UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2004
-------------------------------------------------
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
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0328154
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
RODNEY SQUARE NORTH, 1100 NORTH MARKET STREET, WILMINGTON, DELAWARE 19890
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(302) 651-1000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
--------------------------------------------------------------------------------
(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 March
31, 2004
Class Outstanding at March 31, 2004
----- -----------------------------
COMMON STOCK - PAR VALUE $1.00 66,403,314
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
FIRST QUARTER 2004 FORM 10-Q
TABLE OF CONTENTS
PAGE
----
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 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 32
Item 4 - Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 33
Item 2 - Changes in Securities and Use of Proceeds 34
Item 3 - Defaults Upon Senior Securities 34
Item 4 - Submission of Matters to a Vote of Security Holders 34
Item 5 - Other Information 34
Item 6 - Exhibits and Reports on Form 8-K 34
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------
March 31, December 31,
(in millions) 2004 2003
---------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 193.5 $ 210.2
---------------------
Federal funds sold and securities purchased
under agreements to resell 151.5 3.8
---------------------
Investment securities available for sale:
U.S. Treasury and government agencies 468.1 470.0
Obligations of state and political subdivisions 11.2 12.9
Other securities 1,459.9 1,392.3
-------------------------------------------------------------------------------------------------
Total investment securities available for sale 1,939.2 1,875.2
---------------------
Investment securities held to maturity:
Obligations of state and political subdivisions 3.1 3.1
Other securities 1.0 1.1
-------------------------------------------------------------------------------------------------
Total investment securities held to maturity (market values
of $4.3 and $4.5, respectively) 4.1 4.2
---------------------
Loans:
Commercial, financial, and agricultural 2,338.8 2,275.2
Real estate-construction 733.0 699.8
Mortgage-commercial 1,144.5 1,078.2
-------------------------------------------------------------------------------------------------
Total commercial loans 4,216.3 4,053.2
---------------------
Mortgage-residential 471.9 489.6
Consumer 1,073.7 1,077.1
Secured with liquid collateral 609.1 605.4
-------------------------------------------------------------------------------------------------
Total retail loans 2,154.7 2,172.1
---------------------
Total loans net of unearned income 6,371.0 6,225.3
Reserve for loan losses (91.2) (89.9)
-------------------------------------------------------------------------------------------------
Net loans 6,279.8 6,135.4
---------------------
Premises and equipment, net 151.4 152.3
Goodwill, net of accumulated amortization
of $29.8 in 2004 and 2003 256.0 243.2
Other intangible assets, net of accumulated amortization
of $11.8 in 2004 and $11.1 in 2003 23.6 24.0
Accrued interest receivable 43.6 39.5
Other assets 127.7 132.4
-------------------------------------------------------------------------------------------------
Total assets $9,170.4 $8,820.2
=====================
1
-----------------------
March 31, December 31,
(in millions) 2004 2003
---------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $1,054.6 $1,025.5
Interest-bearing:
Savings 379.0 369.0
Interest-bearing demand 2,275.4 2,364.1
Certificates under $100,000 769.3 788.3
Local CDs $100,000 and over 137.6 130.3
-------------------------------------------------------------------------------------
Total core deposits 4,615.9 4,677.2
National CDs $100,000 and over 2,243.0 1,900.0
-------------------------------------------------------------------------------------
Total deposits 6,858.9 6,577.2
---------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 885.5 820.5
U.S. Treasury demand 18.6 48.3
Line of credit -- 8.0
-------------------------------------------------------------------------------------
Total short-term borrowings 904.1 876.8
---------------------
Accrued interest payable 24.9 23.6
Other liabilities 127.1 134.5
Long-term debt 418.6 407.1
-------------------------------------------------------------------------------------
Total liabilities 8,333.6 8,019.2
---------------------
Minority interest 1.0 0.2
---------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 64.6 54.6
Retained earnings 966.2 948.4
Accumulated other comprehensive loss (8.6) (16.1)
-------------------------------------------------------------------------------------
Total contributed capital and retained earnings 1,100.7 1,065.4
Less: Treasury stock, at cost, 12,471,686 and
12,465,014 shares, respectively (264.9) (264.6)
-------------------------------------------------------------------------------------
Total stockholders' equity 835.8 800.8
---------------------
Total liabilities and stockholders' equity $9,170.4 $8,820.2
=====================
See Notes to Consolidated Financial Statements
2
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------------
For the three months ended
March 31,
---------------------------
(in millions; except per share data) 2004 2003
--------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $ 72.9 $ 77.1
Interest and dividends on investment securities:
Taxable interest 16.2 13.6
Tax-exempt interest 0.1 0.3
Dividends 1.8 1.7
Interest on federal funds sold and securities
purchased under agreements to resell -- 0.1
-----------------------------------------------------------------------------
Total interest income 91.0 92.8
-------------------------
Interest on deposits 13.2 18.7
Interest on short-term borrowings 3.1 3.2
Interest on long-term debt 2.9 2.6
-----------------------------------------------------------------------------
Total interest expense 19.2 24.5
-------------------------
Net interest income 71.8 68.3
Provision for loan losses (5.5) (4.9)
-----------------------------------------------------------------------------
Net interest income after provision
for loan losses 66.3 63.4
-------------------------
NONINTEREST INCOME
Advisory fees
Wealth Advisory Services 39.7 33.6
Corporate Client Services 17.9 14.9
Cramer Rosenthal McGlynn 2.1 0.7
Roxbury Capital Management 0.2 (0.9)
-----------------------------------------------------------------------------
Advisory fees 59.9 48.3
Amortization of affiliate other intangibles (0.4) (0.3)
-----------------------------------------------------------------------------
Advisory fees after amortization of
affiliate other intangibles 59.5 48.0
-------------------------
Service charges on deposit accounts 8.2 7.3
Loan fees and late charges 1.6 2.0
Card fees 2.1 2.6
Other noninterest income 1.3 1.2
-----------------------------------------------------------------------------
Total noninterest income 72.7 61.1
-------------------------
Net interest and noninterest income 139.0 124.5
-------------------------
NONINTEREST EXPENSE
Salaries and wages 32.4 29.8
Incentives and bonuses 8.3 9.5
Employment benefits 10.9 9.6
Net occupancy 5.3 5.4
3
Furniture, equipment, and supplies 7.6 7.3
Advertising and contributions 1.6 1.9
Servicing and consulting fees 4.6 4.0
Travel, entertainment, and training 1.7 1.5
Originating and processing fees 2.1 1.8
Other noninterest expense 8.7 8.8
-----------------------------------------------------------------------------
Total noninterest expense 83.2 79.6
-------------------------
NET INCOME
Income before income taxes and minority
interest 55.8 44.9
Income tax expense 19.8 15.3
-----------------------------------------------------------------------------
Net income before minority interest 36.0 29.6
Minority interest 0.3 0.2
-----------------------------------------------------------------------------
Net income $ 35.7 $ 29.4
=========================
Net income per share:
basic $ 0.54 $ 0.45
=========================
diluted $ 0.53 $ 0.44
=========================
Weighted average shares outstanding:
basic 66,160 65,692
diluted 67,493 66,174
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
--------------------------
For the three months ended
March 31,
(in millions) 2004 2003
------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 35.7 $ 29.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 5.5 4.9
Provision for depreciation and other amortization 4.6 4.8
Amortization of other intangible assets 0.7 0.6
Minority interest in net income 0.3 0.2
Amortization of investment securities available for sale
discounts and premiums 3.6 2.5
Deferred income taxes 1.5 (1.0)
Originations of residential mortgages available for sale (16.9) (55.1)
Gross proceeds from sales of residential mortgages 17.3 56.3
Gains on sales of residential mortgages (0.4) (1.2)
(Increase)/decrease in other assets (1.1) 7.0
Decrease in other liabilities (10.3) (24.3)
-------------------------------------------------------------------------------------------------
Net cash provided by operating activities 40.5 24.1
-----------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 5.5 0.1
Proceeds from maturities of investment securities available for sale 177.1 258.4
Proceeds from maturities of investment securities held to maturity 0.1 0.1
Purchases of investment securities available for sale (238.3) (458.0)
Purchases of residential mortgages -- (0.3)
Net increase in loans (149.9) 13.1
Purchases of premises and equipment (8.2) (5.5)
Dispositions of premises and equipment 4.6 1.9
-------------------------------------------------------------------------------------------------
Net cash used for investing activities (209.1) (190.2)
-----------------
FINANCING ACTIVITIES
Net (decrease)/increase in demand, savings, and interest-bearing
demand deposits (49.6) 43.1
Net increase in certificates of deposit 331.3 196.9
Net increase/(decrease) in federal funds purchased and securities sold
under agreements to repurchase 65.0 (54.9)
Net decrease in U.S. Treasury demand (29.7) (31.2)
Proceeds from issuance of long-term debt 11.5 --
Net decrease in line of credit (8.0) (10.0)
Cash dividends (17.9) (16.8)
Distributions to minority shareholders (0.3) (0.2)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 4.6 1.9
Payments for common stock acquired through buybacks (7.4) (0.5)
-------------------------------------------------------------------------------------------------
Net cash provided by financing activities 299.5 128.3
-----------------
Effect of foreign currency translation on cash 0.1 --
-----------------
Increase in cash and cash equivalents 131.0 (37.8)
5
Cash and cash equivalents at beginning of period 214.0 248.9
-------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $345.0 $211.1
=================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 17.9 $ 25.3
Taxes 7.3 1.0
See Notes to Consolidated Financial Statements
6
Notes to Unaudited Consolidated Financial Statements
Note 1 - Stock-Based Compensation Plans
At March 31, 2004, 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 2003 Annual Report to Shareholders.
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 three months ended
March 31,
--------------------------
(in millions, except per share amounts) 2004 2003
--------------------------------------------------------------------------------------
Net income:
As reported $ 35.7 $ 29.4
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (0.8) (0.4)
----------------------------------------------------------------------------------
Pro forma net income $ 34.9 $ 29.0
Basic earnings per share:
As reported $ 0.54 $ 0.45
Pro forma 0.53 0.44
Diluted earnings per share:
As reported $ 0.53 $ 0.44
Pro forma 0.52 0.44
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 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 Consolidated Financial Statements" included in
the
7
Corporation's 2003 Annual Report to Shareholders. 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 three months ended
March 31,
--------------------------
(in millions) 2004 2003
---------------------------------------------------------------------------------------------------------
Net income $35.7 $29.4
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities 7.6 (0.5)
Reclassification adjustment for securities gains included in net income -- --
Net unrealized holding gains arising during the period
on derivatives used for cash flow hedge 0.1 --
Reclassification adjustment for derivative gains included in net income (0.1) --
Foreign currency translation adjustments (0.1) (0.1)
Minimum pension/SERP liability adjustment -- --
---------------
Total comprehensive income $43.2 $28.8
===============
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
March 31,
--------------------------
(in millions; except per share data) 2004 2003
-----------------------------------------------------------------------------------------
Numerator:
Net income $ 35.7 $ 29.4
------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 66.2 65.7
------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 1.3 0.5
------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 67.5 66.2
------------------------------------------------------------------------------------
Basic earnings per share $ 0.54 $ 0.45
====================================================================================
Diluted earnings per share $ 0.53 $ 0.44
====================================================================================
Cash dividends per share $ 0.27 $ 0.255
8
The number of anti-dilutive stock options excluded for the three-month period
ended March 31, 2004, was 1.0 million. The number of anti-dilutive stock options
excluded for the three-month period ended March 31, 2003, was 2.0 million.
Note 5 - Segment Reporting
For the purposes of segment reporting, the Corporation discusses its business in
four segments. There is a segment for each of the Corporation's three
businesses, which are Regional Banking, Wealth Advisory Services, and Corporate
Client Services, as well as a segment for Affiliate Money Managers.
This segment reporting methodology was first implemented for the three and nine
months ended September 30, 2003, and included in the Form 10-Q filed by the
Corporation with the Securities and Exchange Commission on November 14, 2003.
Segment reporting for the three months ended March 31, 2003, has been revised to
reflect that change, and all prior period amounts have been restated
accordingly. The 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.
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 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 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 consolidated
in the Corporation'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 2003 Annual Report to Shareholders.
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.
Financial data by segment for the quarters ended March 31, 2004, and March 31,
2003, is as follows:
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended March 31, 2004 (in millions) Banking Services Services Managers Totals
----------------------------------------------------------------------------------------------------------------
Net interest income $64.3 $ 6.5 $ 2.3 $(1.3) $71.8
Provision for loan losses (5.3) (0.2) -- -- (5.5)
----------------------------------------------------------------------------------------------------------------
Net interest income after provision 59.0 6.3 2.3 (1.3) 66.3
Advisory fees:
Wealth Advisory Services 0.5 36.5 2.7 -- 39.7
Corporate Client Services 0.3 -- 17.6 -- 17.9
Affiliate Money Managers -- -- -- 2.3 2.3
----------------------------------------------------------------------------------------------------------------
9
-----------------------------------------------------------------------------------------------------------------------
Advisory fees 0.8 36.5 20.3 2.3 59.9
Amortization of other intangibles -- (0.2) (0.1) (0.1) (0.4)
-----------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.8 36.3 20.2 2.2 59.5
Other noninterest income 12.7 0.2 0.3 -- 13.2
-----------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 72.5 42.8 22.8 0.9 139.0
Noninterest expense (34.1) (32.9) (16.2) -- (83.2)
-----------------------------------------------------------------------------------------------------------------------
Segment profit from operations 38.4 9.9 6.6 0.9 55.8
Segment gain from infrequent events -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 38.4 $ 9.9 $ 6.6 $ 0.9 $ 55.8
=======================================================================================================================
Depreciation and amortization $ 5.4 $ 1.9 $ 1.4 $ 0.2 $ 8.9
Investment in equity method investees -- -- -- 242.2 242.2
Segment average assets 7,315.7 1,149.7 206.8 242.9 8,915.1
-----------------------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended March 31, 2003 (in millions) Banking Services Services Managers Totals
-----------------------------------------------------------------------------------------------------------------------
Net interest income $ 61.3 $ 6.0 $ 2.5 $ (1.5) $ 68.3
Provision for loan losses (4.8) (0.1) -- -- (4.9)
-----------------------------------------------------------------------------------------------------------------------
Net interest income after provision 56.5 5.9 2.5 (1.5) 63.4
Total advisory fees:
Wealth Advisory Services 0.6 30.5 2.5 -- 33.6
Corporate Client Services 0.4 -- 14.5 -- 14.9
Affiliate Money Managers -- -- -- (0.2) (0.2)
-----------------------------------------------------------------------------------------------------------------------
Advisory fees 1.0 30.5 17.0 (0.2) 48.3
Amortization of other intangibles -- (0.1) (0.1) (0.1) (0.3)
-----------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 1.0 30.4 16.9 (0.3) 48.0
Other noninterest income 12.3 0.5 0.3 -- 13.1
-----------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 69.8 36.8 19.7 (1.8) 124.5
Noninterest expense (35.0) (30.5) (14.1) -- (79.6)
-----------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 34.8 $ 6.3 $ 5.6 $ (1.8) $ 44.9
=======================================================================================================================
Depreciation and amortization $ 4.6 $ 1.9 $ 1.3 $ 0.1 $ 7.9
Investment in equity method investees -- -- -- 241.2 241.2
Segment average assets 6,687.2 1,028.9 202.3 240.8 8,159.2
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.
10
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 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 first quarter of 2004, approximately $77,100 of gains in "Accumulated
other comprehensive income" were reclassified to earnings.
During the 12 months ending March 31, 2005, 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 is as follows:
March 31, 2004 December 31, 2003
-----------------------------------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount Amortization amount amount amortization amount
-------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $ 285.8 $ 29.8 $ 256.0 $ 273.0 $ 29.8 $ 243.2
=======================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 7.3 $ 4.2 $ 3.1 $ 7.2 $ 4.0 $ 3.2
Customer lists 19.3 5.3 14.0 19.1 4.8 14.3
Acquisition costs 1.7 1.7 -- 1.7 1.7 --
Other intangibles 0.7 0.6 0.1 0.7 0.6 0.1
Nonamortizing
Other intangible assets 6.4 -- 6.4 6.4 -- 6.4
-----------------------------------------------------------------------
Total other intangibles $ 35.4 $ 11.8 $ 23.6 $ 35.1 $ 11.1 $ 24.0
=======================================================================
11
Amortization expense of other intangible assets for the three months ended March
31 is as follows:
--------------------------
For the three months ended
March 31,
--------------------------
(in millions) 2004 2003
----------------------------------------------------------------------------------------
Amortization expense $ 0.7 $ 0.6
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, 2005 $ 2.5
For the year ended December 31, 2006 2.4
For the year ended December 31, 2007 1.5
For the year ended December 31, 2008 1.3
For the year ended December 31, 2009 1.2
The changes in the carrying amount of goodwill for the three months ended March
31 are as follows:
2004
--------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(in millions) Banking Services Services Managers Total
-------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2004 $ 3.8 $ 4.4 $ 7.8 $ 227.2 $ 243.2
Goodwill acquired -- 12.7 -- -- 12.7
Increase in carrying value due to foreign
currency translation adjustments -- -- 0.1 -- 0.1
--------------------------------------------------------------
Balance as of March 31, 2004 $ 3.8 $ 17.1 $ 7.9 $ 227.2 $ 256.0
==============================================================
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
Decrease in carrying value due to foreign
currency translation adjustments -- -- (0.1) -- (0.1)
---------------------------------------------------------------
Balance as of March 31, 2003 $ 3.8 $ 4.4 $ 7.1 $ 224.8 $ 240.1
===============================================================
The goodwill acquired in 2004 above represents $12.7 million recorded in connection with the payment of a portion of
the purchase price for Balentine Holdings, Inc.
12
The following table lists other intangible assets acquired during the three
months ended March 31.
2004 2003
-----------------------------------------------------------------------
Weighted Weighted
average average
amortization amortization
Amount Residual period Amount Residual period
(in millions) Assigned Value in years Assigned Value in years
-------------------------------------------------------------------------------------------------------------
Mortgage servicing rights $ 0.1 -- 8 $ 0.5 -- 8
Customer list increase in carrying
value due to foreign currency
translation adjustments 0.1 -- -- --
---------------- ----------------
$ 0.2 -- $ 0.5 --
================ ================
Note 8 - Components of net periodic benefit cost
The following table reflects the net periodic benefit cost of the pension plan,
supplemental executive retirement plan (SERP), and other postretirement benefits
for the three months ended March 31, 2004, and 2003. Descriptions of these plans
are contained in "Note 15" to the "Consolidated Financial Statements" in the
Corporation's 2003 Annual Report to Shareholders.
Pension benefits SERP benefits Postretirement benefits
--------------------------------------------------------------------
(in millions) 2004 2003 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 1.6 $ 1.6 $ 0.1 $ 0.1 $ 0.3 $ 0.2
Interest cost 2.1 2.7 0.3 0.3 0.6 0.6
Expected return on plan assets (2.8) (3.4) -- -- -- --
Amortization of transition
obligation/(asset) (0.2) (0.3) -- -- -- --
Amortization of prior service cost 0.2 0.3 0.1 0.1 -- --
Recognized actuarial (gain)/loss 0.2 -- 0.1 -- 0.2 0.1
--------------------------------------------------------------------
Net periodic benefit cost $ 1.1 $ 0.9 $ 0.6 $ 0.5 $ 1.1 $ 0.9
====================================================================
Employer contributions $ -- $ 15.0 $ 0.1 $ 0.1 $ 1.0 $ 0.7
Note 9 - Temporarily impaired investment securities
At March 31, 2004, the Corporation's investment portfolio consisted of 45
positions with an estimated market value of $469.6 million and unrealized losses
of $6.9 million. Of the 45 positions, 15 were corporate and equity securities
that have carried unrealized losses for a continuous 12-month period.
13
These unrealized losses reflected temporary impairment attributable to financial
scandals which began in 2002 and whose effects continued throughout 2003. These
events created a continuing negative impact on credit spreads, specifically for
collateralized debt and equity securities.
Improved credit ratings in the banking sector as well as a decline in benchmark
interest rates led to a decline in the unrealized losses from December 2003.
This trend continued in the first quarter of 2004.
The following table shows the estimated market value and unrealized losses on
debt and marketable equity securities that are temporarily impaired.
Less than 12 months 12 months or longer Total
---------------------------------------------------------------------------
Estimated Estimated Estimated
market Unrealized market Unrealized market Unrealized
(in millions) value losses value losses value losses
----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004
Other securities:
Preferred stock $ 7.0 $ -- $ 2.7 $ 0.4 $ 9.7 $ 0.4
Mortgage-backed securities 318.5 5.2 -- -- 318.5 5.2
Other debt securities 63.2 0.4 78.2 0.9 141.4 1.3
---------------------------------------------------------------------------
Total temporarily impaired
securities $ 388.7 $ 5.6 $ 80.9 $ 1.3 $ 469.6 $ 6.9
===========================================================================
Note 10 - Accounting Pronouncements
FIN No.46R: On December 24, 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (FIN 46R or the Interpretation), which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate an entity. This Interpretation replaces Interpretation No.
46, Consolidation of Variable Interest Entities (FIN 46), which was issued on
January 17, 2003. FIN 46R requires that an enterprise review its degree of
involvement in an entity to determine if consolidation of the entity is required
or if disclosures are required about an enterprise's level of involvement in the
entity. Public companies must apply either FIN 46 or FIN 46R to entities
considered to be special-purpose entities for periods ending after December 15,
2003. Application by public companies for all other types of entities is
required in financial statements for periods ending after March 15, 2004. The
application of this Interpretation did not have a material impact on the
Corporation's consolidated earnings, financial condition, or equity, nor has
there been any requirement for disclosures.
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 issued an
exposure draft on March 31, 2004, that would require the expensing of the value
of employee stock options for fiscal years beginning after December 15, 2004.
The Statement is expected to be finalized in 2004.
14
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 - which it delivers through its primary wholly owned
subsidiaries:
a) 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 43
branch offices throughout the state.
b) Wilmington Trust of Pennsylvania, a Pennsylvania-chartered bank and trust
company. Wilmington Trust of Pennsylvania has offices in center city
Philadelphia, Doylestown, Villanova, and West Chester.
c) 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,
and deposit taking services, and residential, consumer, 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 clients in the
state of Delaware and commercial clients throughout the Delaware Valley region.
In its commercial banking business, the Corporation targets family-owned or
closely held businesses with annual sales of up to $250 million where there is
an opportunity to develop an advisory as well as a lending relationship.
The Corporation and its subsidiaries are subject to regulation by the Federal
Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the Delaware Department of Banking, the Pennsylvania Department of
Banking, and certain other federal and state authorities.
The Corporation has ownership interests in two affiliate money managers, Cramer
Rosenthal McGlynn and Roxbury Capital Management. For the purposes of segment
reporting, the income, expenses, and assets of these two affiliates are reported
as a separate segment in addition to the segments for the Wealth Advisory
Services, Corporate Client Services, and Regional Banking businesses.
SUMMARY OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004
Higher sales volumes and the improving economy combined to produce strong 2004
first quarter results. Earnings per share were $0.53 on a diluted basis and net
income was $35.7 million. These were increases of 20.5% and 21.4%, respectively,
from the year-ago first quarter. This improvement was achieved opposite a 4.5%
increase in expenses and a 22-basis-point decline in the net interest margin
from a year ago.
Several factors contributed to the positive first quarter performance. Each
business engaged new clients and developed additional business with existing
clients. The economic rebound that began to take shape in the latter half of
2003 gained traction in the first three months of 2004.
Interest rates remained stable and equity markets remained above their year-ago
levels.
Highlights of the 2004 first quarter included:
- The 12th consecutive quarter of growth in loan balances, which rose 2.3%
to $6.37 billion, a record high;
- 18% growth in Wealth Advisory Services revenue;
- 20% growth in Corporate Client Services revenue;
- Higher income from affiliate money manager Cramer Rosenthal McGlynn;
- A return to profitability at affiliate money manager Roxbury Capital
Management;
15
- An increase in combined assets under management to $32.7 billion;
- A net interest margin of 3.53%; and
- Stable credit quality.
On an annualized basis, the 2004 first quarter return on average assets (ROA)
was 1.61% and the return on average stockholders' equity (ROE) was 17.69%. These
were upticks from the full-year 2003, when the ROA and ROE were 1.58% and
17.46%, respectively. They also were improvements from the 2003 first quarter
annualized returns of 1.46% and 15.97%, respectively.
In a reflection of continued growth in net income and stockholders' equity, the
quarterly cash dividend was raised by $0.015 per share. This took the quarterly
dividend from $0.27 to $0.285 per share, or $1.14 on an annualized basis. This
was a 5.6% increase. This marked the 23rd consecutive year that the cash
dividend has been raised.
STATEMENT OF CONDITION
This section discusses changes in the balance sheet for the period between
December 31, 2003, and March 31, 2004. All balances referenced in this section
are period-end balances unless otherwise noted.
Assets
Total assets rose 3.8% to $9.17 billion as a result of higher balances in
earning assets, including the commercial loan portfolio and the investment
securities portfolio. Earning assets increased 4.4% to $8.47 billion due to
growth in loan and investment balances.
Investment securities
Investment portfolio balances rose 3.4% to $1.94 billion as new investments were
made to offset anticipated paydowns in mortgage-backed instruments. On a
percentage basis, the composition of assets within the investment portfolio
remained relatively unchanged, as the following table illustrates.
SECURITY MARCH 31, 2004 DECEMBER 31, 2003 SEPTEMBER 30, 2003
--------------------------------------------------------------------------------------------------
Mortgage-backed securities and
collateralized mortgage obligations 53% 52% 49%
U.S. treasuries 11% 11% 17%
Corporate issues 14% 14% 13%
U.S. government agencies 13% 13% 11%
Money market preferred stocks 7% 8% 7%
Municipal bonds 1% 1% 1%
Other 1% 1% 2%
At March 31, 2004, approximately 99% of the mortgage-backed securities in the
portfolio were invested in fixed-rate instruments of 15 years or less. The
Corporation believes that duration and risk can be managed more effectively by
investing in mortgage-related instruments than by retaining individual
residential mortgage loans on the balance sheet.
The average life of mortgage-backed instruments in the investment portfolio was
3.7 years at March 31, 2004, and the duration was 3.9. The corresponding life
and duration at December 31, 2003, were 4.50 and 4.50, respectively.
At March 31, 2004, the average life of the total investment portfolio was 5.25
years and the duration was 2.37. In comparison, at December 31, 2003, the
average life was 5.67 years and the duration was 2.81.
Loan balances
The 2004 first quarter marked the 12th consecutive quarter of growth in loan
balances, which rose to a record high of $6.37 billion. This was an increase of
2.3%. This growth was achieved opposite a 3.6% decrease in residential
16
mortgage balances, which declined mainly because the Corporation sells all new
residential mortgage production into the secondary market.
The growth trend in loan balances was attributed to two primary factors.
First was the concentration of the Regional Banking business on the Delaware
Valley region, which benefits from a strong regional economy. The Corporation
defines the Delaware Valley region as the state of Delaware, geographically
adjacent areas along the I-95 corridor from Princeton, New Jersey, to Baltimore,
Maryland, and Maryland's Eastern Shore.
Second was the focus of the commercial banking business on family owned or
closely held businesses in the Delaware Valley region.
The Corporation holds a leading market share in the state of Delaware and
continues to gain market share throughout southeastern Pennsylvania.
Commercial loans
Nearly all of the first quarter growth in loan balances occurred in the
commercial portfolio, which rose 4.0% to $4.22 billion.
Commercial loan balances are reported in three categories:
- Commercial, financial, and agricultural loans (commercial and industrial
loans, or C and I);
- Commercial construction/real estate loans (CRE); and
- Commercial mortgage loans.
Balance increases were recorded in all three categories during the first
quarter.
Most of the growth occurred in commercial mortgage balances, which increased
$66.3 million, or 6.1%, to $1.14 billion. In large part, the increase reflected
refinancing activity for new as well as existing clients, and included retail,
restaurant, industrial park, and education-related projects.
C and I balances rose $63.6 million to $2.34 billion. Factors in this growth
included higher demand for automobile floor plan loans, as dealers borrowed to
support new seasonal inventory. In addition, clients in the precision
manufacturing and metal fabrication business were added as a result of the
upturn in the light manufacturing sector in the southeastern Pennsylvania
market.
CRE balances rose 4.7%, or $33.2 million, to $733.0 million. Most of this growth
occurred in Delaware, where residential real estate construction and land
development activity continued to generate demand for loans.
Retail loans
Declines in residential mortgage balances were the primary cause of the modest
decline in total retail loan balances.
Residential mortgage balances fell $17.7 million, or 3.6%, to $471.9 million.
While the Corporation continued to be a leading residential mortgage originator
in Delaware, residential mortgage balances decreased mainly because the
Corporation sells all new residential mortgage production into the secondary
market. Mortgages are sold to reduce the Corporation's risk associated with
rising interest rates. In addition, paydowns continued, and the low interest
rate environment continued to generate a high volume of refinancings.
Reserve for loan losses
The reserve for loan losses increased 1.4% to $91.2 million. Changes in the
reserve reflected the growth in loan balances and the Corporation's internal
risk rating analysis, reserve methodology, and net charge-off experience.
The loan loss reserve ratio was 1.43% at March 31, 2004, which was a decline of
1 basis point from December 31, 2003. For more information about credit quality,
please refer to the "Asset Quality" section of this report.
17
Liabilities
Total liabilities increased 3.9% to $8.33 billion. Most of the increase resulted
from higher balances of national certificates of deposits (CDs) in amounts of
$100,000 or more, which the Corporation uses as a source of funds.
Deposit balances
The national CDs were the primary driver of the 4.3% increase in deposit
balances, which rose to $6.86 billion. National CD balances were 18.1%, or
$343.0 million, higher than at December 31, 2003, because increased loan demand
exceeded core deposits.
Because national CDs represent a funding source that the Corporation can
control, as opposed to client deposits, they are not considered to be core
deposits. For more information about funding sources, please refer to the
"Liquidity" section of this report.
Core deposit balances decreased 1.3%, as interest-bearing demand deposit
balances dropped $88.7 million and balances of CDs in amounts of less than
$100,000 fell $19.0 million. These declines offset the growth in
noninterest-bearing demand deposits, savings deposits, and balances of local CDs
in amounts of $100,000 or more (which do represent client deposits).
Part of the decrease in interest-bearing demand deposits was related to
Corporate Client Services clients who use the Corporation's cash management and
paying agent services. It is not unusual for the funds associated with the
Corporate Client business to be deposited for short periods of time.
As a result, average core deposit balances are a better indicator of trends in
deposit balances. On an average balance basis, interest-bearing demand deposits
decreased $31.1 million between the 2003 fourth quarter and the 2004 first
quarter. This was $57.6 million less than the period-end decrease.
Stockholders' equity
Stockholders' equity increased 4.4% to $835.8 million. For more information
about the increase, please refer to the "Capital Resources" section of this
report.
The Corporation repurchased 200,903 shares of its stock during the first quarter
at an average price of $36.74 per share. This brought the total number of shares
purchased under the current 8-million-share program, which commenced in April
2002, to 285,272 shares.
INCOME STATEMENT
This section compares the Corporation's income and expenses for the first
quarter of 2004 with those of the first quarter of 2003.
Net income for the first quarter of 2004 was $35.7 million and earnings per
share were $0.53 on a diluted basis. These were increases of 21.4% and 20.5%,
respectively. Higher revenue from each of the Corporation's businesses, improved
results from the two affiliate money managers, and a stable net interest margin
drove the increase. The size of the increase also was a reflection of the
comparative weakness of the 2003 first quarter, when growth in loan balances and
advisory business sales was offset by the low interest rate environment, low
equity market levels, a loss in affiliate money manager income, and significant
compression in the net interest margin.
On an annualized basis, the 2004 first quarter return on average assets was
1.61% and the return on average stockholders' equity was 17.69%. This was an
improvement from the 2003 first quarter annualized returns of 1.46% and 15.97%,
respectively.
18
The Corporation has two sources of revenue: net interest income and noninterest
income. This combination generates a diversified stream of revenue that enables
the Corporation to deliver consistent profitability and growth, with low
volatility, in a variety of economic conditions.
The Corporation endeavors to strike a balance between its two sources of income.
The following table illustrates that balance and how, on a percentage basis, it
remained relatively unchanged.
SOURCE OF INCOME FOR THE FIRST QUARTER 2004 2003
-----------------------------------------------------------------------------
Advisory business income 43.1% 38.8%
Total noninterest income 52.3% 49.1%
Net interest income (after provision for loan losses) 47.7% 50.9%
Net interest income, expenses, and margin
Loan balances and earning assets reached record-high levels in the 2004 first
quarter, but the absolute level of market interest rates precluded a
corresponding increase in net interest income. The Federal Reserve's reduction
in short-term interest rates in June 2003 brought rates to their lowest level
since 1958. As a result, the pace of growth in net interest income - which was
4.6% after the provision for loan losses - did not match the pace of growth in
loan balances, which rose 5.5%, on average, or that of earning assets, which
increased 10.2%, on average.
Both interest income and interest expense were lower for the 2004 first quarter
than for the year-ago first quarter. Interest income decreased 1.9%, while
interest expense dropped 21.6%.
The low interest rate environment, combined with the Corporation's balance sheet
expansion and asset sensitivity, led to a 22-basis-point decline in the net
interest margin, which fell to 3.53%. The net interest margin improved 1 basis
point from the 2003 fourth quarter level of 3.52%.
To compute the net interest margin, the Corporation divides net interest income
on a fully tax-equivalent (FTE) basis by average total earning assets. On an FTE
basis, net interest income for the 2004 first quarter was $72.9 million,
compared with $69.6 million for the 2003 first quarter. Total earning assets, on
average, were $8.22 billion, which was $760.7 million more than for the 2003
first quarter average of $7.46 billion, and $198.6 million more than the 2003
fourth quarter average of $8.03 billion.
Interest-rate-driven factors, which caused disparities between the magnitude of
declines in the yields on earning assets and the cost of funds used to support
the earning assets, were the primary cause of the margin compression. The drop
of 61 basis points in the average yield on earning assets was considerably
larger than the 39-basis-point decline in the average cost of funds.
Investment portfolio balances, on average, were 29% higher, but the average
yield on the portfolio was 56 basis points lower. The increase in balances
reflected the investment of the proceeds from the Corporation's April 2003
issuance of $250 million in long-term subordinated debt.
Loan balances, on average, rose 5.5%, with average yields declining 60 basis
points.
This decline outpaced the corresponding adjustments to core deposit pricing. The
cost of core interest-bearing deposits fell 40 basis points to 0.77%. This was a
new low. The cost of total interest-bearing deposits fell 45 basis points.
The average cost of funds also was affected by favorable repricing of national
CDs. The cost of these CDs, on average, declined 56 basis points, while their
balances were $157.6 million higher.
The following tables present comparative net interest income data and a
rate/volume analysis of the changes in net interest income for the first
quarters of 2004 and 2003.
19
QUARTERLY ANALYSIS OF EARNINGS
2004 First Quarter 2003 First 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 $ 16.8 $ -- 1.01% $ 24.1 $ 0.1 1.40%
U.S. Treasury and government
agencies 465.3 3.9 3.44 461.0 4.2 3.73
State and municipal 14.7 0.3 8.55 16.5 0.4 8.97
Preferred stock 120.3 2.2 7.42 114.0 2.2 7.68
Mortgage-backed securities 1,008.8 10.6 4.12 642.6 7.7 4.97
Other 289.4 2.0 2.79 227.5 1.8 3.17
---------------------------------------------------------------- ------------------------
Total investment
securities 1,898.5 19.0 3.99 1,461.6 16.3 4.55
--------------------------------------------------------------------------
Commercial, financial, and
agricultural 2,325.2 24.4 4.16 2,214.8 25.1 4.53
Real estate-construction 725.0 8.1 4.42 544.6 6.1 4.45
Mortgage-commercial 1,103.1 13.4 4.82 1,008.0 14.2 5.63
---------------------------------------------------------------- ------------------------
Total commercial loans 4,153.3 45.9 4.38 3,767.4 45.4 4.81
--------------------------------------------------------------------------
Mortgage-residential 481.7 7.3 6.08 649.0 11.1 6.82
Consumer 1,071.1 16.1 6.04 1,028.3 17.4 6.85
Secured with liquid collateral 602.6 3.8 2.51 532.9 3.8 2.87
---------------------------------------------------------------- ------------------------
Total retail loans 2,155.4 27.2 5.06 2,210.2 32.3 5.88
--------------------------------------------------------------------------
Total loans net of
unearned income 6,308.7 73.1 4.61 5,977.6 77.7 5.21
--------------------------------------------------------------------------
Total earning assets $ 8,224.0 92.1 4.46 $ 7,463.3 94.1 5.07
==========================================================================
Funds supporting earning assets
Savings $ 372.1 0.1 0.13 357.3 0.2 0.23
Interest-bearing demand 2,267.0 2.1 0.37 2,062.9 2.4 0.47
Certificates under $100,000 779.3 4.1 2.12 874.6 6.6 3.05
Local CDs $100,000 and over 134.8 0.5 1.44 151.1 0.8 1.99
---------------------------------------------------------------- ------------------------
Total core interest-
bearing deposits 3,553.2 6.8 0.77 3,445.9 10.0 1.17
National CDs $100,000 and over 2,223.9 6.4 1.13 2,066.3 8.7 1.69
---------------------------------------------------------------- ------------------------
Total interest-
bearing deposits 5,777.1 13.2 0.91 5,512.2 18.7 1.36
--------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 893.0 3.1 1.37 778.7 3.2 1.64
U.S. Treasury demand 11.8 ---- 0.77 8.1 ---- 0.99
---------------------------------------------------------------- ------------------------
Total short-term
borrowings 904.8 3.1 1.37 786.8 3.2 1.64
--------------------------------------------------------------------------
Long-term debt 410.8 2.9 2.81 160.5 2.6 6.58
---------------------------------------------------------------- ------------------------
Total interest-
bearing liabilities 7,092.7 19.2 1.08 6,459.5 24.5 1.52
--------------------------------------------------------------------------
20
Other noninterest funds 1,131.3 ---- ---- 1,003.8 ---- ----
---------------------------------------------------------------- ------------------------
Total funds used to
support earning assets $ 8,224.0 19.2 0.93 $7,463.3 24.5 1.32
==========================================================================
Net interest income/yield 72.9 3.53 69.6 3.75
Tax-equivalent adjustment (1.1) (1.3)
------- -------
Net interest income $ 71.8 $ 68.3
======= =======
In order to assure the comparability of yields and rates and their impact on net
interest income, average rates are calculated using average balances based on
historical cost and do not reflect the market valuation adjustment required by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective January 1, 1994.
21
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
-------------------------------------
For the three months ended March 31,
-------------------------------------
2004/2003
Increase (Decrease)
due to change in
-------------------------------------
1 2
(in millions) Volume Rate Total
-----------------------------------------------------------------------------
Interest income:
Federal funds sold and
securities purchased under
agreements to resell $ ---- $ (0.1) $ (0.1)
-------------------------------------
U.S. Treasury and
government agencies 0.1 (0.4) (0.3)
State and municipal * ---- (0.1) (0.1)
Preferred stock * 0.1 (0.1) ----
Asset-backed securities 4.7 (1.8) 2.9
Other * 0.5 (0.3) 0.2
-----------------------------------------------------------------------------
Total investment
securities 5.4 (2.7) 2.7
-------------------------------------
Commercial, financial, and
agricultural * 1.2 (1.9) (0.7)
Real estate-construction 2.0 ---- 2.0
Mortgage-commercial * 1.3 (2.1) (0.8)
-----------------------------------------------------------------------------
Total commercial
loans 4.5 (4.0) 0.5
-------------------------------------
Mortgage-residential (2.8) (1.0) (3.8)
Consumer 0.7 (2.0) (1.3)
Secured with liquid collateral 0.5 (0.5) ----
-----------------------------------------------------------------------------
Total retail loans (1.6) (3.5) (5.1)
-------------------------------------
Total loans net of
unearned income 2.9 (7.5) (4.6)
-----------------------------------------------------------------------------
Total interest income $ 8.3 $ (10.3) $ (2.0)
-------------------------------------
Interest expense:
Savings $ ---- $ (0.1) $ (0.1)
Interest-bearing demand 0.2 (0.5) (0.3)
Certificates under $100,000 (0.7) (1.8) (2.5)
Local CDs $100,000 and over (0.1) (0.2) (0.3)
-----------------------------------------------------------------------------
Total core interest-
bearing deposits (0.6) (2.6) (3.2)
22
National CDs $100,000
and over 0.7 (3.0) (2.3)
-----------------------------------------------------------------------------
Total interest-
bearing deposits 0.1 (5.6) (5.5)
-------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 0.5 (0.6) (0.1)
U.S. Treasury demand ---- ---- ----
-----------------------------------------------------------------------------
Total short-term
borrowings 0.5 (0.6) (0.1)
-------------------------------------
Long-term debt 4.1 (3.8) 0.3
-----------------------------------------------------------------------------
Total interest expense $ 4.7 $ (10.0) $ (5.3)
-------------------------------------
Changes in net interest income $ 3.6 $ (0.3) $ 3.3
=====================================
* 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.
23
Noninterest income
Noninterest income rose as a result of double-digit increases in Wealth Advisory
Services revenue, Corporate Client Services revenue, and service charges on
deposit accounts. In addition, revenue from the two affiliate money managers was
much higher.
Wealth Advisory Services
The 18.2% jump in Wealth Advisory Services revenue was a reflection of higher
sales, relative stability in the equity markets compared to the 2003 first
quarter, and asset appreciation. The 2004 first quarter marked the first time in
four years that equity markets were higher than their previous year first
quarter levels. The sales growth occurred in large part because of high demand
for financial and estate planning services and multi-manager investment
consulting services.
The following table compares changes in the components of Wealth Advisory
Services income.
FIRST QUARTER WEALTH ADVISORY SERVICES INCOME (in millions) 2004 2003
----------------------------------------------------------- ---- ----
Trust and investment advisory fees $26.9 $22.5
Mutual fund fees $ 5.2 $ 5.6
Other service fees $ 7.6 $ 5.5
Wealth Advisory Services total $39.7 $33.6
The largest contributor to total Wealth Advisory Services revenue for the 2004
first quarter was trust and investment advisory income, which rose 19.6%. Trust
and investment advisory fees accounted for 67.7% of total Wealth Advisory
Services income for the 2004 first quarter, compared with 67.0% in the 2003
first quarter. Fees for trust and investment advisory services are based on
asset valuations. Approximately 75% of trust and investment advisory fees are
tied to the equity markets; the remainder is tied to fixed income instruments.
The fastest-growing component of Wealth Advisory revenue in the 2004 first
quarter was other service fees, which increased 38.2%. Other service fees
include fees for financial and estate planning services. These fees are based on
the complexity of the service provided, and bear no relationship to financial
markets. Because other service fees represent client demand at any given point
in time, they may fluctuate from period to period.
Corporate Client Services
First quarter 2004 Corporate Client Services income increased 20.1%. While sales
were robust, the percentage increase reflected the relative weakness in the
year-ago first quarter, particularly in the structured finance industry.
All components of the Corporate Client Services business contributed to the
growth, as the following table illustrates.
FIRST QUARTER CORPORATE CLIENT SERVICES INCOME (in millions) 2004 2003
------------------------------------------------------------ ---- ----
Capital markets services $ 7.8 $ 6.3
Entity management services $ 5.5 $ 4.9
Corporate retirement services $ 2.8 $ 2.4
Cash management services $ 1.8 $ 1.3
Corporate Client Services total $17.9 $14.9
Half of the increase in Corporate Client Services income was due to the strength
of the capital markets component. The increase in this component reflected the
rebounding structured finance industry. Demand was strong for trust and
administrative services that support asset-backed securitizations,
trust-preferred securities, and traditional debt issues.
Cash management fees, which are associated mainly with capital markets or entity
management services, are also tied to asset valuations. The other components of
Corporate Client Services income are based on the complexity of the services
provided. Most are performed under multiyear contracts and generate an
annuity-like stream of revenue.
24
Cramer Rosenthal McGlynn (CRM)
The significant improvement in equity market levels from the 2003 first quarter
was the primary cause of the 200% increase in income from CRM. Assets under
management also benefited, rising 59.4% to $5.1 billion.
The amount of income received from CRM is based on the Corporation's ownership
interest in the firm, which was 69.14% at March 31, 2004, and 63.47% at March
31, 2003. CRM's results are not consolidated in the Corporation's financial
statements.
Roxbury Capital Management (RCM)
RCM returned to profitability in the 2004 first quarter and contributed $0.2
million. This was a considerable change for the better from the year-ago first
quarter, when a $0.9 million loss was recorded for RCM. The improvement
reflected the success of RCM's efforts over the past 12 months to reduce
expenses, stem the flow of lost business, and attract additional assets,
particularly to its small-capitalization stock product. This was evident in
RCM's 6.2% increase in managed assets.
The amount of income received from RCM represents the Corporation's ownership
interest in the firm. At March 31, 2004, this was 41.23% of RCM's common shares
and 30% of RCM's gross revenue, compared with 40.91% and 30%, respectively, at
March 31, 2003. RCM's results are not consolidated in the Corporation's
financial statements.
The following table compares changes in the Affiliate Money Managers income.
FIRST QUARTER AFFILIATE MONEY MANAGERS INCOME/LOSS (in millions) 2004 2003
---------------------------------------------------------------- ---- ----
Cramer Rosenthal McGlynn $2.1 $ 0.7
Roxbury Capital Management $0.2 $(0.9)
Affiliate Money Managers Total $2.3 $(0.2)
Assets under management
The following table compares changes in assets under management at Wilmington
Trust and the two affiliate money managers.
ASSETS UNDER MANAGEMENT (in billions) MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003
------------------------------------- -------------- ------------- --------------
Wilmington Trust $24.2 $24.4 $21.6
Cramer Rosenthal McGlynn $ 5.1 $ 4.7 $ 3.2
Roxbury Capital Management $ 3.4 $ 3.2 $ 3.2
Total $32.7 $32.3 $28.0
The decline in Wilmington Trust's managed assets between December 31, 2003, and
March 31, 2004, reflected trust distributions and tax payments.
Wilmington Trust's managed assets are invested in a mix of instruments that
reflects the primary considerations of Wealth Advisory Services clients, who
count wealth preservation, tax savings, and income generation among their chief
concerns. Approximately 80% of Wilmington Trust's managed assets pertain to
Wealth Advisory Services relationships. The following table compares changes in
the investment mix in Wilmington Trust's managed assets, excluding affiliate
managers.
WILMINGTON TRUST ASSET MIX MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003
-------------------------- -------------- ------------- --------------
Equities 54% 55% 54%
Fixed income 26% 25% 26%
Cash and equivalents 8% 9% 12%
Mutual funds 7% 7% 5%
Miscellaneous assets 5% 4% 3%
Noninterest expense
Noninterest expense reflects the costs that the Corporation incurs in the course
of normal operations. It includes expenses associated with employment,
occupancy, supplies, advertising, third-party providers, and other items.
As predicted and as planned, total noninterest expense increased in order to
support business line growth. Higher salary, wage, and employment benefits costs
were the primary causes of the increase.
25
Salary and wage costs accounted for approximately 72% of the increase in total
noninterest expense. While full-time-equivalent headcount declined
year-over-year, salary and wage expense rose as more staff members were added in
high-cost markets such as Baltimore, Philadelphia, and Florida.
The $1.2 million decrease in incentive and bonus costs reflected adjustments
that were made to various incentive programs.
Employment benefits expense rose $1.3 million due primarily to higher pension
and health insurance costs.
Servicing and consulting fees rose $0.6 million. This increase reflected demand
for the multi-manager investment consulting capabilities, which resulted in
additional payments to third-party investment advisors.
Headcount
At March 31, 2004, full-time equivalent (FTE) headcount was 2,340. This was 2
less than at March 31, 2003, when FTE headcount was 2,342, but 33 more than at
December 31, 2003, when FTE headcount was 2,307.
Income taxes
Income tax expense for the 2004 first quarter was $19.8 million, an increase of
29.4%. Pre-tax income rose 24.3%. The Corporation's effective tax rate for the
2004 first quarter was 35.48%, compared with 34.07% for the 2003 first quarter.
The changes reflected higher state income taxes due to higher income from the
affiliate money managers.
LIQUIDITY
The Corporation manages its liquidity to ensure that its cash flows are
sufficient to support its operating, investing, and financing activities.
Liquidity management enables the Corporation to meet increases in demand for
loans or other assets, and decreases in deposits or other funding sources.
Liquidity is affected by the proportion of funding that is provided by core
deposits and stockholders' equity.
The Corporation's sources of funding include deposit balances, cash that is
generated by the investment and loan portfolios; short- and long-term
borrowings, including national certificates of deposit in amounts of $100,000
and more and term federal funds; internally generated capital; and other credit
facilities.
Among the Corporation's available sources of funds is the Federal Home Loan Bank
of Pittsburgh, of which Wilmington Trust Company is a member. That company has
$1 billion in available borrowing capacity secured by collateral. In addition,
at March 31, 2004, the Corporation had $75 million in available borrowing
capacity through two lines of credit that are maintained with major U.S.
financial institutions.
In April 2003 the Corporation added another source of funding by issuing $250
million of long-term subordinated debt. The issue was for general corporate
purposes and the proceeds were invested initially in mortgage-backed securities.
At March 31, 2004, the balance of the investment portfolio was $1.94 billion.
This portfolio is expected to generate approximately $600 million of cash over
the next 12 months.
For the 2004 first quarter, the proportion of loan funding provided by core
deposits - demand deposits, interest-bearing demand deposits, and certificates
of deposit - was 72.5%, compared with 73.6% for the 2003 first quarter.
The Corporation is a guarantor for a portion of two line-of-credit obligations
of affiliate money manager Cramer Rosenthal McGlynn (CRM). The Corporation's
guaranty portion is representative of its ownership interest in CRM, which at
March 31, 2004, was 69.14%. The guaranty is for two lines of credit, at LIBOR
plus 2%, which total $8 million and will expire on December 6, 2004. At March
31, 2004, the balance of these two lines was zero.
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 in a timely and cost-effective
manner, should the need arise.
26
ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION
Credit quality remained stable for the first three months of 2004, which was a
reflection of the Corporation's strict adherence to underwriting standards.
Before extending credit, the Corporation undertakes a comprehensive review of
the financial condition of the individuals and companies to which it lends. One
of the key determinants in the decision to extend credit is the nature and
extent of the client relationship.
The Corporation rarely makes loans outside of the Delaware Valley region and it
rarely makes commercial loans outside of its target client market of family
owned or closely held businesses. The geographic focus enables management to
remain cognizant of economic and other external factors that may affect credit
quality. To minimize the impact of such factors, management endeavors to
maintain a loan portfolio that is well diversified across commercial and
consumer lines and industry sectors.
During the first three months of 2004, the composition of the loan portfolio
remained well diversified and relatively unchanged, as the following table
illustrates.
LOAN PORTFOLIO COMPOSITION MARCH 31, 2004 DECEMBER 31, 2003 MARCH 31, 2003
----------------------------------------------------------------------------------------------------------
Commercial/financial/agricultural 37% 37% 36%
---------------------------------------------------------------------------- -----------------------------
Commercial real estate construction 12% 11% 10%
---------------------------------------------------------------------------- -----------------------------
Commercial mortgage 18% 17% 18%
---------------------------------------------------------------------------- -----------------------------
Residential mortgage 7% 8% 10%
---------------------------------------------------------------------------- -----------------------------
Consumer 17% 17% 17%
---------------------------------------------------------------------------- -----------------------------
Secured by liquid collateral 10% 10% 9%
----------------------------------------------------------------------------------------------------------
The Corporation's quarterly internal analysis of credits showed that more than
95% of the loans in the portfolio were rated pass. More than 95% of the loans
have been rated pass since 2000. More than 92% of the loans have been rated pass
every year since 1998.
The internal analysis has four classifications, which are:
- Pass, which identifies loans with no current potential problems;
- Watchlisted, which identifies potential problem credits;
- Substandard, which identifies problem credits with some probability of
loss; and
- Doubtful, which identifies problem credits with a higher probability of
loss.
The definitions of problem and potential problem credits are consistent with the
classifications used by regulatory agencies. The following table illustrates
changes in the analysis.
CATEGORY MARCH 31, 2004 DECEMBER 31, 2003 MARCH 31, 2003
-------------------------------------------------------------------------------------------------------
Pass 95.90% 95.83% 95.52%
-------------------------------------------------------------------------------------------------- ----
Watchlisted 2.64% 2.58% 2.48%
-------------------------------------------------------------------------------------------------- ----
Substandard 1.21% 1.27% 1.79%
-------------------------------------------------------------------------------------------------- ----
Doubtful 0.25% 0.32% 0.21%
-------------------------------------------------------------------------------------------------------
Net charge-offs, which the Corporation regards as the primary indicator of
credit quality, were 7 basis points and in line with historical levels. This was
equal to net charge-offs for the 2003 first quarter and 3 basis points lower
than for the 2003 fourth quarter, as the following table illustrates.
NET CHARGE-OFFS FOR THE QUARTER ENDED MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003
------------------------------------------------------------------------------------------------------------
Net charge-off ratio 7 basis points 10 basis points 7 basis points
------------------------------------------------------------------------------------------------------------
Net charge-offs (on average) $4.2 million $6.4 million $4.1 million
------------------------------------------------------------------------------------------------------------
Net charge-offs for the quarter ended December 31, 2003, reflected a large
credit that had been transferred to nonaccruing status at the end of the 2003
first quarter.
27
The following table presents a period-end comparison of other risk elements in
the Corporation's loan portfolio.
NONPERFORMING ASSETS (in millions) MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003
-----------------------------------------------------------------------------------------------------------
Nonaccruing loans $40.6 $45.4 $ 64.6
------------------------------------------------------------------------------------------------------- ---
Loans past due 90 days or more $ 6.2 $ 5.6 $ 8.3
------------------------------------------------------------------------------------------------------- ---
Total $46.8 $51.0 $ 72.9
------------------------------------------------------------------------------------------------------- ---
Percentage of period-end loans 0.73% 0.82% 1.21%
------------------------------------------------------------------------------------------------------- ---
Other real estate owned (OREO) $ 1.1 $ 1.4 $ 3.9
-----------------------------------------------------------------------------------------------------------
The downward trends reflected a combination of pay-downs and charge-offs
recorded earlier that were associated with the large credit mentioned
previously. Nonaccruing loans decreased for the fourth consecutive quarter, as
did other real estate owned (OREO). The decline in OREO was due to the
successful work out throughout the past year of a residential beach resort
project in Maryland that first was classified as OREO in December 2002.
Of the loans past due 90 days or more at March 31, 2004, approximately 57% were
in the commercial loan portfolio; 27% were in the residential mortgage
portfolio; and 16% were consumer loans. At December 31, 2003, the corresponding
ratios were 39%, 37%, and 24%. The corresponding ratios at March 31, 2003, were
50%, 31%, and 19%.
In accordance with growth in loan balances, the provision for loan losses and
the reserve for loan losses were increased, while the loan loss reserve ratio
remained relatively unchanged, as the following table illustrates.
PROVISION AND RESERVE MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003
------------------------------------------------------------------------------------------------------
Provision for loan losses (in millions) $ 5.5 $ 5.0 $ 4.9
------------------------------------------------------------------------------------------------------
Reserve for loan losses (in millions) $91.2 $89.9 $86.0
------------------------------------------------------------------------------------------------------
Loan loss reserve ratio 1.43% 1.44% 1.43%
------------------------------------------------------------------------------------------------------
The reserve for loan losses reflects management's best estimate, based on
subjective judgments regarding the collectibility of loans within the portfolio,
of known and inherent estimated losses. In calculating the reserve, the
Corporation evaluates micro- and macro-economic factors, historical net loss
experience, delinquency trends, and movements within the internal risk rating
classifications, among other things. To accommodate growth in loan balances, a
portion of the reserve is allocated to new loans within the parameters of the
reserve methodology.
At March 31, 2004, in light of the levels of past due, nonaccruing, and problem
loans, management believed that the reserve for loan losses was a reasonable
assessment of estimated and inherent losses in the loan portfolio. The portion
of the reserve allocated to new loans was relatively unchanged.
At March 31, 2004, approximately $6.1 million, or 6.7%, of the reserve for loan
losses was unallocated. In comparison, approximately $6.1 million, or 6.8%, of
the reserve was unallocated at December 31, 2003. At March 31, 2003,
approximately $6.1 million, or 7%, of the reserve was unallocated.
Management reassesses the reserve on a quarterly basis as part of the regular
application of the reserve methodology. The process that is used to calculate
the reserve has provided a high degree of reserve adequacy over an extended
period of time, and the Corporation believes that it is sound.
Changes in the regional economy or other external factors could impair the
ability of some borrowers to repay their loans. Such an environment would cause
management to anticipate increases in nonperforming assets, credit losses, and
the provision for loan losses.
Management continually monitors the entire loan portfolio to identify potential
problem loans and to avoid disproportionately high concentrations of loans to
any one borrower or industry sector. Integral parts of this process include a
regular analysis of all past-due loans and the identification of loans that
management doubts will be repaid on a timely basis.
At March 31, 2004, management identified approximately $23.1 million of loans
that it doubted would be repaid on a timely basis, even though these loans were
performing in accordance with their terms or were less than 90 days past due.
This compares with $28.5 million of such loans at December 31, 2003, and $32.2
million of such loans at March 31, 2003.
28
CAPITAL RESOURCES
For the first three months of 2004, the Corporation's capital continued to
increase and its capital ratios continued to exceed the Federal Reserve Board's
minimum guidelines.
The annualized capital generation rate for the 2004 first quarter was 8.9%,
compared with an annualized rate of 6.9% for the 2003 first quarter and 8.7% for
the 2003 full year.
Stockholders' equity rose 4.4%, or $35.0 million, to $835.8 million. Between
December 31, 2003, and March 31, 2004, additions to capital included:
- $17.8 million, which reflected earnings of $35.7 million net of $17.9
million in cash dividends;
- $4.4 million from the issue of common stock under employment benefit
plans;
- $0.1 million in foreign currency exchange adjustments; and
- $7.6 million in unrealized gains on securities, net of taxes.
- $12.7 million in common stock issued in connection with the payment of
a portion of the purchase price for Balentine Holdings, Inc.
These additions were partially offset by $7.6 million in reductions, which
consisted of:
- $7.4 million for the repurchase of shares; and
- an $0.2 million reclassification adjustment for derivative and
securities gains included in net income, net of income taxes.
The Corporation purchased 200,903 shares of its shares during the first three
months of 2004 at an average cost of $36.74 and a total cost of $7.4 million.
This brought the total number of shares purchased under the 8-million-share
program, which commenced in April 2002, to 285,272 shares at a cost of $9.8
million.
The Corporation's capital ratios continued to exceed the Federal Reserve Board's
minimum guidelines for both well-capitalized and adequately capitalized
institutions. These guidelines 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 ratios to the guidelines.
ADEQUATELY WELL-
CAPITALIZED CAPITALIZED
CAPITAL RATIO MARCH 31, 2004 DECEMBER 31, 2003 MINIMUM MINIMUM
------------------------------------------------------------------------------------------------------
Total risk-based capital 12.75% 12.45% 8% 10%
---------------------------------------- ------------------ ------------------------------------ -----
Tier 1 risk-based capital 7.66% 7.46% 4% 6%
---------------------------------------- ------------------ ------------------------------------ -----
Tier 1 leverage capital 6.38% 6.34% 4% 5%
------------------------------------------------------------------------------------------------------
On April 15, 2004, the Corporation's Board of Directors raised the quarterly
cash dividend from $0.27 to $0.285 per share. This was an increase of 5.6%. The
Corporation has paid cash dividends on its common stock every year since 1908,
paid quarterly cash dividends every year since 1916, and increased the dividend
every year since 1982.
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.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Sarbanes-Oxley Act of 2002 requires the Corporation to disclose off-balance
sheet transactions and other contractual obligations that may have a material
current or future effect on the financial condition of the Corporation.
In its day-to-day operations, the Corporation employs various financial
instruments that generally accepted accounting principles deem to be off-balance
sheet arrangements. Under regulatory guidelines, such instruments are considered
for the purpose of calculating risk-based capital ratios, but they do not appear
on the Corporation's balance sheet.
Such instruments include stand-by and performance letters of credit, unfunded
loan commitments, unadvanced lines of credit, and interest rate swaps. The
interest rate swaps permit clients to convert floating-rate loan payments to
fixed-rate loan payments without exposing the Corporation to interest rate risk.
In these arrangements, the
29
Corporation retains the credit risk associated with the potential failure of
counter-parties. The Corporation also uses interest rate swaps to manage
interest rate risk associated with its issues of long-term subordinated debt.
At March 31, 2004, the liquidity exposure of the Corporation that was associated
with letters of credit, unfunded loan commitments, and unadvanced lines of
credit was $3.05 billion.
At March 31, 2004, the Corporation had entered into a total of $959.4 million of
interest rate swaps as follows:
- $292.2 million of swaps were associated with loan clients for whom the
Corporation exchanged floating rates for fixed rates.
- To offset the exposure from changes in the market value of those swaps,
$292.2 million of swaps were made with other financial institutions
that exchanged fixed rates for floating rates.
- $375.0 million of swaps associated with the Corporation's long-term
subordinated debt issues were made with other financial institutions.
The Corporation has two outstanding loans that total $35.5 million from the
Federal Home Loan Bank of Pittsburgh. These funds were used to construct
Wilmington Trust Plaza, the Corporation's operations center in Wilmington,
Delaware, which was completed in 1998.
Many of the Corporation's branch offices in Delaware, and all of its offices
outside Delaware, are leased. Lease commitments, net of sublease arrangements,
for these locations totaled $41.4 million at March 31, 2004.
At March 31, 2004, the Corporation was the guarantor of two obligations of
affiliate money manager Cramer Rosenthal McGlynn (CRM). The guaranty is for
69.14%, which represents the Corporation's ownership interest in CRM, of two
lines of credit totaling $8 million, which will expire on December 6, 2004.
The following table summarizes the obligations referenced above and the periods
over which they extend.
MORE
CONTRACTUAL OBLIGATION PAYMENTS LESS THAN 1 - 3 3 - 5 THAN 5
DUE BY PERIOD (in millions) TOTAL 1 YEAR YEARS YEARS YEARS
--------------------------------------------------------------------------------------------------------
Long-term debt obligations $578.0 $22.8 $75.8 $198.9 $280.5
--------------------------------------------------------------------------------------------------------
Operating lease obligations $ 41.1 $ 6.7 $17.8 $ 11.5 $ 5.1
--------------------------------------------------------------------------------------------------------
Guaranty obligations $ 8.0 $ 8.0 -- -- --
--------------------------------------------------------------------------------------------------------
Total $627.1 $37.5 $93.6 $210.4 $285.6
--------------------------------------------------------------------------------------------------------
The long-term debt obligations in the table above refer to the Corporation's two
outstanding subordinated debt issues and its Federal Home Loan Bank advances.
The first debt issue, in the amount of $125 million, was issued in 1998, is due
in 2008, and was used in the acquisitions of affiliate money managers CRM and
Roxbury Capital Management (RCM). The second debt issue, in the amount of $250
million, was issued in 2003, is due in 2013, and was for general liquidity
purposes. All of these debt issues are included in the "Long-term debt" line of
the Corporation's balance sheet.
In addition, the acquisition agreements for CRM, RCM, and Balentine & Company,
the Corporation's investment counseling firm, permit principal members and
certain key employees (principals) of each firm, subject to certain
restrictions, to put their interests in their respective firms to the
Corporation. For more information on these acquisition agreements, please refer
to "Note 1" of the "Notes to Consolidated Financial Statements" in the
Corporation's 2003 Annual Report to Shareholders.
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.
30
OTHER INFORMATION
Accounting pronouncements
Please refer to "Note 10" to the "Consolidated Financial Statements" in this
report for a discussion of the impact of recent accounting pronouncements on the
Corporation's financial condition and results of operations.
Critical accounting policies and estimates
Management's 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 the related disclosures 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 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 the
consolidated financial statements and relate to 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 of the reserve is determined by assigning specific
amounts to individually identified problem credits. A general amount is reserved
for all other loans. In evaluating the reserve, management gives specific
consideration to current micro- and macro-economic factors, historical net loss
experience, current delinquency trends, and movement within the internal risk
rating classification system. 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 with respect to the amounts and timing of future cash flows
expected to be received on impaired loans, that may be susceptible to
significant change. Because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that increases to
the 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 those 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 Accounting Principles Board (APB)
31
Opinion No. 25, rather than the "fair value" approach prescribed in Statement
of Financial Accounting Standards (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 herein and 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. The Financial Accounting Standards Board (FASB) is considering
such changes, which were outlined in an exposure draft dated March 31, 2004.
Upon their finalization, the new rules will require that options be expensed
beginning in 2005.
Impairment of goodwill: Through a series of acquisitions, the Corporation has
accumulated goodwill with a net carrying value of $256.0 million at March 31,
2004. 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 warrant 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, which would result in 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 in its place. 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 any of these firms could result in an impairment expense.
Cautionary statement
Estimates, predictions, opinions, or statements of belief in this report might
be construed to be forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Examples of such statements could
relate to identification of trends, statements about the adequacy of the 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 the "Quantitative and
Qualitative Disclosures About Market Risk" section of this report.
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
As a financial institution, the Corporation's primary market risk lies in its
exposure to interest rate volatility. Fluctuations in interest rates impact net
interest income, which 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:
32
- 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 a period of 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 interest rates were at historic lows at March 31, 2004, the declining
rate scenario in the simulation model gradually moved down only 100 basis
points, until the federal funds rate equaled zero. This prevented the creation
of negative interest rates within the model. The rising rate scenario remained
able to accommodate a 250-basis-point upside move.
As of March 31, 2004, the model projected that, if interest rates were to
experience a gradual decline of 100 basis points, net interest income would
decrease 4.59% over a one-year period. At December 31, 2003, the model predicted
a 5.33% decrease in net interest income.
Conversely, the model projected that a gradual 250-basis-point increase in
market interest rates would cause net interest income to rise 5.55% over a
one-year period. At December 31, 2003, the model projected a 6.14% increase.
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 such derivative contracts as
interest rate swaps and interest rate floors.
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.
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
33
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.
ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum
Number (or
Approximate
(c) Total Number of Dollar Value) of
Shares (or Units) Shares (or Units)
(a) Total (b) Purchased as Part that May Yet Be
Number of Average Price of Publicly Purchased Under
Shares (or Units) Paid per Share Announced Plans the Plans or
Period Purchased (or Unit) or Programs Programs
-----------------------------------------------------------------------------------------------------------------------------
Month #1
January 1, 2004 - January 31, 2004 11,918 $37.43 11,918 7,903,713
-----------------------------------------------------------------------------------------------------------------------------
Month #2
February, 1, 2004 - February 29, 2004 6,559 $37.09 6,559 7,897,154
-----------------------------------------------------------------------------------------------------------------------------
Month #3
March 1, 2004 - March 31, 2004 182,426 $36.69 182,426 7,714,728
-----------------------------------------------------------------------------------------------------------------------------
Total 200,903 $36.74 200,903 7,714,728
-----------------------------------------------------------------------------------------------------------------------------
In April 2002 the Corporation announced a plan to repurchase 8 million shares of
its stock.
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)
10.59 Limited Liability Company Interest Purchase Agreement dated as of April 2, 2004
among Grant, Tani, Barash & Altman, Inc. Warren Grant, Jane Tani, Corey
Barash, Howard Altman and GTBA Holdings, Inc. (3)
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.
(3) Filed herewith.
34
The Corporation filed a current report on Form 8-K on January 16, 2004, under
Item 12 reporting its financial condition and results of operations for the
fourth quarter and full year of 2003.
35
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.
WILMINGTON TRUST CORPORATION
Date
May 10, 2004
/s/ Ted T. Cecala
-------------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and Chief
Executive Officer
(Authorized Officer)
Date
May 10, 2004
/s/ David R. Gibson
---------------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
36