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 SEPTEMBER 30, 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
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0328154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
RODNEY SQUARE NORTH, 1100 NORTH MARKET STREET, WILMINGTON, DELAWARE 19890
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(Address of principal executive offices) (Zip Code)
(302) 651-1000
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(Registrant's telephone number, including area code)
NONE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of September 30, 2004
----- ------------------------------------
COMMON STOCK - PAR VALUE $1.00 67,356,350
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
THIRD 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 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 43
Item 4 Controls and Procedures 45
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 45
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 46
Item 3 Defaults upon Senior Securities 46
Item 4 Submission of Matters to a Vote of Security Holders 46
Item 5 Other Information 46
Item 6 Exhibits and Reports on Form 8-K 47
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------------
September 30, December 31,
(in millions) 2004 2003
-----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 217.7 $ 210.2
---------------------------
Federal funds sold and securities purchased
under agreements to resell 332.1 3.8
---------------------------
Investment securities available for sale:
U.S. Treasury and government agencies 447.1 470.0
Obligations of state and political subdivisions 9.9 12.9
Other securities 1,403.8 1,392.3
-----------------------------------------------------------------------------------------------------
Total investment securities available for sale 1,860.8 1,875.2
---------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions
(market values of $3.0 and $3.4 respectively) 2.8 3.1
Other securities (market values of $0.5 and $ 1.1 respectively) 0.4 1.1
-----------------------------------------------------------------------------------------------------
Total investment securities held to maturity 3.2 4.2
---------------------------
Loans:
Commercial, financial, and agricultural 2,428.6 2,275.2
Real estate-construction 759.0 699.8
Mortgage-commercial 1,186.6 1,078.2
-----------------------------------------------------------------------------------------------------
Total commercial loans 4,374.2 4,053.2
---------------------------
Mortgage-residential 439.8 489.6
Consumer 1,182.6 1,077.1
Secured with liquid collateral 619.4 605.4
-----------------------------------------------------------------------------------------------------
Total retail loans 2,241.8 2,172.1
---------------------------
Total loans net of unearned income 6,616.0 6,225.3
Reserve for loan losses (91.3) (89.9)
-----------------------------------------------------------------------------------------------------
Net loans 6,524.7 6,135.4
---------------------------
Premises and equipment, net 151.5 152.3
Goodwill, net of accumulated amortization
of $29.8 in 2004 and 2003 325.6 243.2
Other intangible assets, net of accumulated amortization
of $13.6 in 2004 and $11.1 in 2003 34.6 24.0
Accrued interest receivable 39.2 39.5
Other assets 141.5 132.4
-----------------------------------------------------------------------------------------------------
Total assets $ 9,630.9 $ 8,820.2
===========================
1
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
-----------------------------
September 30, December 31,
(in millions) 2004 2003
---------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 1,167.5 $ 1,025.5
Interest-bearing:
Savings 358.1 369.0
Interest-bearing demand 2,342.4 2,364.1
Certificates under $100,000 762.3 788.3
Local CDs $100,000 and over 181.1 130.3
---------------------------------------------------------------------------------------------
Total core deposits 4,811.4 4,677.2
National CDs $100,000 and over 2,177.9 1,900.0
---------------------------------------------------------------------------------------------
Total deposits 6,989.3 6,577.2
-----------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,111.6 820.5
U.S. Treasury demand 78.6 48.3
Line of credit -- 8.0
---------------------------------------------------------------------------------------------
Total short-term borrowings 1,190.2 876.8
-----------------------------
Accrued interest payable 23.7 23.6
Other liabilities 126.5 134.5
Long-term debt 410.7 407.1
---------------------------------------------------------------------------------------------
Total liabilities 8,740.4 8,019.2
-----------------------------
Minority interest -- 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 94.3 54.6
Retained earnings 999.1 948.4
Accumulated other comprehensive loss (20.0) (16.1)
---------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 1,151.9 1,065.4
Less: Treasury stock, at cost, 11,171,996 and
12,465,014 shares, respectively (261.4) (264.6)
---------------------------------------------------------------------------------------------
Total stockholders' equity 890.5 800.8
-----------------------------
Total liabilities and stockholders' equity $ 9,630.9 $ 8,820.2
=============================
See Notes to Consolidated Financial Statements
2
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
--------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
--------------------------------------------------------
(in millions; except per share data) 2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $ 79.4 $ 74.0 $ 226.2 $ 227.9
Interest and dividends on investment securities:
Taxable interest 16.3 14.3 48.1 43.9
Tax-exempt interest 0.1 0.3 0.4 0.7
Dividends 1.9 1.8 5.5 5.3
Interest on federal funds sold and securities
purchased under agreements to resell 0.1 0.1 0.2 0.3
------------------------------------------------------------------------------------------------------------------------------
Total interest income 97.8 90.5 280.4 278.1
-----------------------------------------------------
Interest on deposits 14.9 14.7 40.4 50.3
Interest on short-term borrowings 5.4 4.0 12.4 11.1
Interest on long-term debt 3.5 3.7 9.6 10.0
------------------------------------------------------------------------------------------------------------------------------
Total interest expense 23.8 22.4 62.4 71.4
-----------------------------------------------------
Net interest income 74.0 68.1 218.0 206.7
Provision for loan losses (2.9) (5.7) (11.6) (16.6)
------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 71.1 62.4 206.4 190.1
-----------------------------------------------------
NONINTEREST INCOME
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory fees 27.4 24.9 81.1 70.9
Mutual fund fees 5.0 5.6 15.1 16.9
Planning and other services 4.6 5.0 17.8 14.5
------------------------------------------------------------------------------------------------------------------------------
Total Wealth Advisory Services 37.0 35.5 114.0 102.3
-----------------------------------------------------
Corporate Client Services:
Capital markets services 7.1 7.5 23.3 21.4
Entity management services 5.8 5.2 16.8 15.4
Retirement services 2.9 2.4 8.9 7.1
Cash management services 1.4 1.3 4.6 3.9
------------------------------------------------------------------------------------------------------------------------------
Total Corporate Client Services 17.2 16.4 53.6 47.8
-----------------------------------------------------
Cramer Rosenthal McGlynn 2.5 1.3 7.1 3.2
Roxbury Capital Management 0.3 (0.1) 0.7 (2.3)
------------------------------------------------------------------------------------------------------------------------------
Advisory fees 57.0 53.1 175.4 151.0
Amortization of affiliate other intangibles (0.6) (0.7) (1.5) (1.4)
------------------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate other intangibles 56.4 52.4 173.9 149.6
-----------------------------------------------------
Service charges on deposit accounts 7.8 8.6 24.1 23.7
Loan fees and late charges 1.7 2.1 4.6 6.5
Card fees 2.1 2.1 6.5 7.1
Securities gains 0.6 -- 0.6 --
Other noninterest income 0.8 1.1 2.6 3.6
------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 69.4 66.3 212.3 190.5
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Net interest and noninterest income 140.5 128.7 418.7 380.6
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3
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
----------------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
----------------------------------------------------------------
(in millions; except per share data) 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and wages 33.8 31.5 98.6 92.5
Incentives and bonuses 7.1 5.4 21.8 19.2
Employment benefits 10.3 8.8 31.2 27.3
Net occupancy 5.2 4.8 15.5 15.2
Furniture, equipment, and supplies 8.1 6.6 23.5 21.1
Advertising and contributions 1.9 1.4 6.2 6.1
Servicing and consulting fees 5.9 4.0 15.4 12.0
Travel, entertainment, and training 2.2 1.8 6.2 5.1
Originating and processing fees 2.1 2.1 6.2 5.8
Other noninterest expense 10.3 8.8 27.9 27.6
--------------------------------------------------------------------------------------------------------------------
Total noninterest expense 86.9 75.2 252.5 231.9
----------------------------------------------------------------
NET INCOME
Income before income taxes and minority
interest 53.6 53.5 166.2 148.7
Income tax expense 19.2 18.8 58.9 51.5
--------------------------------------------------------------------------------------------------------------------
Net income before minority interest 34.4 34.7 107.3 97.2
Minority interest -- 0.3 0.7 0.8
--------------------------------------------------------------------------------------------------------------------
Net income $ 34.4 $ 34.4 $ 106.6 $ 96.4
================================================================
Net income per share:
basic $ 0.51 $ 0.52 $ 1.60 $ 1.46
================================================================
diluted $ 0.50 $ 0.52 $ 1.57 $ 1.45
================================================================
Weighted average shares outstanding:
basic 67,321 65,956 66,596 65,814
diluted 68,468 66,670 67,805 66,348
See Notes to Consolidated Financial Statements
4
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
-------------------------
For the nine months ended
September 30,
(in millions) 2004 2003
----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 106.6 $ 96.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 11.6 16.6
Provision for depreciation and other amortization 14.4 14.0
Amortization of other intangible assets 2.5 2.3
Minority interest in net income 0.7 0.8
Amortization of investment securities available for sale
discounts and premiums 10.1 11.2
Deferred income taxes (0.7) 4.3
Originations of residential mortgages available for sale (59.2) (149.2)
Gross proceeds from sales of residential mortgages 60.3 151.6
Gains on sales of residential mortgages (1.1) (2.4)
Securities gains (0.6) --
(Increase)/decrease in other assets (2.4) 1.7
Decrease in other liabilities (5.7) (11.8)
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 136.5 135.5
-------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 30.7 0.4
Proceeds from maturities of investment securities available for sale 995.4 890.0
Proceeds from maturities of investment securities held to maturity 1.0 0.5
Purchases of investment securities available for sale (1,027.0) (1,365.7)
Investments in affiliates (15.7) (7.2)
Cash paid for purchase of subsidiary (33.0) --
Purchase of minority interest (1.3) --
Purchases of residential mortgages (5.2) (2.7)
Net increase in loans (395.7) (82.0)
Purchases of premises and equipment (32.6) (19.1)
Dispositions of premises and equipment 19.3 8.5
----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (464.1) (577.3)
-------------------------
5
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
-------------------------
For the nine months ended
September 30,
(in millions) 2004 2003
--------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand, savings, and interest-bearing
demand deposits 109.4 679.3
Net increase/(decrease) in certificates of deposit 302.7 (245.7)
Net increase in federal funds purchased and securities sold
under agreements to repurchase 291.1 269.5
Net increase in U.S. Treasury demand 30.3 13.7
Proceeds from issuance of long-term debt -- 250.2
Net decrease in line of credit (8.0) (23.5)
Cash dividends (55.9) (52.3)
Distributions to minority shareholders (0.8) (0.5)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 14.2 9.1
Payments for common stock acquired through buybacks (19.6) (0.8)
------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 663.4 899.0
---------------------
Effect of foreign currency translation on cash -- 0.1
---------------------
Increase in cash and cash equivalents 335.8 457.3
Cash and cash equivalents at beginning of period 214.0 248.9
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $549.8 $ 706.2
=====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 62.3 $ 68.8
Taxes 65.7 48.0
In conjunction with the acquisition of Balentine & Company, LLC, Cramer
Rosenthal McGlynn, LLC, Roxbury Capital Management, LLC, and Camden
Partners Holdings, LLC, liabilities were assumed as follows:
Book value of assets acquired $ 6.4 $ --
Goodwill and other intangible assets acquired 92.7 7.2
---------------------
Fair value of assets acquired 99.1 7.2
Common stock issued (48.4) -------
Cash paid (50.7) (7.2)
------------------------------------------------------------------------------------------------------------
Liabilities assumed $ -- $ --
See Notes to Consolidated Financial Statements
6
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 1 - STOCK-BASED COMPENSATION PLANS
---------------------------------------
At September 30, 2004, we had three types of stock-based compensation plans,
which are described in "Note 15" to the "Consolidated Financial Statements"
included in our 2003 Annual Report to Shareholders.
We apply Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for these plans.
If compensation cost for our 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,"
our net income would have been as follows:
--------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
--------------------------------------------------------
(in millions, except per share amounts) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------
Net income:
As reported $ 34.4 $ 34.4 $ 106.6 $ 96.4
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1.3) (1.0) (3.9) (2.8)
---------------------------------------------------------------------------------------------------------
Pro forma net income $ 33.1 $ 33.4 $ 102.7 $ 93.6
Basic earnings per share:
As reported $ 0.51 $ 0.52 $ 1.60 $ 1.46
Pro forma 0.49 0.51 1.54 1.42
Diluted earnings per share:
As reported $ 0.50 $ 0.52 $ 1.57 $ 1.45
Pro forma 0.48 0.50 1.51 1.41
We made grants of restricted stock to certain employees. The value of the award
is amortized into compensation expense over the applicable vesting period.
Forfeitures are recorded as incurred. During the restriction period, award
holders have the rights of stockholders, including the right to vote and receive
cash dividends, but they cannot transfer ownership. We recognized expense in
connection with restricted stock awards for the three- and nine-month periods
ended September 30, 2004 of $0.0 million and $0.1 million, respectively.
7
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
NOTE 2 - ACCOUNTING AND REPORTING POLICIES
------------------------------------------
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP) and include, after elimination of material intercompany balances
and transactions, the accounts of the corporation, Wilmington Trust Company
(WTC), Wilmington Trust of Pennsylvania, Wilmington Trust FSB, WT Investments,
Inc. (WTI), Rodney Square Management Corporation, Wilmington Trust (UK) Limited,
Balentine Holdings, Inc., and WTC's subsidiaries. The preparation of financial
statements in conformity with GAAP requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. We
evaluate these 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. The consolidated financial
statements presented herein should be read in conjunction with the "Notes to
Consolidated Financial Statements" included in our 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 For the nine months ended
September 30, September 30,
------------------------------------------------------
(in millions) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------
Net income $ 34.4 $ 34.4 $106.6 $ 96.4
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities 13.9 (16.0) (3.3) (10.2)
Reclassification adjustment for securities gains
included in net income (0.4) -- (0.4) --
Net unrealized holding gains arising during the
period on derivatives used for cash flow hedge 0.1 -- 0.1 --
Reclassification adjustment for derivative gains
included in net income (0.1) -- (0.2) (0.1)
Foreign currency translation adjustments -- 0.1 (0.1) 0.2
----------------------------------------------------
Total comprehensive income $ 47.9 $ 18.5 $102.7 $ 86.3
====================================================
8
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
NOTE 4 - EARNINGS PER SHARE
----------------------------
The following table sets forth the computation of basic and diluted net earnings
per share:
-----------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
-----------------------------------------------------------
(in millions; except per share data) 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 34.4 $ 34.4 $ 106.6 $ 96.4
--------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 67.3 66.0 66.6 65.8
--------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 1.2 0.7 1.2 0.5
--------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 68.5 66.7 67.8 66.3
--------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.51 $ 0.52 $ 1.60 $ 1.46
==============================================================================================================
Diluted earnings per share $ 0.50 $ 0.52 $ 1.57 $ 1.45
==============================================================================================================
Cash dividends per share $ 0.285 $ 0.27 $ 0.84 $ 0.795
The number of anti-dilutive stock options excluded was 1.0 million for the
three- and nine-month periods ended September 30, 2004. The number of
anti-dilutive stock options excluded was 1.1 and 2.1 million for the three- and
nine-month periods ended September 30, 2003.
NOTE 5 - SEGMENT REPORTING
---------------------------
For the purposes of segment reporting, we discuss our business in four segments.
There is a segment for each of our three businesses, which are Regional Banking,
Wealth Advisory Services, and Corporate Client Services, as well as a segment
for Affiliate Money Managers.
The segment reporting 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 our 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,
insurance services, business management services, and family office services.
Results of 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
our partial ownership interest in each firm. Services provided by these two
affiliates
9
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
include fixed income and equity investing services and investment portfolio
management services. Neither CRM's or RCM's results are consolidated in our
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 our 2003 Annual Report to Shareholders. We evaluate
performance based on profit or loss from operations before income taxes and
without including nonrecurring gains and losses. We generally record
intersegment sales and transfers as if the sales or transfers were to third
parties (e.g., at current market prices). We report profit or loss from
infrequent events, such as the sale of a business, separately for each segment.
Financial data by segment for the quarters ended September 30, 2004, and
September 30, 2003, is as follows:
--------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended September 30, 2004 (in millions) Banking Services Services Managers Totals
--------------------------------------------------------------------------------------------------------------------
Net interest income $ 67.4 $ 5.8 $ 2.2 $ (1.4) $ 74.0
Provision for loan losses (3.2) 0.3 -- -- (2.9)
--------------------------------------------------------------------------------------------------------------------
Net interest income after provision 64.2 6.1 2.2 (1.4) 71.1
Advisory fees:
Wealth Advisory Services 0.4 34.7 1.9 -- 37.0
Corporate Client Services 0.2 -- 17.0 -- 17.2
Affiliate Money Managers -- -- -- 2.8 2.8
--------------------------------------------------------------------------------------------------------------------
Advisory fees 0.6 34.7 18.9 2.8 57.0
Amortization of other intangibles -- (0.3) (0.1) (0.2) (0.6)
--------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.6 34.4 18.8 2.6 56.4
Other noninterest income 12.2 0.2 -- -- 12.4
Securities gains 0.6 -- -- -- 0.6
--------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 77.6 40.7 21.0 1.2 140.5
Noninterest expense (36.0) (33.3) (17.6) -- (86.9)
--------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 41.6 $ 7.4 $ 3.4 $ 1.2 $ 53.6
====================================================================================================================
Depreciation and amortization $ 5.3 $ 2.1 $ 1.5 $ 0.3 $ 9.2
--------------------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended September 30, 2003 (in millions) Banking Services Services Managers Totals
--------------------------------------------------------------------------------------------------------------------
Net interest income $ 61.0 $ 6.0 $ 2.3 $ (1.2) $ 68.1
Provision for loan losses (5.1) (0.6) -- -- (5.7)
--------------------------------------------------------------------------------------------------------------------
Net interest income after provision 55.9 5.4 2.3 (1.2) 62.4
Total advisory fees:
Wealth Advisory Services 0.5 32.6 2.4 -- 35.5
Corporate Client Services 0.3 -- 16.1 -- 16.4
Affiliate Money Managers -- -- -- 1.2 1.2
--------------------------------------------------------------------------------------------------------------------
Advisory fees 0.8 32.6 18.5 1.2 53.1
Amortization of other intangibles -- (0.2) (0.1) (0.4) (0.7)
--------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.8 32.4 18.4 0.8 52.4
Other noninterest income 13.1 0.5 0.3 -- 13.9
--------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 69.8 38.3 21.0 (0.4) 128.7
Noninterest expense (33.9) (28.2) (13.1) -- (75.2)
--------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 35.9 $ 10.1 $ 7.9 $ (0.4) $ 53.5
====================================================================================================================
Depreciation and amortization $ 6.4 $ 2.0 $ 1.5 $ 0.6 $ 10.5
10
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
-----------------------------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Year-to-Date September 30, 2004 (in millions) Banking Services Services Managers Totals
-----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 197.1 $ 18.2 $ 6.6 $ (3.9) $ 218.0
Provision for loan losses (11.6) -- -- -- (11.6)
-----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 185.5 18.2 6.6 (3.9) 206.4
Total advisory fees:
Wealth Advisory Services 1.4 105.7 6.9 -- 114.0
Corporate Client Services 0.7 -- 52.9 -- 53.6
Affiliate Money Managers -- -- -- 7.8 7.8
-----------------------------------------------------------------------------------------------------------------------------
Advisory fees 2.1 105.7 59.8 7.8 175.4
Amortization of other intangibles -- (0.6) (0.4) (0.5) (1.5)
-----------------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 2.1 105.1 59.4 7.3 173.9
Other noninterest income 35.3 1.9 0.6 -- 37.8
Securities gains 0.6 -- -- -- 0.6
-----------------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 223.5 125.2 66.6 3.4 418.7
Noninterest expense (105.7) (97.5) (49.3) -- (252.5)
-----------------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 117.8 $ 27.7 $ 17.3 $ 3.4 $ 166.2
=============================================================================================================================
Depreciation and amortization $ 16.0 $ 6.0 $ 4.3 $ 0.7 $ 27.0
Segment average assets 7,432.2 1,172.0 196.9 248.0 9,049.1
-----------------------------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Year-to-Date September 30, 2003 (in millions) Banking Services Services Managers Totals
-----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 185.4 $ 18.5 $ 7.6 $ (4.8) $ 206.7
Provision for loan losses (15.6) (1.0) -- -- (16.6)
-----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 169.8 17.5 7.6 (4.8) 190.1
Total advisory fees:
Wealth Advisory Services 1.8 93.2 7.3 -- 102.3
Corporate Client Services 1.0 -- 46.8 -- 47.8
Affiliate Money Managers -- -- -- 0.9 0.9
-----------------------------------------------------------------------------------------------------------------------------
Advisory fees 2.8 93.2 54.1 0.9 151.0
Amortization of other intangibles -- (0.4) (0.4) (0.6) (1.4)
-----------------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 2.8 92.8 53.7 0.3 149.6
Other noninterest income 38.4 1.4 1.1 -- 40.9
-----------------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 211.0 111.7 62.4 (4.5) 380.6
Noninterest expense (103.2) (86.5) (42.2) -- (231.9)
-----------------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 107.8 $ 25.2 $ 20.2 $ (4.5) $ 148.7
=============================================================================================================================
Depreciation and amortization $ 16.7 $ 5.8 $ 4.2 $ 0.8 $ 27.5
Segment average assets 6,936.8 1,073.2 210.9 242.4 8,463.3
11
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
NOTE 6 - DERIVATIVE AND HEDGING ACTIVITIES
------------------------------------------
From time to time, we enter into interest rate swap and interest rate floor
contracts to manage interest rate risk and to reduce the impact of fluctuations
in interest rates of identifiable asset categories, principally floating-rate
commercial loans and commercial mortgage loans.
When the index is equal to or above the strike rate, we do not make or receive
any payments.
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts.
We employ interest rate swaps so that clients may convert floating-rate loan
payments to fixed-rate loan payments without exposing us to interest rate risk.
In these arrangements, we retain the credit risk associated with the potential
failure of counter-parties. We also use interest rate swaps to manage interest
rate risk associated with our issues of long-term subordinated debt.
At September 30, 2004, we had entered into a total of $999.8 million notional
amount of interest rate swaps as follows:
- $312.4 million of swaps were associated with loan clients for whom we
exchanged floating rates for fixed rates.
- To offset the exposure from changes in the market value of those swaps,
$312.4 million of swaps were made with other financial institutions that
exchanged fixed rates for floating rates.
- $375.0 million of swaps associated with our long-term subordinated debt
issues were made with other financial institutions.
Changes in the fair value that are determined to be ineffective are also
recorded in "Other noninterest income" in the Consolidated Statements of Income.
The effective portion of the change in fair value is recorded in "Other
comprehensive income" in the Consolidated Statements of Condition.
For the third quarter of 2004, approximately $77,100 of gains, resulting from
the sale of floors in 2001, in "Accumulated other comprehensive income" were
reclassified to earnings.
During the 12 months ending September 30, 2005, we expect to reclassify
approximately $258,064 of gains in "Accumulated other comprehensive income" to
earnings.
We do not hold or issue derivative financial instruments for trading purposes.
12
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
---------------------------------------------
A summary of goodwill and other intangible assets is as follows:
September 30, 2004 December 31, 2003
------------------------------------------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount amortization amount amount amortization amount
-------------------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $ 355.4 $ 29.8 $ 325.6 $ 273.0 $ 29.8 $ 243.2
=============================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 7.8 $ 4.7 $ 3.1 $ 7.2 $ 4.0 $ 3.2
Customer lists 31.6 6.5 25.1 19.1 4.8 14.3
Acquisition costs 1.7 1.7 -- 1.7 1.7 --
Other intangibles 0.7 0.7 -- 0.7 0.6 0.1
Nonamortizing
Other intangible assets 6.4 -- 6.4 6.4 -- 6.4
------------------------------------------------------------------------------------------------------------------
Total other intangibles $ 48.2 $ 13.6 $ 34.6 $ 35.1 $ 11.1 $ 24.0
=============================================================================
Amortization expense of other intangible assets for the three months and nine
months ended September 30 is as follows:
---------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
---------------------------------------------------------
(in millions) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------
Amortization expense $ 0.9 $ 1.0 $ 2.5 $ 2.3
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 $ 4.6
For the year ended December 31, 2006 4.4
For the year ended December 31, 2007 3.7
For the year ended December 31, 2008 3.0
For the year ended December 31, 2009 2.8
13
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
The changes in the carrying amount of goodwill for the nine months ended
September 30 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 -- 70.7 -- 11.7 82.4
-------------------------------------------------------------------------------------------------------------
Balance as of September 30, 2004 $ 3.8 $ 75.1 $ 7.8 $ 238.9 $ 325.6
============================================================
2003
-----------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(in millions) Banking Services Services Managers Total
------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2003 $ 3.8 $ 4.4 $ 7.2 $ 224.8 $ 240.2
Goodwill acquired -- -- -- 2.4 2.4
Increase in carrying value due to foreign
currency translation adjustments -- -- 0.2 -- 0.2
------------------------------------------------------------------------------------------------------------
Balance as of September 30, 2003 $ 3.8 $ 4.4 $ 7.4 $ 227.2 $ 242.8
===========================================================
The goodwill acquired in 2004 includes: $70.4 million recorded in connection
with the payment of a portion of the purchase price for our interest in
Balentine Delaware Holding Company, LLC; $11.7 million recorded in connection
with an increase in WTI's equity interest in Cramer Rosenthal McGlynn; and $0.3
million recorded in connection with Balentine Delaware Holding Company, LLC's
acquisition of the remaining interests in Balentine & Company Tennessee, L.L.C.
The goodwill acquired in 2003 includes $1.9 million recorded in connection with
increases in WTI's equity interest in Cramer Rosenthal McGlynn and $0.5 million
recorded in connection with increases in WTI's equity interest in Camden
Partners Holdings.
The following table lists other intangible assets acquired during the nine
months ended September 30.
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 $ 0.6 -- 8 $ 1.2 -- 8
Customer lists 12.4 -- 20 3.5 -- 20
Customer list increase in carrying
value due to foreign currency
translation adjustments 0.1 -- -- --
--------------------------------------------------------------------------
$ 13.1 -- $ 4.7 --
==========================================================================
14
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
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 and nine months ended September 30, 2004, and 2003. Descriptions
of these plans are contained in "Note 15" to the "Consolidated Financial
Statements" in our Annual Report to Shareholders for 2003.
Pension benefits SERP benefits Postretirement benefits
--------------------------------------------------------------------------
For the three months ended
September 30, 2004 (in millions) 2004 2003 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 1.7 $ 1.6 $ 0.2 $ 0.1 $ 0.2 $ 0.2
Interest cost 2.2 2.7 0.4 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 -- 0.2 -- 0.2 0.1
--------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1.3 $ 0.9 $ 0.9 $ 0.5 $ 1.0 $ 0.9
==========================================================================
Employer contributions $ 12.0 $ -- $ 0.1 $ 0.1 $ 1.0 $ 0.9
Pension benefits SERP benefits Postretirement benefits
--------------------------------------------------------------------------
For the nine months ended
September 30, 2004 (in millions) 2004 2003 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 4.9 $ 4.9 $ 0.5 $ 0.4 $ 0.7 $ 0.7
Interest cost 6.6 8.2 0.9 0.8 1.9 1.8
Expected return on plan assets (8.5) (10.3) -- -- -- --
Amortization of transition
obligation/(asset) (0.6) (0.7) -- 0.1 -- --
Amortization of prior service cost 0.6 0.7 0.3 0.2 -- --
Recognized actuarial (gain)/loss 0.6 -- 0.4 0.1 0.6 0.4
--------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 3.6 $ 2.8 $ 2.1 $ 1.6 $ 3.2 $ 2.9
==========================================================================
Employer contributions $ 12.0 $ 15.0 $ 0.4 $ 0.3 $ 2.8 $ 2.4
Expected annual contribution $ 12.0 $ 0.5 $ 3.7
We sponsor a postretirement health care plan that provides a prescription drug
benefit. The Medicare Prescription Drug, Improvement and Modernization Act of
2003 provides a subsidy for such prescription drug benefits. Neither the
accumulated postretirement benefit obligation nor periodic postretirement
benefit cost reflect any amount associated with this subsidy.
15
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
NOTE 9 - TEMPORARILY IMPAIRED INVESTMENT SECURITIES
---------------------------------------------------
At September 30, 2004, our investment portfolio had temporarily impaired
investment securities with an estimated market value of $872.9 million and
unrealized losses of $12.7 million. The improvement from the previous quarter
was due to a decline in market interest rates offered on securities with
durations similar to those of the investment securities we own, precipitated by
employment concerns, a softer economy, and a perception by the markets that the
Federal Open Market Committee will effect a slow, measured pace of interest rate
hikes. These factors have caused a rise in market values across all sectors of
investments.
The following table shows the estimated market value and gross unrealized loss
of 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 September 30, 2004
Other securities:
U.S. Treasury and
government agencies $ 96.8 $ 0.3 $ -- $ -- $ 96.8 $ 0.3
Preferred stock 48.4 0.1 12.5 1.8 60.9 1.9
Mortgage-backed securities 427.0 5.9 164.3 3.6 591.3 9.5
Other debt securities 85.5 0.5 38.4 0.5 123.9 1.0
------------------------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $ 657.7 $ 6.8 $ 215.2 $ 5.9 $ 872.9 $ 12.7
===========================================================================
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 the 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 disclosure under the Interpretation.
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 statements. The
requirements of SFAS No. 148 are effective for financial statements for fiscal
years ended and interim periods beginning after December 15, 2002. We use the
"intrinsic value" approach to accounting for stock-based compensation as
permitted under APB Opinion No. 25. We have adopted the disclosure provisions of
SFAS No. 148. The disclosure provisions had no impact on our consolidated
earnings, financial condition, or equity. On March 31, 2004, the FASB issued an
exposure draft that would eliminate the use of the intrinsic value method of
accounting for stock-based compensation for fiscal years beginning after
December 15, 2004. At its October 13, 2004, board meeting, the FASB decided that
the final Statement will be effective for any interim or annual period beginning
after June 15, 2005.
16
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPANY OVERVIEW
----------------
Wilmington Trust is a financial services holding company with a diversified mix
of three businesses - Wealth Advisory Services, Corporate Client Services, and
Regional Banking - which we deliver primarily through three wholly owned
subsidiaries:
- Wilmington Trust Company, a Delaware-chartered bank and trust company that
has engaged in commercial and trust banking activities since 1903.
Wilmington Trust Company is the 15th largest personal trust provider in
the United States and the largest full-service bank in Delaware, with 43
branch offices throughout the state.
- 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.
- Wilmington Trust FSB, which serves as the platform for our activities
beyond Delaware and Pennsylvania. Wilmington Trust FSB offices are located
in California, Florida, Georgia, Maryland, Nevada, and New York.
Wilmington Trust and our affiliates also have offices in the Cayman Islands, the
Channel Islands, and London, and other affiliates in Dublin and Milan.
Through our subsidiaries, we engage in fiduciary, wealth management, investment
advisory, financial planning, insurance, broker-dealer, and deposit taking
services; residential, consumer, commercial, and construction lending services;
and business management and family office services.
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 our commercial
banking business, we target family-owned or closely held businesses with annual
sales of up to $250 million where there are opportunities to develop advisory as
well as lending relationships.
Wilmington Trust and our 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.
In addition to our wholly owned subsidiaries, we hold ownership interests in two
affiliate money managers:
- Cramer Rosenthal McGlynn, LLC (CRM), which is a New-York based value-style
manager; and
- Roxbury Capital Management, LLC (RCM), which is a Santa Monica-based
growth-style manager.
For the purposes of business discussion, we report income and assets from CRM
and RCM separately. For the purposes of required segment reporting, we combine
results from CRM and RCM into one segment. For more information about segment
reporting, please refer to "Note 5" of the "Notes to Consolidated Financial
Statements" in this report.
SUMMARY OF RESULTS FOR THE 3 MONTHS AND 9 MONTHS ENDED SEPTEMBER 30, 2004
-------------------------------------------------------------------------
Net income for the 2004 third quarter was $34.4 million, equal to the year-ago
third quarter amount. Earnings per share for the 2004 third quarter, on a
diluted basis, were $0.50, opposite $0.52 for the same period last year.
17
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
Here is a summary of our 2004 third quarter highlights:
- Results from the Regional Banking business were robust. Loan balances rose
for the 14th consecutive quarter, and credit quality remained strong.
- The net interest margin stabilized at 3.51%.
- Good sales momentum in the Wealth Advisory business offset weakness in the
financial markets, and revenue rose 4.2%.
- Corporate Client Services revenue increased 4.9% opposite sluggish capital
markets activity.
- We continued to invest in our future by expanding our presence in existing
markets, replacing outdated technology, and hiring more people.
- We completed the acquisition of Grant Tani Barash & Altman (GTBA), a
Beverly Hills-based business management firm that serves high-net-worth
clients. Beginning with the 2004 fourth quarter, GTBA's revenue and
expenses will be consolidated in WAS results and included in our financial
statements. We expect the addition of GTBA to be modestly accretive to our
2004 earnings.
- We completed our acquisition of the minority interest in Balentine.
Original terms of the 2002 acquisition agreement entitled certain
Balentine principals to receive Wilmington Trust stock payments in 2005,
2006, and 2007, and cash for their minority interests in the firm. The
parties elected to accelerate the stock and cash payments, and we
completed the transaction on July 1, 2004.
- We reissued 967,000 shares of our stock in connection with the
acceleration of the Balentine transaction. This increased the number of
our shares outstanding, and reduced third quarter 2004 earnings per share
by approximately $0.01.
Third quarter 2004 results brought net income for the first 9 months of 2004 to
$106.6 million, which was 10.6% higher than for the comparable period last year.
Earnings per share, on a diluted basis, were $1.57 for the first 9 months of
2004, which was an increase of 8.3%.
With three-quarters of the year complete, here are the factors that have driven
our 2004 performance to date:
- Our commercial loan balances have risen successively since the second
quarter of 2001. This is due to the health of the Delaware Valley regional
economy, our relationship management focus, our ability to remain the
banking leader in Delaware, and our success at gaining more market share
in southeastern Pennsylvania.
- Total loan balances are up 6.3% from the end of 2003, and amounted to
$6.62 billion at September 30, 2004. Commercial balances are up 7.9% year
to date, and retail balances are up 3.2% year to date, even though we
continue to sell all new fixed-rate residential mortgage balances into the
secondary market.
- Once the interest rate environment stabilized, so did our net interest
margin. The end of June 2004 marked the first time since 1994 that we
experienced a full 12-month cycle without a change in market interest
rates. The falling rate environment of the past 3 years put considerable
pressure on our margin. Beginning with the third quarter of 2002, our
margin fell for 5 consecutive quarters. The rate of decline ranged from 11
basis points to 17 basis points, until the fourth quarter of 2003, when
the margin rose 7 basis points to 3.52%. It has remained in the 3.51% to
3.53% range since then, and was 3.52% for the first 9 months of 2004.
- Our disciplined approach to underwriting manifested itself in the strength
of our credit quality opposite loan growth. On an annualized basis, our
net charge-off ratio at September 30, 2004, was 21 basis points, compared
with 23 basis points at the same time last year. The percentage of loans
rated "pass" by our internal risk rating analysis topped 96% for the first
time in the 2004 second quarter, and remained above 96% in the 2004 third
quarter.
- The financial markets continue to mask the full impact of the good sales
momentum we have seen in our Wealth Advisory Services business. Sales for
the first 9 months of 2004 are 18.9% higher than for the first 9 months of
last year. Wealth Advisory revenue, at $114.0 million, is up 11.4%. In
comparison, the Standard and Poor's 500 Index was up 0.24% for the first 9
months of 2004, while the Dow Jones Industrial Average and the NASDAQ
Composite Indices recorded declines for the same period.
18
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
- Revenue from the Corporate Client Services business for the first 9 months
of 2004 was $53.6 million, which was 12.1% higher than for the comparable
period last year. The entity management and retirement services components
of the Corporate Client business remain strong, while weakness in the
capital markets, which stemmed from legislative and regulatory changes,
has hampered the Corporate Client growth rate overall.
- Results at both affiliate money managers continue to improve. Managed
assets at value-style manager Cramer Rosenthal McGlynn are at their
highest level in the firm's history, and income is more than double what
it was for the first 9 months of 2003. At growth-style manager Roxbury
Capital Management, the return to profitability continues to gain
momentum.
- We continue to make strategic investments in each of our businesses to
position our company for future growth. We have added staff, expanded in
key markets, and improved our technological capabilities. We also have
augmented compliance and risk management functions in order to fulfill the
requirements of the Sarbanes-Oxley Act. Our noninterest expenses reflect
these investments, and totaled $252.5 million for the first 9 months of
2004, which was an increase of 8.9% from the first 9 months of 2003.
On an annualized basis, third quarter 2004 results produced a return on average
assets of 1.48% and a return on average stockholders' equity of 15.71%. In
comparison, annualized results at September 30, 2003, produced returns of 1.58%
and 17.64%, respectively.
In April 2004 we announced our 23rd consecutive year of increases in the cash
dividend. We raised the quarterly cash dividend by 5.6% from $0.27 per share to
$0.285 per share, or $1.14 per share on an annualized basis.
STATEMENT OF CONDITION
----------------------
This section discusses changes in the balance sheet for the period between
December 31, 2003, and September 30, 2004. All balances referenced in this
section are period-end balances unless otherwise noted.
ASSETS
------
Total assets at September 30, 2004, were $9.63 billion, which was 9.2% more than
at the end of 2003. Earning assets totaled $8.81 billion, an increase of 8.7%,
and accounted for 91.5% of total assets. The rise in earning assets included a
$390.7 million increase in loan balances, and a $328.3 million increase in
federal funds sold and securities purchased under agreements to resell (federal
funds sold).
The amount of federal funds sold increased due to cash management activity. Much
of the cash management activity was associated with Corporate Client Services
clients who use paying-agent services. It is not unusual for these clients to
deposit funds with us for short periods of time, particularly over period-ends.
That is why we consider average balances for a period to be a more accurate
depiction of balance sheet trends than period-end balances.
At September 30, 2004, the period-end balance of federal funds sold and
securities purchased under agreements to resell was $332.1 million. In
comparison, the average balance for the first nine months of 2004 was $20.6
million, which was $12.1 million lower than for the first nine months of 2003.
At September 30, 2004, period-end loan balances accounted for 75.1% of earning
assets, compared with 72.8% at the end of September 2003. On average, loan
balances for the first 9 months of 2004 accounted for 77.2% of earning assets,
compared with 77.6% for the first 9 months of 2003.
19
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
INVESTMENT SECURITIES
---------------------
At September 30, 2004, the size of the investment portfolio was $1.86 billion,
slightly less than the $1.88 billion at December 31, 2003. On a percentage
basis, the composition of assets within the investment portfolio remained
relatively unchanged, as the following table illustrates.
COMPOSITION AT PERIOD-END 2004 Q3 2003 Q4 2003 Q3
------------------------- ------- ------- -------
Mortgage-backed securities and collateralized mortgage obligations 51% 52% 49%
U.S. treasuries 10% 11% 17%
Corporate issues 16% 14% 13%
U.S. government agencies 13% 13% 11%
Money market preferred stocks 7% 8% 7%
Municipal bonds 1% 1% 1%
Other 2% 1% 2%
At September 30, 2004, approximately 98% of the mortgage-backed securities in
the portfolio were invested in fixed-rate instruments with terms of 15 years or
less. We believe we can manage duration and risk more efficiently by investing
in mortgage-related instruments than by retaining individual residential
mortgage loans on our balance sheet.
At September 30, 2004, the average life of mortgage-backed instruments in the
investment portfolio was 4.0 years, and the duration was 3.88. The corresponding
life and duration at December 31, 2003, were 4.50 and 4.50, respectively.
At September 30, 2004, the average life of the total investment portfolio was
6.06 years and the duration was 2.62. In comparison, at December 31, 2003, the
average life was 5.67 years and the duration was 2.81.
The changes in average life and duration reflected the rising interest rate
environment. Most of the changes were associated with callable agency
securities, and our assumption that these instruments will be held to maturity
because of the higher rates.
LOAN BALANCES
-------------
Results from the Regional Banking business for the 2004 third quarter were
robust. Total loan balances at September 30, 2004, were 6.2% higher than at
December 31, 2003, and reached $6.62 billion. We continued to be the leading
full-service bank in Delaware, and our loan balances continued to grow in
southeastern Pennsylvania.
On average, loan balances for the first 9 months of 2004 were $6.42 billion.
This was 7% more than the $6.00 billion reported for the first 9 months of 2003.
We regard average balances for a period, rather than period-end balances, as the
more accurate indicator of trends in our Regional Banking business.
The Regional Banking business benefited from the health of the broadly
diversified economy in the Delaware Valley, which is where we focus our banking
activities. Unemployment rates remain lower and other economic indicators for
Delaware and southeastern Pennsylvania remain stronger than for other parts of
the United States.
We define the Delaware Valley region as including the state of Delaware;
geographically adjacent areas along the I-95 corridor from Princeton, New
Jersey, to Baltimore; and Maryland's Eastern Shore. Within this region, we
target family-owned or closely held businesses with annual sales of up to $250
million. Our retail banking activities target the state of Delaware.
During the 2004 third quarter, we expanded by opening a commercial loan
production office in Bel Air, Maryland, which is located between Wilmington and
Baltimore. Many of our Delaware clients, especially auto dealers, are already
active in this area. By having a physical presence there, we will be better able
to serve their growing needs and to establish new relationships.
20
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
COMMERCIAL LOANS
----------------
Commercial loan balances accounted for 82.2% of the 9-month growth in total loan
balances, and reached $4.37 billion at September 30, 2004. This was an increase
of $321.0 million, or 7.9%.
Within the commercial portfolio, nearly half of the 9-month growth was in
traditional commercial and industrial (C and I) loans. Demand for C&I loans came
from throughout the Delaware Valley region, and was not concentrated in any one
locale or industry sector. Contractors, building suppliers, light manufacturing
companies, and auto dealers were among the clients who increased their
borrowings.
The rest of the 9-month growth occurred in commercial mortgage and commercial
real estate and construction balances. This reflected the strength of the
housing market throughout the region, and burgeoning development in southern
Delaware, along with activity in the Ocean City, Maryland, area. Borrowings
spanned a range of residential, retail, agricultural, and hotel projects.
In southern Delaware, a growing influx of year-round residents has spawned
considerable housing demand and related development. Kiplinger's ranks Delaware
among the top retirement destinations in the United States. According to the
U.S. Census Bureau, Delaware is the fifth most popular state among residents
aged 65 or older.
RETAIL LOANS
------------
Retail loans at September 30, 2004, totaled $2.24 billion. This was higher by
$69.7 million, or 3.2%, than at December 31, 2003. We achieved this growth rate
even though residential mortgage balances fell by $49.8 million, or 10.2%.
As noted earlier, we prefer to manage mortgage-related risk in our investment
portfolio, instead of retaining individual residential mortgage loans as assets.
Although we remain among the leading mortgage originators in Delaware, we sell
all new fixed-rate production into the secondary market. Prepayments and
refinancings also contributed to the 9-month decline in residential mortgage
balances.
Consumer loan balances increased $105.5 million during the first 9 months of
2004, which more than offset the residential mortgage balance decline. Targeted
efforts to increase home equity and small business lending contributed to the
consumer loan increase.
Indirect auto lending also increased. Dealer-generated loan originations in the
2004 third quarter were 35% higher than for the year-ago third quarter. For the
first 9 months of 2004, dealer-generated originations were 20% ahead of the
comparable year-ago period.
Loans secured with liquid collateral increased marginally during the first 9
months of 2004, and totaled $619.4 million at September 30. In general, these
loans are extended to Wealth Advisory clients.
RESERVE FOR LOAN LOSSES
-----------------------
The reserve for loan losses increased from $89.9 million at December 31, 2004,
to $91.3 million at September 30, 2004, and was influenced by continued growth
in loan balances and strength in credit quality.
The loan loss reserve ratio was 1.38% at September 30, 2004, which was 6 basis
points lower than at December 31, 2003. The loan loss reserve ratio declined due
to the high percentage of loans rated "pass" by our internal risk-rating
analysis, and the lower provision for loan losses. The provision was lowered
primarily because approximately $1.4 million was recovered during the 2004 third
quarter on two previously charged-off loans.
For more information about credit quality, please refer to the "Asset Quality"
section of this report.
21
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
GOODWILL
--------
Goodwill rose from $243.2 million at December 31, 2003, to $325.6 million at
September 30, 2004. The increase occurred primarily because we completed our
acquisition of the minority interest in Balentine.
LIABILITIES
-----------
Total liabilities increased by 9.0% during the first 9 months of 2004 and
reached $8.74 billion. Most of the increase resulted from borrowings that were
used to fund loan growth.
DEPOSIT BALANCES
----------------
Changes in deposit balances reflect trends in the retail banking business, which
is concentrated in the state of Delaware, as well as in funding strategies that
we employ when loan demand exceeds core deposit balances. As a rule, core
deposits represent client-driven balances, and indicate trends in our Regional
Banking business. Other balances are driven by funding needs.
At September 30, 2004, core deposit balances totaled $4.81 billion, which was
$134.2 million, or 2.9%, more than at December 31, 2003. Increases of $142.0
million in noninterest-bearing demand deposits and $50.8 million in local
certificates of deposit (CDs) over $100,000 were offset partially by declines in
interest-bearing savings and demand deposit balances and CDs under $100,000.
Noninterest demand deposit balances are used by Corporate Client Services
clients who use our cash management and paying agent services. It is not unusual
for these clients to deposit funds with us for short periods of time,
particularly over period-ends. For that reason, we believe average deposit
balances offer a better indicator of core deposit trends in our Regional Banking
business than period-end balances. On average, core deposit balances for the
first 9 months of 2004 were $4.49 billion, compared with $4.32 billion for the
first 9 months of 2003.
Changes in other deposits and short-term borrowings reflect funding strategies.
Other deposits include national CDs of $100,000 and over, which are purchased
funds and not indicative of client activity. Decisions on whether to use
national CDs or short-term borrowings typically are made based on the most
favorable rate.
Between December 31, 2003, and September 30, 2004, other deposits increased
$277.9 million, and short-term borrowings rose $313.4 million. These funds were
used to support loan growth.
For more information about funding sources, please refer to the "Liquidity"
section of this report.
STOCKHOLDERS' EQUITY
--------------------
Stockholders' equity at September 30, 2004, was $890.5 million. This was an
11.2% increase from the December 31, 2003, amount of $800.8 million. For more
information about this increase, please refer to the "Capital Resources" section
of this report.
INCOME STATEMENT
----------------
This section compares the Corporation's income and expenses for the third
quarter and first 9 months of 2004 with those of the corresponding periods of
2003.
For the third quarter of 2004, net income was $34.4 million, which was equal to
the year-ago third quarter amount. Earnings per share, on a diluted basis, were
$0.50 for the 2004 third quarter, compared with $0.52 for the year-ago third
quarter.
22
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
For the 2004 third quarter, the growth in net interest income was robust. The
Wealth Advisory and Corporate Client Services businesses recorded single-digit
increases, due to the impact of weakness in the financial markets and the
capital markets industry, respectively. This slowdown in the pace of advisory
fee revenue was exacerbated by a 15.6% increase in noninterest expenses, as we
continued to make investments in each of our businesses.
Our results were much more positive on a year-to-date basis. Net income for the
first 9 months of 2004 totaled $106.6 million, which was 10.6% more than for the
corresponding year-ago period. Earnings per share, on a diluted basis, were
$1.57, which was 8.3% more than for the first 9 months of 2003.
Year-to-date results reflected stability in the net interest margin, credit
quality that reduced the provision for loan losses, double-digit increases in
Wealth Advisory and Corporate Client revenue, and considerable improvement in
the results from the 2 affiliate money managers.
SOURCES OF INCOME
-----------------
We generate 2 kinds of revenue:
- Net interest income. Net interest income is the difference between the
interest revenue we receive on earning assets, such as loans and
investments, and the interest we pay on liabilities, such as deposits and
short-term borrowings. Net interest income is generated primarily by
banking and funding activities.
- Noninterest income. Noninterest income consists primarily of income from
the advisory businesses, which comprise Wealth Advisory Services,
Corporate Client Services, and the two affiliate money managers, Cramer
Rosenthal McGlynn and Roxbury Capital Management. Noninterest income also
includes service charges on deposit accounts, loan fees and late charges,
card fees, securities gains (or losses), and other noninterest income.
Our 2 sources of revenue generate a diversified stream of income that enables us
to deliver consistent profitability and growth, with low volatility, in a
variety of economic conditions.
INTEREST INCOME AND EXPENSE, NET INTEREST INCOME, AND NET INTEREST MARGIN
-------------------------------------------------------------------------
Continued loan growth and the rising interest rate environment held the net
interest margin steady; narrowed the disparity between the yield on earning
assets and the cost of funds used to support those assets; and contributed to
the highest rate of quarterly growth in net interest income (before the
provision for loan losses) in more than 4 years.
Net interest income, before the provision, was $74.0 million for the 2004 third
quarter, an 8.7% improvement from the year-ago third quarter. For the first 9
months of 2004, net interest income totaled $218.0 million, an increase of 5.5%
from the comparable period in 2003.
Comparing the 2004 third quarter with the 2003 third quarter, interest income
rose $7.3 million, while the increase in interest expense was $1.4 million.
These results caused interest income for the first 9 months of 2004 to increase
$2.3 million, opposite a $9.0 million decline in interest expense for the same
period.
Several key yields and rates reversed their long-standing trends during the 2004
third quarter. After 13 consecutive quarters of declines, the yield on total
earning assets rose 6 basis points from its year-ago third quarter level, while
the cost of funds used to support earning assets did not change. The yield on
loan balances fell 4 basis points, while the cost of core deposits decreased 5
basis points. The yield on commercial loans rose 22 basis points.
These factors helped stabilize the net interest margin at 3.51% for the third
quarter of 2004, and 3.52% for the first 9 months of 2004. This was 6 basis
points higher than for the third quarter of 2003, but 8 basis points lower than
for the first 9 months of 2003.
23
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
To compute the net interest margin, the Corporation divides annualized 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 third quarter was $75.0
million, compared with $69.3 million for the 2003 third quarter. Total earning
assets were $8.42 billion, on average, for the 2004 third quarter, which was
$467.5 million, or 5.9%, higher than for the year-ago third quarter.
For the first 9 months of 2004, net interest income on an FTE basis was $221.3
million, compared with $210.3 million for the first 9 months of 2003. Total
earning assets were $8.31 billion, on average, for the first 9 months of 2004,
compared with $7.76 billion, on average, for the first 9 months of 2003.
Since June 30, 2004, the Federal Reserve has raised market interest rates 3
times for a total of 75 basis points, but only the first 25-basis-point increase
was in place for the entire third quarter. Following the Federal Reserve's lead,
we raised our prime lending rate on June 29 from 4.00% to 4.25%; to 4.50% on
August 10; and to 4.75% on September 21. Assets are repricing at a faster pace
than liabilities, however, and we remain asset-sensitive.
The following tables present comparative net interest income data and
rate/volume analyses for the third quarters and first 9 months of 2004 and 2003.
24
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
QUARTERLY ANALYSIS OF EARNINGS
2004 Third Quarter 2003 Third Quarter
---------------------------------------------------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
-------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 28.5 $ 0.1 1.48% $ 35.6 $ 0.1 1.12%
U.S. Treasury and government
agencies 449.6 4.0 3.53 517.1 4.1 3.22
State and municipal 12.7 0.3 8.75 16.2 0.3 8.99
Preferred stock 121.2 2.3 7.42 120.7 2.2 7.39
Mortgage-backed securities 960.4 9.9 4.08 961.2 8.8 3.64
Other 322.2 2.5 3.04 249.9 1.8 2.88
------------------------------------------------------------- ---------------------
Total investment securities 1,866.1 19.0 4.02 1,865.1 17.2 3.71
--------------------------------------------------------------------
Commercial, financial, and
agricultural 2,403.3 27.6 4.51 2,202.2 23.5 4.18
Real estate-construction 718.1 9.0 4.93 624.9 7.0 4.37
Mortgage-commercial 1,186.4 14.7 4.85 1,039.4 13.5 5.08
------------------------------------------------------------- ---------------------
Total commercial loans 4,307.8 51.3 4.67 3,866.5 44.0 4.45
--------------------------------------------------------------------
Mortgage-residential 440.2 6.6 6.02 573.9 9.5 6.63
Consumer 1,164.1 17.2 5.84 1,031.3 17.1 6.58
Secured with liquid collateral 616.8 4.6 2.93 583.6 3.8 2.52
------------------------------------------------------------- ---------------------
Total retail loans 2,221.1 28.4 5.07 2,188.8 30.4 5.51
--------------------------------------------------------------------
Total loans net of
unearned income 6,528.9 79.7 4.81 6,055.3 74.4 4.85
--------------------------------------------------------------------
Total earning assets $ 8,423.5 98.8 4.62 $ 7,956.0 91.7 4.56
====================================================================
Funds supporting earning assets
Savings $ 368.4 0.2 0.21 $ 368.8 0.1 0.13
Interest-bearing demand 2,297.1 3.0 0.52 2,244.7 2.2 0.39
Certificates under $100,000 763.9 3.8 1.95 817.6 5.2 2.50
Local CDs $100,000 and over 189.0 0.7 1.40 128.4 0.5 1.60
------------------------------------------------------------- ---------------------
Total core interest-
bearing deposits 3,618.4 7.7 0.84 3,559.5 8.0 0.89
National CDs $100,000
and over 1,937.1 7.2 1.48 1,780.9 6.7 1.48
------------------------------------------------------------- ---------------------
Total interest-bearing
deposits 5,555.5 14.9 1.06 5,340.4 14.7 1.09
--------------------------------------------------------------------
25
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
2004 Third Quarter 2003 Third Quarter
----------------------------------- ----------------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,289.8 5.4 1.62 1,115.2 4.0 1.39
U.S. Treasury demand 3.8 -- 1.54 20.0 -- 0.76
----------------------------------------------------------------------- ----------------------
Total short-term
borrowings 1,293.6 5.4 1.62 1,135.2 4.0 1.38
------------------------------------------------------------------------------
Long-term debt 403.2 3.5 3.44 405.4 3.7 3.63
----------------------------------------------------------------------- ----------------------
Total interest-bearing
liabilities 7,252.3 23.8 1.29 6,881.0 22.4 1.29
------------------------------------------------------------------------------
Other noninterest funds 1,171.2 -- -- 1,075.0 -- --
----------------------------------------------------------------------- ----------------------
Total funds used to support
earning assets $ 8,423.5 23.8 1.11 $7,956.0 22.4 1.11
==============================================================================
Net interest income/yield 75.0 3.51 69.3 3.45
Tax-equivalent adjustment (1.0) (1.2)
------- -------
Net interest income $ 74.0 $ 68.1
======= =======
In order to ensure 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."
26
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
YEAR-TO-DATE ANALYSIS OF EARNINGS
Year-to-Date 2004 Year-to-Date 2003
------------------------------------ ------------------------------------
(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 $ 20.6 $ 0.2 1.25% $ 32.7 $ 0.3 1.27%
U.S. Treasury and government
agencies 448.3 11.6 3.49 502.5 12.5 3.40
State and municipal 13.9 0.9 8.67 16.5 1.1 8.99
Preferred stock 120.3 6.7 7.42 118.3 6.6 7.49
Mortgage-backed securities 986.1 30.3 4.05 832.0 26.4 4.27
Other 305.8 6.8 2.97 239.5 5.5 2.99
-------------------------------------------------------------------- -----------------------
Total investment
securities 1,874.4 56.3 3.99 1,708.8 52.1 4.10
---------------------------------------------------------------------------
Commercial, financial, and
agricultural 2,363.4 77.1 4.29 2,202.6 73.2 4.39
Real estate-construction 726.1 25.4 4.60 587.1 19.8 4.46
Mortgage-commercial 1,153.1 42.2 4.81 1,034.1 42.3 5.39
-------------------------------------------------------------------- -----------------------
Total commercial loans 4,242.6 144.7 4.49 3,823.8 135.3 4.67
---------------------------------------------------------------------------
Mortgage-residential 460.3 20.9 6.05 608.9 30.8 6.74
Consumer 1,111.1 49.5 5.93 1,030.3 51.7 6.70
Secured with liquid collateral 605.7 12.2 2.64 560.9 11.5 2.71
-------------------------------------------------------------------- -----------------------
Total retail loans 2,177.1 82.6 5.04 2,200.1 94.0 5.69
---------------------------------------------------------------------------
Total loans net of
unearned income 6,419.7 227.3 4.67 6,023.9 229.3 5.04
---------------------------------------------------------------------------
Total earning assets $ 8,314.7 283.8 4.51 $ 7,765.4 281.7 4.82
===========================================================================
Funds supporting earning assets
Savings $ 373.3 0.4 0.16 $ 365.2 0.5 0.17
Interest-bearing demand 2,294.5 7.3 0.42 2,145.5 7.0 0.44
Certificates under $100,000 768.6 11.6 2.01 847.7 17.7 2.79
Local CDs $100,000 and over 152.6 1.7 1.45 139.7 1.9 1.80
-------------------------------------------------------------------- -----------------------
Total core interest-bearing
deposits 3,589.0 21.0 0.78 3,498.1 27.1 1.03
National CDs $100,000 and over 2,046.9 19.4 1.25 1,941.2 23.2 1.58
-------------------------------------------------------------------- -----------------------
Total interest-bearing
deposits 5,635.9 40.4 0.95 5,439.3 50.3 1.23
---------------------------------------------------------------------------
27
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
Year-to-Date 2004 Year-to-Date 2003
--------------------------------------- --------------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
----------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,108.1 12.3 1.46 961.0 11.0 1.51
U.S. Treasury demand 9.3 0.1 0.89 12.2 0.1 0.88
------------------------------------------------------------------------ --------------------
Total short-term borrowings 1,117.4 12.4 1.46 973.2 11.1 1.50
---------------------------------------------------------------------------
Long-term debt 406.4 9.6 3.15 325.5 10.0 4.10
------------------------------------------------------------------------ --------------------
Total interest-bearing
liabilities 7,159.7 62.4 1.15 6,738.0 71.4 1.41
---------------------------------------------------------------------------
Other noninterest funds 1,155.0 -- -- 1,027.4 -- --
------------------------------------------------------------------------ --------------------
Total funds used to support
earning assets $ 8,314.7 62.4 0.99 $7,765.4 71.4 1.22
===========================================================================
Net interest income/yield 221.4 3.52 210.3 3.60
Tax-equivalent adjustment (3.4) (3.6)
------- -------
Net interest income $ 218.0 $ 206.7
======= =======
In order to ensure 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."
28
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
-------------------------------------------------------------------------------
For the three months ended Sept. 30, For the nine months ended Sept. 30,
------------------------------------ -------------------------------------
2004/2003 2004/2003
Increase (Decrease) Increase (Decrease)
due to change in due to change in
----------------------------------- -------------------------------------
(in millions) Volume (1) Rate (2) Total Volume (1) Rate (2) Total
-------------------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and
securities purchased under
agreements to resell $ -- $ -- $ -- $ (0.1) $ 0.0 $ (0.1)
U.S. Treasury and
government agencies (0.5) 0.4 (0.1) (1.2) 0.3 (0.9)
State and municipal * (0.1) 0.1 -- (0.2) 0.0 (0.2)
Preferred stock * 0.1 0.0 0.1 0.2 (0.1) 0.1
Mortgage-backed securities 0.1 1.0 1.1 5.4 (1.5) 3.9
Other * 0.5 0.2 0.7 1.4 (0.1) 1.3
-------------------------------------------------------------------------------------------------------------------------------
Total investment
securities 0.1 1.7 1.8 5.6 (1.4) 4.2
------------------------------------------------------------------------------
Commercial, financial, and
agricultural * 2.1 2.0 4.1 5.3 (1.4) 3.9
Real estate-construction 1.0 1.0 2.0 4.7 0.9 5.6
Mortgage-commercial * 1.9 (0.7) 1.2 4.8 (4.9) (0.1)
-------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 5.0 2.3 7.3 14.8 (5.4) 9.4
------------------------------------------------------------------------------
Mortgage-residential (2.2) (0.7) (2.9) (7.5) (2.4) (9.9)
Consumer 2.2 (2.1) 0.1 4.1 (6.3) (2.2)
Secured with liquid collateral 0.2 0.6 0.8 0.9 (0.2) 0.7
-------------------------------------------------------------------------------------------------------------------------------
Total retail loans 0.2 (2.2) (2.0) (2.5) (8.9) (11.4)
------------------------------------------------------------------------------
Total loans net of
unearned income 5.2 0.1 5.3 12.3 (14.3) (2.0)
-------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 5.3 $ 1.8 $ 7.1 $ 17.8 $ (15.7) $ 2.1
------------------------------------------------------------------------------
Interest expense:
Savings $ 0.0 $ 0.1 $ 0.1 $ 0.0 $ (0.1) $ (0.1)
Interest-bearing demand 0.1 0.7 0.8 0.5 (0.2) 0.3
Certificates under $100,000 (0.3) (1.1) (1.4) (1.7) (4.4) (6.1)
Local CDs $100,000 and over 0.2 0.0 0.2 0.2 (0.4) (0.2)
-------------------------------------------------------------------------------------------------------------------------------
Total core interest-bearing
deposits 0.0 (0.3) (0.3) (1.0) (5.1) (6.1)
29
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
----------------------------------------------------------------------------
For the three months ended Sept. 30, For the nine months ended Sept. 30,
----------------------------------- -----------------------------------
2004/2003 2004/2003
Increase (Decrease) Increase (Decrease)
due to change in due to change in
------------------------------------ -----------------------------------
(in millions) Volume (1) Rate (2) Total Volume (1) Rate (2) Total
-----------------------------------------------------------------------------------------------------------------------
National CDs $100,000 and over 0.6 (0.1) 0.5 1.3 (5.1) (3.8)
-----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 0.6 (0.4) 0.2 0.3 (10.2) (9.9)
----------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 0.6 0.8 1.4 1.7 (0.4) 1.3
Long-term debt 0.0 (0.2) (0.2) 2.5 (2.9) (0.4)
-----------------------------------------------------------------------------------------------------------------------
Total interest expense $ 1.2 $ 0.2 $ 1.4 $ 4.5 $(13.5) $ (9.0)
----------------------------------------------------------------------------
Changes in net interest income $ 4.1 $ 1.6 $ 5.7 $ 13.3 $ (2.2) $ 11.1
============================================================================
* 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.
30
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
NONINTEREST INCOME
------------------
The table below shows changes in the mix between net interest and noninterest
income. It demonstrates that:
- Our sources of income are diversified and balanced.
- Advisory income is the predominant source of noninterest income.
Advisory and total noninterest income as a percentage of combined net interest
and noninterest income
FOR THE PERIOD ENDED 2004 Q3 2003 Q3 2004 YTD 2003 YTD
-------------------- ------- ------- -------- --------
Advisory income (after amortization) 40.1% 40.7% 41.5% 39.3%
Total noninterest income 49.4% 51.5% 50.7% 50.0%
---- ---- ---- ----
Net interest income (after provision) 50.6% 48.5% 49.3% 49.9%
---- ---- ---- ----
ASSETS UNDER MANAGEMENT
-----------------------
A portion of the revenue from our advisory businesses is derived from the levels
of assets under management. The assets we manage include assets in personal
trusts that are structured around wealth planning, preservation, and transition
considerations. These assets are invested in a mix of instruments.
Changes in the level of managed assets at Wilmington Trust reflect trust
distributions and terminations as well as business flows and financial market
movements. In addition to revenue associated with managing assets, the Wealth
Advisory business generates revenue from a variety of planning and other
services.
In contrast, asset management is the primary business of the 2 affiliate money
managers. Changes in managed assets at these 2 firms reflect business flows as
well as financial market movements.
The following table compares changes in assets under management.
Changes in assets under management (AUM)*
AUM AT PERIOD-END (IN BILLIONS) 2004 Q3 2003 Q4 2003 Q3
------------------------------- ------- ------- -------
Wilmington Trust $24.6 $24.4 $23.6
Cramer Rosenthal McGlynn $ 5.8 $ 4.7 $ 4.0
Roxbury Capital Management $ 2.9 $ 3.2 $ 3.1
----- ----- -----
Total $33.3 $32.3 $30.7
----- ----- -----
The following table compares changes in the investment mix of managed assets at
Wilmington Trust (excluding the affiliate money managers).
Changes in the investment mix of managed assets at Wilmington Trust*
INVESTMENT MIX AT PERIOD-END 2004 Q3 2003 Q4 2003 Q3
---------------------------- ------- ------- -------
Equities 42% 55% 52%
Fixed income 25% 25% 27%
Cash and equivalents 13% 9% 11%
Mutual funds 8% 7% 6%
Other assets 12% 4% 4%
* Assets under management include estimates for values associated with certain
assets that lack readily ascertainable values, such as limited partnership
interests.
31
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
WEALTH ADVISORY SERVICES
------------------------
Income from the Wealth Advisory Services (WAS) business was $37.0 million for
the third quarter, and $114.0 million for the first 9 months of 2004. Compared
to the corresponding periods in 2003, these were increases of 4.2% and 11.4%,
respectively. Sluggish financial markets continued to stymie WAS results
overall, and masked the impact of strong sales momentum.
Third quarter 2004 WAS sales were 28.5% higher than for the year-ago third
quarter. For the first 9 months of 2004, sales were 18.9% ahead of the year-ago
amount. Markets outside of Delaware continued to gain traction and generate a
higher percentage of sales.
As noted earlier, the sources of WAS revenue include asset management, financial
planning, and other services. To offer insight into what is driving WAS revenue
for any given period, we group the sources of revenue into three categories:
- Trust and investment advisory fees. This is the largest component of WAS
revenue. These fees are generated by the asset management and investment
consulting services we provide, and they are based on market valuations.
- Mutual fund fees. Approximately 87% of these fees are tied to money
market mutual funds, and do not reflect equity market movements.
- Planning and other service fees. These fees are generated by the
sophisticated planning services in which we specialize, including
financial planning, retirement planning, and wealth transition planning.
Estate settlement, tax preparation, and other services also generate these
fees. These fees are not tied to asset valuations. Instead, they are based
on the level and complexity of the services provided, and they can vary
widely in amount. Some portions of these fees may recur annually; others
may be nonrecurring. These fees reflect client demand at any point in
time, and it is not unusual for them to fluctuate up or down from period
to period.
Revenue from trust and investment advisory services was $27.4 million for the
2004 third quarter, and $81.1 million for the first 9 months of 2004. These were
increases of 10.0% and 14.4%, respectively, from the comparable year-ago
periods.
The increases in trust and investment advisory revenue reflected higher demand
for our investment consulting services, and outpaced changes in the financial
markets. Opposite the percentage increases we recorded, the three major equity
market indices recorded single-digit increases for the comparable 52-week
period. For the first 9 months of 2004, the Standard and Poor's 500 Index was up
0.24%, while the Dow Jones Industrial Average and the NASDAQ Composite Indices
declined.
Fees from planning and other services were $4.6 million for the 2004 third
quarter, which was $400,000 less than for the year-ago third quarter. As noted
above, fees from planning and other services are unpredictable, and demand for
these services was much stronger in the 2004 first and second quarters than in
the third. The growth in these fees during the first half of 2004 is what
accounted for the 22.8% increase in these fees for the first 9 months of 2004
versus the first 9 months of 2003.
The decline in mutual fund fees for the third quarter and first 9 months of
2004, opposite the comparable periods in 2003, reflected increasing client
demand for investments that generate higher returns.
Beginning with the 2004 fourth quarter, revenue from the acquisition of Grant
Tani Barash & Altman will be reported in the other service fees component of WAS
revenue.
CORPORATE CLIENT SERVICES
-------------------------
Revenue from the Corporate Client Services (CCS) business was $17.2 million for
the third quarter and $53.6 million for the first 9 months of 2004. Compared to
the corresponding periods in 2003, these were increases of 4.9% and 12.1%,
respectively. The capital markets environment was uncharacteristically weak
during the 2004 third quarter, and this weakness hampered the growth rate of the
CCS business overall.
In the CCS business, we provide specialized trust and administrative functions
in the niche markets of capital markets services, entity management services,
and retirement services. Capital markets and entity management services are
priced according to complexity, and are performed on a fee-for-service basis. In
general, fees for retirement services are based on the value of the retirement
plan assets for which we serve as trustee. Most CCS services are performed under
multiyear contracts.
32
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
In addition to the trust and administrative functions, we provide cash
management services for some CCS clients. Fees associated with these services
are tied to asset values.
For the 2004 third quarter and first 9 months, approximately 25% of total CCS
revenue was tied to asset valuations, compared with approximately 23% for the
corresponding year-ago periods.
CCS CAPITAL MARKETS SERVICES
----------------------------
Our capital markets services support the structured finance industry, including
such transactions as asset-backed securitizations, issues of trust-preferred
securities, capital equipment leasing, and structures associated with companies
in distressed financial condition.
For the first 9 months of 2004, revenue from capital markets services totaled
$23.3 million, which was 8.9% higher than for the comparable period in 2003. On
a third quarter 2004 versus 2003 basis, however, capital markets revenue fell
5.3%, and reflected changing dynamics in various parts of the structured finance
industry.
Some parts of the industry remained strong. For the 2004 third quarter, sales of
services that support trust-preferred securities were 17.1% higher, and sales of
services that support asset-backed securitizations were 19.1% higher, than for
the year-ago third quarter.
At the same time, there was a decrease in recurring revenue from services for
asset-backed securitizations. This occurred because more contracts are maturing
in a shorter span of time than in the past. Prior to the downward turn in market
interest rates that began 3 years ago, the duration of most contracts was 5 to
10 years. As interest rates fell, investors sought durations of 2 to 5 years,
which means that many of the contracts are now reaching maturity and ceasing to
generate revenue.
A significant part of the structured finance industry, the market for
cross-border and capital equipment leasings, stagnated while investors awaited
the outcome of proposed tax legislation. For the year-ago third quarter, sales
of services that support leasing transactions were nearly $530,000. In
comparison, for the current-year third quarter, these sales amounted to less
than $300,000.
The corporate tax bill that Congress passed on October 11 eliminated favorable
tax treatments for cross-border and municipal equipment leasing structures.
CCS ENTITY MANAGEMENT SERVICES
------------------------------
In this part of the CCS business, we provide administrative services for legal
entities in jurisdictions that offer favorable legal and tax environments. These
services include accounting, regulatory and tax filings, providing independent
directors for an entity, and other activities. Our growing ability to provide
services in multiple jurisdictions is helping us grow this part of the business,
as it enables us to attract more multinational corporations who want to
establish trusts and entities in more than one location, but use a single
provider to do so.
Entity management services revenue was $5.8 million for the third quarter, and
$16.8 million for the first 9 months of 2004. These were increases of 11.5%, and
9.1%, respectively, from the corresponding periods in 2003. Higher revenue from
services provided in Europe accounted for much of the growth.
CCS RETIREMENT SERVICES
-----------------------
In the retirement services component of the CCS business, we provide trust and
custody services for institutional defined contribution benefit plans, such as
401(k) and other retirement plans. Third quarter 2004 sales of trustee services
for defined contribution plans were nearly double the amount recorded for the
year-ago third quarter. Retirement services revenue for the 2004 third quarter
was 20.8% higher than for the year-ago third quarter. Revenue for the first 9
months of 2004 was 25.4% higher than for the comparable year-ago period. New
business development contributed to the growth.
33
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
CRAMER ROSENTHAL MCGLYNN
------------------------
At value-style affiliate money manager Cramer Rosenthal McGlynn (CRM), assets
under management reached $5.8 billion, surpassing the record set at June 30,
2004, by $300 million, or 5.4%. Managed assets were higher by $1.8 billion, or
45.0%, than at September 30, 2003. In comparison, as noted earlier, the three
major equity market indices recorded declines for the comparable 52-week period.
For the 2004 third quarter, income from our investment in CRM was nearly double
the year-ago third quarter amount. For the first 9 months of 2004, income from
CRM was more than double the amount for the same period in 2003.
The amount of income recorded from CRM is based on our ownership interest in the
firm, which was 77.24% at September 30, 2004. In comparison, we held a 69.14%
interest in CRM at September 30, 2003, and at December 31, 2003. CRM's results
are not consolidated in our financial statements. Despite the high percentage of
our position, we do not hold a controlling interest in CRM. CRM principals
retain certain management controls, including veto powers over a variety of
matters.
ROXBURY CAPITAL MANAGEMENT
--------------------------
Roxbury Capital Management's (RCM) return to profitability continued to gain
momentum. Income from our investment in the growth-style affiliate was $300,000
for the 2004 third quarter, and $700,000 for the first 9 months of the year. In
comparison, we recorded a $100,000 loss from RCM for the year-ago third quarter,
and a $2.3 million loss for the first 9 months of 2003.
RCM's results reflected continued stringent expense management and the
popularity of its small- and mid-capitalization products, which generate higher
fees than other investment products. Outflows from its core large-capitalization
product caused overall assets under management to decline.
Results recorded for RCM represent our ownership interest in the firm. At
September 30, 2004, our interest consisted of 41.23% of RCM's common shares and
30% of its gross revenue. In comparison, at September 30, 2003, our interest
consisted of 41.04% of RCM's common shares and 30% of its gross revenue. At
December 31, 2003, our interest consisted of 41.23% of RCM's common shares and
30% of its gross revenue.
NONINTEREST EXPENSE
-------------------
Noninterest expense reflects the costs that we incur in the course of normal
operations. It includes expenses associated with employment, occupancy,
supplies, advertising, third-party providers, and other items.
Noninterest expenses totaled $86.9 million for the third quarter of 2004, and
$252.5 million for the first 9 months of 2004. These were increases of 15.6% and
8.9%, respectively, from the corresponding year-ago periods. These increases
were in line with our plan and reflected a number of steps we have taken
throughout 2004 to position our company for continued growth.
The largest expense increases were recorded in salaries and wages, which were
$2.3 million higher than for the year-ago third quarter, and $6.1 million higher
than for the first 9 months of 2003. These increases resulted from staff
additions we made to strengthen each of the company's businesses and to comply
with increasing regulatory requirements. On a full-time equivalent basis, there
were 73 more staff members at September 30, 2004, than at the same time last
year.
In our Regional Banking business, we added commercial lending staff in Maryland
and Pennsylvania, and opened a commercial loan production office in Bel Air,
Maryland, as noted earlier. In Delaware, we added retail banking staff to
develop new products and business strategies.
The Wealth Advisory business has expanded its investment management team and
added other staff in New York and Baltimore. The Corporate Client business has
added sales and support staff in Europe and the United States. Company-wide, we
have hired additional staff in order to comply with the Sarbanes-Oxley Act and
related regulatory requirements.
To a certain extent, the larger staff size accounted for increases in incentives
and bonuses. In the 2004 third quarter, these expenses also reflected certain
incentives that are earned semiannually. Higher pension expense and health
insurance costs accounted for the rise in employment benefits costs.
34
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
The increases in furniture, equipment, and supplies expense were attributable to
technology projects. We upgraded our desktop operating system, which added
depreciation costs. At the end of May 2004, we completed our conversion to a
third-party trust accounting system, which added approximately $1 million in
quarterly expenses, beginning with the 2004 third quarter. Training on the new
systems caused travel, entertainment, and training expenses to increase.
The increases in servicing and consulting fees were due to strong demand for
multi-manager investment consulting capabilities, which led to additional
payments to third-party investment advisors. These increases also included costs
associated with Sarbanes-Oxley compliance that were approximately $444,000 in
the 2004 third quarter and approximately $719,000 for the first 9 months of
2004.
Other noninterest expenses increased due to a combination of higher legal,
audit, insurance, and courier costs, and higher banking and trust differences.
HEADCOUNT
---------
At September 30, 2004, our full-time equivalent (FTE) headcount was 2,375. In
comparison, at September 30, 2003, FTE headcount was 2,302. At December 31,
2003, FTE headcount was 2,307.
INCOME TAXES
------------
Income tax expense totaled $19.2 million for the 2004 third quarter and $58.9
million for the first 9 months of 2004. These were increases of 2.1% and 14.4%,
respectively. Our effective tax rate for the 2004 third quarter was 35.8%,
compared with 35.1% for the 2003 third quarter. For the first 9 months of 2004,
our effective tax rate was 35.4%, compared with 34.6% for the first 9 months of
2003. The changes reflected higher state income taxes due to increased income,
especially from the affiliate money managers.
LIQUIDITY
---------
We manage liquidity to ensure that our cash flows are sufficient to support our
operating, investing, and financing activities. Liquidity management enables us
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.
As noted earlier, our sources of funding include deposit balances; cash that is
generated by the investment and loan portfolios; short- and long-term
borrowings, which include national certificates of deposit in amounts of
$100,000 and more as well as term federal funds; internally generated capital;
and other credit facilities.
Among our sources of available funds is the Federal Home Loan Bank of
Pittsburgh, of which Wilmington Trust Company is a member. Wilmington Trust
Company has $1.2 billion in maximum available borrowing capacity secured by
collateral. In addition, at September 30, 2004, we had $75 million in available
borrowing capacity through lines of credit that we maintain with two major U.S.
financial institutions.
In April 2003 we added another source of funding by issuing $250 million of
long-term subordinated debt. The issue was for general corporate purposes, and
we initially invested the proceeds in mortgage-backed securities.
We expect our investment portfolio to generate approximately $600 million of
cash over the next 12 months from maturities and income. At September 30, 2004,
the balance of the investment portfolio was $1.86 billion.
For the 2004 third quarter, the proportion of funding provided by core deposits
was 56.6%, compared with 64.2% for the 2003 third quarter and 62.75% for the
2003 fourth quarter.
35
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
We are a guarantor for 77.24% of a line-of-credit obligation of affiliate money
manager Cramer Rosenthal McGlynn (CRM). The line of credit is at LIBOR plus 2%,
totals $5 million, and is scheduled to expire on December 6, 2004. At September
30, 2004, the balance of this line of credit was zero. Our guaranty portion
reflects our ownership interest in CRM at September 30, 2004.
We monitor our existing and projected liquidity requirements continuously, and
we believe that our standing in the national markets will enable us to obtain
additional funding in a timely and cost-effective manner, should the need arise.
A significant change in our financial performance or credit ratings could reduce
the availability of funding, or increase the cost of such funding.
ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION
---------------------------------------------------------
We seek to maintain stable credit quality by using a disciplined approach to
lending and adhering to strict underwriting standards. We make the vast majority
of our loans within the Delaware Valley region, and we rarely make commercial
loans outside of our target client market of family-owned or closely held
businesses with annual sales of up to $250 million. This geographic focus
enables us to remain cognizant of economic and other external factors that may
affect credit quality, as does our focus on client relationships.
Credit quality remained strong throughout the third quarter and first 9 months
of 2004. Key measures of credit quality remained in line with historic levels.
The percentage of loans rated "pass" by our internal risk rating analysis topped
96% for both the second and third quarters of 2004, and remained higher than at
September 30, 2003, and December 31, 2003. The composition of the loan portfolio
remained well diversified and relatively unchanged, as the following table
illustrates.
LOAN PORTFOLIO COMPOSITION FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3
----------------------------------------------- ------- ------- -------
Commercial/financial/agricultural 37% 37% 36%
Commercial real estate construction 11% 11% 11%
Commercial mortgage 18% 17% 17%
Residential mortgage 7% 8% 9%
Consumer 18% 17% 18%
Secured by liquid collateral 9% 10% 9%
Of the various measures of credit quality, we regard the net charge-off ratio as
the most accurate indicator. For the 2004 third quarter, the net charge-off
ratio was 6 basis points, and net charge-offs totaled $4.1 million. Compared
with the year-ago third quarter, this was an increase of 3 basis points and $2.1
million. Compared with the year-ago fourth quarter, this was a decrease of 4
basis points and $2.3 million.
For the first 9 months of 2004, net charge-offs totaled $10.2 million. This was
$300,000 less than for the first 9 months of 2003. On an annualized basis, the
net charge-off ratio was 21 basis points at September 30, 2004, compared with 23
basis points at September 30, 2003. For the full-year 2003, the net charge-off
ratio was 27 basis points.
The following table provides 9- and 12-month comparisons of changes in net
charge-offs.
NET CHARGE-OFFS FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3
------------------------------------ ------- ------- -------
Net charge-off ratio 6 basis points 10 basis points 3 basis points
Net charge-offs $4.1 million $6.4 million $2.0 million
We continue to pursue repayment even after loans are charged off. During the
2004 third quarter, we recovered approximately $1.4 million from 2 previously
charged-off loans.
36
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
The following table presents 9- and 12-month comparisons of other risk elements
of credit risk.
NONPERFORMING ASSETS FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3
----------------------------------------- ------- ------- -------
Nonaccruing loans (in millions) $ 60.7 $ 45.4 $ 50.2
Loans past due 90 days or more (in millions) $ 7.6 $ 5.6 $ 7.3
Total (in millions) $ 68.3 $ 51.0 $ 57.5
Percentage of period-end loans 1.03% 0.82% 0.94%
Other real estate owned (in millions) $ 0.2 $ 1.4 $ 1.6
The increases in nonaccruing loans were due mainly to a single relationship with
a Delaware Valley-based client who is in the dining and recreation business.
During the 2004 third quarter, we transferred approximately $23 million
associated with this relationship to nonaccrual status.
The declines in other real estate owned reflected the successful work out during
the past 12 months of a Maryland beach resort residential project that first was
classified as OREO in December 2002.
The following table compares how loans past due 90 days or more were dispersed
throughout the loan portfolio on a percentage basis.
LOANS PAST DUE 90 DAYS OR MORE FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3
--------------------------------------------------- ------- ------- -------
Commercial loan portfolio 69% 39% 59%
Residential mortgage portfolio 18% 37% 24%
Consumer loan portfolio 13% 24% 17%
Changes in the reserve and provision for loan losses reflected loan growth,
credit quality, and the aforementioned loan recoveries. The following table
compares 9- and 12-month changes in these measures of credit quality.
FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3
-------------------- ------- ------- -------
Provision for loan losses (in millions) $ 2.9 $ 5.0 $ 5.7
Reserve for loan losses (in millions) $ 91.3 $ 89.9 $ 91.2
Loan loss reserve ratio 1.38% 1.44% 1.50%
For the first 9 months of 2004, the provision for loan losses totaled $11.6
million. This was $5.0 million less than for the first 9 months of 2003.
The reserve for loan losses reflects our best estimate, based on subjective
judgments regarding how collectible loans within the portfolio are, of known and
inherent estimated losses. In calculating the reserve, we evaluate micro- and
macro-economic factors, historical net loss experience, delinquency trends, and
movements within the internal risk rating classifications, among other things.
We reassess the reserve on a quarterly basis as part of the regular application
of the reserve methodology. The process that we use to calculate the reserve has
provided a high degree of reserve adequacy over an extended period of time, and
we believe that it is sound.
To accommodate growth in loan balances, we allocated a portion of the reserve to
new loans within the parameters of the reserve methodology. At September 30,
2004, in light of the levels of past due, nonaccruing, and problem loans, we
believe 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 September 30, 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 September 30, 2003,
approximately $6.1 million, or 6.7%, of the reserve was unallocated.
At September 30, 2004, our quarterly internal analysis of credits showed that
more than 96% of the loans in the portfolio were rated pass for the second
consecutive quarter. The percentage of loans with pass ratings has been higher
than 92% since 1998, and higher than
37
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
95% since 2000.
The internal analysis has four classifications, which are:
- Pass, which identifies loans with no current potential problems;
- Watchlist, 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 compares 9- and 12-month changes in the internal risk rating
analysis.
FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3
-------------------- ------- ------- -------
Pass 96.74% 95.83% 95.81%
Watchlist 1.81% 2.58% 2.53%
Substandard 1.21% 1.27% 1.25%
Doubtful 0.24% 0.32% 0.41%
We monitor the entire loan portfolio continually 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 regular
analyses of all past-due loans and the identification of loans that we doubt
will be repaid on a timely basis.
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
us to anticipate increases in nonperforming assets, credit losses, and the
provision for loan losses.
At September 30, 2004, we identified approximately $5.5 million of loans that we
doubted would be repaid on a timely basis, even though those 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 $26.6
million of such loans at September 30, 2003.
CAPITAL RESOURCES
-----------------
During the first 9 months of 2004, our capital continued to increase and our
capital ratios continued to exceed the Federal Reserve Board's minimum
guidelines.
The annualized capital generation rate for the first 9 months of 2004 was 6.33%,
compared with an annualized rate of 5.95% for the first 9 months of 2003 and a
rate of 8.7% for the 2003 full year.
Stockholders' equity rose 11.2%, or $89.7 million, to $890.5 million. Between
December 31, 2003, and September 30, 2004, additions to capital included:
- $50.7 million, which reflected earnings of $106.6 million net of $55.9
million in cash dividends;
- $14.2 million from the issue of common stock under employment benefit
plans; and
- $48.4 million in common stock issued in connection with the payment of a
portion of the purchase price for Balentine & Company, LLC, our investment
counseling firm.
38
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
These additions were offset partially by $32.6 million in reductions, which
consisted of:
- $3.7 million in unrealized losses on securities, net of taxes;
- $19.6 million for the repurchase of shares;
- $0.2 million in foreign currency exchange adjustments;
- A reclassification adjustment of $0.1 million for derivative and
securities gains included in net income, net of income taxes.
During the 2004 third quarter, we bought back 122,854 of our shares, at an
average price of $36.34 and a total cost of $4.5 million. During the first 9
months of 2004, we bought back a total of 543,275 shares at an average price of
$36.13 and a total cost of $19.6 million. Since the current 8-million-share
program began in April 2002, we have bought back a total of 627,644 shares at a
total cost of $22.08 million.
Also during the 2004 third quarter, we reissued 1,106,625 shares of our stock.
The size of the stock reissue included our acquisition of the minority interest
in Balentine. The original terms of the acquisition entitled certain Balentine
principals to receive payments in the form of Wilmington Trust stock in 2005,
2006, and 2007, and cash for their limited liability company interests. In June,
the parties elected to accelerate the stock and cash payments, and the
transaction was completed on July 1, 2004.
Our 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 our
ratios to the guidelines.
ADEQUATELY WELL-
CAPITALIZED CAPITALIZED
CAPITAL RATIO SEPT. 30, 2004 DEC. 31, 2003 MINIMUM MINIMUM
------------- -------------- ------------- ------- -------
Total risk-based capital 11.97% 12.45% 8% 10%
Tier 1 risk-based capital 7.17% 7.46% 4% 6%
Tier 1 leverage capital 6.04% 6.34% 4% 5%
On April 15, 2004, our Board of Directors raised the quarterly cash dividend
from $0.27 to $0.285 per share. This was an increase of 5.6%. We have paid cash
dividends on our common stock every year since 1908; paid quarterly cash
dividends every year since 1916; and increased the cash dividend every year
since 1982.
We review our capital position and make adjustments as needed to assure that our
capital base is sufficient to satisfy existing and impending regulatory
requirements, meet appropriate standards of safety, and provide for future
growth.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
----------------------------------------------------------
In our day-to-day operations, we employ various financial instruments that
generally accepted accounting principles deem to be off-balance sheet
arrangements. Under regulatory guidelines, these instruments are considered for
the purpose of calculating risk-based capital ratios. Some of these instruments,
such as stand-by and performance letters of credit, unfunded loan commitments,
unadvanced lines of credit, and interest rate swaps, do not appear on our
balance sheet. We include other instruments, such as long-term debt obligations,
on our balance sheet.
We employ interest rate swaps so that clients may convert floating-rate loan
payments to fixed-rate loan payments without exposing our company to interest
rate risk. In these arrangements, we retain the credit risk associated with the
potential failure of counter-parties. We also use interest rate swaps to manage
interest rate risk associated with our issues of long-term subordinated debt.
39
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
At September 30, 2004, we had entered into a total of $999.8 million of interest
rate swaps as follows:
- $312.4 million of swaps were associated with loan clients for whom we
exchanged floating rates for fixed rates.
- To offset the exposure from changes in the market value of those swaps, we
made $312.4 million of swaps with other financial institutions that
exchanged fixed rates for floating rates.
- We swapped $375.0 million associated with our long-term subordinated debt
issues with other financial institutions.
We have 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, our operations center in downtown Wilmington, Delaware, which was
completed in 1998.
Many of our branch offices in Delaware, and all of our offices outside Delaware,
are leased. Lease commitments for these locations, net of sublease arrangements,
totaled $55.7 million at September 30, 2004.
At September 30, 2004, we were guarantor of an obligation of affiliate money
manager Cramer Rosenthal McGlynn (CRM). The guaranty is for 77.24%, which
represents our current ownership interest in CRM, of a $5 million line of
credit, which is scheduled to expire on December 6, 2004.
At September 30, 2004, the liquidity exposure we had that was associated with
letters of credit, unfunded loan commitments, and unadvanced lines of credit was
$2.93 billion.
The following table summarizes the obligations referenced above and the periods
over which they extend.
MORE
CONTRACTUAL OBLIGATION PAYMENTS DUE BY LESS THAN 1 - 3 3 - 5 THAN 5
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 $ 55.7 $ 8.0 $ 22.6 $ 15.1 $ 10.0
Guaranty obligations $ 5.0 $ 5.0 -- -- --
------ --------- ------ ------ ------
Total $638.7 $ 35.8 $ 98.4 $214.0 $290.5
------ --------- ------ ------ ------
The long-term debt obligations in the table above refer to our two outstanding
subordinated debt issues and our 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 our balance
sheet.
In addition, the acquisition agreements for CRM and RCM permit principal members
and certain key employees of each firm, subject to certain restrictions, to put
their interests in their respective firms to our company. For more information
on these acquisition agreements, please refer to "Note 1" of the "Notes to
Consolidated Financial Statements" in our 2003 Annual Report to Shareholders.
INFLATION
---------
Our 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.
40
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
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 our
financial condition and results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which are prepared in
conformity with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us 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. We evaluate 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. We base our estimates on historical experience and other factors and
assumptions that we believe 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.
We believe the following critical accounting policies affect our more
significant judgments and the estimates we use to prepare the consolidated
financial statements, and relate to the reserve for loan losses, stock-based
employee compensation, and impairment of goodwill.
Reserve for loan losses: We maintain a reserve for loan losses that is our 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, we give 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 we use 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.
We believe that we use the best information available to make determinations
about the reserve, and that we have established our 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 our
financial results could be affected.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review our banking affiliates' reserve for
losses on loans. These agencies may require us 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: We account for our stock-based employee
compensation plans under the "intrinsic value" approach, in accordance with the
provisions of Accounting Principles Board (APB) 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.
41
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
Since our 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, we have disclosed, in the notes to the financial statements
contained herein and in our Annual Report to Shareholders, what the earnings
impact would have been had we 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. On March 31, 2004, the FASB issued an exposure draft, that would
eliminate the use of the intrinsic value method of accounting for stock-based
compensation for fiscal years beginning after December 15, 2004. At its October
13, 2004, board meeting, the FASB decided that the final Statement will be
effective for any interim or annual period beginning after June 15, 2005.
Impairment of goodwill: Through a series of acquisitions, we have accumulated
goodwill with a net carrying value of $325.6 million at September 30, 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 warranted a
revised estimate of the useful lives of the assets. Additionally, under APB No.
17, estimations of value and future benefits could indicate that the unamortized
cost should be reduced, 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 our books is related to certain of our
affiliate asset manager acquisitions. A decline in the fair value of the
investment in any of these firms could result in an impairment expense.
SUBSEQUENT EVENT
----------------
On October 1, 2004, we completed the acquisition of 90% of Grant Tani Barash &
Altman (GTBA), a Beverly Hills-based business management firm that serves
high-net-worth clients. The services GTBA performs for its clients include
bookkeeping, investment advice, cash flow management, budgeting, tax
preparation, tax planning, insurance consultation, and other services. The firm
employs approximately 40 staff members.
The balance of the ownership in GTBA is retained by its principals. We and those
principals will be able to purchase additional ownership interests in GTBA from
an owner upon the occurrence of a number of specified events, including the
termination of employment, death, disability, or retirement of the owner.
GTBA is managed by a board of five managers, composed of three people we
designate and two people designated by GTBA's principals.
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 us, 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. Our ability to achieve the results reflected in those statements
could be affected by, among other things, changes in national or regional
economic conditions, changes in market interest rates, 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.
42
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY AND MARKET RISK
-----------------------------------------
We consider interest rate risk to be our most significant market risk. Interest
rate risk is the exposure to adverse changes in our net income as a result of
changes in interest rates, both in the level of change and in the pace at which
it occurs.
Fluctuations in interest rates impact net interest income, which is an important
determinant of our financial performance. By managing our interest rate risk, we
seek to maximize the growth of net interest income on a consistent basis by
minimizing the effects of fluctuations associated with changing market interest
rates.
In other words, our objective is for growth in net interest income to be
generated by changes in loans and deposits, not by changes in market interest
rates. At the same time, our intent is to prevent market interest rate changes
from reducing net interest income by 10% or more within any 12-month period.
To assess interest rate risk, we consider a number of balance sheet risks and
market variables, which include:
- The mix of assets, liabilities, and off-balance sheet instruments;
- Their respective repricing and maturity characteristics;
- The level of market interest rates; and
- Other external factors.
We use computer-based modeling to quantify these variables and simulate their
impact on net interest income. The simulations compare multiple interest rate
scenarios against a stable interest rate environment. As a rule, the model
employs scenarios in which rates gradually move up or down 250 basis points over
a period of 12 months.
One of the external factors that we take into consideration is the inability of
certain interest rates to decline further. One such example is the targeted
federal funds rate, which was 1.75% at September 30, 2004.
With the rate at 1.75%, we considered a declining scenario of 250 basis points
to be unreasonable, since a decline of that magnitude would create negative
interest rates in the model. Instead, as of September 30, 2004, the declining
rate scenario employed a gradual downward move of 175 basis points, at which
point the federal funds rate would equal zero.
The rising rate scenario remained able to accommodate a 250-basis-point upside
move.
The following table presents how the simulation model projected the impact of
gradual and sustained interest rate changes on net interest income over 12-month
periods beginning September 30, 2004, and December 31, 2003.
IMPACT OF CHANGING INTEREST RATES FOR THE 12 MONTHS FOR THE 12 MONTHS
ON NET INTEREST INCOME BEGINNING 9/30/04 BEGINNING 12/31/03
--------------------------------- ----------------- ------------------
Gradual 250 basis point increase 4.85% 6.14%
Gradual 100 basis point decrease N/A (5.33)%
Gradual 175 basis point decrease (6.92)% N/A
The preceding paragraphs contain certain forward-looking statements regarding
the anticipated effects on our net interest income that may result from
hypothetical changes in market interest rates. The assumptions we use 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 our
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. We
review our 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.
43
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
OTHER RISKS
-----------
FINANCIAL MARKET RISK
---------------------
Financial market risk is the risk of exposure to adverse changes in our
noninterest income as a result of changes to the economic valuation of assets
which we manage or hold in custody on behalf of clients. Such changes in
valuation could be driven by the equity markets, the fixed income markets, or
both.
Certain components of the noninterest income from the Wealth Advisory Services
business and the Corporate Client Services business are based on fees that are
tied directly to the market valuation of assets that we manage or hold in
custody on behalf of clients. Income from the affiliate managers is based
entirely on financial market valuations.
The following table presents changes in the percentage of noninterest income for
the Wealth Advisory Services (WAS) and Corporate Client Services (CCS)
businesses that were associated directly with financial market valuations.
Percentage of WAS and CCS income based on financial market valuations
FOR THE PERIOD ENDED 2004 Q3 2004 YTD 2003 Q3 2003 YTD
------------------------- ------- -------- ------- --------
Wealth Advisory Services 55.5% 53.3% 52.6% 52.0%
Corporate Client Services 25.0% 25.2% 22.6% 23.0%
For more information about the percentage of noninterest income that is tied to
financial market valuations, please refer to the section on "Noninterest income"
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report.
OPERATIONAL RISK
----------------
Operational risk is the risk of unexpected losses attributable to human error,
systems failures, fraud, or inadequate internal controls and procedures. This
risk is mitigated through a system of internal controls that are designed to
keep operating risk at a level appropriate to our standards, in view of the
risks inherent in the markets and businesses in which we are engaged.
The system of internal controls includes policies and procedures that require
the proper authorization, approval, documentation, and monitoring of
transactions. Each business unit is responsible for complying with our policies
and applicable regulations, and is responsible for establishing specific
procedures to do so.
In connection with our efforts to comply with Section 404 of the Sarbanes-Oxley
Act, we have documented the internal controls over financial reporting, and have
evaluated the design effectiveness of these controls for each of our business
areas. This documentation includes a narrative, flow chart, and risk control
matrix for each process cycle within the business area, as well as walk-through
documentation for use by our independent auditors. We evaluate the process
documentation and test the primary controls on a quarterly basis, and remediate
where necessary. Appropriate managers in each business unit are to certify to
the Chairman of the Board and Chief Executive Officer and the Chief Financial
Officer each quarter about the effectiveness of the internal controls within
each of their areas.
44
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
FIDUCIARY RISK
--------------
Fiduciary risk is the risk of loss that may occur if we were to breach a
fiduciary duty to a client. To limit this risk, we have established policies and
procedures to reduce the risk that obligations to clients would not be
discharged faithfully or in compliance with applicable legal and regulatory
requirements.
These policies and procedures provide guidance and establish standards related
to the creation, sale, documentation, and management of investment products,
trade execution, and counterparty selection. Business units have the primary
responsibility for adhering to the policies and procedures applicable to their
businesses.
ITEM 4. CONTROLS AND PROCEDURES.
Our Chairman of the Board and Chief Executive Officer and our Chief Financial
Officer conducted an evaluation of the effectiveness of our 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 our disclosure controls and procedures are effective in alerting them on a
timely basis to material information about the Corporation (including our
consolidated subsidiaries) required to be included in the periodic filings we
make with the Securities and Exchange Commission. There was no change in our
internal control over financial reporting during the third quarter of 2004 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-----------------
We and our 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 proceedings 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 ultimately are resolved. While it is not feasible to
predict the outcome of these proceedings, management does not believe the
ultimate resolution of any of them will have a materially adverse effect on our
consolidated financial condition. Further, management believes that some of the
claims may be covered by insurance, and has advised its insurance carriers of
the proceedings.
45
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On July 1, 2004, we issued 967,000 shares of our common stock to the principals
of Balentine & Company, LLC and certain other parties in acceleration of the
purchase price for that company under our Merger Agreement with them dated as of
October 23, 2001. Those shares were not registered under the Securities Act of
1933 in reliance on the exemption provided under Section 4(2) thereunder.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table shows our purchases of our equity securities during the
third quarter.
(d) Maximum
(c) Total Number Number (or
of Shares Approximate
(or Units) Dollar Value)
Purchased of Shares (or
(a) Total (b) as Part of Units) that May
Number of Average Publicly Yet Be
Shares (or Price Paid Announced Purchased Under
Units) per Share Plans or the Plans or
Period Purchased (or Unit) Programs Programs
------------------- ---------- ---------- --------------- ---------------
Month #1
July 1, 2004 -
July 31, 2004 104,326 $ 36.34 104,326 7,390,884
Month #2
August, 1, 2004 -
August 31, 2004 18,528 $ 36.30 18,528 7,372,356
Month #3
September 1, 2004 -
September 30, 2004 -- -- -- 7,372,356
---------- --------- ------------ ---------------
Total 122,854 $ 36.34 122,854 7,372,356
---------- --------- ------------ ---------------
In April 2002, we announced a plan to repurchase 8 million shares of our 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.
46
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
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)
10.63 Amended and Restated Limited Liability Company Agreement of Grant Tani
Barash & Altman, LLC dated as of October 1, 2004 among Grant, Tani, Barash
& Altman, Inc., GTBA Holdings, Inc., Warren Grant, Jane Tani, Corey
Barash, and Howard Altman(3)(4)
10.64 Amended and Restated 2002 Long-Term Incentive Plan of Wilmington Trust
Corporation(3)
10.65 Form of Stock Option Agreement(3)
10.66 Form of Restricted Stock Agreement(3)
10.67 Form of Restricted Stock Unit Agreement(3)
31 Rule 13a-14(a)/15d-14(a) Certifications (3)
32 Section 1350 Certification (3)
----------
(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.
(4) Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment filed with the SEC and has been marked by an
asterisk [*].
We filed current a current report on Form 8-K on July 16, 2004, under Item 12
reporting our financial condition and results of operations for the second
quarter of 2004.
47
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended September 30, 2004
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: November 9, 2004
/s/ Ted T. Cecala
----------------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and
Chief Executive Officer
(Authorized Officer)
Date: November 9, 2004
/s/ David R. Gibson
----------------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
48