, contributed to the growth in the investment
portfolio.
The percentage of the portfolio invested in mortgage-backed instruments rose
32.4%, to 49% at September 30, 2003, from 37% at December 31 and September 30,
2002. Approximately 73% of the mortgage-related instruments in the securities
portfolio are invested in 15-year, fixed-rate instruments. Excluding
collateralized mortgage obligations, approximately 97% of the mortgage-backed
securities in the portfolio are invested in 15-year, fixed-rate instruments. The
Corporation believes that duration and risk can be better managed with
mortgage-backed securities than by retaining individual residential mortgages.
The average life of investments in the total securities portfolio is
approximately 5.18 years. Duration is approximately 2.57. On mortgage-related
instruments, the average life is approximately 4.01 years and the duration is
approximately 4.27.
19
The following table compares changes in the composition of the investment
securities portfolio.
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
SECURITY 2003 2002 2002
-------- ------------- ------------ -------------
Mortgage-backed securities and
collateralized mortgage obligations 49% 37% 33%
Treasuries 17% 24% 28%
Corporate issues 13% 15% 13%
Agencies 11% 11% 14%
Money market preferred stocks 7% 10% 9%
Municipal bonds 1% 2% 2%
Other 2% 1% 1%
Loan balances
Loan balances at September 30, 2003, were $6.10 billion, which was 1.2% higher
than the $6.03 billion recorded at December 31, 2002. For the first nine months
of 2003, loan balances, on average, were $6.0 billion, which was 7.1% more than
the $5.6 billion reported for the first nine months of 2002. The Corporation
considers average balances, rather than period-end balances, to be more
indicative of trends in its banking business.
The Corporation's Regional Banking business is concentrated in the Delaware
Valley region, which it defines as the area along the I-95 corridor from
Princeton to Baltimore, the state of Delaware, and Maryland's Eastern Shore. The
economy in this region is well diversified among the financial services,
technology, life sciences, manufacturing, retail, agriculture, and tourism
sectors, and remains relatively strong compared to many other parts of the
United States.
Approximately 99% of the third quarter and year-to-date growth in loan balances
occurred in this region. Most of the growth occurred in the commercial
portfolio. For the third quarter, approximately 41% of the commercial loan
growth was generated in the Delaware market, where Wilmington Trust is the
dominant banking company. Approximately 58% of the commercial loan growth came
from the southeastern Pennsylvania market, which comprises the five-county
metropolitan area including and surrounding Philadelphia. In contrast,
southeastern Pennsylvania accounted for only 16% of the commercial loan growth
in the 2002 third quarter.
Commercial loans
Most of the growth in loan balances occurred in the commercial portfolio. At
September 30, 2003, commercial loan balances totaled $3.93 billion. This was
$140.0 million, or 3.7%, higher than the $3.79 billion recorded at December 31,
2002, and $380.0 million, or 10.7%, higher than at September 30, 2002.
For the first nine months of 2003, commercial loan balances, on average, were
$3.82 billion, which was $440.0 million, or 13.0%, more than the $3.38 billion
reported for the first nine months of 2002.
Commercial loan balances are reported in three categories:
- Commercial, financial, and agricultural loans,
- Mortgage-commercial loans, and
- Real estate-construction loans.
More than half of the commercial loan growth in the third quarter, and most of
the growth in the first nine months of 2003, occurred in commercial real estate
and construction (CRE) loans. The growth occurred throughout the Delaware Valley
region and was not concentrated in any one area. Housing demand remained strong
throughout the region, and much of the growth funded primary, retirement, and
resort residential projects and included single-family, multi-family, and
age-restricted developments. In addition, CRE loans were booked across a variety
of hotel, industrial, and retail projects, both on a construction and permanent
financing basis.
At September 30, 2003, CRE balances totaled $663.4 million, which was $71.5
million, or 12.1%, more than the $591.9 million recorded at December 31, 2002.
For the first nine months of 2003, CRE balances, on average, were $587.1
million. This was $146.2 million, or 33.2%, higher than the $440.9 million
reported for the first nine months of 2002.
20
Commercial, financial, and agricultural (C and I) loan balances at September 30,
2003, were $2.22 billion. This was $80.0 million, or 3.7%, more than the $2.14
billion recorded at December 31, 2002.
For the first nine months of 2003, C and I loan balances, on average, were $2.20
billion, which was $260.0 million, or 13.4%, more than the $1.94 billion
reported for the first nine months of 2002.
Commercial mortgage balances were $1.05 billion at September 30, 2003, which was
$20.0 million, or 1.9%, lower than the $1.07 billion recorded at December 31,
2002.
For the first nine months of 2003, commercial mortgage balances, on average,
were $1.62 billion, which was $170.0 million, or 11.7%, more than the $1.45
billion recorded for the first nine months of 2002.
Retail loans
On a period-end basis, total retail loans declined to $2.17 billion, from $2.23
billion at December 31, 2002.
Retail loan balances also declined on average, to $2.20 billion for the first
nine months of 2003, which was $39.0 million, or 1.74%, less than for the first
nine months of 2002.
Retail loan balances are reported in three categories:
- Mortgage-residential mortgage loans,
- Consumer loans, and
- Secured with liquid collateral loans.
Almost all of the decrease in total retail loan balances for the quarter and
year to date occurred in the residential mortgage portfolio, where balances
continued to decline due to refinancings, prepayments, and the ongoing sale of
all new residential mortgage production into the secondary market.
Residential mortgage balances at September 30, 2003, totaled $545.9 million.
This was $131.3 million, or 19.4%, lower than the $677.2 million recorded at
December 31, 2002.
For the first nine months of 2003, residential mortgage balances, on average,
were $608.9 million, which was $191.2 million, or 23.9%, less than the $800.1
million reported for the first nine months of 2002.
While residential mortgage balances declined, balances rose for consumer loans
and loans secured with liquid collateral.
Consumer loan balances at September 30, 2003, were $1.06 billion. This was $8.8
million, or 0.8%, more than the $1.05 billion recorded at December 31, 2002. For
the first nine months of 2003, consumer loan balances, on average, were $1.03
billion. This was $28.3 million, or 2.8%, more than the $1.00 billion reported
for the first nine months of 2002.
Loans secured with liquid collateral are tied primarily to relationships with
Wealth Advisory Services clients. At September 30, 2003, the period-end balance
of these loans was $565.8 million. This was $59.5 million, or 11.8%, more than
the $506.3 million recorded at December 31, 2002. For the first nine months of
2003, balances for loans secured with liquid collateral, on average, were $560.9
million, which was $123.9 million, or 28.4%, higher than the $437.0 million
reported for the first nine months of 2002.
The growth in these balances came from all of the Wealth Advisory Services
markets, and two factors contributed to the increases. First, the overall
expansion of the Wealth Advisory Services business has generated organic
expansion in secured lending. Second, the demand for this type of lending has
increased as clients seek to maintain personal cash flow levels opposite equity
market declines and the low interest rate environment.
21
Loan portfolio composition
The following table illustrates how composition of the total loan portfolio has
remained relatively unchanged.
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
LOAN PORTFOLIO COMPOSITION 2003 2002 2002
-------------------------- -------------- ------------ -------------
Commercial/financial/agricultural 36% 35% 36%
Commercial real estate construction 11% 10% 8%
Commercial mortgage 17% 18% 17%
Residential mortgage 9% 11% 13%
Consumer 27% 26% 26%
Reserve and provision
Changes in the reserve and provision for loan losses reflected the growth in
loan balances and the Corporation's internal risk rating analysis, reserve
methodology, and net charge-offs.
At September 30, 2003, the period-end reserve for loan losses was $91.2 million,
or 1.50% of loans outstanding. This was $6.0 million, or 7%, higher than the
December 31, 2002, reserve of $85.2 million, and the reserve ratio was 9 basis
points higher than the December 31, 2002, ratio of 1.41%.
The provision for loan losses for the 2003 third quarter was $5.7 million. This
was $600,000, or 11.8%, more than for the 2002 third quarter. For the first nine
months of 2003, the provision totaled $16.6 million. This was $100,000, or 0.6%,
more than the provision for the first nine months of 2002.
Net charge-offs declined substantially. For the 2003 third quarter, net
charge-offs were $2.0 million, versus $7.1 million for the 2002 fourth quarter
and $5.0 million for the 2002 third quarter. The net charge-off ratio for the
2003 third quarter was 3 basis points, which was 6 basis points lower than for
the 2002 third quarter. For the first nine months of 2003, net charge-offs
totaled 17 basis points, which was 2 basis points less than for the first nine
months of 2002.
Deposit balances
At September 30, 2003, deposit balances totaled $6.77 billion, which was $430.0
million, or 6.8%, more than the $6.34 billion recorded at December 31, 2002.
For the first nine months of 2003, total deposit balances, on average, were
$6.26 billion, which was $550.9 million, or 9.7%, higher than the $5.71 billion
recorded for the first nine months of 2002. As with loan balances, the
Corporation regards average balances, not period-end balances, as a better
indicator of deposit trends.
Core deposit balances, which comprise noninterest-bearing demand,
interest-bearing demand, savings, and certificate of deposit balances, totaled
$4.99 billion at September 30, 2003. This was $600.0 million, or 13.7%, more
than the $4.39 billion recorded at December 31, 2002.
For the first nine months of 2003, core deposits, on average, were $4.32
billion. This was $410 million, or 10.5%, higher than the $3.91 billion in
average core deposits for the first nine months of 2002.
Within core deposit balances, most of the growth occurred in interest-bearing
demand balances, while certificate of deposit (CD) balances decreased. Anecdotal
evidence suggested that these changes were due to the low interest rate
environment and financial market volatility. With CD rates at historic lows, and
as uncertainty about equity investing continued, clients seemed to prefer the
advantages of demand accounts to longer-term CD commitments.
At September 30, 2003, interest-bearing demand balances were $2.25 billion,
which was $420.0 million, or 23.0%, more than the $1.83 billion recorded at
December 31, 2002. CD balances totaled $934.7 million, which was $84.7 million,
or 8.3%, less than the $1.02 billion recorded at December 31, 2002.
On average, interest-bearing demand balances for the first nine months of 2003
were $1.71 billion, which was $430 million, or 33.6%, higher than the $1.28
billion reported for the first nine months of 2002.
For the first nine months of 2003, core CD balances, on average, declined to
$987.4 million, from the $1.06 billion reported for the first nine months of
2002.
Noninterest-bearing demand balances were $1.44 billion at September 30, 2003.
This was an increase of $250.0 million, or 21.0%, from the $1.19 billion
recorded at December 31, 2002.
For the first nine months of 2003, noninterest-bearing demand
22
balances, on average, were $821.5 million. This was $37 million, or 4.7%, higher
than the $784.5 million reported for the first nine months of 2002.
The use of national CDs in amounts greater than $100,000 declined on a
period-end basis as well as on average. The period-end national CD balance was
$1.78 billion, which was 8.3% less than at December 31, 2002. On average, the
national CD balance was $1.94 billion for the first nine months of 2003, which
was 7.9% higher than for the first nine months of 2002.
These CDs represent wholesale funding that the Corporation, by design, uses to
help fund loan growth on as much of a variable-cost basis as possible. The
decline in these CD balances was offset by the increase in short-term
borrowings, which rose on a period-end basis as well as on average.
Short-term borrowings
At September 30, 2003, period-end short-term borrowings totaled $994.4 million,
which was $259.7 million, or 35.4%, more than the $734.7 million recorded at
December 31, 2002. For the first nine months of 2003, short-term borrowings, on
average, were $973.2 million, which was $134.7 million, or 16.0%, more than the
$838.5 million reported for the first nine months of 2002.
The use of short-term borrowings was increased to support growth in the loan
portfolio.
Most of the increase occurred in federal funds purchased and securities sold
under agreements to repurchase, which, at $928.3 million, were 40.9% higher on a
period-end basis from December 31, 2002. These funds and securities represented
approximately 94% of total period-end short term borrowings at September 30,
2003, and December 31, 2002.
On average, federal funds purchased and securities sold under agreements to
repurchase totaled $960.0 million for the first nine months of 2003, and
represented 98.7% of total short-term borrowings. This compares with $805.3
million for the first nine months of 2002, which represented 96.0% of total
short-term borrowings.
Other liabilities
Long-term debt more than doubled, due primarily to the Corporation's issue in
April of $250 million of 10-year subordinated notes. At September 30, 2003,
long-term debt totaled $410.7 million, compared with $160.5 million at December
31, 2002. For the first nine months of 2003, long-term debt, on average, was
$325.5 million, compared with $160.5 million for the first nine months of 2002.
Stockholders' equity
At September 30, 2003, stockholders' equity was $783.6 million, which was an
increase of 5.7% from December 31, 2002. See the "Capital Resources" section of
this report for an in-depth discussion.
Year-to-date, the Corporation has repurchased 27,179 of its shares, 9,812 of
which were bought back during the third quarter. This brings the total purchased
under the current 8-million-share program to 75,913.
INCOME STATEMENT
The Corporation's mix of businesses generates a diversified stream of net
interest income and noninterest income.
Net interest income is income the Corporation earns on assets such as loans and
investment securities, and is produced primarily by the Regional Banking
business. Noninterest income is income the Corporation earns from fees it
charges for services it provides.
The majority of noninterest income is generated by the advisory businesses,
which include Wealth Advisory Services, Corporate Client Services, and
contributions from the two affiliate money managers, Cramer Rosenthal McGlynn
and Roxbury Capital Management. In addition to advisory income, noninterest
income includes service charges on deposit accounts, the amortization of other
intangibles associated with acquisitions and investments in the two affiliate
money managers, securities gains or losses, and other noninterest sources of
income.
The main sources of income remained balanced and, on a percentage basis,
relatively unchanged. For the 2003 third quarter, net interest income and
noninterest income accounted for 48.5% and 51.5%, respectively, of total net
interest and noninterest income. This compares with 50.1% and 49.9%,
respectively, for the 2002 third quarter. For the first nine months of 2003,
23
net interest income and noninterest income accounted for 49.9% and 50.1%,
respectively, of total net interest and noninterest income. This compares with
49.4% and 50.6%, respectively, for the first nine months of 2002.
The following table shows the balance between the main sources of income.
THIRD THIRD FIRST
QUARTER QUARTER NINE MONTHS FIRST NINE MONTHS
SOURCE OF INCOME 2003 2002 2003 2002
---------------- ---- ---- ---- ----
Advisory business income 41.2% 40.1% 39.7% 40.8%
Total noninterest income 51.5% 49.9% 50.1% 50.6%
Net interest income
(after provision) 48.5% 50.1% 49.9% 49.4%
Comparing the third quarters of 2003 and 2002, the percentage of total
noninterest income rose on the strength of Wealth Advisory Services income.
Comparing the first nine months of 2003 and 2002, the percentage of total
noninterest income declined, primarily due to lower income from the two
affiliate money managers.
Net interest income
Net interest income is the difference between the interest income received on
earning assets, such as loans and investments, and the interest expense paid on
liabilities, such as deposits and short-term borrowings. Interest rate
movements, and the relative levels of earning assets and interest-bearing
liabilities held by the Corporation, are the primary factors that affect net
interest income.
For the 2003 third quarter, interest income, interest expense, and net interest
income all declined from the third quarter of 2002. For the first nine months of
2003 versus 2002, interest income and interest expense declined, but net
interest income increased slightly.
For the 2003 third quarter, interest income totaled $90.5 million, which was
$9.6 million, or 9.6%, lower than the $100.1 million reported for the 2002 third
quarter. Interest and fee income on loans for the 2003 third quarter totaled
$74.0 million, which was $10.5 million, or 12.4%, lower than the $84.5 million
reported for the 2002 third quarter. Interest and dividend income on investment
securities totaled $16.4 million for the 2003 third quarter, which was $0.9
million, or 5.8%, higher than the $15.5 million reported for the 2002 third
quarter. Interest income on federal funds sold and securities purchased under
agreements to resell for the third quarter and first nine months of 2003 was
equal to the amounts reported for the corresponding year-ago period.
Interest expense also declined, but not by the same magnitude. Interest expense
for the 2003 third quarter was $22.4 million, which was $6.9 million, or 23.5%,
less than the $29.3 million reported for the 2002 third quarter. Interest
expense on deposits fell $8.2 million, or 35.8%, to $14.7 million for the 2003
third quarter from $22.9 million for the 2002 third quarter. This decrease was
offset by higher interest expense on short-term borrowings and long-term debt,
which rose 8.1% and 37.0%, respectively, for the 2003 versus 2002 third
quarters.
Net interest income for the 2003 third quarter was $68.1 million, which was $2.7
million, or 3.8%, less than the $70.8 million reported for the 2002 third
quarter. After the provision for loan losses, net interest income was $62.4
million for the 2003 third quarter, which was $3.3 million, or 5.0%, lower than
the $65.7 million reported for the 2002 third quarter.
For the first nine months of 2003, interest income totaled $278.1 million, which
was $17.8 million, or 6.0%, less than the $295.9 million reported for the first
nine months of 2002. Interest and dividends received on investments were $3.9
million higher, but interest and fees earned on loans were $21.7 million lower.
Interest expense for the first nine months of 2003 was $71.4 million, which was
$17.9 million, or 20.0%, less than the $89.3 million reported for the comparable
period in 2002. Interest paid on deposits was $16.9 million lower, and interest
paid on short-term borrowings was $3.1 million lower. Interest expense on
long-term debt was $2.1 million higher.
Net interest income for the first nine months of 2003 was $206.7 million, which
was $100,000 more than the $206.6 million reported for the first nine months of
2002. After the provision for loan losses, net interest income for the first
nine months of 2003 was equal to the amount reported for the corresponding
year-ago period.
24
Net interest margin
To compute the net interest margin, the Corporation annualizes net interest
income on a fully tax-equivalent (FTE) basis, and then divides that number by
average total earning assets.
On an FTE basis, net interest income for the 2003 third quarter was $69.3
million, which was $2.7 million less than the $72.0 million reported for the
2002 third quarter.
For the first nine months of 2003, net interest income on an FTE basis was
$210.3 million, which was slightly less than the $210.4 million reported for the
first nine months of 2002.
Total earning assets for the 2003 third quarter, on average, were $7.96 billion,
which was $850.0 million, or 12.0%, higher than the $7.11 billion for the 2002
third quarter. For the first nine months of 2003, total earning assets, on
average, were $7.77 billion, which was $860.0 million, or 12.4%, more than the
$6.91 billion reported for the first nine months of 2003.
The net interest margin for the 2003 third quarter was 3.45%. This was 57 basis
points lower than the 4.02% reported for the 2002 third quarter.
For the first nine months of 2003, the net interest margin was 3.60%. This was
45 basis points lower than the 4.05% reported for the first nine months of 2002.
A combination of factors, caused chiefly by the low interest rate environment,
balance sheet expansion, and the Corporation's asset sensitivity, contributed to
the net interest margin compression. Growth in loan balances was offset by lower
yields on new loan production as well as on a high volume of loans that were
paid down or refinanced. Likewise, falling yields on investments offset the
increase in the size of the investment portfolio. These declines in asset yields
far outpaced the declines in funding costs.
Between the 2002 and 2003 third quarters, the average yield on total earning
assets declined more than twice as much as the cost of funds used to support
those assets. The average yield on total earning assets for the 2003 third
quarter was 4.56%, which was 109 basis points lower than for the 2002 third
quarter. In comparison, the average cost of funds used to support those assets
for the comparable period was 1.11%, a decline of 52 basis points.
For the first nine months of 2003, the average yield on total earning assets was
4.82%, which was a decrease of 94 basis points from the 5.76% average yield on
total earning assets for the first nine months of 2002. In comparison, the
average cost of funds used to support those assets for the comparable period was
1.22%, which was a decrease of 49 basis points.
In the investment portfolio, average balances for the 2003 third quarter were
higher by $534.0 million, or 40.1%, from the 2002 third quarter. The yield for
the corresponding period fell 124 basis points, from 4.95% to 3.71%.
For the first nine months of 2003, average investment portfolio balances were
higher by $432.8 million, or 33.9%, from the first nine months of 2002. The
yield fell 98 basis points to 4.10% for the first nine months of 2003 from 5.08%
for the first nine months of 2002.
The majority of the growth in the securities portfolio came from the proceeds of
the Corporation's long-term debt issue, which were invested during the second
quarter of 2003. Most of the proceeds were invested at a net average spread of
1.65%.
The Corporation's average prime lending rate was 4.00% for the 2003 third
quarter, which was 75 basis points lower than for the 2002 third quarter. The
2003 third quarter was the first quarter to reflect fully the Federal Reserve's
25-basis-point reduction in interest rates at the end of June. For the first
nine months of 2003, the average prime lending rate was 4.17%, which was 58
basis points lower than for the first nine months of 2003.
In the loan portfolio, average balances for the 2003 third quarter were 5.1%
higher than for the 2002 third quarter, while the average yield for the
corresponding period fell by 96 basis points, or 16.5%, from 5.81% to 4.85%.
Loan balances, on average, for the first nine months of 2003 were 7.2% higher
than for the first nine months of 2002, while the corresponding yields were
5.04% and 5.93%, respectively. This was a decline of 89 basis points.
25
While commercial loan balances accounted for the majority of total loan growth,
the commercial portfolio also experienced the most severe declines in average
yields. On average, commercial balances rose 10.8% from the third quarter of
2002 to the third quarter of 2003. At the same time, the yield on average
commercial loan balances dropped 108 basis points. For the first nine months of
2003, commercial loan balances, on average, rose 13.0%, or $441.3 million, from
the corresponding period in 2002, but the average yield on those balances fell
91 basis points. The largest yield decreases occurred in the commercial mortgage
portfolio, where yields were 126 basis points and 103 basis points lower,
respectively, than for the third quarter and first nine months of 2002.
The magnitude of the yield declines in the loan and investment portfolios
exceeded the corresponding adjustments to core deposit pricing. The average rate
paid on core interest-bearing deposits for the 2003 third quarter reached a new
low of 0.89%, which was a decline of 57 basis points from the average rate of
1.46% paid for the 2002 third quarter. For the first nine months of 2003, the
average rate paid on core interest-bearing deposits was 1.03%, which was 50
basis points lower than the 1.53% paid for the corresponding period in 2002.
Barring additional interest rate movements by the Federal Reserve, the
Corporation estimates that the net interest margin will stabilize in the 2003
fourth quarter.
The following tables present comparative net interest income data and a
rate/volume analysis of the changes in net interest income for the third
quarters of 2003 and 2002 and for the first nine months of 2003 and 2002.
26
QUARTERLY ANALYSIS OF EARNINGS
2003 Third Quarter 2002 Third Quarter
------------------------------ -------------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance Expense Rate balance expense rate
-------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 35.6 $ 0.1 1.12% $ 16.4 $ 0.1 2.77%
U.S. Treasury and government
agencies 517.1 4.1 3.22 591.9 6.2 4.27
State and municipal 16.2 0.3 8.99 17.2 0.3 8.97
Preferred stock 120.7 2.2 7.39 85.4 1.8 8.13
Mortgage-backed securities 961.2 8.8 3.64 447.6 6.2 5.68
Other 249.9 1.8 2.88 189.0 1.7 3.55
--------------------------------------------------------------- -------------------
Total investment securities 1,865.1 17.2 3.71 1,331.1 16.2 4.95
------------------------------------------------------------------
Commercial, financial, and
agricultural 2,202.2 23.5 4.18 2,055.7 27.3 5.20
Real estate-construction 624.9 7.0 4.37 448.7 6.0 5.23
Mortgage-commercial 1,039.4 13.5 5.08 986.1 16.0 6.34
--------------------------------------------------------------- -------------------
Total commercial loans 3,866.5 44.0 4.45 3,490.5 49.3 5.53
------------------------------------------------------------------
Mortgage-residential 573.9 9.5 6.63 759.0 12.9 6.82
Consumer 1,031.3 17.1 6.58 1,027.8 18.7 7.20
Secured with liquid collateral 583.6 3.8 2.52 483.0 4.1 3.35
--------------------------------------------------------------- -------------------
Total retail loans 2,188.8 30.4 5.51 2,269.8 35.7 6.25
------------------------------------------------------------------
Total loans net of
unearned income 6,055.3 74.4 4.85 5,760.3 85.0 5.81
------------------------------------------------------------------
Total earning assets $ 7,956.0 91.7 4.56 $7,107.8 101.3 5.65
==================================================================
27
Funds supporting earning assets
Savings $ 368.8 0.1 0.13 355.8 0.2 0.25
Interest-bearing demand 2,244.7 2.2 0.39 1,767.7 2.7 0.60
Certificates under $100,000 817.6 5.2 2.50 891.8 7.8 3.46
Local CDs $100,000 and over 128.4 0.5 1.60 178.8 1.1 2.36
National CDs $100,000 and over 1,780.9 6.7 1.48 2,027.0 11.1 2.14
-------------------------------------------------------------- ------------------
Total interest-bearing
deposits 5,340.4 14.7 1.09 5,221.1 22.9 1.72
---------------------------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,115.2 4.0 1.39 705.3 3.6 2.04
U.S. Treasury demand 20.0 -- 0.76 27.3 0.1 1.51
-------------------------------------------------------------- ------------------
Total short-term borrowings 1,135.2 4.0 1.38 732.6 3.7 2.02
------------------------------------------------------
Long-term debt 405.4 3.7 3.63 160.5 2.7 6.61
-------------------------------------------------------------- ------------------
Total interest-bearing
liabilities 6,881.0 22.4 1.29 6,114.2 29.3 1.89
------------------------------------------------------
Other noninterest funds 1,075.0 -- -- 993.6 -- --
-------------------------------------------------------------- ------------------
Total funds used to support
earning assets $ 7,956.0 22.4 1.11 $7,107.8 29.3 1.63
======================================================
Net interest income/yield 69.3 3.45 72.0 4.02
Tax-equivalent adjustment (1.2) (1.2)
----- ------
Net interest income $68.1 $ 70.8
===== ======
Average rates are calculated using average balances based on historical cost and
do not reflect the market valuation adjustment required by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
January 1, 1994.
28
YEAR-TO-DATE ANALYSIS OF EARNINGS
Year-to-Date 2003 Year-to-Date 2002
------------------------------ -------------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense Rate balance expense rate
------------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 32.7 $ 0.3 1.27% $ 16.3 $ 0.3 2.72%
U.S. Treasury and government
agencies 502.5 12.5 3.40 582.8 18.7 4.36
State and municipal 16.5 1.1 8.99 17.4 1.2 8.96
Preferred stock 118.3 6.6 7.49 82.1 5.3 8.27
Mortgage-backed securities 832.0 26.4 4.27 426.4 18.3 5.89
Other 239.5 5.5 2.99 167.3 4.6 3.55
-------------------------------------------------------------------- -------------------
Total investment securities 1,708.8 52.1 4.10 1,276.0 48.1 5.08
-----------------------------------------------------------------
Commercial, financial, and
agricultural 2,202.6 73.2 4.39 1,937.0 77.0 5.24
Real estate-construction 587.1 19.8 4.46 440.9 17.3 5.16
Mortgage-commercial 1,034.1 42.3 5.39 1,004.6 48.9 6.42
-------------------------------------------------------------------- -------------------
Total commercial loans 3,823.8 135.3 4.67 3,382.5 143.2 5.58
-----------------------------------------------------------------
Mortgage-residential 608.9 30.8 6.74 800.1 41.7 6.93
Consumer 1,030.3 51.7 6.70 1,002.0 55.1 7.36
Secured with liquid collateral 560.9 11.5 2.71 437.0 11.4 3.45
-------------------------------------------------------------------- -------------------
Total retail loans 2,200.1 94.0 5.69 2,239.1 108.2 6.44
-----------------------------------------------------------------
Total loans net of
unearned income 6,023.9 229.3 5.04 5,621.6 251.4 5.93
-----------------------------------------------------------------
Total earning assets $7,765.4 281.7 4.82 $6,913.9 299.8 5.76
=================================================================
29
Funds supporting earning assets
Savings $ 365.2 0.5 0.17 $ 356.4 0.7 0.25
Interest-bearing demand 2,145.5 7.0 0.44 1,709.1 7.8 0.61
Certificates under $100,000 847.7 17.7 2.79 891.1 23.8 3.58
Local CDs $100,000 and over 139.7 1.9 1.80 169.8 3.4 2.55
National CDs $100,000 and over 1,941.2 23.2 1.58 1,799.0 31.5 2.34
----------------------------------------------------------------- --------------------
Total interest-bearing
deposits 5,439.3 50.3 1.23 4,925.4 67.2 1.81
--------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 961.0 11.0 1.51 805.2 13.8 2.26
U.S. Treasury demand 12.2 0.1 0.88 33.3 0.4 1.48
----------------------------------------------------------------- --------------------
Total short-term borrowings 973.2 11.1 1.50 838.5 14.2 2.22
--------------------------------------------------------------
Long-term debt 325.5 10.0 4.10 160.5 7.9 6.60
----------------------------------------------------------------- --------------------
Total interest-bearing
liabilities 6,738.0 71.4 1.41 5,924.4 89.3 2.00
--------------------------------------------------------------
Other noninterest funds 1,027.4 -- -- 989.5 -- --
----------------------------------------------------------------- --------------------
Total funds used to support
earning assets $7,765.4 71.4 1.22 $6,913.9 89.3 1.71
==============================================================
Net interest income/yield 210.3 3.60 210.5 4.05
Tax-equivalent adjustment (3.6) (3.9)
------- -------
Net interest income $ 206.7 $ 206.6
======= =======
Average rates are calculated using average balances based on historical cost and
do not reflect the market valuation adjustment required by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
January 1, 1994.
30
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
------------------------------------ -----------------------------------
For the three months ended Sept. 30, For the nine months ended Sept. 30,
------------------------------------ -----------------------------------
2003/2002 2003/2002
Increase (Decrease) Increase (Decrease)
due to change in due to change in
----------------------------------- -----------------------------------
1 2 1 2
(in millions) Volume Rate Total Volume Rate Total
-----------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and
securities purchased under
agreements to resell $ 0.1 $ (0.1) $ -- $ 0.3 $ (0.3) $ --
--------------------------------------------------------------------------
U.S. Treasury and
government agencies (0.7) (1.4) (2.1) (2.6) (3.6) (6.2)
State and municipal * -- -- -- (0.1) 0.1 --
Preferred stock * 0.6 (0.2) 0.4 2.0 (0.7) 1.3
Asset-backed securities 7.5 (4.9) 2.6 18.2 (10.1) 8.1
Other * 0.5 (0.4) 0.1 1.9 (1.0) 0.9
-----------------------------------------------------------------------------------------------------------------------
Total investment
securities 7.9 (6.9) 1.0 19.4 (15.3) 4.1
--------------------------------------------------------------------------
Commercial, financial, and
agricultural * 1.9 (5.7) (3.8) 10.4 (14.2) (3.8)
Real estate-construction 2.3 (1.3) 1.0 5.6 (3.1) 2.5
Mortgage-commercial * 0.9 (3.4) (2.5) 1.4 (8.0) (6.6)
-----------------------------------------------------------------------------------------------------------------------
Total commercial loans 5.1 (10.4) (5.3) 17.4 (25.3) (7.9)
--------------------------------------------------------------------------
Mortgage-residential (3.2) (0.2) (3.4) (9.9) (1.0) (10.9)
Consumer 0.1 (1.7) (1.6) 1.6 (5.0) (3.4)
Secured with liquid collateral 0.8 (1.1) (0.3) 3.2 (3.1) 0.1
-----------------------------------------------------------------------------------------------------------------------
Total retail loans (2.3) (3.0) (5.3) (5.1) (9.1) (14.2)
--------------------------------------------------------------------------
Total loans net of
unearned income 2.8 (13.4) (10.6) 12.3 (34.4) (22.1)
-----------------------------------------------------------------------------------------------------------------------
Total interest income $ 10.8 $(20.4) $ (9.6) $ 32.0 $ (50.0) $(18.0)
--------------------------------------------------------------------------
31
Interest expense:
Savings $ 0.0 $(0.1) $ (0.1) $ 0.0 $ (0.2) $ (0.2)
Interest-bearing demand 0.7 (1.2) (0.5) 2.0 (2.8) (0.8)
Certificates under $100,000 (0.6) (2.0) (2.6) (1.2) (4.9) (6.1)
Local CDs $100,000 and over (0.3) (0.3) (0.6) (0.6) (0.9) (1.5)
National CDs $100,000
and over (1.3) (3.1) (4.4) 2.5 (10.9) (8.4)
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits (1.5) (6.7) (8.2) 2.7 (19.7) (17.0)
----------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 2.1 (1.7) 0.4 2.6 (5.4) (2.8)
U.S. Treasury demand -- (0.1) (0.1) (0.2) (0.1) (0.3)
-------------------------------------------------------------------------------------------------------------------------------
Total short-term
borrowings 2.1 (1.8) 0.3 2.4 (5.5) (3.1)
----------------------------------------------------------------------------------
Long-term debt 4.1 (3.1) 1.0 8.1 (6.0) 2.1
-------------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 4.7 $(11.6) $(6.9) $ 13.2 $(31.2) $(18.0)
-----------------------------------------------------------------------------------
Changes in net interest income $ 6.1 $ (8.8) $(2.7) $ 18.8 $(18.8) $ --
======= ====== ======= ======= ======= ======
* 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 a 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.
32
Noninterest income
For the 2003 third quarter, total noninterest income was $66.3 million, which
was 1.2% higher than the $65.5 million reported for the year-ago third quarter.
This increase was due primarily to higher Wealth Advisory Services income.
For the first nine months of 2003, total noninterest income was $190.5 million,
which was $3.9 million, or 2.0%, less than for the first nine months of 2002.
Lower income from the affiliate money managers, Cramer Rosenthal McGlynn and
Roxbury Capital Management, was the primary cause of this decline.
Income from the advisory businesses, which include Wealth Advisory Services,
Corporate Client Services, and the affiliate money managers, for the 2003 third
quarter was $53.1 million, before amortization expense. This was 1.0% higher
than the $52.6 million reported for the 2002 third quarter.
For the first nine months of 2003, advisory income was $151.0 million, before
amortization expense, which was $5.7 million, or 3.6%, less than for the first
nine months of 2002. While Wealth Advisory Services income rose, this growth was
more than offset by the decrease in affiliate money manager income.
Combined income from the two affiliate money managers was $1.2 million for the
2003 third quarter, which was $3 million, or 71.4%, less than the $4.2 million
reported for the 2002 third quarter. For the first nine months of 2003,
affiliate money manager income was $900,000, opposite $16.5 million for the
first nine months of 2002. These declines represented approximately $0.03 per
share for the third quarter and approximately $0.15 per share year to date.
Service charges on deposit accounts were $8.6 million for the third quarter of
2003 and $23.7 million for the first nine months of 2003, which was higher than
for each of the corresponding year-ago periods. The increase was due to higher
volumes of returned items and overdrafts.
Card fees were $2.1 million for the third quarter of 2003 and $7.1 million for
the first nine months of 2003, which were 19% lower than the third quarter of
2002 and 9% lower year to date as the merchant credit card service business was
sold in the fourth quarter of 2002.
Other noninterest income for the 2003 third quarter was $1.1 million, which was
$100,000 higher than for the 2002 third quarter.
For the first nine months of 2003, other noninterest income was $3.6 million,
which was $500,000 higher than for the first nine months of 2002. These
increases were due primarily to an increase in loan prepayment fees associated
with refinancings.
There were no securities gains or losses for the third quarters of 2003 or 2002,
or for the first nine months of 2003 or 2002.
Wealth Advisory Services
Wealth Advisory Services income for the 2003 third quarter was $35.5 million,
which was $4.3 million, or 13.8%, higher than for the 2002 third quarter. For
the first nine months of 2003, Wealth Advisory Services income was $102.3
million, which was $8.1 million, or 8.6%, higher than for the first nine months
of 2002. The growth reflected the strength of sales activity in all major
components of the Wealth Advisory business, as well as the asset appreciation
that resulted from equity market increases in the third quarter.
The impact of sales and asset appreciation also was evident in assets under
management. At Wilmington Trust, assets under management were $23.6 billion at
September 30, 2003, which was an increase of 12.4% from December 31, 2002, and
11.8% from September 30, 2002.
Approximately 30% of Wealth Advisory Services income is related to planning and
administrative services. Approximately 70% of Wealth Advisory income is related
to asset management services and tied to the market value of assets held in
client portfolios. Of that amount, approximately 50% is tied to the equity
markets. Fees for asset management services are priced either in advance at the
beginning of each quarter, or monthly at the beginning of each month. Both
pricing methods use valuations that are taken on the final day of the previous
month.
To compare changes in Wealth Advisory Services income against the performance of
equity markets, the Corporation averages market closes for the corresponding
pricing period. Accordingly, the third quarter comparison averages the market
closes at the ends of June, July, and August. The nine-month comparison averages
the market closes at the ends of every month from December through August.
33
The following table, which compares changes in Wealth Advisory Services income
with the three- and nine-month averages for key equity market indices, shows
that the growth in Wealth Advisory income considerably outpaced the Standard &
Poor's (S&P) 500 index for the third quarter of 2003 and for the first nine
months of 2003. The Corporation regards the S&P 500 as the most relevant index
for comparison, since its composition most closely reflects client holdings.
CHANGES IN WEALTH ADVISORY SERVICES THIRD QUARTER FIRST NINE MONTHS
INCOME VS. INDEX DECLINES, ON AVERAGE 2003 VS. 2002 2003 VS. 2002
--------------------------------------------------------------------------------
Wealth Advisory Services income 13.8% 8.6%
--------------------------------------------------------------------------------
Dow Jones Industrial Average (average) 3.7% (10.6)%
--------------------------------------------------------------------------------
Standard & Poor's 500 (average) 5.5% (11.8)%
--------------------------------------------------------------------------------
NASDAQ Composite Index (average) 25.9% (5.8)%
--------------------------------------------------------------------------------
Much of the growth of Wealth Advisory revenue for the 2003 third quarter was due
to increased asset management, asset allocation, trust administration, and
financial planning activity. For the first nine months of 2003, the Wealth
Advisory growth reflected sales of open-architecture investment consulting
services, which have been immensely successful in attracting new business as
well as additional assets from existing clients.
The open-architecture investing products are managed by Balentine & Company,
which the Corporation regards as a source of core growth and investment
counseling products, not a separate entity. Balentine is integrated fully in the
Wealth Advisory Services business, and its assets under management, income, and
expenses have been included in the Corporation's financial statements and
disclosures since January 2002.
The Delaware division, which serves Wealth Advisory clients throughout the
United States, continued to generate most of the Wealth Advisory sales growth.
In the 2003 third quarter, as well as for the first nine months of 2003, sales
growth was particularly strong in the Florida and Pennsylvania markets. By the
end of the 2003 third quarter, sales in Florida and Pennsylvania had exceeded
the full-year 2002 levels achieved in those markets.
The following table shows changes in the percentage of sales, as measured by
annualized fees, that are generated in the Corporation's key wealth advisory
markets. The percentages will not add up to 100, since other smaller sources of
growth are not included here.
FIRST FIRST
THIRD QUARTER THIRD QUARTER NINE MONTHS NINE MONTHS
MARKET 2003 2002 2003 2002
--------------------------------------------------------------------------------
California 3% 7% 7% 7%
--------------------------------------------------------------------------------
Delaware 58% 53% 54% 59%
--------------------------------------------------------------------------------
Florida 12% 2% 9% 5%
--------------------------------------------------------------------------------
New York 14% 29% 15% 18%
--------------------------------------------------------------------------------
Pennsylvania 12% 7% 14% 9%
--------------------------------------------------------------------------------
Corporate Client Services
Third quarter 2003 income from the Corporate Client Services business was $16.4
million, which was $800,000, or 4.7%, lower than for the 2002 third quarter. For
the first nine months of 2003, Corporate Client Services income totaled $47.8
million, which was $1.8 million, or 3.9%, higher than the $46.0 million reported
for the first nine months of 2002.
Income from the entity management and retirement services components of this
business increased from the 2002 third quarter and first-ninth-month levels,
while income from the capital markets component decreased for the same periods.
The capital markets decrease was the cause of the third quarter decline in total
Corporate Client Services income, and it slowed the pace of year-to-date growth.
34
The following table compares the changes in income of the three components of
the Corporate Client Services business:
FIRST FIRST
THIRD THIRD NINE NINE
QUARTER QUARTER % MONTHS MONTHS %
REVENUE (in millions) 2003 2002 CHANGE 2003 2002 CHANGE
----------------------------------------------------------------------------------------
Capital markets services $ 8.8 $10.3 (20)% $25.2 $26.8 (6.0)%
----------------------------------------------------------------------------------------
Entity management services $ 5.2 $ 4.7 10.6% $15.4 $12.7 21.3%
----------------------------------------------------------------------------------------
Retirement services $ 2.4 $ 2.2 9.1% $ 7.2 $ 6.5 10.8%
----------------------------------------------------------------------------------------
Total Corporate Client Services $16.4 $17.2 (4.7)% $47.8 $46.0 3.9%
----------------------------------------------------------------------------------------
The capital markets component is the largest component of the Corporate Client
Services business. For the 2003 third quarter, capital markets income was $8.8
million, which was 20.0% lower than the $10.3 million reported for the 2002
third quarter. For the first nine months of 2003, capital markets income was
$25.2 million, which was 6.0% lower than the $26.8 million reported for the
first nine months of 2002.
Certain elements of the capital markets component are counter-cyclical, such as
successor trustee and other services for distressed and bankrupt companies. As
the economic recovery began to take hold in the third quarter, demand for
distressed and bankrupt company-related services waned. Bankruptcy-related
income was $900,000 lower in the 2003 third quarter than it was in the 2002
third quarter. At the same time, without evidence of a sustained recovery,
demand remained slow for the structured finance services generally associated
with more robust economies.
Income for the entity management component was $5.2 million for the 2003 third
quarter, which was $500,000, or 10.6%, more than the $4.7 million reported for
the 2002 third quarter. For the first nine months of 2003, entity management
income was $15.4 million, which was $2.7 million, or 21.3%, more than for the
first nine months of 2002. The increase was due to increased activity in the
European markets and increased demand for cross-border transactions.
Income from the retirement services component was $2.4 million for the 2003
third quarter, which was 9.1% higher than the $2.2 million reported for the 2002
second quarter. For the first nine months of 2003, retirement services revenue
was $7.2 million, which was 10.8% higher than the $6.5 million reported for the
first nine months of 2002.
The Corporate Client Services business prices fees according to the complexity
of the services provided, which include trustee and related administrative
services for financing structures that clients create in preferred
jurisdictions; administrative services that help clients establish and maintain
legal residency requirements in preferred jurisdictions; and trustee services
for retirement plans. Many of these services are performed on a multi-year
contract basis, which generates an annuity-like stream of income and accounts
for the majority of Corporate Client Services fees. Approximately 25% of
Corporate Client Services fees are tied to asset valuations, and most of these
fees are associated with the retirement plan assets for which the Corporation
serves as trustee.
Cramer Rosenthal McGlynn
Income from affiliate money manager Cramer Rosenthal McGlynn (CRM) was $1.3
million for the 2003 third quarter. This was $500,000, or 27.8%, lower than the
$1.8 million reported for the 2002 third quarter.
For the first nine months of 2003, CRM income was $3.2 million, which was $3.3
million, or 50.8%, lower than for the first nine months of 2002.
The quarter and year-to-date decreases in income were due to lower market
valuations and lower incentive payments related to hedge funds.
At September 30, 2003, assets under management at CRM totaled $4.0 billion. This
was a 14.3% increase from the $3.5 billion under management at December 31,
2002, and an 8.1% increase from the $3.7 billion under management at September
30, 2002.
35
The 2003 income reported for CRM reflects the Corporation's current 69.14%
equity interest in the firm. At September 30, 2002, the Corporation held a
63.58% equity interest in CRM.
Roxbury Capital Management
For the 2003 third quarter, Roxbury Capital Management (RCM) recorded a loss of
$100,000. This was significantly less than the $1.2 million loss recorded for
the 2003 second quarter, and it was the smallest amount since the 2002 fourth
quarter, when RCM began recording losses. For the third quarter of 2002, RCM
reported income of $2.4 million.
For the first nine months of 2003, RCM recorded a loss of $2.3 million, versus
income of $10.0 million for the first nine months of 2002.
At September 30, 2003, assets under management at RCM totaled $3.1 billion,
which was 16.2% less than the $3.7 billion under management at December 31,
2002, and 20.5% lower than the $3.9 billion under management at September 30,
2002.
Over the past year, a combination of equity market downturns, market volatility,
and lost business impacted RCM's results. The reduction in the loss for the
third quarter reflected the steps that RCM has taken to return to profitability,
which include the addition of a small-cap product, the elimination of
noncritical support staff, and expense reduction initiatives. The Corporation
anticipates that RCM will return to profitability by the end of 2003.
The RCM results recorded on the Corporation's income statement reflect the
Corporation's current 41.04% interest in Roxbury's common shares and 30%
preferred interest in Roxbury's gross revenue. At September 30, 2002, the
Corporation's investment in Roxbury consisted of a 40.81% interest in common
shares and a 30% preferred interest in gross revenue.
Assets under management
The following tables compare changes in assets under management at Wilmington
Trust and its two affiliate money managers.
ASSETS UNDER MANAGEMENT
(in billions) SEPT. 30, 2003 DEC. 31, 2002 SEPT. 30, 2002
--------------------------------------------------------------------------------
Wilmington Trust $23.6 $21.0 $21.1
--------------------------------------------------------------------------------
Cramer Rosenthal McGlynn $ 4.0 $ 3.5 $ 3.7
--------------------------------------------------------------------------------
Roxbury Capital Management $ 3.1 $ 3.7 $ 3.9
--------------------------------------------------------------------------------
Total $30.7 $28.2 $28.7
--------------------------------------------------------------------------------
PERCENT CHANGE IN ASSETS UNDER MANAGEMENT FROM FROM
(at September 30, 2003) DEC. 31, 2002 SEPT. 30, 2002
-----------------------------------------------------------------------------
Wilmington Trust 12.4% 11.8%
-----------------------------------------------------------------------------
Cramer Rosenthal McGlynn 14.3% 8.1%
-----------------------------------------------------------------------------
Roxbury Capital Management (16.2)% (20.5)%
-----------------------------------------------------------------------------
Total 8.9% 7.0%
-----------------------------------------------------------------------------
36
The following table shows the mix of instruments in which managed assets are
invested on behalf of clients. The mix reflects the primary considerations of
Wealth Advisory clients, which include wealth preservation, tax protection, and
income generation. At September 30, 2003, the mix was relatively unchanged from
December 31, 2002, and September 30, 2002.
ASSET SEPT. 30, 2003 DEC. 31, 2002 SEPT. 30, 2002
-----------------------------------------------------------------------------
Equities 52% 56% 54%
-----------------------------------------------------------------------------
Fixed income 27% 26% 26%
-----------------------------------------------------------------------------
Cash and equivalents 11% 10% 12%
-----------------------------------------------------------------------------
Mutual funds 6% 5% 5%
-----------------------------------------------------------------------------
Misc. assets 4% 3% 3%
-----------------------------------------------------------------------------
Noninterest expense
Noninterest expense for the 2003 third quarter was $75.2 million. This was a
decrease of $1.9 million, or 2.5%, from the 2002 third quarter.
For the first nine months of 2003, noninterest expense totaled $231.9 million.
This was an increase of $3.7 million, or 1.6%, from the $228.2 million reported
for the first nine months of 2002.
Continued expense management initiatives caused the third quarter decrease and
minimized the year-to-date increase. Approximately $1.0 million of the
year-to-date increase reflected expenses in the first quarter of 2003 that were
associated with SPV Management.
The Corporation acquired SPV Management, which provides European capabilities
for the Corporate Client Services business, in April 2002. The consolidation of
SPV's income and expenses in the Corporation's financial statements began in the
2002 second quarter.
Salary and wage expense for the 2003 third quarter was $31.5 million, which was
$1.2 million, or 4.0%, higher than the $30.3 million reported for the 2002 third
quarter. The increase was due primarily to merit increases.
For the first nine months of 2003, salary and wage expense totaled $92.5
million, which was $3.3 million, or 3.7%, higher than the $89.2 million reported
for the first nine months of 2002. Approximately 10.9% of the year-to-date
increase was related to SPV salary expense.
At September 30, 2003, full-time equivalent headcount was 2,302, which was 59
fewer than the 2,361 recorded at December 31, 2002, and 49 fewer than the 2,351
recorded at September 30, 2002.
The largest decrease in expenses continued to occur in the incentive and bonus
line, which reflected the elimination of the Corporation's company-wide profit
sharing plan. For the 2003 third quarter, incentive and bonus expense was $5.4
million, which was $2 million, or 27.0%, lower than the $7.4 million reported
for the 2002 third quarter. For the first nine months of 2003, incentive and
bonus expense was $19.2 million, which was $4.5 million, or 19.0%, lower than
for the first nine months of 2002.
Employee benefit expense continued to reflect higher health insurance and
pension costs. For the 2003 third quarter, employee benefit expense was $8.8
million, which was $1.0 million, or 12.8%, more than for the 2002 third quarter.
For the first nine months of 2003, employee benefit expense totaled $27.3
million, which was $3.2 million, or 13.3%, more than for the first nine months
of 2002.
Net occupancy expense for the 2003 third quarter decreased 9.4%, or $500,000, to
$4.8 million from $5.3 million in the 2002 third quarter. For the first nine
months of 2003, net occupancy expense, at $15.2 million, was 2.7%, or $400,000,
higher than the $14.8 million for the first nine months of 2002.
Expenses associated with furniture, equipment, and supplies declined due to
lower depreciation costs, fewer annual maintenance contract renewals, and the
deferral of certain projects in line with expense management initiatives. For
the 2003 third quarter, furniture, equipment, and supplies expense was $6.6
million, which was $1.6 million, or 19.5%, lower than the $8.2 million reported
for the 2002 third quarter. For the first nine months of 2003, furniture,
equipment, and supplies expense totaled $21.1 million, which was a decrease of
13.2%, or $3.2 million, from the $24.3 million reported for the first nine
months of 2002.
37
Expense management initiatives lowered advertising and contributions expense.
For the third quarter of 2003, advertising and contribution expense was $1.4
million, which was $700,000, or 33.3%, lower than for the 2002 third quarter.
For the first nine months of 2003, advertising and contributions expense totaled
$6.1 million, which was $600,000, or 9.0%, lower than for the first nine months
of 2002.
Servicing and consulting costs were 25.0% higher in the third quarter and 36.4%
higher for the first nine months of 2003 than for the corresponding 2002
periods, due primarily to an increase in payments to third-party investment
advisors used in the open-architecture investment service.
Expense management initiatives were responsible for the decreases in travel and
entertainment expense. At $1.8 million, travel and entertainment expense for the
2003 third quarter was 10% less than for the 2002 third quarter. For the first
nine months of 2003, travel and entertainment expense was $5.1 million, which
was 7.3% less than for the first nine months of 2002.
Originating and processing expense was slightly higher for the third quarter and
first nine months of 2003, compared with the corresponding year-ago periods. The
increases were due primarily to higher costs associated with the outsourcing of
lockbox services.
Other noninterest expense was $8.8 million for the 2003 third quarter, which was
$0.3 million less than for the year-ago third quarter. For the first nine months
of 2003, other noninterest expense was $1.8 million higher than for the
corresponding year-ago period, due primarily to higher legal and auditing costs.
Income taxes
Income tax expense for the 2003 third quarter was $18.8 million, which was
$600,000, or 3.1%, less than for the 2002 third quarter. Pre-tax income for the
same period declined 1.1%, or $600,000. The Corporation's effective tax rate for
the 2003 third quarter was 35.1%, compared with 35.9% for the 2002 third
quarter. This was due to the decline in pre-tax income and lower revenue from
the affiliate money managers, which reduced California and New York taxes.
For the first nine months of 2003, income tax expense totaled $51.5 million.
This was $3.6 million, or 6.5%, less than the $55.1 million reported for the
first nine months of 2002. Pre-tax income for the same period declined 4.9%, or
$7.6 million. The Corporation's effective tax rate for the first nine months of
2003 was 34.6%, compared with 35.3% for the first nine months of 2002. This was
also due to the decline in pre-tax income and lower revenue from the affiliate
money managers, which reduced California and New York taxes.
LIQUIDITY
A financial institution's liquidity demonstrates its ability to meet, in a
timely manner, cash flow requirements that may arise from increases in demand
for loans or other assets, or from decreases in deposits or other funding
sources. Liquidity management, therefore, contains both asset and liability
components.
The maturity and marketability of loans and investments provide liquidity, as do
time deposits at other banks, federal funds sold, and securities purchased under
agreements to resell. Liquidity also results from internally generated capital,
core deposits, large certificates of deposit, federal funds purchased,
securities sold under agreements to repurchase, and other credit facilities. In
April 2003, the Corporation issued $250 million in 10-year subordinated notes.
For the third quarter of 2003, the proportion of funding provided by core
deposits - demand deposits, interest-bearing demand deposits, and certificates
of deposit - was 55.7%, compared with 56.0% for the third quarter of 2002.
The Corporation is a guarantor for 69.14%, which represents its ownership
interest, of two obligations of affiliate money manager Cramer Rosenthal
McGlynn. The guaranty is for two lines of credit, at LIBOR plus 2%, which total
$8 million and expire on December 8, 2003. At September 30, 2003, the balance of
these two lines was $2.5 million.
Management continuously monitors the Corporation's existing and projected
liquidity requirements, and believes that its standing in the national markets
will enable it to obtain additional funding if the need arises. Wilmington Trust
Company is a member of the Federal Home Loan Bank of Pittsburgh, and has $1
billion in available borrowing capacity secured by collateral.
38
ASSET QUALITY AND LOAN LOSS PROVISION
For the third quarter as well as for the first nine months of 2003, credit
quality remained stable, and the composition of the loan portfolio remained well
diversified and relatively unchanged. The Corporation's internal analysis of
credits showed that more than 95% of the loans were rated pass, as has been the
case since 2000.
Net charge-offs dropped, and loans past due 90 days or more declined from
December 31, 2002. The percentage of loans with an internal risk rating of pass
was higher than at December 31, 2002. The provision for loan losses, the reserve
for loan losses, and the loan loss reserve ratio increased, which reflected the
growth in loan balances, the net charge-off ratio, and the results of the
internal risk rating analysis.
The Corporation believes that the most meaningful measure of asset quality is
the ratio of net charge-offs to loan balances, on average. For the third quarter
of 2003, the net charge-off ratio was 3 basis points. This was 6 basis points
lower than the 9-basis-point ratio reported for the 2002 third quarter. The
dollar amount of net charge-offs totaled $2.0 million for the 2003 third
quarter, which was $3.0 million, or 60.0%, lower than the $5.0 million reported
for the 2002 third quarter.
Period-end loans past due 90 days or more at September 30, 2003, totaled $7.3
million. This was $5.2 million, or 41.6%, lower than at year-end 2002, and $15.0
million, or 67.3%, lower than at September 30, 2002. The ratio of period-end
loans past due 90 days to total loans at September 30, 2003, was 12 basis
points, which was 9 basis points lower than at the 2002 year-end, and 26 basis
points lower than at September 30, 2002.
The provision for loan losses for the 2003 third quarter was $5.7 million. This
was $600,000, or 11.8%, more than for the 2002 third quarter. For the first nine
months of 2003, the provision totaled $16.6 million. This was $100,000, or 0.6%,
more than the provision for the first nine months of 2002.
At September 30, 2003, the period-end reserve for loan losses was $91.2 million,
or 1.50% of loans outstanding. The reserve was $6.0 million, or 7%, higher than
the December 31, 2002, reserve of $85.2 million, and the reserve ratio was 9
basis points higher than the December 31, 2002, ratio of 1.41%. Compared with
September 30, 2002, the reserve was $4.4 million, or 5.1%, higher, and the
reserve ratio was 2 basis points higher.
Nonaccruing loans at September 30, 2003, totaled $50.2 million. This was $7.8
million, or 18.4%, higher than the $42.4 million recorded at December 31, 2002,
and $5.8 million, or 13.1%, higher than the $44.4 million recorded at September
30, 2002. These increases reflect a commercial loan that was moved to
nonaccruing status at the end of the 2003 first quarter. This loan also
accounted for the majority of the increase in loans rated "doubtful" in the
internal risk rating analysis.
This loan is associated with a Delaware-based specialty restaurant and
entertainment business client, who made a payment on this loan of approximately
$10 million during the third quarter. This resulted in a significant decrease in
the period-end balance of nonaccruing loans from March 31, 2003, and June 30,
2003.
Other real estate owned (OREO) at September 30, 2003, totaled $1.6 million. This
was a decrease of $1.5 million from December 31, 2002, and an increase of $1.3
million from September 30, 2002. The increase from the year-ago period end
reflected, in part, a residential construction project at a beach resort in
Maryland that was classified as OREO in December 2002. The decrease in OREO that
occurred over the first nine months of 2003 reflected the successful work out of
this project.
The ratio of period-end nonperforming assets to loans at September 30, 2003, was
0.85%. This was 9 basis points higher than the 0.76% that was recorded at
December 31, 2002, as well as at September 30, 2002.
As a result of the nonaccruing loan payment and the OREO project work out, the
nonperforming asset ratio fell steadily over the first nine months of 2003. The
September 30, 2003, nonperforming asset ratio was 29 basis points lower than at
March 31, 2003, and 20 basis points lower than at June 30, 2003.
39
The following table provides a nine- and 12-month comparison of the risk
elements in the Corporation's loan portfolio.
NONPERFORMING ASSETS
(in millions) SEPT. 30, 2003 DEC. 31, 2002 SEPT. 30, 2002
-------------------------------------------------------------------------------
Nonaccruing loans 50.2 $42.4 $44.4
-------------------------------------------------------------------------------
Past due 90 days or more $ 7.3 $12.5 $22.3
-------------------------------------------------------------------------------
Total $57.5 $54.9 $66.7
-------------------------------------------------------------------------------
Percentage of period-end loans 0.94% 0.91% 1.14%
-------------------------------------------------------------------------------
Other real estate owned $ 1.6 $ 3.1 $ 0.3
-------------------------------------------------------------------------------
The following table shows changes in the composition of the loan portfolio.
LOAN PORTFOLIO COMPOSITION SEPT. 30, 2003 DEC. 31, 2002 SEPT. 30, 2002
--------------------------------------------------------------------------------
Commercial/financial/agricultural 36% 35% 36%
--------------------------------------------------------------------------------
Commercial real estate construction 11% 10% 8%
--------------------------------------------------------------------------------
Commercial mortgage 17% 18% 17%
--------------------------------------------------------------------------------
Residential mortgage 9% 11% 13%
--------------------------------------------------------------------------------
Consumer 27% 26% 26%
--------------------------------------------------------------------------------
The following table shows changes in the internal risk rating analysis.
CATEGORY SEPT. 30, 2003 DEC. 31, 2002 SEPT. 30, 2002
-------------------------------------------------------------------------------
Pass 95.81% 95.65% 95.62%
-------------------------------------------------------------------------------
Watchlisted 2.53% 2.57% 2.29%
-------------------------------------------------------------------------------
Substandard 1.25% 1.53% 1.83%
-------------------------------------------------------------------------------
Doubtful 0.41% 0.25% 0.26%
-------------------------------------------------------------------------------
If the economy in markets where the Corporation lends remains sluggish or
deteriorates further, the ability of some borrowers to repay their loans in full
may be impaired. In that event, management would expect levels of nonperforming
assets, credit losses, and the provision for loan losses to increase.
To minimize the impact of such conditions, management continually monitors the
entire loan portfolio to identify potential problem loans and avoid
disproportionately high concentrations of loans to individual borrowers and
industry sectors. An integral part of this process is a regular analysis of all
past due loans.
Of the loans past due 90 days or more at September 30, 2003, approximately 59%
were in the commercial portfolio; 24% were in the residential mortgage
portfolio; and 17% were in the consumer portfolio. The corresponding ratios at
December 31, 2002, were 64%, 22%, and 14%, respectively. At September 30, 2002,
the corresponding ratios were 83%, 12%, and 5%, respectively.
As a result of scrutinizing the portfolio, management identifies loans about
which serious doubt exists as to whether the borrowers will be able to continue
to repay their loans on a timely basis. At September 30, 2003, management
identified approximately $26.6 million of such loans. Currently these loans
either are performing in accordance with their terms, or are less than 90 days
past due. This compares with the $36.2 million of loans about which management
had similar doubt at December 31, 2002, and $42.1 million at September 30, 2002.
In light of current levels of past due, nonaccruing, and problem loans,
management believes that the reserve for loan losses is a reasonable estimate of
the known and inherent losses in the loan portfolio. The methodology used to
calculate the reserve has provided a high degree of reserve adequacy over an
extended period of time and the Corporation believes the methodology is sound.
The reserve reflects estimated credit losses specifically identified, as well as
estimated, probable losses inherent in the remainder of the portfolio based on
loan type and risk rating classification.
The reserve methodology includes an analysis of the business climate and its
potential effect on credit losses, which serves as the basis for the unallocated
portion of the reserve. The business climate analysis reviews shifts in current
market conditions; the average loan size and complexity within the portfolio;
trends in delinquency; the direction of risk rating migration within the
portfolio; the level of loans about which management has serious doubt; the
potential for recoveries; and bankruptcy trends.
40
The allocated and unallocated portions of the reserve are assessed quarterly as
part of the regular application of the reserve methodology. In accordance with
the growth in loan balances, a portion of the reserve is allocated to new loans
within the parameters of the reserve methodology.
At September 30, 2003, approximately $6.1 million, or 7.0%, of the reserve for
loan losses was unallocated. This was the same amount and percentage as for
December 31, 2002, and September 30, 2002.
CAPITAL RESOURCES
For the first nine months of 2003, the Corporation's capital continued to
increase and its capital ratios continued to exceed the Federal Reserve Board's
minimum guidelines.
Although capital rose, the annualized capital generation rate declined. The
annualized capital generation rate for the first nine months of 2003 was 5.95%,
which was 41.1% lower than the annualized rate of 10.11% for the first nine
months of 2002. This decline occurred primarily because net income was lower and
cash dividend payments were higher.
Net income for the first nine months of 2003 was $96.4 million, which was 4.4%
less than the $100.9 million in net income for the first nine months of 2002. At
the same time, cash dividend payments for the first nine months of 2003 were
$52.3 million, which was 6.3% higher than the $49.2 million in cash dividend
payments for the first nine months of 2002.
Between December 31, 2002, and September 30, 2003, capital rose by $53.4
million. The additions to capital consisted of:
- $44.1 million, which reflected earnings of $96.4 million net of $52.3
million in cash dividends;
- $9.1 million from the issue of common stock under employment benefit plans;
and
- $200,000 in foreign currency exchange adjustments.
These additions were offset by reductions of $11.1 million, which consisted of:
- $10.2 million in unrealized losses on securities, net of income taxes;
- $800,000 for the repurchase of shares; and
- a $100,000 reclassification adjustment for derivative gains included in net
income, net of income taxes.
As a result, stockholders' equity at September 30, 2003, was $783.6 million.
This was an increase of $42.3 million, or 5.7%, from the December 31, 2002,
amount of $741.3 million, and $44.3 million, or 6.0%, higher than the September
30, 2002, amount of $739.3 million.
The Corporation repurchased 9,812 of its shares during the 2003 third quarter at
a total cost of $312,669 and an average cost per share of $31.87. This brought
the total number of shares repurchased during the first nine months of 2003 to
27,179. These buybacks increased the total number of shares repurchased under
the current 8-million-share program, which was authorized in April 2002, to
75,913, at a cost of $2.2 million.
The Corporation's capital ratios continued to exceed the Federal Reserve Board's
minimum guidelines for both well-capitalized and adequately capitalized
institutions, which are intended to reflect the varying degrees of risk
associated with different on- and off-balance sheet items. The following table
compares the Corporation's capital levels with the guidelines, and shows the
changes in the ratios for the nine-month period ended September 30, 2003, and
the year ended December 31, 2002.
ADEQUATELY WELL-
WILMINGTON TRUST WILMINGTON TRUST CAPITALIZED CAPITALIZED
CAPITAL RATIO SEPT. 30, 2003 DEC. 31, 2002 MINIMUM MINIMUM
-------------------------------------------------------------------------------
Total risk-based capital 12.15% 10.15% 8% 10%
-------------------------------------------------------------------------------
Tier 1 risk-based capital 7.27% 7.03% 4% 6%
-------------------------------------------------------------------------------
Tier 1 leverage capital 6.19% 6.08% 4% 5%
-------------------------------------------------------------------------------
The Corporation's issuance in April of $250 million of 10-year 4.875%
subordinated notes contributed to the improvement in the total risk-based
capital ratio.
41
On April 17, 2003, the Corporation's Board of Directors increased the quarterly
dividend 5.9%, from $0.255 per share to $0.27 per share. This marked the 22nd
consecutive year that the Corporation has raised its dividend.
Management reviews the Corporation's capital position and makes adjustments as
needed to assure that the capital base is sufficient to satisfy existing and
impending regulatory requirements; to meet appropriate standards of safety; and
to provide for future growth.
INFLATION
The Corporation's asset and liability structure is substantially different from
that of an industrial company, since virtually all of the assets and liabilities
of a financial institution are monetary in nature. Accordingly, changes in
interest rates may have a significant impact on a bank holding company's
performance. Interest rates do not necessarily move in the same direction or at
the same magnitude as the prices of goods and services. The impact, therefore,
of inflation on a bank holding company's financial performance is
indeterminable.
OTHER INFORMATION
Accounting pronouncements
SFAS No. 146: In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of this
Statement did not have an impact on the Corporation's consolidated earnings,
financial condition, or equity.
SFAS No. 148: In December, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This Statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair
value-based method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of that Statement to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. Finally,
this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial information. The
requirements for SFAS No. 148 are effective for financial statements for fiscal
years ended and interim periods beginning after December 15, 2002. The
Corporation uses the "intrinsic value" approach to accounting for stock-based
compensation as permitted under APB Opinion No. 25. The Corporation has adopted
the disclosure provisions of SFAS No. 148. The disclosure provisions had no
impact on the Corporation's consolidated earnings, financial condition, or
equity. On April 22, 2003, the FASB announced its intention to require that all
companies expense the value of employee stock options. The FASB plans to issue a
new exposure draft later this year that could become effective in 2004. Until
the new Statement is issued, the provisions of Statement No. 123 remain in
effect. See "Stock-based employee compensation" under "Critical Accounting
Policies and Estimates."
SFAS No. 149: In April 2003, the FASB issued SFAS No. 149, "Amendments of
Statement 133 on Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including derivatives embedded in other contracts and hedging activities. The
Statement amends Statement No. 133 for decisions made by the FASB as part of its
Derivatives Implementation Group process. The Statement also amends Statement
No. 133 to incorporate clarifications of the definition of a derivative. The
Statement is effective for contracts entered into or modified and hedging
relationships designated after June 30, 2003. The provisions of this Statement
did not have a material impact on the Corporation's consolidated earnings,
financial condition, or equity.
SFAS No. 150: In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify these financial instruments as a liability (or, in
certain circumstances, an asset). Previously these financial instruments
42
would have been classified entirely as equity, or between the liabilities
section and equity section of the statement of financial condition. This
Statement also addresses questions about the classification of certain financial
instruments that embody obligations to issue equity shares. The provisions of
this Statement are effective for interim periods beginning after June 15, 2003.
The adoption of this Statement did not have an impact on the Corporation's
consolidated earnings, financial condition, or equity.
FIN No. 45: In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This is an interpretation of
FASB Nos. 5, 57, and 107, and rescinds FASB Interpretation No. 34. The
Interpretation elaborates on the disclosures a guarantor is required to make in
both its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions are to be applied on a prospective basis
to guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's year-end. Accounting for guarantees issued prior to the date of this
Interpretation's initial application will not be revised or restated to reflect
the effect of the recognition and measurement provisions of the Interpretation.
The application of this Interpretation did not have a material effect on the
Corporation's consolidated earnings, financial condition, or equity.
FIN No. 46: On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," an interpretation of Accounting
Research Bulletin (ARB) No. 51, "Consolidated Financial Statements." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities to which the normal conditions for consolidation do not apply,
due to the entities' lack of a voting interest or lack of control through
ownership of a voting interest. The Interpretation requires that an enterprise
review its degree of involvement in a variable interest entity to determine if
it is the primary beneficiary. Certain disclosures about the variable interest
entity and the enterprise's involvement are required by both the primary
beneficiary and by the enterprise that has a significant interest in a variable
interest entity. This Interpretation has had no material impact on the
Corporation's consolidated earnings, financial condition, or equity, nor has
there been any additional requirement for disclosures.
Critical Accounting Policies and Estimates
Discussion and analysis of the financial condition and results of operations are
based on the consolidated financial statements of the Corporation, which are
prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses, as well as related disclosure of
contingent assets and liabilities at the date of the financial statements and
during the reporting period. Management evaluates those estimates on an ongoing
basis, including those estimates related to the reserve for loan losses,
stock-based employee compensation, affiliate fee income, impairment of goodwill,
recognition of Corporate Client Services fees, loan origination fees, and
mortgage servicing assets. Management bases its estimates on historical
experience and various other factors and assumptions that are believed to be
reasonable under the circumstances. These form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and the estimates that are used in preparation of its
consolidated financial statements: the reserve for loan losses, stock-based
employee compensation, and impairment of goodwill.
Reserve for loan losses
The Corporation maintains a reserve for loan losses that is management's best
estimate of known and inherent estimated losses, based on subjective judgments
regarding the collectibility of loans within the portfolio. The reserve is
reduced by actual credit losses, and is increased by the provision for loan
losses and recoveries from loans previously charged-off. Personnel independent
of the various lending functions evaluate the reserve on a quarterly basis. The
level is determined by assigning specific reserves to individually identified
problem credits, and a general reserve to all other loans. In evaluating the
reserve, specific consideration is given to current micro- and macro-economic
factors, historical net loss experience, current delinquency trends, and
movement within the
43
internally reported loan quality classifications. The methodology used to
determine the necessary level of the reserve has been applied on a basis
consistent with prior periods.
A portion of the reserve is not specifically allocated to the individual
components of the portfolio, and represents probable or inherent losses that
could be caused by certain business conditions not accounted for otherwise.
Typically, business conditions, including current economic and market
conditions, portfolio complexity, payment performance, loan portfolio risk
rating migration, the level of serious doubt loans, litigation impact, and
bankruptcy trends, are the core of the unallocated reserve position. The
determination of the reserve is inherently subjective, and it requires material
estimates, including the amounts and timing of future cash flows expected to be
received on impaired loans, that may be susceptible to significant change.
Because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that increases to the reserve will not
be necessary if the quality of loans deteriorates as a result of the factors
discussed above.
Management believes that it uses the best information available to make
determinations about the reserve and that it has established its existing
reserve for loan losses in accordance with generally accepted accounting
principles. If circumstances differ substantially from the assumptions used in
making the determinations, future adjustments to the reserve may be necessary
and results of the Corporation's operations could be affected.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's banking affiliates'
reserve for losses on loans. These agencies may require the Corporation to
recognize additions to the reserve based on their judgments about information
available to them at the time of their examination.
Stock-based employee compensation
The Corporation accounts for its stock-based employee compensation plans under
the "intrinsic value" approach, in accordance with the provisions of APB Opinion
No. 25, rather than the "fair value" approach prescribed in SFAS No. 123. The
"intrinsic value" approach limits the compensation expense to the excess of a
stock option's market price on the grant date over the option's exercise price.
Since the Corporation's stock-based employee compensation option plans have
exercise prices equal to market values on the grant date, no compensation
expense is recognized in the financial statements. The "fair value" approach
under SFAS No. 123 takes into account the time value of the option and will
generally result in compensation expense being recorded upon grant. Each year
since the inception of SFAS No. 123, the Corporation has disclosed, in the notes
to the financial statements contained in its annual report to shareholders, what
the earnings impact would have been had the Corporation elected the "fair value"
approach under SFAS No. 123. Future earnings would be impacted if any change in
generally accepted accounting principles were to limit the continued use of the
"intrinsic value" approach. Such changes are reported to be under consideration
by the financial accounting standard setters.
Impairment of goodwill
Through a series of acquisitions, the Corporation has accumulated goodwill with
a net carrying value of $242.8 million at September 30, 2003. Through 2001, this
goodwill was subject to periodic amortization in accordance with the provisions
of APB No. 17, "Intangible Assets." This treatment provided for a gradual
reduction in the book value of the assets over their useful lives. Amortization
could be changed if later events and circumstances warranted a revised estimate
of the useful lives of the assets. Additionally, under APB No. 17, estimations
of value and future benefits could indicate that the unamortized cost should be
reduced by a reduction in net income.
The 2002 adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
eliminated the requirement to amortize goodwill, and substituted impairment
testing. The purpose of impairment testing is to ensure that an amount presented
in the financial statements for goodwill does not exceed its actual fair value.
A methodology that is consistent with how the acquired entity or business was
originally valued is to be utilized in testing for impairment on an annual
basis. If this testing indicates that the fair value of the asset is less than
its book value, an impairment expense must be recorded. There may be more
volatility in reported income than under the previous standard, because
impairment losses are likely to occur irregularly and in varying amounts. A
major portion of the goodwill on the Corporation's books is related to certain
of its affiliate asset manager acquisitions. A decline in the fair value of the
investment in either of these firms could result in an impairment expense.
44
Cautionary statement
Estimates, predictions, opinions, or statements of belief in this report might
be construed to be forward-looking statements with the meaning of the Private
Securities Litigation Reform Act of 1995. Examples of such statements could
relate to identification of trends, statements about the adequacy of the reserve
for loan losses, credit quality, the impact of FASB pronouncements on the
Corporation, and the effects of asset sensitivity, interest rate changes, and
information concerning market risk described in Item 3 below. Forward-looking
statements are based on current expectations and assessments of potential
developments. The Corporation's ability to achieve the results reflected in
those statements could be affected by, among other things, changes in national
or regional economic conditions, changes in market interest rates, significant
changes in banking laws or regulations, increased competition in our businesses,
higher-than-expected credit losses, the effects of acquisitions and integration
of acquired businesses, unanticipated changes in regulatory, judicial, or
legislative tax treatment of business transactions, and economic uncertainty
created by unrest in other parts of the world.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Net interest income is an important determinant of the Corporation's financial
performance. Through management of its interest rate risk, 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 assess interest rate exposure and
the effect of variations in interest rates on net interest income. The models
evaluate numerous factors, including:
- the composition of assets, liabilities, and off-balance sheet instruments;
- their respective repricing and maturity characteristics;
- the level of market interest rates; and
- other external factors.
The simulations compare multiple interest rate scenarios against a stable
interest rate environment. As a general rule, the model employs scenarios in
which rates gradually move up or down 250 basis points over one year. The
Corporation's objective is to keep market interest rate changes from reducing
net interest income by 10% or more within a one-year period.
Because of 2003's low interest rate levels, as of September 30, 2003, the
declining rate scenario in the simulation model gradually moved down only 100
basis points, until the federal funds rate equaled zero. This ensured that
negative rates were not created within the model. The rising rate scenario
remained able to accommodate a 250-basis-point upside move.
As of September 30, 2003, the simulation projected that a gradual
250-basis-point increase in market interest rates would cause net interest
income to rise 7.25% over a one-year period. At December 31, 2002, the scenario
predicted an 8.53% increase.
If interest rates were to experience a gradual decline of 100 basis points, the
model at September 30, 2003, projected that net interest income would decrease
3.90% over a one-year period. At December 31, 2002, the model employed a
125-basis-point-decline scenario and projected that net interest income would
decrease approximately 7%.
The preceding paragraphs contain 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 the Corporation
uses regarding the effects of changes in interest rates on the adjustment of
retail deposit rates and the prepayment of residential mortgages, asset-backed
securities, and collateralized mortgage obligations play a significant role in
the results the simulation model projects. Rate and prepayment assumptions used
in the Corporation's simulation model differ for both assets and liabilities in
rising, as compared to declining, interest rate environments. Nevertheless,
these assumptions are inherently uncertain and, as a result, the simulation
model cannot predict precisely the impact of changes in interest rates on net
interest income. Management reviews the exposure to interest rate risk
regularly, and may employ a variety of strategies as needed to adjust its
sensitivity. This includes changing the relative proportions of fixed-rate and
floating-rate assets and liabilities; changing the number and maturity of
funding sources; securitizing assets; and utilizing derivative contracts such as
interest rate swaps and interest rate floors.
45
ITEM 4. CONTROLS AND PROCEDURES
The Chairman of the Board and Chief Executive Officer of the Corporation and its
Chief Financial Officer conducted an evaluation of the effectiveness of the
Corporation's disclosure controls and procedures as of the end of the period
covered by this report, pursuant to Securities Exchange Act Rule 13a-14. Based
on that evaluation, the Chairman of the Board and Chief Executive Officer and
the Chief Financial Officer concluded that the Corporation's disclosure controls
and procedures are effective in alerting them on a timely basis to material
information about the Corporation (including its consolidated subsidiaries)
required to be included in the periodic filings it makes with the Securities and
Exchange Commission. There have been no significant changes in the Corporation's
internal controls or in other factors that could significantly affect those
controls subsequent to the date of that evaluation.
46
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Corporation and its subsidiaries are subject to various legal proceedings
that arise from time to time in the ordinary course of their businesses and
operations. Some of these seek relief or damages in amounts that may be
substantial. Because of the complex nature of some of these proceedings, it may
be a number of years before they are ultimately resolved. While it is not
feasible to predict the outcome of these proceedings, the Corporation's
management does not believe the ultimate resolution of any of them will have a
material adverse effect on the Corporation's consolidated financial condition.
Further, the Corporation's management believes that some of the claims may be
covered by insurance, and has advised its insurance carriers of the proceedings.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit
Number Exhibit
------- -----------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Corporation(1)
3.2 Amended and Restated Bylaws of the Corporation(2)
99.1 Section 302 Certifications
99.2 Section 906 Certification
------------------------------
(1) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K of Wilmington Trust Corporation filed on March 30, 1996.
(2) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K of Wilmington Trust Corporation filed on March 27, 2003.
The Corporation filed a current report on Form 8-K on July 18, 2003, under Item
12 reporting its financial condition and results of operations for the second
quarter of 2003.
47
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 14, 2003 /s/ Ted T. Cecala
__________________________________________________
Name: Ted T. Cecala
Title: Chairman of the Board and Chief Executive
Officer
(Authorized Officer)
/s/ David R. Gibson
___________________________________________________
Name: David R. Gibson
Title: Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
48