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 JUNE 30, 2005
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
incorporation or organization) Identification No.)
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 June 30, 2005
------------------------------ -------------------------------
COMMON STOCK - PAR VALUE $1.00 67,730,736
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
SECOND QUARTER 2005 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 19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 50
Item 4 Controls and Procedures 55
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 56
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 56
Item 3 Defaults upon Senior Securities 56
Item 4 Submission of Matters to a Vote of Security Holders 57
Item 5 Other Information 57
Item 6 Exhibits 57
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
------------------------
June 30, December 31,
(in millions, except share amounts) 2005 2004
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ASSETS
Cash and due from banks $ 242.1 $ 248.6
----------------------
Federal funds sold and securities purchased
under agreements to resell 11.7 63.3
----------------------
Investment securities available for sale:
U.S. Treasury and government agencies 503.3 441.3
Obligations of state and political subdivisions 9.3 9.8
Other securities 1,363.5 1,359.1
---------------------------------------------------------------------------------------
Total investment securities available for sale 1,876.1 1,810.2
----------------------
Investment securities held to maturity:
Obligations of state and political subdivisions 2.5 2.6
(market values of $2.6 and $2.8 respectively)
Other securities (market value of $0.5) 0.5 0.5
---------------------------------------------------------------------------------------
Total investment securities held to maturity 3.0 3.1
----------------------
Loans:
Commercial, financial, and agricultural 2,508.4 2,505.2
Real estate - construction 900.9 735.4
Mortgage - commercial 1,256.4 1,246.8
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Total commercial loans 4,665.7 4,487.4
----------------------
Mortgage - residential 444.5 431.3
Consumer 1,332.4 1,239.6
Secured with liquid collateral 610.5 604.7
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Total retail loans 2,387.4 2,275.6
----------------------
Total loans net of unearned income 7,053.1 6,763.0
Reserve for loan losses (92.4) (89.7)
---------------------------------------------------------------------------------------
Net loans 6,960.7 6,673.3
----------------------
Premises and equipment, net 148.4 150.3
Goodwill, net of accumulated amortization
of $29.8 in 2005 and 2004 343.6 337.0
Other intangible assets, net of accumulated amortization
of $17.6 in 2005 and $15.0 in 2004 41.4 43.8
Accrued interest receivable 41.9 38.3
Other assets 122.0 142.3
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Total assets $9,790.9 $9,510.2
======================
1
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
---------------------------
June 30, December 31,
(in millions, except share amounts) 2005 2004
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 999.5 $1,118.8
Interest-bearing:
Savings 347.7 355.5
Interest-bearing demand 2,241.7 2,442.5
Certificates under $100,000 804.7 765.4
Local CDs $100,000 and over 367.4 305.4
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Total core deposits 4,761.0 4,987.6
National CDs $100,000 and over 2,310.7 1,884.3
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Total deposits 7,071.7 6,871.9
-------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,163.5 1,120.2
U.S. Treasury demand 25.4 37.1
-----------------------------------------------------------------------------------------
Total short-term borrowings 1,188.9 1,157.3
-------------------------
Accrued interest payable 30.8 25.6
Other liabilities 138.1 141.4
Long-term debt 412.2 408.6
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Total liabilities 8,841.7 8,604.8
-------------------------
Minority interest 0.2 0.1
-------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 100.5 95.2
Retained earnings 1,056.2 1,015.3
Accumulated other comprehensive loss (28.3) (22.7)
-----------------------------------------------------------------------------------------
Total contributed capital and retained earnings 1,206.9 1,166.3
Less: Treasury stock, at cost, 10,797,610 and
11,122,924 shares, respectively (257.9) (261.0)
-----------------------------------------------------------------------------------------
Total stockholders' equity 949.0 905.3
-------------------------
Total liabilities and stockholders' equity $9,790.9 $9,510.2
=========================
See Notes to Consolidated Financial Statements
2
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
-------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
-------------------------------------------------------
(in millions; except per share data) 2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $ 103.3 $ 74.0 $ 197.5 $ 146.8
Interest and dividends on investment securities:
Taxable interest 17.4 15.6 34.3 31.6
Tax-exempt interest 0.1 0.1 0.4 0.4
Dividends 1.6 1.9 3.0 3.7
Interest on federal funds sold and securities
purchased under agreements to resell 0.2 - 0.3 0.1
--------------------------------------------------------------------------------------------------------------
Total interest income 122.6 91.6 235.5 182.6
-----------------------------------------------------
Interest on deposits 29.9 12.3 52.9 25.5
Interest on short-term borrowings 7.7 3.8 15.5 7.0
Interest on long-term debt 4.9 3.3 9.4 6.1
--------------------------------------------------------------------------------------------------------------
Total interest expense 42.5 19.4 77.8 38.6
-----------------------------------------------------
Net interest income 80.1 72.2 157.7 144.0
Provision for loan losses (3.8) (3.2) (6.9) (8.8)
--------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 76.3 69.0 150.8 135.2
-----------------------------------------------------
NONINTEREST INCOME
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory fees 30.0 26.9 59.7 53.7
Mutual fund fees 4.6 4.9 9.4 10.1
Planning and other services 7.8 5.6 16.9 13.2
--------------------------------------------------------------------------------------------------------------
Total Wealth Advisory Services 42.4 37.4 86.0 77.0
-----------------------------------------------------
Corporate Client Services:
Capital markets services 8.3 8.3 15.9 16.2
Entity management services 5.9 5.4 11.8 10.9
Retirement services 3.2 3.2 6.4 5.9
Cash management services 1.3 1.5 2.6 3.3
--------------------------------------------------------------------------------------------------------------
Total Corporate Client Services 18.7 18.4 36.7 36.3
-----------------------------------------------------
Cramer Rosenthal McGlynn 4.0 2.5 8.3 4.6
Roxbury Capital Management 0.2 0.2 0.5 0.4
--------------------------------------------------------------------------------------------------------------
Advisory fees 65.3 58.5 131.5 118.3
Amortization of affiliate other intangibles (1.0) (0.5) (2.1) (0.8)
--------------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate other intangibles 64.3 58.0 129.4 117.5
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3
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
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(in millions; except per share data) 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 6.7 8.1 13.5 16.3
Loan fees and late charges 1.8 1.2 3.3 2.9
Card fees 2.2 2.3 4.0 4.4
Other noninterest income 1.4 0.6 2.9 1.8
Securities gains - - 0.8 -
-------------------------------------------------------------------------------------------------------
Total noninterest income 76.4 70.2 153.9 142.9
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Net interest and noninterest income 152.7 139.2 304.7 278.1
-----------------------------------------------------
NONINTEREST EXPENSE
Salaries and wages 35.0 32.4 67.9 64.8
Incentives and bonuses 8.0 6.4 16.8 14.7
Employment benefits 11.7 10.0 24.2 20.9
Net occupancy 5.1 5.0 10.8 10.3
Furniture, equipment, and supplies 9.0 7.8 17.5 15.4
Advertising and contributions 2.1 2.8 4.2 4.4
Servicing and consulting fees 2.3 2.6 5.0 5.1
Subadvisor expense 1.7 2.4 4.2 4.5
Travel, entertainment, and training 1.9 2.3 3.6 4.0
Originating and processing fees 2.7 2.0 4.9 4.1
Legal and auditing fees 2.2 1.3 3.7 2.6
Other noninterest expense 7.9 7.4 16.2 14.8
-------------------------------------------------------------------------------------------------------
Total noninterest expense 89.6 82.4 179.0 165.6
-----------------------------------------------------
NET INCOME
Income before income taxes and minority
interest 63.1 56.8 125.7 112.5
Income tax expense 22.6 19.9 45.1 39.6
-------------------------------------------------------------------------------------------------------
Net income before minority interest 40.5 36.9 80.6 72.9
Minority interest 0.1 0.4 0.1 0.8
-------------------------------------------------------------------------------------------------------
Net income $ 40.4 $ 36.5 $ 80.5 $ 72.1
=====================================================
Net income per share:
Basic $ 0.60 $ 0.55 $ 1.19 $ 1.09
=====================================================
Diluted $ 0.59 $ 0.54 $ 1.18 $ 1.07
=====================================================
Weighted average shares outstanding:
Basic 67,618 66,309 67,549 66,234
Diluted 68,387 67,454 68,309 67,474
See Notes to Consolidated Financial Statements
4
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Wilmington Trust Corporation and Subsidiaries
------------------------
For the six months ended
June 30,
------------------------
(in millions) 2005 2004
-------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 80.5 $ 72.1
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 6.9 8.8
Provision for depreciation and other amortization 9.6 9.4
Amortization of other intangible assets 2.6 1.5
Minority interest in net income 0.1 0.8
Amortization of investment securities available for sale
discounts and premiums 2.0 6.9
Deferred income taxes (0.1) (0.7)
Originations of residential mortgages available for sale (43.2) (40.1)
Gross proceeds from sales of residential mortgages 44.0 40.9
Gains on sales of residential mortgages (0.8) (0.8)
Securities gains (0.8) -
Income tax benefit realized on employee exercise of stock
options 0.5 1.0
Decrease in other assets 13.1 11.3
Increase/(decrease) in other liabilities 4.9 (5.8)
----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 119.3 105.3
-------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 32.1 6.7
Proceeds from maturities of investment securities available for sale 321.1 657.3
Proceeds from maturities of investment securities held to maturity 0.2 0.7
Purchases of investment securities available for sale (428.4) (649.3)
Purchases of investment securities held to maturity (0.1) -
Investments in affiliates - (16.3)
Purchases of residential mortgages (7.6) (5.2)
Net increase in loans (286.7) (258.9)
Purchases of premises and equipment (8.4) (26.2)
Dispositions of premises and equipment 0.9 16.8
----------------------------------------------------------------------------------------------------
Net cash used for investing activities (376.9) (274.4)
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5
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
------------------------
For the six months ended
June 30,
------------------------
(in millions) 2005 2004
--------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease)/increase in demand, savings, and interest-bearing
demand deposits (327.9) 118.5
Net increase/(decrease) in certificates of deposit 527.7 (273.4)
Net increase in federal funds purchased and securities sold
under agreements to repurchase 43.3 614.4
Net (decrease)/increase in U.S. Treasury demand (11.7) 15.8
Net decrease in line of credit - (8.0)
Cash dividends (39.6) (36.7)
Distributions to minority shareholders - (0.8)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 9.3 10.6
Payments for common stock acquired through buybacks (1.4) (15.2)
-----------------------------------------------------------------------------------------------
Net cash provided by financing activities 199.7 425.2
-------------------
Effect of foreign currency translation on cash (0.2) -
-------------------
(Decrease)/increase in cash and cash equivalents (58.1) 256.1
Cash and cash equivalents at beginning of period 311.9 214.0
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 253.8 $ 470.1
===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 72.6 $ 41.4
Taxes 44.8 47.0
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 - $ 18.0
Goodwill and other intangible assets acquired 7.3 13.2
-------------------
Fair value of assets acquired 7.3 31.2
Common stock issued - (12.9)
Cash paid - (18.3)
-----------------------------------------------------------------------------------------------
Liabilities assumed $ 7.3 $ -
===================
See Notes to Consolidated Financial Statements
6
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - STOCK-BASED COMPENSATION PLANS
At June 30, 2005, we had three types of stock-based compensation plans, which
are described in Note 18, "Stock-based compensation, which begins on page 80 of
our 2004 Annual Report to Shareholders.
In accounting for these plans, we apply Accounting Principles Board (APB)
Opinion No. 25 and related interpretations. If we had used the methods outlined
in Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," we would have used the fair value of stock-based
compensation at the date awards were granted under these plans as the basis for
determining the compensation cost of these plans. Had we followed SFAS No. 123,
our net income would have been as follows:
--------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
--------------------------------------------------------
(in millions, except per share amounts) 2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------
Net income:
As reported $ 40.4 $ 36.5 $ 80.5 $ 72.1
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1.9) (1.9) (2.8) (2.6)
-------------------------------------------------------------------------------------------------------
Pro forma net income $ 38.5 $ 34.6 $ 77.7 $ 69.5
Basic earnings per share:
As reported $ 0.60 $ 0.55 $ 1.19 $ 1.09
Pro forma 0.57 0.52 1.15 1.05
Diluted earnings per share:
As reported $ 0.59 $ 0.54 $ 1.18 $ 1.07
Pro forma 0.56 0.51 1.14 1.03
In addition, we made grants of restricted stock to certain employees. We
amortize the value of these awards into compensation expense over the applicable
vesting period and we record forfeitures as they are incurred. During the
restriction period, award recipients have the rights of stockholders, including
the right to vote and receive cash dividends, but they cannot transfer
ownership. Expenses in connection with restricted stock awards were as follows:
--------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
--------------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------
Restricted stock award expense (in millions) $ 0.1 $ 0.0 $ 0.2 $ 0.1
7
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
NOTE 2 - ACCOUNTING AND REPORTING POLICIES
We have prepared the accompanying consolidated financial statements in
accordance with generally accepted accounting principles (GAAP) in the United
States, and with practices generally accepted within the banking industry. The
information for interim periods is unaudited, and includes all adjustments of a
normal recurring nature which we believe are necessary for fair presentation. We
have reclassified certain prior-year amounts to conform to the current-year
presentation.
The accompanying consolidated financial statements include, after elimination of
material intercompany balances and transactions, the accounts of Wilmington
Trust Corporation (Corporation); Wilmington Trust Company (WTC); Wilmington
Trust of Pennsylvania; Wilmington Trust FSB; WT Investments, Inc. (WTI); Rodney
Square Management Corporation; Wilmington Trust (UK) Limited; Wilmington Trust
Investment Management, LLC; GTBA Holdings, Inc.; and WTC's subsidiaries.
Preparing financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities; 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 in this report should be
read in conjunction with the "Notes to Consolidated Financial Statements" in our
2004 Annual Report to Shareholders.
NOTE 3 - COMPREHENSIVE INCOME
The following table depicts other comprehensive income as required by SFAS No.
130:
------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
------------------------------------------------------
(in millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Net income $ 40.4 $ 36.5 $ 80.5 $ 72.1
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities 11.9 (24.8) (4.7) (17.2)
Reclassification adjustment for securities gains
included in net income - - (0.5) -
Net unrealized holding gains arising during the
period on derivatives used for cash flow hedge (0.1) - - -
Reclassification adjustment for derivative gains
included in net income - (0.1) (0.1) (0.1)
Foreign currency translation adjustments (0.2) - (0.3) (0.1)
--------------------------------------------------
Total comprehensive income $ 52.0 $ 11.6 $ 74.9 $ 54.7
==================================================
8
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
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 six months ended
June 30, June 30,
------------------------------------------------------
(in millions; except per share data) 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 40.4 $ 36.5 $ 80.5 $ 72.1
----------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 67.6 66.3 67.5 66.2
----------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 0.8 1.2 0.8 1.3
----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 68.4 67.5 68.3 67.5
----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.60 $ 0.55 $ 1.19 $ 1.09
==========================================================================================================
Diluted earnings per share $ 0.59 $ 0.54 $ 1.18 $ 1.07
==========================================================================================================
Cash dividends per share $ 0.30 $ 0.285 $ 0.585 $ 0.555
The number of anti-dilutive stock options excluded was 1.0 and 1.1 million for
the three- and six-month periods ended June 30, 2005. The number of
anti-dilutive stock options excluded was 1.0 million for the three- and
six-month periods ended June 30, 2004.
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. The fourth segment
combines the results from our affiliate money managers, Cramer Rosenthal McGlynn
(CRM) and Roxbury Capital Management (RCM).
The Regional Banking segment includes lending, deposit taking, and branch
banking in our primary banking markets of Delaware, southeastern Pennsylvania,
and Maryland. 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 (WAS) 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. We
provide WAS services to clients throughout the United States and around the
world.
The Corporate Client Services (CCS) segment includes a variety of trust,
custody, and administrative services that support capital markets transactions,
entity management, and retirement plan assets. We provide CCS services to
clients around the world.
The Affiliate Money Managers segment represents the combined contributions from
CRM and RCM. These contributions are based on our partial ownership interest in
each firm. Services provided by these two affiliates include fixed-income and
equity investing services and investment portfolio management services. Neither
CRM's nor RCM's results are consolidated in our financial statements.
9
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
The segment reporting methodology employs activity-based costing principles to
assign corporate overhead expenses to each segment. Funds transfer pricing
concepts are used to credit and charge segments for funds provided and funds
used.
The accounting policies of the segments are the same as those described in Note
1, "Summary of significant accounting policies," which begins on page 60 of our
2004 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 June 30, 2005, and June 30,
2004:
----------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended June 30, 2005 (in millions) Banking Services Services Managers Totals
----------------------------------------------------------------------------------------------------------
Net interest income $ 74.8 $ 5.4 $ 2.2 $ (2.3) $ 80.1
Provision for loan losses (3.8) - - - (3.8)
---------------------------------------------------------------------------------------------------------
Net interest income after provision 71.0 5.4 2.2 (2.3) 76.3
Advisory fees:
Wealth Advisory Services 0.5 39.7 2.2 - 42.4
Corporate Client Services 0.2 - 18.5 - 18.7
Affiliate Money Managers - - - 4.2 4.2
---------------------------------------------------------------------------------------------------------
Advisory fees 0.7 39.7 20.7 4.2 65.3
Amortization of other intangibles - (0.6) (0.2) (0.2) (1.0)
---------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.7 39.1 20.5 4.0 64.3
Other noninterest income 11.5 0.3 0.3 - 12.1
---------------------------------------------------------------------------------------------------------
Net interest and noninterest income 83.2 44.8 23.0 1.7 152.7
Noninterest expense (36.3) (34.6) (18.7) - (89.6)
---------------------------------------------------------------------------------------------------------
Segment profit before income taxes 46.9 10.2 4.3 1.7 63.1
Applicable income taxes and minority interest 16.3 3.8 1.6 1.0 22.7
---------------------------------------------------------------------------------------------------------
Segment net income $ 30.6 $ 6.4 $ 2.7 $ 0.7 $ 40.4
=========================================================================================================
Depreciation and amortization $ 3.4 $ 2.3 $ 1.2 $ 0.2 $ 7.1
10
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
---------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended June 30, 2004 (in millions) Banking Services Services Managers Totals
---------------------------------------------------------------------------------------------------------
Net interest income $ 65.0 $ 6.1 $ 2.2 $ (1.1) $ 72.2
Provision for loan losses (3.1) (0.1) - - (3.2)
---------------------------------------------------------------------------------------------------------
Net interest income after provision 61.9 6.0 2.2 (1.1) 69.0
Total advisory fees:
Wealth Advisory Services 0.4 34.8 2.2 - 37.4
Corporate Client Services 0.2 - 18.2 - 18.4
Affiliate Money Managers - - - 2.7 2.7
---------------------------------------------------------------------------------------------------------
Advisory fees 0.6 34.8 20.4 2.7 58.5
Amortization of other intangibles - (0.2) (0.1) (0.2) (0.5)
---------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.6 34.6 20.3 2.5 58.0
Other noninterest income 10.5 1.4 0.3 - 12.2
---------------------------------------------------------------------------------------------------------
Net interest and noninterest income 73.0 42.0 22.8 1.4 139.2
Noninterest expense (35.2) (31.5) (15.7) - (82.4)
---------------------------------------------------------------------------------------------------------
Segment profit before income taxes 37.8 10.5 7.1 1.4 56.8
Applicable income taxes and minority interest 12.9 4.0 2.7 0.7 20.3
---------------------------------------------------------------------------------------------------------
Segment net income $ 24.9 $ 6.5 $ 4.4 $ 0.7 $ 36.5
=========================================================================================================
Depreciation and amortization $ 5.4 $ 1.8 $ 1.5 $ 0.2 $ 8.9
11
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
---------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Year-to-Date June 30, 2005 (in millions) Banking Services Services Managers Totals
---------------------------------------------------------------------------------------------------------
Net interest income $ 146.3 $ 10.9 $ 4.9 $ (4.4) $ 157.7
Provision for loan losses (6.6) (0.3) - - (6.9)
---------------------------------------------------------------------------------------------------------
Net interest income after provision 139.7 10.6 4.9 (4.4) 150.8
Total advisory fees:
Wealth Advisory Services 0.9 80.6 4.5 - 86.0
Corporate Client Services 0.4 - 36.3 - 36.7
Affiliate Money Managers - - - 8.8 8.8
---------------------------------------------------------------------------------------------------------
Advisory fees 1.3 80.6 40.8 8.8 131.5
Amortization of other intangibles - (1.4) (0.4) (0.3) (2.1)
---------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 1.3 79.2 40.4 8.5 129.4
Other noninterest income 22.4 0.6 0.7 - 23.7
Securities gains 0.8 - - - 0.8
---------------------------------------------------------------------------------------------------------
Net interest and noninterest income 164.2 90.4 46.0 4.1 304.7
Noninterest expense (72.0) (71.0) (36.0) - (179.0)
---------------------------------------------------------------------------------------------------------
Segment profit before income taxes 92.2 19.4 10.0 4.1 125.7
Applicable income taxes and minority interest 32.4 7.0 3.7 2.1 45.2
---------------------------------------------------------------------------------------------------------
Segment net income $ 59.8 $ 12.4 $ 6.3 $ 2.0 $ 80.5
=========================================================================================================
Depreciation and amortization $ 6.8 $ 4.6 $ 2.4 $ 0.4 $ 14.2
Investment in equity method investees - - - 254.6 254.6
Segment average assets 7,807.6 1,295.9 181.5 260.2 9,545.2
12
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
-----------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Year-to-Date June 30, 2004 (in millions) Banking Services Services Managers Totals
-----------------------------------------------------------------------------------------------------------
Net interest income $ 128.9 $ 12.8 $ 4.8 $ (2.5) $ 144.0
Provision for loan losses (8.5) (0.3) - - (8.8)
----------------------------------------------------------------------------------------------------------
Net interest income after provision 120.4 12.5 4.8 (2.5) 135.2
Total advisory fees:
Wealth Advisory Services 0.9 71.4 4.7 - 77.0
Corporate Client Services 0.5 - 35.8 - 36.3
Affiliate Money Managers - - - 5.0 5.0
----------------------------------------------------------------------------------------------------------
Advisory fees 1.4 71.4 40.5 5.0 118.3
Amortization of other intangibles - (0.3) (0.3) (0.2) (0.8)
----------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 1.4 71.1 40.2 4.8 117.5
Other noninterest income 23.0 1.7 0.7 - 25.4
----------------------------------------------------------------------------------------------------------
Net interest and noninterest income 144.8 85.3 45.7 2.3 278.1
Noninterest expense (69.5) (65.0) (31.1) - (165.6)
----------------------------------------------------------------------------------------------------------
Segment profit before income taxes 75.3 20.3 14.6 2.3 112.5
Applicable income taxes and minority interest 26.0 7.8 5.5 1.1 40.4
----------------------------------------------------------------------------------------------------------
Segment net income $ 49.3 $ 12.5 $ 9.1 $ 1.2 $ 72.1
==========================================================================================================
Depreciation and amortization $ 10.9 $ 3.7 $ 2.9 $ 0.3 $ 17.8
Investment in equity method investees - - - 254.1 254.1
Segment average assets 7,361.3 1,148.5 205.6 242.2 8,957.6
Segment data for prior periods may differ from previously published figures due
to changes in reporting methodology and/or organizational structure.
NOTE 6 - DERIVATIVE AND HEDGING ACTIVITIES
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. We also have used interest rate swaps in conjunction
with our issues of subordinated long-term debt.
We do not hold or issue derivative financial instruments for trading purposes.
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts. Floors are contracts that generate interest payments to us
that are based on the difference between the floating-rate index and a
predetermined strike rate of the specific floor when the index is below the
strike rate. When the index is equal to or above the strike rate, we do not
receive or make any payments.
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.
13
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
At June 30, 2005, we had entered into a total of $1,099.4 million notional
amount of interest rate swaps as follows: $362.2 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,
$362.2 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.
We record changes in fair value that are determined to be ineffective in "Other
noninterest income" in the Consolidated Statements of Income. We record the
effective portion of the change in fair value in "Other comprehensive income" in
the Consolidated Statements of Condition.
For the second quarter of 2005, we reclassified to earnings approximately
$77,100 of gains, which resulted from our sale of interest rate floors in 2001.
During the remainder of 2005, we expect to reclassify approximately $26,764 of
gains in "Accumulated other comprehensive income" to earnings. This amortization
period ends in August 2005.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes goodwill and other intangible assets.
--------------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount amortization amount amount amortization amount
--------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $ 373.4 $ 29.8 $ 343.6 $ 366.8 $ 29.8 $ 337.0
=======================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 8.5 $ 5.4 $ 3.1 $ 8.0 $ 4.9 $ 3.1
Client lists 42.9 9.8 33.1 43.2 7.7 35.5
Acquisition costs 1.7 1.7 - 1.7 1.7 -
Other intangibles 0.7 0.7 - 0.7 0.7 -
Nonamortizing
Other intangible assets 5.2 - 5.2 5.2 - 5.2
--------------------------------------------------------------------------------------------------------
Total other intangibles $ 59.0 $ 17.6 $ 41.4 $ 58.8 $ 15.0 $ 43.8
=======================================================================
The amortization expense of other intangible assets for the three and six months
ended June 30 was as follows:
----------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
----------------------------------------------------------
(in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------
Amortization expense $1.3 $0.8 $2.6 $1.5
14
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
The estimated amortization expense of other intangible assets for each of the
next five fiscal years is as follows:
Estimated annual amortization expense (in millions)
-------------------------------------------------------------------------
For the year ended December 31, 2006 $4.9
For the year ended December 31, 2007 $4.6
For the year ended December 31, 2008 $3.6
For the year ended December 31, 2009 $3.2
For the year ended December 31, 2010 $2.8
Changes in the carrying amount of goodwill by business segment for the six
months ended June 30 were as follows:
2005
--------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(in millions) Banking Services Services Managers Total
-------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2005 $ 3.8 $ 84.3 $ 10.3 $ 238.6 $337.0
Goodwill acquired - - 7.3 - 7.3
Decrease in carrying value due to foreign
currency translation adjustments - - (0.7) - (0.7)
-------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2005 $ 3.8 $ 84.3 $ 16.9 $ 238.6 $343.6
==============================================================
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 - 13.2 - 12.3 25.5
Increase in carrying value due to foreign
currency translation adjustments - - - - -
-------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2004 $ 3.8 $ 17.6 $ 7.8 $ 239.5 $268.7
==============================================================
The goodwill acquired in 2005 consists of:
- $7.3 million of deferred payments associated with the acquisition of SPV
Management recorded under Corporate Client Services.
The goodwill acquired in 2004 consists of:
- $12.9 million recorded under Wealth Advisory Services in connection with
the payment of a portion of the purchase price for our interest in
Balentine Delaware Holding Company, LLC.(1)
- $0.3 million recorded under Wealth Advisory Services in connection with
Balentine Delaware Holding Company, LLC's acquisition of the remaining
interests in Balentine & Company of Tennessee, LLC.(1)
- $12.3 million recorded under Affiliate Money Managers in connection with
an increase in WTI's equity interest in Cramer Rosenthal McGlynn.
(1) In January 2005, the Balentine name was changed to Wilmington Trust
Investment Management, LLC.
15
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
The following table lists other intangible assets acquired during the six months
ended June 30.
2005 2004
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 $ 0.5 - 8 $ 0.5 - 8
Client lists - - 5.6 - 20
Client list (decrease)/
increase in carrying value
due to foreign currency
translation adjustments (0.3) - 0.1 -
---------------------- ---------------------
$ 0.2 - $ 6.2 -
====================== =====================
NOTE 8 - COMPONENTS OF NET PERIODIC BENEFIT COST
The following tables present the net periodic benefit cost of the pension plan,
supplemental executive retirement plan (SERP), and other postretirement benefits
for the three and six months ended June 30. Descriptions of these plans are
contained in Note 17, "Pension and other postretirement benefits," which begins
on page 77 of our 2004 Annual Report to Shareholders.
Postretirement
Pension benefits SERP benefits benefits
-----------------------------------------------------------------------
For the three months ended
June 30, 2005 (in millions) 2005 2004 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 1.8 $ 1.6 $ 0.2 $ 0.1 $ 0.2 $ 0.3
Interest cost 2.6 2.1 0.3 0.3 0.6 0.6
Expected return on plan assets (3.1) (2.8) - - - -
Amortization of transition
obligation/(asset) - (0.2) - - - -
Amortization of prior service cost 0.2 0.2 0.1 0.1 - -
Recognized actuarial (gain)/loss 0.4 0.2 0.1 0.1 0.1 0.2
----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1.9 $ 1.1 $ 0.7 $ 0.6 $ 0.9 $ 1.1
=======================================================================
Employer contributions $ - $ - $ 0.2 $ 0.1 $ 1.1 $ 0.9
16
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
Postretirement
Pension benefits SERP benefits benefits
-----------------------------------------------------------------------
For the six months ended
June 30, 2005 (in millions) 2005 2004 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 3.6 $ 3.1 $ 0.4 $ 0.3 $ 0.4 $ 0.5
Interest cost 5.2 4.4 0.7 0.5 1.1 1.4
Expected return on plan assets (6.2) (5.6) - - - -
Amortization of transition
obligation/(asset) - (0.4) - - - -
Amortization of prior service cost 0.4 0.4 0.2 0.2 - -
Recognized actuarial (gain)/loss 0.8 0.4 0.2 0.2 0.3 0.3
----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 3.8 $ 2.3 $ 1.5 $ 1.2 $ 1.8 $ 2.2
=======================================================================
Employer contributions $ - $ - $ 0.3 $ 0.2 $ 2.1 $ 1.9
Expected annual contribution $ - $ 0.6 $ 4.3
In 2004 we adopted the provisions of the Medicare Prescription Drug Improvement
and Modernization Act of 2003, which provides a subsidy for the prescription
drug benefit available under our postretirement health care plan. Adopting the
provisions of the Act reduced our expense for this benefit by $0.9 million for
the fourth quarter of 2004.
NOTE 9 - TEMPORARILY IMPAIRED INVESTMENT SECURITIES
When the market value of securities in our investment portfolio falls below
their book value, we classify them as temporarily impaired, and report an
unrealized loss. The unrealized loss is the difference between the book value
and the market value of the securities.
Long-term market interest rates and the yield curve are key determinants of the
market value of temporarily impaired securities. A rise in long-term rates
typically causes the market value of these securities to decline. When their
market value declines, the unrealized loss increases. Conversely, a decline in
long-term rates typically causes the market value of these securities to
increase. As their market value rises, the unrealized loss diminishes or
disappears.
We consider these impairments temporary because we hold the securities until
maturity, at which point their market value equals par value. Par value is the
amount that is assigned to a security at the time of initial investment.
We retain temporarily impaired securities because, in addition to their known
maturities, they have no credit delinquencies and they generate strong cash
flows.
The primary risk associated with temporarily impaired securities is interest
rate risk. An extended period of increases in long-term rates could further
reduce the market value of fixed income securities, and create additional
unrealized losses.
17
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
The following table shows the estimated market value and gross unrealized loss
of debt and marketable equity securities that were temporarily impaired as of
June 30, 2005.
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 June 30, 2005
Other securities:
U.S. Treasury and
government agencies $ 267.3 $ (1.2) $ 68.0 $ (1.0) $ 335.3 $ (2.2)
Preferred stock 42.6 (0.6) 0.9 (0.1) 43.5 (0.7)
Mortgage-backed securities 370.7 (2.0) 467.4 (9.9) 838.1 (11.9)
Other debt securities 116.5 (1.6) 33.7 (0.6) 150.2 (2.2)
--------------------------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $ 797.1 $ (5.4) $ 570.0 $ (11.6) $ 1,367.1 $ (17.0)
============================================================================
NOTE 10 - ACCOUNTING PRONOUNCEMENTS
Following are recent accounting pronouncements that affect our financial
condition and results of operations.
SFAS No. 123 (revised): On December 17, 2004, the FASB issued SFAS No. 123
(revised), "Share-Based Payment," which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation." The new pronouncement is similar in
approach to Statement No. 123, but it requires us to recognize the fair value of
all share-based payments to employees in our financial statements. Based on a
rule promulgated by the Securities and Exchange Commission on April 14, 2005,
this Statement will be effective for us beginning in the first quarter of 2006,
and will cause us to record additional expense in our income statement. We
expect the annual cost of SFAS No. 123 (revised) to approximate the pro forma
amounts shown in Note 1, "Stock-based compensation plans." We currently 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, "Accounting for Stock-Based Compensation - Transition and
Disclosure," and have reported the pro forma impact of this Statement in Note 1
of the accompanying financial statements.
SFAS No. 154: In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3." SFAS No. 154 changes the accounting for and reporting of a voluntary change
in accounting principle and replaces APB Opinion No. 20 and SFAS No. 3. Under
Opinion No. 20, most changes in accounting principle were reported in the income
statement of the period of change as a cumulative adjustment. However, under
SFAS No. 154, a voluntary change in accounting principle must be shown
retrospectively in the financial statements, if practicable, for all periods
presented. In cases where retrospective application is impracticable, an
adjustment to the assets and liabilities and a corresponding adjustment to
retained earnings can be made as of the beginning of the earliest period for
which retrospective application is practicable rather than being reported in the
income statement.
18
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPANY OVERVIEW
Wilmington Trust Corporation (the Corporation) is (we are) a Delaware
corporation and a financial holding company under the Bank Holding Company Act.
We are a relationship management company that helps clients increase and
preserve their wealth. We do this by engaging in fiduciary, wealth management,
investment advisory, financial planning, insurance, and broker-dealer services;
and lending and deposit-taking activities.
We manage our company through three businesses, each of which targets specific
types of clients, provides different kinds of services, and has a different
geographic scope:
Regional Banking
We offer Regional Banking services throughout the Delaware Valley region, which
we define as the state of Delaware; areas that are geographically adjacent to
Delaware along the I-95 corridor from Princeton, New Jersey, to Baltimore,
Maryland; and Maryland's Eastern Shore. We offer commercial banking services
throughout this region, and target family-owned or closely held businesses with
annual sales of up to $250 million. We target our retail banking activities to
clients in the state of Delaware.
Our lending services include commercial loans, commercial and residential
mortgages, and construction and consumer loans. Our deposit products include
demand checking, certificates of deposit, negotiable order of withdrawal
accounts, and various savings and money market accounts.
Corporate Client Services
This business serves national and multinational institutions with a variety of
trust, custody, and administrative services that support capital markets
transactions, entity management, and retirement plans.
The capital markets component of this business provides services that support
structured finance transactions like securitizations and leveraged leases.
The entity management component helps clients establish "nexus," or legal
presence, in jurisdictions in the United States, Caribbean, and Europe with
favorable legal and tax considerations.
The retirement services component provides trust and custodian services for
retirement plans.
Wealth Advisory Services
This business serves high-net-worth clients in all 50 states. It offers
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.
The investment services we offer feature a combination of proprietary and
independent advisors; forward-looking asset allocation; a blend of active and
index funds; and tactical rebalancing.
Our planning services help high-net-worth individuals and families preserve and
protect their wealth; minimize taxes; transfer wealth to future generations;
support charitable endeavors; and manage their business affairs.
Because we actively seek to deepen our client relationships to the fullest
extent possible, many of our clients use services from two and, in some cases,
all three of these businesses.
We provide our services through various legal entities and subsidiaries that we
own wholly or in part. Our primary wholly owned subsidiary is Wilmington Trust
Company (WTC), a Delaware-chartered bank and trust company that was formed in
1903. At June 30, 2005, WTC had 44 branch offices in Delaware - more than any
other bank in Delaware.
19
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
We own two other depository institutions through which we conduct business in
the United States outside of Delaware:
- Wilmington Trust of Pennsylvania (WTPA), a Pennsylvania-chartered
bank and trust company. WTPA has four offices: one each in center
city Philadelphia, Doylestown, Villanova, and West Chester,
Pennsylvania.
- Wilmington Trust FSB (WTFSB), a federally chartered savings bank and
registered investment advisor, through which we conduct business
from two offices in California, four offices in Florida, two offices
in Maryland, and one office each in Georgia, Nevada, New Jersey, and
New York.
We also own two other registered investment advisors:
- Rodney Square Management Corporation (RSMC), which oversees the
Wilmington family of mutual funds; and
- Wilmington Trust Investment Management, LLC (WTIM), which sets our
investment and asset allocation policies, and selects the
independent asset managers we use in our investment consulting
services. WTIM was known as Balentine & Company, LLC, prior to
January 2005.
We also own three investment holding companies:
- WT Investments, Inc. (WTI), which holds interests in four asset
management firms, including our money manager affiliates, Cramer
Rosenthal McGlynn, LLC (CRM) and Roxbury Capital Management, LLC
(RCM);
- Wilmington Trust (UK) Limited (WTL), through which we conduct
business outside the United States through SPV Management and its
subsidiaries; and
- GTBA Holdings, Inc. (GTBAH), through which we offer business
management and family office services for high-net-worth clients
through GTBAH's subsidiary, Grant Tani Barash & Altman, LLC (GTBA).
In addition to the locations noted above, we and our affiliates have offices in
the Cayman Islands, the Channel Islands, Dublin, Ireland, and London, England,
and other affiliates in Milan, Italy.
We compete for deposits, loans, assets under management, and the opportunity to
provide trust, brokerage, and other services related to financial planning and
management. Our competitors include other trust companies, full-service banks,
deposit-taking institutions, mortgage lenders, credit card issuers, credit
acceptance corporations, securities dealers, asset managers, investment
advisors, mutual fund companies, insurance companies, and other financial
institutions.
We are subject to the regulations of, and undergo periodic examinations by, the
Federal Reserve Bank, Federal Deposit Insurance Corporation, Office of Thrift
Supervision, Delaware Department of Banking, Pennsylvania Department of Banking,
and other federal and state regulatory agencies.
When we discuss our businesses, we report income and assets from CRM and RCM
separately. For meeting the requirements of segment reporting, we combine
results from CRM and RCM into one segment. For more information about segment
reporting, please refer to Note 5, "Segment reporting," in this report.
SUMMARY OF RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005
Revenue growth in each of our businesses, strong credit quality, expense
management, and rising market interest rates influenced our results for the
second quarter of 2005. Net income for the quarter was $40.4 million and
earnings per share were $0.59 (on a diluted basis). These were increases of 11%
and 9%, respectively, from the year-ago second quarter. Specific factors that
influenced our 2005 second quarter results included:
- Year-over-year loan growth of 8%, with period-end balances exceeding $7.0
billion;
- Improvement of 14 basis points from June 30, 2004, in the net interest
margin, which rose to 3.66%;
- Strong credit quality, with net charge-offs of 3 basis points and an
internal rating of "pass" for 97% of the loan portfolio;
- A year-over-year increase of 11% in net interest income, which rose to
$76.3 million (after the provision for loan losses);
20
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
- A year-over-year increase of 12% in Wealth Advisory Services revenue, most
of which came from core trust and investment advisory fees;
- A slight increase in Corporate Client Service revenue, although the
capital markets environment remained challenging;
- Growth in assets under management at value-style affiliate money manager
CRM that continued to surpass previous records and generate higher
revenue;
- Revenue from service charges on deposit accounts, which stabilized after a
five-quarter trend of declines; and
- A slowdown in the pace of growth in operating expenses.
Second quarter results extended the momentum begun in the first quarter, and
brought net income for the first six months of 2005 to $80.5 million and
earnings per share to $1.18 (on a diluted basis). These were increases of 12%
and 10%, respectively.
In other activity during the second quarter, we:
- Announced the acquisition of Charleston Captive Management Company, which
is detailed in the discussion of the Corporate Client Services business;
- Continued to integrate GTBA's expertise in family office management into
our services for high-net-worth-clients;
- Continued to consolidate our asset management activities under Wilmington
Trust Investment Management;
- Broke ground on a new branch office in Middletown, Delaware, which will be
our second branch in that rapidly growing part of our home state;
- Began construction on a new Pennsylvania regional headquarters in
Villanova; and
- Completed renovations of our branch offices in West Chester and
Doylestown, Pennsylvania.
STATEMENT OF CONDITION
This section discusses the changes in our balance sheet between December 31,
2004, and June 30, 2005. We present amounts as of June 30, 2004, for historical
reference. All balances cited are period-end balances unless otherwise noted.
ASSETS
As the following table shows, loans comprised the majority of our assets, and
accounted for most of the growth. The amount of goodwill increased because of
our acquisitions of GTBA and the minority interest in Balentine.
ASSET BALANCES (IN MILLIONS) AT 6/30/05 AT 12/31/04 AT 6/30/04
---------------------------------------------------------------------------------------------------------------
Investment securities $ 1,879.1 $ 1,813.3 $ 1,830.2
Loans 7,053.1 6,763.0 6,483.2
Other 607.5 686.6 800.0
Reserve for loan losses (92.4) (89.7) (92.5)
Goodwill 343.6 337.0 268.7
Total assets $ 9,790.9 $ 9,510.2 $9,289.6
---------------------------------------------------------------------------------------------------------------
Loans continued to comprise the majority of our earning assets, which rose 3.5%.
Earning assets comprise loans before the reserve for loan losses is subtracted;
investment securities; and federal funds sold and securities purchased under
agreements to resell.
COMPOSITION OF EARNING ASSETS AT 6/30/05 AT 12/31/04 AT 6/30/04
------------------------------------------------------------------------------------------------------------------
Total earning assets (in millions) $ 8,943.9 $ 8,639.6 $ 8,390.9
% represented by loans 78.9% 78.3% 77.3%
% represented by investment securities 21.0% 21.0% 21.8%
% represented by other 0.1% 0.7% 0.9%
-----------------------------------------------------------------------------------------------------------------
21
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
INVESTMENT SECURITIES PORTFOLIO
The investment securities portfolio increased by $65.8 million, mainly because
we increased our investment in U.S. treasury and government agency securities.
On a percentage basis, the composition of the portfolio remained relatively
unchanged.
COMPOSITION OF INVESTMENT SECURITIES PORTFOLIO AT 6/30/05 AT 12/31/04 AT 6/30/04
----------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 30% 34% 37%
Collateralized mortgage obligations 18% 17% 15%
U.S. treasuries 6% 8% 11%
Corporate issues 17% 16% 14%
U.S. government agencies 21% 17% 13%
Money market preferred stocks 5% 5% 6%
Municipal bonds 1% 1% 1%
Other 2% 2% 3%
----------------------------------------------------------------------------------------------------------------
Almost all of the mortgage-backed securities we held at June 30, 2005, 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, rather than by retaining individual residential mortgage loans on
our balance sheet. It is our practice to sell most newly originated fixed-rate
residential mortgage loans into the secondary market.
The following tables compare average life and duration in the portfolio.
AVERAGE LIFE IN THE INVESTMENT SECURITIES PORTFOLIO (IN YEARS) AT 6/30/05 AT 12/31/04 AT 6/30/04
--------------------------------------------------------------------------------------------------------------------
Mortgage-backed instruments 3.45 3.96 4.67
Total portfolio 5.69 6.41 6.67
--------------------------------------------------------------------------------------------------------------------
AVERAGE DURATION IN THE INVESTMENT SECURITIES PORTFOLIO (IN YEARS) AT 6/30/05 AT 12/31/04 AT 6/30/04
--------------------------------------------------------------------------------------------------------------------
Mortgage-backed instruments 2.98 3.72 4.54
Total portfolio 2.39 2.66 3.07
--------------------------------------------------------------------------------------------------------------------
Compared with December 31, 2005, the percentage of mortgage-backed instruments
in the portfolio was slightly smaller, and the percentage of short-duration
corporate securities was slightly higher. These minor changes in the portfolio's
composition, coupled with lower market interest rates, tighter credit spreads,
and the flattening of the yield curve, caused the decreases in average life and
duration.
LOANS
Loan balances rose for the 17th consecutive quarter and exceeded $7.0 billion at
June 30, 2005. This was 4% more than at the end of 2004 and 9% more than at June
30, 2004. The growth was more balanced between the commercial and consumer
portfolios than in recent quarters, with consumer loans accounting for nearly
40% of the year-over-year growth in total loan balances. This is noteworthy
because we conduct commercial lending activities throughout the Delaware Valley
region, while our retail lending is primarily in the state of Delaware.
-----------------------------------------------------------------------------------------------------------------
PERIOD-END LOAN BALANCES (IN MILLIONS) AT 6/30/05 AT 12/31/04 AT 6/30/04
-----------------------------------------------------------------------------------------------------------------
Commercial loans $ 4,665.7 $ 4,487.4 $ 4,300.4
Retail loans 2,387.4 2,275.6 2,182.8
Total loans $ 7,053.1 $ 6,763.0 $ 6,483.2
-----------------------------------------------------------------------------------------------------------------
22
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
More than half of our loan growth for the first six months of 2005 came from
Delaware, which demonstrated our ability to leverage our leadership of the
Delaware market. According to reports published by the Federal Deposit Insurance
Corporation, Wilmington Trust's loan and deposit balances exceed those of any
other full-service bank in Delaware.
We also continued to expand our banking business in other parts of the region.
Loans from the southeastern Pennsylvania market accounted for approximately 40%
of the year-over-year growth in total loans. At June 30, 2005, the size of the
Pennsylvania portfolio exceeded $1.5 billion. In addition, some of the largest
new loans we booked during the second quarter of 2005 were for projects in
Maryland and New Jersey.
Although this section discusses balances on a period-end basis, we present
average balances in the table below as a point of comparison. We believe that
average balances, rather than period-end balances, offer a better measure of
trends in our Regional Banking business. For more detail on average balances,
please refer to the "Quarterly Analysis of Earnings" section of this report.
LOAN BALANCES, ON AVERAGE (IN MILLIONS) 2005 FIRST HALF 2004 FULL YEAR 2004 FIRST HALF
--------------------------------------------------------------------------------------------------------------------
Commercial loans $4,559.2 $4,274.8 $4,209.4
Retail loans 2,295.3 2,195.6 2,155.0
Total loans $6,854.5 $6,470.4 $6,364.4
-------------------------------------------------------------------------------------------------------------------
A primary factor in our ability to generate loan growth is the economic
environment throughout the Delaware Valley. For a detailed discussion on the
economic dynamics in this region, please refer to the "Quantitative and
qualitative disclosures about market risk" section of this report.
COMMERCIAL LOANS
Between December 31, 2004, and June 30, 2005, the commercial loan portfolio
increased $178.3 million, or more than 4%. Real estate lending remained brisk,
and accounted for much of the year-over-year increase, and most of the increase
since the beginning of 2005, in total commercial loans.
PERIOD-END COMMERCIAL LOANS (IN MILLIONS) AT 6/30/05 AT 12/31/04 AT 6/30/04
-------------------------------------------------------------------------------------------------------------------
Commercial and industrial (C&I) $2,508.4 $2,505.2 $2,408.7
Commercial real estate/construction (CRE) 900.9 735.4 695.9
Commercial mortgage 1,256.4 1,246.8 1,195.8
Total commercial loans $4,665.7 $4,487.4 $4,300.4
-------------------------------------------------------------------------------------------------------------------
Most of the real estate lending in the second quarter and first half of 2005 was
for single-family residential projects, and was spread among projects in
Delaware, southeastern Pennsylvania, the Baltimore area, and southern New
Jersey. The Delaware activity reflected population growth in our home state. The
Maryland activity reflected the efforts of the commercial lenders we added in
our Baltimore office during the second half of 2004. The southern New Jersey
activity reflected the fact that we served more commercial banking clients in
that market, which is a logical extension of our commercial banking regional
footprint.
We continued to apply our disciplined underwriting standards to commercial real
estate (CRE) loans. Our target size for CRE loans is $1 million to $10 million,
with a $15 million limit. We place maximum terms of two years on unimproved land
and three years on development loans, which means that approximately 33% of our
total residential project outstandings are repaid in any given year. Most of the
residential construction projects we fund are for primary residences, including
the projects we fund at the beach resort areas in our region.
Net charge-offs of CRE loans have been zero in six of the past 10 years. For
more detail about our credit quality, please refer to the "Asset quality"
section of this report.
23
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
RETAIL LOANS
Between December 31, 2004, and June 30, 2005, the retail loan portfolio
increased $111.8 million, or nearly 5%. More than 80% of this growth occurred in
the consumer portfolio.
In our retail loan portfolio, residential mortgage and consumer loan balances
primarily reflect Regional Banking activity in the state of Delaware. Loans
secured with liquid collateral are extended mainly to Wealth Advisory clients
throughout the United States, and changes in their balances reflect client
demand.
-------------------------------------------------------------------------------------------------------------------
PERIOD-END RETAIL LOANS (IN MILLIONS) AT 6/30/05 AT 12/31/04 AT 6/30/04
-------------------------------------------------------------------------------------------------------------------
Residential mortgage $ 444.5 $ 431.3 $ 447.6
Consumer 1,332.4 1,239.6 1,132.1
Secured with liquid collateral 610.5 604.7 603.1
Total retail loans $ 2,387.4 $ 2,275.6 $ 2,182.8
-------------------------------------------------------------------------------------------------------------------
The increase in residential mortgage balances during the first half of 2005 was
due mainly to activity during the second quarter. Residential mortgage balances
at June 30, 2005, were $16.2 million higher than at March 31, 2005. This
linked-quarter growth marked the first increase in residential mortgage balances
since the third quarter of 2000.
In recent years, our residential mortgage balances have declined steadily. This
trend is evident in the table above, which shows balance declines year-over-year
as well as between June 30, 2004, and December 31, 2004. These decreases are
largely by design. Although prepayments and refinancings have been factors,
balances have declined because we sell most newly originated fixed-rate
residential mortgages into the secondary market. This means that the new
fixed-rate residential mortgages we originate are not included in our
residential mortgage balances. Selling these loans is one of the ways we manage
interest rate risk, and we discuss this strategy more fully in the "Quantitative
and qualitative disclosures about market risk" section of this report.
At the same time, residential mortgage originations have remained an important
aspect of our market presence in Delaware. In 2004, we increased our residential
mortgage marketing activity, and we enhanced our residential mortgage product
with a suite of services we offer clients at closing, including preferential
rates on deposit accounts and home equity loans. Origination volumes have risen
as a result. As the following table shows, opposite balance declines,
residential mortgage originations (dollar volume) for the 2005 second quarter
were 48% higher year-over-year, and 72% higher on a linked-quarter basis.
-------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE ACTIVITY AS OF THE 3 MONTHS ENDED 6/30/05 3/31/05 12/31/04 6/30/04
-------------------------------------------------------------------------------------------------------------------------
Residential mortgage originations (number of loans) 269 182 209 233
Residential mortgage originations (volume in millions) $ 54.9 $ 31.9 $ 35.1 $ 37.2
Residential mortgage balances (in millions, at period-end) $444.5 $428.3 $ 431.3 $ 447.6
-------------------------------------------------------------------------------------------------------------------------
In the consumer portfolio, loan balances rose $92.8 million, or 7%, during the
first six months of 2005. Most of the growth in consumer lending was associated
with clients in Delaware, and it was split fairly evenly among home equity,
indirect auto, and other consumer loans.
----------------------------------------------------------------------------------------------------------------
PERIOD-END CONSUMER LOANS (IN MILLIONS) AT 6/30/05 AT 12/31/04 AT 6/30/04
----------------------------------------------------------------------------------------------------------------
Home equity $ 331.7 $ 305.8 $ 266.0
Indirect 599.5 566.7 531.8
Credit card 57.3 59.2 55.8
Other consumer 343.9 307.9 278.5
Total consumer loans $1,332.4 $1,239.6 $1,132.1
----------------------------------------------------------------------------------------------------------------
Our loan portfolio benefits from the strong relationships we have with many of
the leading auto dealers in the Delaware Valley region. We supply commercial
loans for auto dealers' inventory (known as "floor plan" loans), and
24
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
our relationship extends to indirect lending to their customers. We make most of
our indirect auto loans for late-model used cars, because these loans typically
have shorter terms and higher yields than loans for new cars.
During the second quarter of 2005, we experienced higher demand for loans on new
cars, which we attributed to the promotional pricing that auto manufacturers
have offered recently. Since the auto manufacturers have not offered
preferential financing as part of their pricing programs, auto buyers who seek
financing have turned to sources other than the manufacturers' captive lenders
(finance companies owned by auto manufacturers that lend directly to buyers).
RESERVE FOR LOAN LOSSES
Opposite 4% growth in loan balances for the first six months of 2005, we
increased the reserve for loan losses by 3%, or $2.7 million, to $92.4 million.
The loan loss reserve ratio was 1.31% at June 30, 2005, versus 1.33% at December
31, 2004. These changes reflected continued strength in our credit quality. For
more information about our credit quality, please refer to the "Asset Quality"
section of this report.
LIABILITIES AND STOCKHOLDERS' EQUITY
During the first six months of 2005, total liabilities increased 3% and
stockholders' equity rose 5%.
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (IN MILLIONS) AT 6/30/05 AT 12/21/04 AT 6/30/04
-------------------------------------------------------------------------------------------------------------------
Core deposits $4,761.0 $4,987.6 $4,795.3
Wholesale deposits(1) 3,499.6 3,041.6 3,126.0
Other liabilities 581.1 575.6 540.5
Stockholders' equity and minority interest 949.2 905.4 827.8
Total liabilities and stockholders' equity $9,790.9 $9,510.2 $9,289.6
------------------------------------------------------------------------------------------------------------------
(1) Includes national CDs $100,000 and over plus short-term borrowings.
Most of the increase in liabilities was in wholesale funding (national CDs
$100,000 and over plus short-term borrowings). The use of wholesale funding
increased because our loan growth is coming from throughout the Delaware Valley
region, while our core deposit-gathering activities occur mainly in the state of
Delaware, where we focus our retail banking services. Although the rates on
wholesale funds are higher than those of core deposits, we believe using
wholesale funding is more efficient and cost-effective than investing capital
and increasing annual operating costs in a large-scale expansion of our branch
office network. For more details on our funding strategy, please refer to the
"Liquidity and Funding" section of this report.
Stockholders' equity increased primarily because net income was higher. For more
details on the changes in stockholders' equity, please refer to the "Capital
Resources" section of this report.
CORE DEPOSITS
During the first six months of 2005, core deposit balances fell $226.6 million.
Most of the decline was in interest-bearing demand deposits. The activity of one
Corporate Client Services client accounted for most of that decrease.
-----------------------------------------------------------------------------------------------------------------
PERIOD-END CORE DEPOSITS (IN MILLIONS) AT 6/30/05 AT 12/31/04 AT 6/30/04
-----------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 999.5 $1,118.8 $1,207.2
Savings 347.7 355.5 373.4
Interest-bearing demand 2,241.7 2,442.5 2,296.5
CDs under $100,000 804.7 765.4 762.7
Local CDs $100,000 and more 367.4 305.4 155.5
Total core deposits $ 4,761.0 $4,987.6 $4,795.3
% of core deposits from Delaware clients 93.7% 94.2% 94.5%
----------------------------------------------------------------------------------------------------------------
25
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
Core deposits comprised 67% of our total deposits at June 30, 2005, versus 73%
at December 31, 2004. Approximately 94% of our core deposit balances were
associated with clients in Delaware, versus our loans, which come from
throughout the Delaware Valley region. This is because we focus our retail
banking activities in the state of Delaware, while we offer commercial banking
services throughout the region.
Within core deposits, the balances of local CDs in amounts of $100,000 and more
continued to increase. We count these deposits as core deposits because they are
client deposits. Several clients purchased CDs in very large amounts during the
fourth quarter of 2004, which is why these balances were so much higher at June
30, 2005, than at June 30, 2004. As the following table shows, the majority of
these jumbo CDs were purchased by consumer banking clients in Delaware.
----------------------------------------------------------------------------------------------------------------
TYPES OF CLIENTS PURCHASING LOCAL CDS $100,000 AND MORE 2005 Q2 2005 Q1
----------------------------------------------------------------------------------------------------------------
Consumer clients in Delaware 68% 60%
Commercial clients in the Delaware Valley 22% 20%
Wealth Advisory clients 8% 18%
Corporate Client Services clients 2% 2%
----------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
This section compares our income and expenses for the second quarter and first
six months of 2005 with the corresponding periods in 2004. Year-to-date (YTD)
references are as of June 30.
Net income was 11% higher for the 2005 second quarter, and 12% higher for the
first six months of the year. Earnings per share (diluted) were 9% higher for
the second quarter, and 10% higher for the first half of the year.
The percentage increase amounts for net income and earnings per share differ
because the number of shares outstanding (diluted) was more than 900,000 higher
at June 30, 2005, than at June 30, 2004. The number of shares outstanding
increased because we accelerated our acquisition of the minority interest in
Balentine, as detailed in our Form 10-Q report for the quarterly period ended
September 30, 2004.
-------------------------------------------------------------------------------------------------------------------
NET INCOME 2005 Q2 2004 Q2 2005 YTD 2004 YTD
-------------------------------------------------------------------------------------------------------------------
Net income (in millions) $40.4 $36.5 $80.5 $72.1
Earnings per share (diluted) $0.59 $0.54 $1.18 $1.07
-------------------------------------------------------------------------------------------------------------------
The main factors in second quarter and year-to-date growth were:
- Higher amounts of net interest income, due to loan growth and strong
credit quality;
- Significant improvement in the net interest margin, largely as a result of
the Federal Open Market Committee's (FOMC) increases in short-term market
interest rates and our asset sensitivity (which we discuss more fully in
the "Interest rate sensitivity" section of this report);
- Double-digit increases in advisory business revenue; and
- Minimal growth in expenses.
SOURCES OF INCOME
We generate two types of revenue:
1. Net interest income. This revenue is the difference between the interest
revenue we receive on earning assets, such as loans and investments, and
the interest expense we pay on liabilities, such as deposits and
short-term borrowings. We generate net interest income mainly through
banking and funding activities.
2. Noninterest income. This revenue 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
26
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
deposit accounts, loan fees and late charges, card fees, securities gains (or
losses), and other noninterest income.
These two sources of revenue generate a diversified stream of income that we
believe enables us to deliver consistent profitability and growth, with low
volatility, in a variety of economic conditions.
--------------------------------------------------------------------------------------------------------------------
SOURCES OF NET INTEREST AND NONINTEREST INCOME 2005 Q2 2004 Q2 2005 YTD 2004 YTD
--------------------------------------------------------------------------------------------------------------------
% from advisory business income (after amortization) 42.1% 41.7% 42.5% 42.3%
% from total noninterest income 50.0% 50.4% 50.5% 51.4%
% from net interest income (after provision) 50.0% 49.6% 49.5% 48.6%
--------------------------------------------------------------------------------------------------------------------
The table above demonstrates that:
- Our sources of income remained diversified and balanced between net
interest and noninterest income; and
- The advisory businesses generated the majority of our noninterest income.
NET INTEREST INCOME
Net interest income was 11% higher for the 2005 second quarter than for the
year-ago second quarter, both before and after the provision for loan losses. On
a year-to-date basis, net interest income was 10% higher before the provision
for loan losses, and 12% higher after the provision for loan losses.
---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME (IN MILLIONS) 2005 Q2 2004 Q2 2005 YTD 2004 YTD
---------------------------------------------------------------------------------------------------------------------
Interest income $122.6 $91.6 $235.5 $182.6
Interest expense 42.5 19.4 77.8 38.6
Net interest income 80.1 72.2 157.7 144.0
Provision for loan losses (3.8) (3.2) (6.9) (8.8)
Net interest income (after provision) $76.3 $69.0 $150.8 $135.2
---------------------------------------------------------------------------------------------------------------------
The primary reasons for the increases in net interest income were:
- Loan growth. Loan balances were more than 8% higher for the second quarter
and first half of 2005 than for the corresponding periods in 2004.
- Credit quality. With net charge-offs among the lowest in our history, and
with 97% of our loans rated "pass" by our internal risk rating analysis,
the second quarter 2005 increase in our provision was minimal. On a
year-to-date basis, the provision was lower than for the first six months
of 2004 mainly because, in the 2005 first quarter, we recovered
approximately $1.1 million on a loan that we previously had charged off.
- Our net interest margin. The margin was higher because increases in the
yield on our earning assets outpaced increases in our cost of funds.
NET INTEREST MARGIN
The net interest margin for the 2005 second quarter was 3.66%, which was 14
basis points higher than for the year-ago second quarter. For the first half of
2005, the net interest margin was 3.65%, which was 13 basis points higher than
for the corresponding period in 2004.
To compute the net interest margin, we divide annualized net interest income on
a fully tax-equivalent (FTE) basis by average total earning assets.
--------------------------------------------------------------------------------------------------------------------
IN MILLIONS (EXCEPT MARGIN) 2005 Q2 2004 Q2 2005 YTD 2004 YTD
--------------------------------------------------------------------------------------------------------------------
FTE (1) net interest income $ 81.0 $ 73.4 $ 159.5 $ 146.3
Earning assets, on average $8,786.9 $8,295.3 $8,709.1 $8,259.7
Net interest margin 3.66% 3.52% 3.65% 3.52%
-------------------------------------------------------------------------------------------------------------------
(1) Fully tax-equivalent
27
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
The margin improved for the second quarter and first half of 2005 because our
interest rate sensitivity position is slightly asset-sensitive, and our yield on
earning assets continued to increase more quickly than our cost of funds.
Compared to the year-ago second quarter, the average yield on earning assets
rose 113 basis points, while the average cost of funds increased 99 basis
points. Two main factors contributed to the favorable spread:
- Rising market interest rates. Market interest rates were 200 basis points
higher at June 30, 2005, than they were at June 30, 2004, due to the eight
rate increases enacted by the FOMC during that span of time.
- Favorable deposit pricing. Loans continued to reprice more quickly than
deposits. Our loan yields have risen in concert with the FOMC moves, but
we have not experienced competitive pressure to make corresponding
increases in our deposit rates. Comparing the 2005 second quarter with the
year-ago second quarter, the average yield on loans was 133 basis points
higher, while the average rate on core deposits was 57 basis points
higher.
ANALYSIS OF EARNINGS
The following tables present comparative rate/volume and net interest income
data for the second quarters and first halves of 2005 and 2004. 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 three and six months ended June 30, 2005
QUARTERLY ANALYSIS OF EARNINGS
2005 Second Quarter 2004 Second 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 $ 21.0 $ 0.2 2.88% $ 16.3 $ - 1.09%
U.S. Treasury and government
agencies 445.3 4.1 3.61 430.0 3.7 3.50
State and municipal 11.8 0.2 8.71 14.2 0.2 8.71
Preferred stock 94.4 1.7 7.82 119.5 2.2 7.42
Mortgage-backed securities 929.8 9.7 4.07 989.4 10.0 3.94
Other 346.0 3.9 4.55 305.9 2.3 3.07
-------------------------------------------------------- ----------------
Total investment securities 1,827.3 19.6 4.27 1,859.0 18.4 3.96
----------------------------------------------------
Commercial, financial, and
agricultural 2,506.3 37.1 5.86 2,361.1 25.0 4.20
Real estate - construction 851.1 13.8 6.42 735.2 8.3 4.46
Mortgage - commercial 1,253.8 19.4 6.13 1,169.2 14.1 4.76
-------------------------------------------------------- ----------------
Total commercial loans 4,611.2 70.3 6.04 4,265.5 47.4 4.40
----------------------------------------------------
Mortgage - residential 432.1 6.4 5.90 459.3 7.0 6.05
Consumer 1,297.8 20.3 6.28 1,097.6 16.2 5.92
Secured with liquid collateral 597.5 6.7 4.40 597.6 3.8 2.49
-------------------------------------------------------- ----------------
Total retail loans 2,327.4 33.4 5.73 2,154.5 27.0 5.00
----------------------------------------------------
Total loans net of
unearned income 6,938.6 103.7 5.93 6,420.0 74.4 4.60
Total earning assets $8,786.9 123.5 5.58 $8,295.3 92.8 4.45
====================================================
29
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
2005 Second Quarter 2004 Second Quarter
-------------------------- --------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
--------------------------------------------------------------------------------------------------
Funds supporting earning assets
Savings $ 354.5 0.2 0.25 $ 379.5 0.1 0.13
Interest-bearing demand 2,264.4 4.7 0.82 2,319.4 2.2 0.37
Certificates under $100,000 795.9 4.7 2.39 762.7 3.7 1.95
Local CDs $100,000 and over 379.0 2.6 2.70 133.5 0.5 1.54
------------------------------------------------------------ ----------------
Total core interest-
bearing deposits 3,793.8 12.2 1.29 3,595.1 6.5 0.72
National CDs $100,000
and over 2,302.0 17.7 3.03 1,980.9 5.8 1.16
------------------------------------------------------------ ----------------
Total interest-bearing
deposits 6,095.8 29.9 1.94 5,576.0 12.3 0.88
-----------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,034.1 7.6 2.93 1,139.5 3.8 1.35
U.S. Treasury demand 17.7 0.1 2.62 12.4 - 0.80
------------------------------------------------------------ ----------------
Total short-term
borrowings 1,051.8 7.7 2.92 1,151.9 3.8 1.34
-----------------------------------------------------
Long-term debt 405.9 4.9 4.85 405.3 3.3 3.21
-------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 7,553.5 42.5 2.24 7,133.2 19.4 1.08
-----------------------------------------------------
Other noninterest funds 1,233.4 - - 1,162.1 - -
------------------------------------------------------------ ----------------
Total funds used to support
earning assets $8,786.9 42.5 1.92 $8,295.3 19.4 0.93
=====================================================
Net interest income/yield 81.0 3.66 73.4 3.52
Tax-equivalent adjustment (0.9) (1.2)
------ ------
Net interest income $ 80.1 $ 72.2
====== ======
30
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
YEAR-TO-DATE ANALYSIS OF EARNINGS
---------------------------------
Year-to-Date 2005 Year-to-Date 2004
-------------------------- --------------------------
(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 $ 0.3 2.53% $ 16.5 $ 0.1 1.05%
U.S. Treasury and government
agencies 443.1 8.0 3.57 447.7 7.7 3.47
State and municipal 11.8 0.5 8.74 14.5 0.6 8.63
Preferred stock 96.9 3.5 7.43 119.9 4.4 7.42
Mortgage-backed securities 945.1 19.5 4.08 999.0 20.3 4.03
Other 337.1 7.3 4.34 297.7 4.3 2.93
------------------------------------------------------------- -----------------
Total investment securities 1,834.0 38.8 4.21 1,878.8 37.3 3.97
----------------------------------------------------
Commercial, financial, and
agricultural 2,509.6 71.4 5.66 2,343.1 49.4 4.18
Real estate-construction 805.9 25.3 6.24 730.1 16.4 4.44
Mortgage-commercial 1,243.7 37.4 5.98 1,136.2 27.5 4.79
------------------------------------------------------------- -----------------
Total commercial loans 4,559.2 134.1 5.85 4,209.4 93.3 4.39
----------------------------------------------------
Mortgage-residential 429.8 12.6 5.89 470.5 14.3 6.06
Consumer 1,266.4 39.0 6.21 1,084.4 32.4 5.98
Secured with liquid collateral 599.1 12.5 4.15 600.1 7.6 2.50
------------------------------------------------------------- -----------------
Total retail loans 2,295.3 64.1 5.61 2,155.0 54.3 5.03
----------------------------------------------------
Total loans net of
unearned income 6,854.5 198.2 5.77 6,364.4 147.6 4.61
Total earning assets $8,709.1 237.3 5.43 $8,259.7 185.0 4.46
====================================================
31
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
Year-to-Date 2005 Year-to-Date 2004
-------------------------- --------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
--------------------------------------------------------------------------------------------------
Funds supporting earning assets
Savings $ 354.5 0.4 0.25 $ 375.8 0.3 0.13
Interest-bearing demand 2,318.7 9.2 0.80 2,293.2 4.2 0.37
Certificates under $100,000 785.0 8.9 2.28 771.0 7.8 2.04
Local CDs $100,000 and over 374.5 4.9 2.59 134.2 1.0 1.49
--------------------------------------------------------------------- ---------------
Total core interest-bearing
deposits 3,832.7 23.4 1.23 3,574.2 13.3 0.75
National CDs $100,000 and over 2,122.2 29.5 2.78 2,102.4 12.2 1.14
------------------------------------------------------------- ---------------
Total interest-bearing
deposits 5,954.9 52.9 1.78 5,676.6 25.5 0.89
----------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,115.6 15.3 2.73 1,016.3 7.0 1.36
U.S. Treasury demand 13.1 0.2 2.44 12.1 - 0.78
------------------------------------------------------------------------------------------------
Total short-term
borrowings 1,128.7 15.5 2.72 1,028.4 7.0 1.35
Long-term debt 406.6 9.4 4.61 408.0 6.1 3.01
------------------------------------------------------------- ----------------
Total interest-bearing
liabilities 7,490.2 77.8 2.07 7,113.0 38.6 1.08
Other noninterest funds 1,218.9 - - 1,146.7 - -
------------------------------------------------------------- ----------------
Total funds used to support
earning assets $8,709.1 77.8 1.78 $8,259.7 38.6 0.94
====================================================
Net interest income/yield 159.5 3.65 146.4 3.52
Tax-equivalent adjustment (1.8) (2.4)
------- ------
Net interest income $ 157.7 $144.0
======= ======
32
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
-------------------------------------------
For the three months ended June 30, For the six months ended June 30,
2005/2004 2005/2004
Increase/(decrease) due to change in Increase/(decrease) 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 $ - $ 0.2 $ 0.2 $ - $ 0.2 $ 0.2
U.S. Treasury and
government agencies 0.2 0.2 0.4 - 0.3 0.3
State and municipal * - - - (0.1) - (0.1)
Preferred stock * (0.5) - (0.5) (0.9) - (0.9)
Mortgage-backed securities (0.5) 0.2 (0.3) (0.9) 0.1 (0.8)
Other * 0.3 1.3 1.6 0.6 2.4 3.0
---------------------------------------------------------------------------------------------------------------
Total investment
securities (0.5) 1.7 1.2 (1.3) 2.8 1.5
------------------------------------------------------------------------
Commercial, financial, and
agricultural * 1.5 10.6 12.1 3.5 18.5 22.0
Real estate - construction 1.3 4.2 5.5 1.7 7.2 8.9
Mortgage - commercial * 1.0 4.3 5.3 2.6 7.3 9.9
---------------------------------------------------------------------------------------------------------------
Total commercial loans 3.8 19.1 22.9 7.8 33.0 40.8
------------------------------------------------------------------------
Mortgage - residential (0.4) (0.2) (0.6) (1.2) (0.5) (1.7)
Consumer 3.0 1.1 4.1 5.4 1.2 6.6
Secured with liquid collateral - 2.9 2.9 - 4.9 4.9
---------------------------------------------------------------------------------------------------------------
Total retail loans 2.6 3.8 6.4 4.2 5.6 9.8
------------------------------------------------------------------------
Total loans net of
unearned income 6.4 22.9 29.3 12.0 38.6 50.6
---------------------------------------------------------------------------------------------------------------
Total interest income $ 5.9 $ 24.8 $30.7 $ 10.7 $ 41.6 $52.3
------------------------------------------------------------------------
33
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
For the three months ended June 30, For the six months ended June 30,
2005/2004 2005/2004
Increase/(decrease) due to change in Increase/(decrease) due to change in
(in millions) Volume(1) Rate (2) Total Volume(1) Rate(2) Total
----------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings $ - $ 0.1 $ 0.1 $ - $ 0.1 $ 0.1
Interest-bearing demand (0.1) 2.6 2.5 - 5.0 5.0
Certificates under $100,000 0.2 0.8 1.0 0.1 1.0 1.1
Local CDs $100,000 and over 1.0 1.1 2.1 1.8 2.1 3.9
----------------------------------------------------------------------------------------------------------------------
Total core interest-bearing
deposits 1.1 4.6 5.7 1.9 8.2 10.1
National CDs $100,000
and over 0.9 11.0 11.9 0.1 17.2 17.3
----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 2.0 15.6 17.6 2.0 25.4 27.4
-------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase (0.4) 4.2 3.8 0.7 7.6 8.3
U.S. Treasury demand - 0.1 0.1 - 0.2 0.2
----------------------------------------------------------------------------------------------------------------------
Total short-term
borrowings (0.4) 4.3 3.9 0.7 7.8 8.5
Long-term debt - 1.6 1.6 - 3.3 3.3
----------------------------------------------------------------------------------------------------------------------
Total interest expense $ 1.6 $ 21.5 $ 23.1 $ 2.7 $ 36.5 $ 39.2
Changes in net interest income $ 4.3 $ 3.3 $ 7.6 8.0 $ 5.1 $ 13.1
=========================================================================
* 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.
34
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
NONINTEREST INCOME
Noninterest income (after amortization) for the 2005 second quarter was 11%
higher than for the year-ago second quarter, and 10% higher for the first half
of 2005 than for the corresponding period last year. Almost all of the growth in
noninterest income occurred in revenue from the advisory businesses. Most of the
increase in advisory revenue was generated by Wealth Advisory Services and
value-style affiliate money manager Cramer Rosenthal McGlynn (CRM).
--------------------------------------------------------------------------
NONINTEREST INCOME (IN MILLIONS) 2005 Q2 2004 Q2 2005 YTD' 2004 YTD
--------------------------------------------------------------------------
Advisory business revenue(1) $64.3 $58.0 $129.4 $117.5
Service charges on deposit accounts 6.7 8.1 13.5 16.3
Other noninterest income 5.4 4.1 10.2 9.1
Securities gains/(losses) - 0.0 0.8 -
Total noninterest income $76.4 $70.2 $153.9 $142.9
-------------------------------------------------------------------------
(1) After amortization.
Noninterest income for the first half of 2005 included securities gains of $0.8
million, which we incurred during the first quarter in the routine course of
balance sheet management. Approximately $0.2 million of that amount was
associated with securities on which call provisions were exercised. The
remainder was associated primarily with amortizing mortgage-backed instruments
with small remaining balances, which we sold and replaced with higher-yielding
securities.
ASSETS UNDER MANAGEMENT AND ADMINISTRATION
A portion of our advisory business revenue is based on financial market
valuations and, therefore, is tied to the levels of assets we manage or hold in
custody.
- Within the Wealth Advisory business, all of the revenue we record as trust
and investment advisory income is based on the market valuations of assets
we manage or administer, and a significant portion of that revenue is tied
to the equity markets. The Wealth Advisory assets we manage include assets
in personal trusts that are structured around wealth planning, wealth
preservation, and wealth transition considerations. Changes in the levels
of these assets reflect trust distributions and terminations, as well as
business flows and financial market movements.
- Most of our Corporate Client Services revenue is transaction-based,
according to services we provide, and not related to the amount of assets
we manage or administer. The exception to this is the retirement services
component. The majority of revenue from retirement services is based on
the market valuations of retirement plans for which we are trustee and/or
custodian.
- All of the recurring income from our investments in CRM and Roxbury
Capital Management (RCM) is based on financial market valuations. The
primary business of these two firms is asset management. Changes in their
managed assets reflect business flows as well as financial market
movements.
The following table compares changes in assets under management.
-------------------------------------------------------------------------------------
ASSETS UNDER MANAGEMENT % CHANGE FROM
(DOLLAR AMOUNTS IN BILLIONS) AT 6/30/05 AT 12/31/04 AT 6/30/04 12/31/04 6/30/04
-------------------------------------------------------------------------------------
Wilmington Trust(1) $ 26.0 $ 26.5 $ 24.3 (1.9)% 7.0%
Cramer Rosenthal McGlynn 7.8 6.9 5.5 13.0% 41.8%
Roxbury Capital Management 3.0 3.1 3.2 (3.2)% (6.3)%
Total assets under management $ 36.8 $ 36.5 $ 33.0 0.8% 11.5%
-----------------------------------------------------------------------------------
(1) Includes estimates for values associated with certain assets that lack
readily ascertainable values, such as limited partnership interests.
35
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
Managed assets at Wilmington Trust were higher at June 30, 2005, than at June
30, 2004, mainly due to Wealth Advisory Services activity. The $500 million
decline in managed assets for the first six months of 2005 was due mainly to
Corporate Client Services activity.
Assets associated with Corporate Client Services clients can fluctuate by
hundreds of millions of dollars from one period to the next, depending on cash
management decisions these clients make. This is just one of the reasons why we
do not consider managed asset levels at Wilmington Trust to be a leading
indicator of business trends.
As the table below shows, the investment mix of our managed assets (excluding
CRM and RCM) remained relatively unchanged.
----------------------------------------------------------------------------------------------------------
INVESTMENT MIX OF WILMINGTON TRUST MANAGED ASSETS (1) AT 6/30/05 AT 12/31/04 AT 6/30/04
----------------------------------------------------------------------------------------------------------
Equities 55% 59% 52%
Fixed income 25% 23% 24%
Cash and equivalents 11% 12% 11%
Mutual funds (2) 0% 0% 8%
Other assets 9% 6% 5%
----------------------------------------------------------------------------------------------------------
(1) Excluding CRM and RCM.
(2) Beginning with the fourth quarter of 2004, we reclassified the percentage
of managed assets that we previously reported as mutual funds into the
relevant categories of equity, fixed income, or other assets.
The following table compares changes in assets under management and assets under
administration at Wilmington Trust (excluding CRM and RCM). Most of the assets
under administration are associated with the Corporate Client Services business.
We regard changes in revenue, rather than changes in assets under management or
administration, as better indicators of business trends.
---------------------------------------------------------------------------------------------------------------------------------
CLIENT ASSETS AT WILMINGTON TRUST (EXCLUDING CRM AND RCM) % CHANGE FROM
---------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN BILLIONS) AT 6/30/05 AT 12/31/04 AT 6/30/04 12/31/04 6/30/04
---------------------------------------------------------------------------------------------------------------------------------
Assets under management (1) $26.0 $26.5 $ 24.3 (1.9)% 7.0%
Assets under administration 71.9 72.5 81.4 (0.8) (11.6)
Total client assets $97.9 $99.0 $105.7 (1.1)% (7.4)%
--------------------------------------------------------------------------------------------------------------------------------
(1) Assets under management include estimates for values associated with
certain assets that lack readily ascertainable values, such as limited
partnership interests.
WEALTH ADVISORY SERVICES
We report Wealth Advisory revenue in three categories:
1. Trust and investment advisory fees. These fees are tied to movements in
the financial markets, and most are based on equity market valuations.
2. Mutual fund fees. The vast majority of these fees are tied to money market
mutual fund valuations, and do not reflect equity market movements.
3. Other services fees. These fees are from financial planning, estate
settlement, family office management, and other services. These fees are
based on the level and complexity of the services we provide. They are not
associated with asset valuations. These fees can vary widely in amount,
and portions of them may be nonrecurring. Because these fees reflect
client demand at any given point in time, it is not unusual for them to
fluctuate up or down from period to period.
36
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
---------------------------------------------------------------------------------------------------------
WEALTH ADVISORY REVENUE (IN MILLIONS) 2005 Q2 2004 Q2 2005 YTD 2004 YTD
---------------------------------------------------------------------------------------------------------
Trust and investment advisory fees $30.0 $26.9 $59.7 $53.9
Mutual fund fees 4.6 4.9 9.4 10.1
Planning and other services fees 7.8 5.6 16.9 13.0
Total Wealth Advisory revenue $42.4 $37.4 $86.0 $77.0
--------------------------------------------------------------------------------------------------------
Compared to the corresponding year-ago periods, Wealth Advisory revenue was 13%
higher for the second quarter of 2005, and 12% higher for the first half of
2005. Revenue from trust and investment advisory activities, as well as from
planning and other services, contributed to the growth.
Trust and investment advisory revenue, which is the revenue generated by our
core asset management services, was 11% higher for the second quarter and for
the first half of 2005, compared with the corresponding periods in 2004.
Business development with new as well as existing clients accounted for much of
this growth, as comparisons with a key equity index, the S&P 500, illustrate.
For the 12 months ended June 30, 2005, the increase in the S&P 500 was less than
5%; for the first half of 2005, it was less than 2%.
Revenue from planning and other services was 39% higher for the second quarter
and 30% higher for the first half of 2005, compared with the corresponding
periods in 2004. Most of this growth resulted from our acquisition of Grant Tani
Barash & Altman (GTBA), the business and family office management firm we
acquired in October 2004. In each of the three quarters since then, GTBA has
accounted for approximately $2 million of quarterly revenue from planning and
other services. GTBA's revenue contribution offset lower revenue for the second
quarter and first half of 2005 from highly specialized financial planning
activities.
Fees from mutual fund services decreased because clients continued to redeem
shares of low-yielding money market funds.
New fees (sales) for the first half of 2005 were approximately $5.5 million
(annualized), the same amount as for the first half of 2004. The lack of growth
in new fees reflected lower demand for specialized planning services. Although
the dollar amount was flat, the percentage of new fees from recurring business
(versus fees that are one-time in nature, such as those for highly complex
financial plans) was higher. Recurring business accounted for 60% of new fees
for the first half of 2005, up from 51% for the first half of 2004.
The following table compares where new fees were generated for the second
quarters of 2005 and 2004. The increase in Maryland reflects the Wealth Advisory
staff additions we made in our Baltimore office during 2004.
--------------------------------------------------------------------------------------
AS A PERCENTAGE OF TOTAL NEW WEALTH ADVISORY FEES 2005 Q2 2004 Q2
--------------------------------------------------------------------------------------
California 3% 6%
Delaware (1) 64% 54%
Florida 6% 5%
Georgia 4% 10%
Maryland 5% 1%
New York 5% 9%
Pennsylvania 13% 15%
--------------------------------------------------------------------------------------
(1) Delaware's contribution includes business development with clients in
Delaware as well as in other states and countries in which we do not have
physical office locations. We serve these clients from our headquarters in
Wilmington.
CORPORATE CLIENT SERVICES
We report Corporate Client revenue in four categories:
1. Capital markets. These fees are based on the complexity of trust and
administrative services we provide that support the structured finance
industry. We perform most of these services under multiyear contracts.
37
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
2. Entity management. These fees are based on the complexity of
administrative services we provide for special purpose entities in
preferred jurisdictions.
3. Retirement services: These fees are based on equity market valuations of
retirement plan assets for which we serve as trustee and/or custodian.
4. Cash management: These fees reflect cash management services we perform
for capital markets and entity management clients.
-----------------------------------------------------------------------------------------------------------
CORPORATE CLIENT REVENUE (IN MILLIONS) 2005 Q2 2004 Q2 2005 YTD 2004 YTD
-----------------------------------------------------------------------------------------------------------
Capital markets $ 8.3 $ 8.3 $15.9 $16.2
Entity management 5.9 5.4 11.8 10.9
Retirement services 3.2 3.2 6.4 5.9
Cash management 1.3 1.5 2.6 3.3
Total Corporate Client revenue $18.7 $18.4 $36.7 $36.3
----------------------------------------------------------------------------------------------------------
During the second quarter and first half of 2005, low activity and pricing
pressures in the structured finance industry challenged the Corporate Client
business and dampened capital markets revenue. These challenges included:
- Downward pricing pressures, as demand for structured finance transactions
remained weak, and as saturation in the market for trust-preferred issues
caused pricing on related services to shift to lower, more commodity-like
levels.
- Less market innovation, and fewer introductions of new structures, which
typically command higher fees than more established structures.
- Fewer issues of asset-backed securitizations, as well as shorter-duration
contracts. Today the typical maturity of asset-backed contracts is
approximately half as long as it was three years ago, which means these
accounts terminate (and cease to generate revenue) more quickly than in
the past.
Comparing the 2005 second quarter with the year-ago second quarter, our capital
markets transaction volumes were 46% higher, but new fees were 21% lower.
Comparing the first half of 2005 with the corresponding period last year, the
number of capital markets transactions was 26% higher, but new fees were 24%
lower.
Retirement services revenue for the second quarter of 2005 was unchanged from
the year-ago second quarter, but was higher for the first six months of 2005
than for the corresponding period last year. This was because we engaged fewer
new clients in the second quarter than we did in the first quarter of 2005.
Revenue from entity management services increased, as our efforts to market a
broader array of entity management services, especially with clients in the
United States, yielded positive results. In addition, we added preparation of
financial statements to the roster of entity management services we offer in
Europe.
In June, we announced an agreement to acquire Charleston Captive Management
Company (CCMC), and we completed that transaction on July 7. CCMC's five staff
members provide administrative services that support captive insurance
companies, and we have begun to integrate CCMC's capabilities into the entity
management services we already offer. CCMC's revenue and expenses will be
consolidated into our financial statements starting with the third quarter of
2005. We did not disclose terms of the transaction. The transaction was
immaterial to our financial condition, and we expect its effect on our 2005
earnings to be neutral.
AFFILIATE MONEY MANAGERS
Our two affiliate money managers are:
- Cramer Rosenthal McGlynn (CRM), a value-style manager based in New York;
and
- Roxbury Capital Management (RCM), a growth-style manager based in Santa
Monica.
Revenue from these two firms is based on our ownership interest in each. Their
results are not consolidated in our financial statements.
38
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
--------------------------------------------------------------------------------------------
AFFILIATE MANAGER REVENUE (IN MILLIONS) 2005 Q2 2004 Q2 2005 YTD 2004 YTD
--------------------------------------------------------------------------------------------
Cramer Rosenthal McGlynn $4.0 $2.5 $8.3 $4.6
Roxbury Capital Management 0.2 0.2 0.5 0.4
Total affiliate manager income $4.2 $2.7 $8.8 $5.0
--------------------------------------------------------------------------------------------
CRAMER ROSENTHAL MCGLYNN
Assets under management at CRM have risen every quarter since the first quarter
of 2003, and have set new records every quarter since the second quarter of
2004. That trend continued for the second quarter of 2005, when CRM's managed
assets reached $7.8 billion. This was an increase of 42% from the $5.5 billion
recorded at June 30, 2004, and $900 million more than the amount recorded at
December 31, 2004. A combination of new business and market appreciation
accounted for the increase.
As a result of the growth in managed assets, second quarter 2005 income from our
investment in CRM was $1.5 million more than for the year-ago second quarter. On
a year-to-date basis, it was $3.7 million more. CRM's revenue for the first half
of 2005 reflected two events that essentially offset each other:
- Approximately $1.4 million of CRM's revenue for the first quarter of 2005
represented a nonrecurring gain on the sale of a private equity
investment.
- CRM's contribution for the second quarter of 2005 included higher
incentive payments.
At June 30, 2005, our ownership interest in CRM was 77.24%, the same as it was
at December 31, 2004, and June 30, 2004. 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
RCM continued to attract assets to its small- and mid-capitalization products,
but not to an extent sufficient to offset outflows from the firm's
large-capitalization product. RCM's managed assets fell from $3.2 billion at
June 30, 2004, to $3.1 billion at the end of 2004, to $3.0 billion at June 30,
2005.
For the 2005 second quarter, income from our investment in RCM was $0.2 million,
equal to the amount for the year-ago second quarter. Income from RCM for the
first half of 2005 was $0.5 million, which was $0.1 million more than for the
corresponding period last year. The year-to-date increase reflected RCM's
ongoing efforts to reduce expenses and improve efficiency.
At June 30, 2005, our ownership interest in RCM consisted of 41.23% of RCM's
common shares and 30% of its gross revenues. These percentages were the same as
at June 30, 2004, and December 31, 2004.
SERVICE CHARGES ON DEPOSIT ACCOUNTS
During the 2005 second quarter, income from service charges on deposit accounts
stabilized at $6.7 million, the same amount as for the 2005 first quarter. That
amount, however, was $1.4 million less than for the second quarter of 2004. Year
to date, service charges were $2.8 million less than for the first half of 2004.
We attribute these decreases to changes in client behavior and the economic
environment:
- Transaction volumes were lower for services that typically generate fees,
such as ATM withdrawals. At the same time, clients made more purchases
with debit and credit cards, which typically do not incur service charges.
ATM transaction volumes were 4% lower for the first half of 2005 than for
the same period in 2004. In comparison, point-of-service transaction
volumes were 6% higher.
- Rising interest rates generated higher earnings credits, which offset
service charges on commercial deposit accounts.
39
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
NONINTEREST EXPENSE
Compared to the corresponding periods in 2004, noninterest expenses were higher
by 9% for the second quarter of 2005, and 8% higher for the first six months of
2005. Almost all of the 2005 second quarter and year-to-date increases were due
to higher staffing-related costs, including salaries and wages, incentives and
bonuses, and employment benefits expense.
------------------------------------------------------------------------------------------------
STAFFING AND TOTAL NONINTEREST EXPENSE 2005 Q2 2004 Q2 2005 YTD 2004 YTD
------------------------------------------------------------------------------------------------
Staffing-related expense (in millions) $54.7 $48.8 $108.9 $100.4
Total noninterest expense (in millions) $89.6 $82.4 $179.0 $165.6
------------------------------------------------------------------------------------------------
These costs were higher because the number of staff members increased, as we:
- Added staff in every department of our company and in every one of our
markets during 2004, in order to better serve clients; and
- Acquired GTBA, which added 43 staff members in October 2004, and accounted
for 48 staff members at the end of the 2005 second quarter.
------------------------------------------------------------------------------------
NUMBER OF STAFF MEMBERS AT 6/30/05 AT 12/31/04 AT 6/30/04
------------------------------------------------------------------------------------
Full-time equivalent headcount 2,425 2,428 2,356
------------------------------------------------------------------------------------
In addition to staffing-related costs, telecommunications, insurance, and audit
costs also were higher for the second quarter and first half of 2005 than for
the corresponding periods last year.
On a linked-quarter basis, the pace of expense growth slowed. Total noninterest
expense for the 2005 second quarter was less than 1% more than for the 2005
first quarter.
Two expense items recorded for the 2005 second quarter are not expected to occur
again in 2005:
- The amount recorded for subadvisor expenses reflected a one-time credit of
approximately $1 million. This credit resulted from account
reconciliations that we made in the process of consolidating Wilmington
Trust's subadvisor expenses with those of Balentine & Company under
Wilmington Trust Investment Management.
- The $7.9 million amount recorded for "other noninterest expense" included
approximately $1 million of expenses associated with product development.
These two items offset each other and had a neutral effect on total noninterest
expenses for the second quarter of 2005.
Beginning with the 2005 second quarter, we separated expenses reported on our
income statement as servicing and consulting fees into two categories:
1. Servicing and consulting fees, which include outsourced residential
mortgage servicing and information technology programming, and
2. Subadvisor expense, which represents the payments we make to third-party
investment advisors as part of the Wealth Advisory business.
INCOME TAXES
Income tax expense for the second quarter and first half of 2005 were 14% higher
than for the corresponding periods last year, mainly because our state income
taxes were higher. This happened because our pretax income was higher, and the
increase reflected the GTBA acquisition as well as higher revenue from Cramer
Rosenthal McGlynn.
--------------------------------------------------------------------------------------
INCOME TAXES AND TAX RATE 2005 Q2 2004 Q2 2005 YTD 2004 YTD
--------------------------------------------------------------------------------------
Pretax income (in millions) 63.1 56.8 125.7 112.5
Income tax expense (in millions) 22.6 19.9 45.1 39.6
Effective tax rate 35.82% 35.04% 35.88% 35.20%
--------------------------------------------------------------------------------------
40
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
CAPITAL RESOURCES
Our capital position remained strong during the first half of 2005.
Stockholders' equity rose 5%; the returns on equity and assets improved; and our
regulatory capital continued to exceed the minimum levels established by the
Federal Reserve Board for well-capitalized institutions.
In a reflection of our capital strength, our Board of Directors raised the
quarterly cash dividend by more than 5% on April 21, 2005, and declared a
regular quarterly dividend on July 21, 2005. The Board's April 2005 action
increased the quarterly dividend from $0.285 to $0.30 per share, or from $1.14
to $1.20 per share, annualized. We have paid cash dividends on our common stock
every year since 1908; paid quarterly cash dividends every year since 1916; and
increased our cash dividend every year since 1982. According to Mergent, Inc.'s
Dividend Achievers, fewer than 3% of the dividend-paying companies that trade on
U.S. exchanges have made that many consecutive annual increases.
-------------------------------------------------------------------------------------------------------
6 MOS. ENDED YEAR ENDED 6 MOS. ENDED
CAPITAL STRENGTH 6/30/05 12/31/04 6/30/04
-------------------------------------------------------------------------------------------------------
Stockholders' equity (period-end, in millions) $949.0 $905.3 $826.4
Return on average stockholders' equity (annualized) 17.62% 16.68% 17.73%
Return on average assets (annualized) 1.70% 1.56% 1.62%
Capital generation rate (annualized) 9.1% 8.4% 8.9%
Dividend payout ratio 49.2% 52.8% 50.9%
-----------------------------------------------------------------------------------------------------
During the first six months of 2005, we added $50.7 million to capital,
including:
- $40.9 million, which reflected earnings of $80.5 million net of $39.6
million in cash dividends; and
- $9.8 million from the issue of common stock under employment benefit
plans.
Offsetting these additions were $7.0 million of reductions in capital, which
consisted of:
- $4.7 million in unrealized losses on securities, net of taxes;
- $0.1 million in derivative losses included in net income, net of taxes;
- $0.3 million in foreign currency exchange adjustments;
- $1.4 million for the repurchase of shares; and
- $0.5 million of security gains reclassified from other comprehensive
income.
Our share repurchase activity was minimal during the first half of 2005, as we
elected to replenish capital that we expended on the GTBA acquisition and other
expansion activities in 2004. During the 2005 second quarter, we bought back
7,045 of our shares at an average per-share price of $34.81 and a total cost of
$0.2 million. The total number of shares we repurchased during the first half of
2005 was 39,857, at an average per-share price of $34.89 and a total cost of
$1.4 million. This brought the total number of shares repurchased under the
current 8-million-share program, which commenced in April 2002, to 674,450,
leaving 7,325,550 available for repurchase.
Our capital ratios continued to exceed the Federal Reserve Board's minimum
guidelines for both well-capitalized and adequately capitalized institutions, as
the following table shows. The Federal Reserve's guidelines are intended to
reflect the varying degrees of risk associated with different on- and
off-balance sheet items.
----------------------------------------------------------------------------------------------------
AT AT MINIMUM TO BE MINIMUM TO BE
REGULATORY CAPITAL RATIOS 6/30/05 12/31/04 ADEQUATELY CAPITALIZED WELL CAPITALIZED
----------------------------------------------------------------------------------------------------
Total risk-based capital 11.92% 11.60% 8% 10%
Tier 1 risk-based capital 7.17% 6.94% 4% 6%
Tier 1 leverage capital 6.23% 5.92% 4% 5%
----------------------------------------------------------------------------------------------------
41
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
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.
LIQUIDITY AND FUNDING
We manage liquidity, which is affected by the proportion of funding that is
provided by core deposits and stockholders' equity, to ensure that our cash
flows are sufficient to support our operating, investing, and financing
activities. By managing liquidity, we are able to meet increases in demand for
loans and other assets, and decreases in deposits and other funding sources.
We use a mix of liquidity sources, including 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.
During the first six months of 2005, core deposits - demand deposits,
interest-bearing demand deposits, time deposits, and local CDs $100,000 and over
- continued to be our primary source of funding, but they accounted for a
smaller proportion of our funding, because the pace of growth in core deposits
lagged the pace of growth in earning assets.
Loan balances accounted for approximately 78% of our total earning assets, both
on a period-end and average-balance basis. Between December 31, 2004, and June
30, 2005, loan balances rose 4%, but core deposit balances fell 5%. On average,
loan balances were 8% higher for the 2005 second quarter than for the year-ago
second quarter, while core deposit balances were 6% higher.
We use purchased funds, which consist of national CDs $100,000 and over, and
short-term borrowings to augment growth in earning assets. We base the mix
between purchased funds and short-term borrowings on which offers the more
favorable rate. In general, the national CDs and term federal funds we purchase
have maturities of 90 days or fewer. Our short-term borrowings typically mature
within 365 days of the transaction date.
The following table shows changes, at period-end, in the proportion of funding
provided by various sources of liquidity.
----------------------------------------------------------------------------------------------
PROPORTION OF FUNDING PROVIDED BY: AT 6/30/05 AT 12/31/04 AT 6/30/04
----------------------------------------------------------------------------------------------
Core deposits 48.6% 52.4% 51.6%
Core deposits and stockholders' equity 58.3% 62.0% 60.5%
Purchased funds and short-term borrowings 35.7% 32.0% 33.7%
----------------------------------------------------------------------------------------------
Between December 31, 2004, and June 30, 2005, the combined balances of purchased
funds and short-term borrowings increased 15%. Most of the increase was in
national CD balances.
The average rate on core interest-bearing deposits for the first half of 2005
was 1.22%. The average rate for national CDs was 1.77%, and the average rate for
total short-term borrowings was 2.74%. Although the cost of national CDs and
short-term borrowings exceeded the rate we paid on core interest-bearing
deposits, we maintained this funding strategy because:
- It lets us add deposits without making capital investments to support the
physical expansion of our branch network;
- It helps us curb growth in the annual operating expense associated with
staffing and maintaining additional branch offices;
- It does not add to our fixed costs; and
- We can predict the balances of purchased funds and short-term borrowings
with more certainty than we can predict changes in our clients' deposit
balances.
42
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
We expect the disparity between the pace of growth in our earning assets and
core deposits to continue, because we make loans throughout the Delaware Valley
region, but we gather core deposits mainly in the state of Delaware, where our
retail banking activities are concentrated.
In addition to deposits, other sources of liquidity that are available to us
include:
- Cash flow generated by our investment portfolio, which we expect will
generate approximately $227 million of cash over the next 12 months from
maturities, calls, and income. At June 30, 2005, the balance of the
investment portfolio was $1.88 billion.
- The Federal Home Loan Bank of Pittsburgh, of which Wilmington Trust
Company is a member. As of June 30, 2005, we had $1.0 billion in available
borrowing capacity that was secured with collateral, compared with $1.2
billion at December 31, 2004.
- Lines of credit with U.S. financial institutions totaling $75.0 million.
Our standing in the national markets, and our ability to obtain funding from
them, factor into our liquidity management strategies. In many cases, national
market investors use the findings of the major credit rating agencies - Standard
& Poor's, Moody's Investors Service, and Fitch - to guide their decisions. All
of our credit ratings are investment grade, and they substantiate our financial
stability and the consistency, over time, of our earnings. Our most recent
credit ratings are posted on wilmingtontrust.com in the "Investor Relations"
section.
Factors or conditions that could affect our liquidity management objectives
include changes in the mix of items on our balance sheet; our investment, loan,
and deposit balances; our reputation; and our credit ratings. A significant
change in our financial performance or credit ratings could reduce the
availability, or increase the cost, of funding from the national markets.
Among our liquidity risks is a partial guaranty of a line of credit obligation
for affiliate money manager Cramer Rosenthal McGlynn (CRM). At June 30, 2005,
this line of credit was $5.0 million, the balance was zero, and our guaranty was
for 77.24%, an amount equal to our ownership interest in CRM. This line of
credit is scheduled to expire on December 6, 2005.
ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION
OVERVIEW
Measuring credit risk involves making subjective judgments that take into
account the levels of net charge-offs and nonperforming assets. We manage credit
risk mainly by applying our rigorous underwriting standards consistently.
As we expand our Regional Banking business, we have chosen to grow loan balances
through our own efforts, rather than by purchasing loans or acquiring other
banks. This prevents us from having to assume the credit risk associated with
loans that were extended under guidelines that may differ from ours.
Economic and other external factors affect credit risk. Changes in these factors
could impair the ability of borrowers to repay their loans, and could result in
higher levels of nonperforming assets, credit losses, and provisions for loan
losses. To mitigate the impact of these factors, 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 and client focus enables us to remain cognizant
of economic and other external factors that may affect credit quality.
- Endeavor to maintain a loan portfolio that is diversified across
commercial and consumer lines and industry sectors.
- Perform an internal analysis that rates the risk in the portfolio.
- Monitor the portfolio continually to identify potential problems, and to
avoid disproportionately high concentrations of loans to any one borrower
or industry sector. Integral parts of this process include regular
analyses of past-due loans and the identification of loans that we doubt
will be repaid on a timely basis.
43
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
When we do have to charge off loans, we continue to pursue repayment even after
we record the charge-off.
RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005
During the first six months of 2005, all key measures of credit quality
improved:
- Net charge-offs, nonaccruing loans, and loans past due 90 days or more
decreased from the levels recorded at December 31, 2004.
- Also lower than their 2004 year-end levels were the loan loss reserve
ratio, the ratio of nonperforming assets, the ratio of loans past due 90
days, and the net charge-off ratio.
- The percentage of loans rated "pass" in the internal risk-rating analysis
approached 97%.
We believe that the primary indicator of credit quality is the net charge-off
ratio.
----------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS 2005 Q2 2004 Q2 2005 YTD 2004 YTD
----------------------------------------------------------------------------------------------------------------
Gross charge-offs (in millions) $2.8 $3.5 $6.3 $8.9
Recoveries (in millions) $1.0 $1.6 $2.1 $2.8
Net charge-off amount (in millions) $1.8 $1.9 $4.2 $6.2
Net charge-off ratio 3 basis points 3 basis points 6 basis points(1) 10 basis points(1)
----------------------------------------------------------------------------------------------------------------
(1) The year-to-date net charge-off ratio is calculated by dividing the
year-to-date dollar amount of net charge-offs by total loans, on average,
for the period.
Both the net charge-off ratio and the dollar amount of charged-off loans
remained at levels that were lower than our historic averages. The net
charge-off ratio, annualized at June 30, 2005, was 12 basis points. In
comparison, the annualized net charge-off ratio at June 30, 2004, was 20 basis
points. Actual net charge-offs for the 2004 full year were 24 basis points.
There have been only five times in the past 20 years when our full-year net
charge-off ratio was less than 25 basis points.
The following table shows how other measures of credit quality improved during
the first half of 2005.
---------------------------------------------------------------------------------------------
NONPERFORMING ASSETS (DOLLARS IN MILLIONS) AT 6/30/05 AT 12/31/04 AT 6/30/04
---------------------------------------------------------------------------------------------
Nonaccruing loans $ 54.2 $ 56.4 $ 41.8
% of nonaccruing loans to total loans 0.77% 0.83% 0.64%
Other real estate owned (OREO) $ 0.2 $ 0.2 $ 0.2
% of OREO to total loans - - -
Renegotiated loans (nonaccruing) $ 4.9 $ 5.2 -
Total nonperforming assets $ 59.3 $ 61.8 $ 42.0
% of nonperforming assets to total loans 0.84% 0.91% 0.65%
---------------------------------------------------------------------------------------------
Nonaccruing loans declined on a year-to-date basis, but they were higher at June
30, 2005, than at the corresponding date last year. This increase reflected a
single relationship with a commercial banking client whose business supplies
agricultural products throughout the Delaware Valley region. This relationship
was transferred to nonaccruing status during the 2005 second quarter. It
accounted for the year-over-year increases in total nonperforming assets, and
the percentage of nonperforming assets to total loans.
Loans past due 90 days or more were lower at June 30, 2005, than at December 31,
2004, and June 30, 2004, as the following table shows.
44
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
----------------------------------------------------------------------------------------------------------
LOANS PAST DUE 90 DAYS OR MORE AT 6/30/05 AT 12/31/04 AT 6/30/04
----------------------------------------------------------------------------------------------------------
Loans past due 90 days or more (in millions) $2.9 $5.5 $5.0
% in the commercial portfolio 17% 56% 69%
% in the residential mortgage portfolio 54% 22% 15%
% in the consumer portfolio 29% 22% 16%
----------------------------------------------------------------------------------------------------------
At June 30, 2004, and December 31, 2004, more than half of the past-due loan
amounts were commercial loans. During the first half of 2005, there was a net
transfer of approximately $4 million of past-due commercial loans to nonaccruing
status. This reduced the overall amount of total past-due loans, and caused the
mix of past-due loans to change on a percentage basis. Although residential and
consumer loans represented a larger percentage of past-due loans at June 30,
2005, the dollar amount of past-due residential and consumer loans remained
fairly level. At June 30, 2005, residential mortgage and consumer loans
accounted for approximately $2.4 million of the $2.9 million total amount of
loans past due 90 days or more.
In our internal risk rating analysis, the percentage of loans rated "pass"
approached 97%. The 2005 second quarter marked the fifth consecutive quarter
that the percentage of loans rated "pass" exceeded 96%. The percentage of loans
with pass ratings has been higher than 92% since 1998, and higher than 95% since
2000.
------------------------------------------------------------------------------------
INTERNAL RISK RATING ANALYSIS AT 6/30/05 AT 12/31/04 AT 6/30/04
------------------------------------------------------------------------------------
Pass 96.96% 96.58% 96.24%
Watchlisted 2.00% 1.82% 2.19%
Substandard 0.82% 1.35% 1.31%
Doubtful 0.22% 0.25% 0.26%
------------------------------------------------------------------------------------
The percentage of loans rated "substandard" declined from year-end 2004 because,
in January 2005, we received the remaining payment on a $23 million loan that
had been transferred to nonaccruing status during the 2004 third quarter.
The definitions of the categories we use in the internal risk-rating analysis,
which we apply consistently, are as follows:
- "Pass" identifies loans with no current potential problems.
- "Watchlisted" identifies potential problem credits;
- "Substandard" identifies problem credits with some probability of loss;
and
- "Doubtful" identifies problem credits with a higher probability of loss.
These definitions are consistent with the classifications that regulatory
agencies use to define problem and potential problem credits.
On a percentage basis, the composition of the loan portfolio remained well
diversified and relatively unchanged, as the following table shows.
---------------------------------------------------------------------------------------
COMPOSITION OF THE LOAN PORTFOLIO AT 6/30/05 AT 12/31/04 AT 6/30/04
---------------------------------------------------------------------------------------
Commercial/financial/agricultural 36% 37% 37%
Commercial real estate/construction 13% 11% 11%
Commercial mortgage 18% 18% 18%
Residential mortgage 6% 6% 7%
Consumer 19% 19% 18%
Secured with liquid collateral 8% 9% 9%
---------------------------------------------------------------------------------------
Changes in our provision and reserve for loan losses reflected loan growth,
strong credit quality, and the level of loan repayments and recoveries. At June
30, 2005, in light of the levels of past due, nonaccruing, and problem
45
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
loans, we believed that the amounts of our provision and reserve for loan losses
were adequate, and that they reflected a reasonable assessment of inherent loan
losses.
--------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 2005 Q2 2004 Q2 2005 YTD 2004 YTD
--------------------------------------------------------------------------------------------
Provision for loan losses (in millions) $3.8 $3.2 $6.9 $8.8
--------------------------------------------------------------------------------------------
The reserve for loan losses reflects our best estimate, based on subjective
judgments regarding how collectible loans within the portfolio are, of inherent
losses. In calculating the reserve, we evaluate micro and macroeconomic factors,
historical net loss experience, delinquency trends, and movements within the
internal risk rating classifications, among other things. We reassess the
adequacy of the reserve on a quarterly basis as part of the regular application
of our reserve methodology.
-------------------------------------------------------------------------------------------------
RESERVE FOR LOAN LOSSES AT 6/30/05 AT 12/31/04 AT 6/30/04
-------------------------------------------------------------------------------------------------
Reserve for loan losses (in millions) $92.4 $89.7 $92.5
Loan loss reserve ratio 1.31% 1.33% 1.43%
Unallocated reserve amount (in millions) $ 7.7 $ 6.1 $ 6.1
% of total reserve that is unallocated 8.4% 6.8% 6.6%
-------------------------------------------------------------------------------------------------
We allocate the majority of our reserve for loan losses to specific commercial
and retail loans. The portion of the reserve that we do not allocate
specifically reflects the inherent losses that we have not accounted for
otherwise.
At June 30, 2005, we had serious doubts that $3 million of loans 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. The following table compares
this amount with those of prior periods.
----------------------------------------------------------------------------------
SERIOUS DOUBT LOANS AT 6/30/05 AT 12/31/04 AT 6/30/04
----------------------------------------------------------------------------------
Serious doubt loans (in millions) $3.0 $4.1 $27.2
----------------------------------------------------------------------------------
The decline in the amount of serious doubt loans since June 30, 2004, reflects
approximately $23 million that was transferred to nonaccruing status during the
2004 third quarter and repaid during the 2005 first quarter.
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 included in the
calculations of 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. Other instruments, such as long-term debt, represent contractual
obligations and do appear 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.
As of June 30, 2005, we had entered into a total of $1.1 billion of interest
rate swaps as follows:
- $362.2 million of swaps for loan clients for whom we exchanged floating
rates for fixed rates.
- $362.2 million of swaps with other financial institutions that exchanged
fixed rates for floating rates, in order to offset the exposure from
changes in the market value of the aforementioned swaps we made on behalf
of clients.
- $375.0 million of swaps with other financial institutions made in
connection with our issues of subordinated long-term debt.
46
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
As of June 30, 2005, our other contractual obligations consisted of:
- Two outstanding loans from the Federal Home Loan Bank of Pittsburgh that
total $35.5 million. We used these funds to construct Wilmington Trust
Plaza, our operations center in downtown Wilmington, Delaware, which was
completed in 1998.
- Lease commitments for offices, net of sublease arrangements, which total
$54.2 million. Many of our branch offices in Delaware, and all of our
offices outside Delaware, are leased.
- A 77.24% guaranty of a $5.0 million line-of-credit obligation of affiliate
money manager Cramer Rosenthal McGlynn (CRM). The guaranty amount
represents our current ownership interest in CRM. The balance of this line
of credit is zero and it is scheduled to expire on December 6, 2005.
- Certificates of deposit amounting to $3.5 billion.
- Letters of credit, unfunded loan commitments, and unadvanced lines of
credit amounting to $2.98 billion.
The following table summarizes the obligations referenced above and the periods
over which they extend.
--------------------------------------------------------------------------------------------------------------
PAYMENTS DUE (IN MILLIONS) TOTAL LESS THAN 1 YEAR 1 TO 3 YEARS 3 TO 5 YEARS MORE THAN 5 YEARS
--------------------------------------------------------------------------------------------------------------
Certificates of deposit $3,482.8 $3,139.2 $ 262.6 $ 55.5 $ 25.5
Long-term debt obligations 554.7 22.8 195.7 67.9 268.3
Operating lease obligations 54.2 8.6 23.1 14.1 8.4
Guaranty obligations 3.9 3.9 - - -
Total $4,095.6 $3,174.5 $ 481.4 $ 137.5 $ 302.2
--------------------------------------------------------------------------------------------------------------
The long-term debt obligations referenced above represent our two outstanding
subordinated debt issues and our Federal Home Loan Bank advances. The first debt
issue, for $125 million, was issued in 1998, is due in 2008, and was used to
support acquisitions and expansion. The second debt issue, for $250 million, was
issued in 2003, is due in 2013, and was used for general liquidity purposes.
Both of these debt issues are included in the "Long-term debt" line of our
balance sheet.
Our agreements with CRM, RCM, and GTBA permit principal members and designated
key employees of each firm, subject to certain restrictions, to put their
interests in their respective firms to our company. For more information about
these agreements, please refer to Note 3, "Affiliates and acquisitions," in our
2004 Annual Report to Shareholders.
INFLATION RISK
As a financial institution, our asset and liability structure is substantially
different from an industrial company's, since nearly all of our assets and
liabilities are monetary in nature. Our primary market risk is interest rate
risk. Interest rates do not necessarily move in the same direction, or at the
same magnitude, as the prices of goods and services. We are unable, therefore,
to determine the effect of inflation on our financial performance.
For more information about our interest rate and other kinds of risk, please
refer to Item 3 of this report, "Quantitative and Qualitative Disclosures about
Market Risk."
OTHER INFORMATION
ACCOUNTING PRONOUNCEMENTS
Please refer to Note 10, "Accounting pronouncements," of this report for a
discussion of the impact of recent accounting pronouncements on our financial
condition and results of operations.
47
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies arise in conjunction with revenue recognition,
the reserve for loan losses, stock-based compensation expense, and goodwill
valuations.
We maintain our accounting records and prepare our financial statements on the
accrual basis of accounting. This basis conforms to U.S. generally accepted
accounting principles (GAAP), and with reporting practices prescribed for the
banking industry. Using these principles, we make estimates and assumptions
about the reserve for loan losses; stock-based employee compensation; revenue
recognition for the Corporate Client Services business and the affiliate money
managers; goodwill impairments; loan origination fees; and mortgage servicing
assets.
The precision of the estimates and assumptions we make depend on a number of
underlying variables and a range of possible outcomes. Actual circumstances that
differ significantly from our judgments and estimates could have a material
impact on our financial results. Our financial results 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;
the impact of accounting pronouncements; increased competition for business;
higher-than-expected credit losses; the effects of acquisitions; the effects of
integrating acquired entities; unanticipated changes in the regulatory,
judicial, legislative, or tax treatment of business transactions; and
uncertainty created by unrest in other parts of the world.
Other than accounting for stock-based compensation, our critical accounting
policies do not involve the choice between alternative methods of accounting. We
have applied our critical accounting policies and estimation methods
consistently in all periods presented, and we have discussed these policies with
our Audit Committee.
Our consolidated financial statements include the accounts of Wilmington Trust
Corporation and WTC, WTPA, WTFSB, RSMC, WTIM, WTI, WTL, and GTBAH. We eliminate
intercompany balances and transactions in consolidation. We have reclassified
certain prior year amounts to conform to the current year's presentation.
We believe the following critical accounting policies affect our more
significant judgments and the estimates we use to prepare the consolidated
financial statements.
RESERVE FOR LOAN LOSSES: We establish the reserve for loan losses by charging a
provision for loan losses against income. We reassess the adequacy of the
reserve quarterly, and we charge loans deemed uncollectible against the reserve
quarterly. We credit recoveries, if any, to the reserve.
Our policy is to maintain a reserve for loan losses that is our best estimate of
known and inherent estimated losses, based on subjective judgments regarding
loan collectibility. Staff members who are not responsible for lending evaluate
the reserve quarterly. In evaluating the reserve, we consider current micro and
macroeconomic factors, historical net loss experience, current delinquency
trends, and movement within our internal risk rating classifications, among
other matters. We have established the reserve in accordance with GAAP, and we
have applied our reserve methodology consistently for all periods presented.
For commercial loans, we maintain reserve allocations at various levels. We
typically establish impairment reserve allocations for nonperforming commercial
loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan." These impairment reserves are based on the present value of
anticipated cash flows discounted at the loan's effective interest rate at the
date the loan is determined to be impaired or, for collateral-dependent loans,
the fair value of the collateral. For collateral-dependent loans, we obtain
appraisals for all significant properties. Specific reserve allocations
represent subjective estimates of probable losses and consider estimated
collateral shortfalls.
For all commercial loans and letters of credit that are not subject to specific
impairment allocations, we assign a general reserve based on an eight-point
risk-rating classification system that we maintain internally. The definitions
and reserve allocation percentages for all adverse classifications are
consistent with current regulatory guidelines.
For retail loans, we use historical trend data to determine reserve allocations.
We establish specific allocations for problem credits we have identified, which
typically represent loans that are nearing our policy guidelines for charge-off
recognition. We establish general allocations for the remainder of the retail
portfolio by applying a ratio to the
48
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
outstanding balances that considers the net loss experience recognized over a
historical period for the respective loan product. We adjust the allocations as
necessary.
A portion of the reserve is not allocated specifically to commercial or retail
loans. This portion represents inherent losses that may be caused by certain
business conditions for which we have not accounted otherwise. These conditions
include current economic and market conditions, the complexity of the loan
portfolio, payment performance, migration within the internal risk rating
classification, the amount of loans we seriously doubt will be repaid, the
impact of litigation, and bankruptcy trends.
Various regulatory agencies, as an integral part of their examination processes,
periodically review the reserve of our banking affiliates. These agencies base
their judgments on information that is available to them when they conduct their
examinations, and they may require us to make adjustments to the reserve.
Determining the reserve is inherently subjective. Estimates we make, including
estimates of the amounts and timing of payments we expect to receive on impaired
loans, may be susceptible to significant change. If actual circumstances differ
substantially from the assumptions we used to determine the reserve, future
adjustments to the reserve may be necessary, which could have a material effect
on our financial performance.
STOCK-BASED EMPLOYEE COMPENSATION: We account for our stock-based employee
compensation plans under the "intrinsic value" approach, in accordance with the
provisions of APB Opinion No. 25, rather than the "fair value" approach
prescribed in SFAS No. 123, "Accounting for Stock-based Compensation." The
"intrinsic value" approach limits the compensation expense to the excess of a
stock option's market price on the grant date over the option's exercise price.
Since our stock 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
when the grant is awarded.
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. If we had accounted for stock-based
compensation under SFAS No. 123 (revised), our net income would have been as
shown in Note 1, "Stock-based compensation plans," on page 7 of this report.
In December 2004, the FASB issued SFAS No. 123 (revised), which will disallow
use of the "intrinsic value" approach, and require us to recognize in our income
statement the expenses associated with the value of all stock options granted
but not yet fully vested. Based on an April 14, 2005, ruling by the SEC, this
pronouncement will be effective for us beginning in the first quarter of 2006,
and it will cause us to record additional expense in our income statement. We
expect the annual cost of SFAS No. 123 (revised) to approximate the pro forma
amounts shown in Note 1, "Stock-based compensation plans," on page 7 of this
report.
GOODWILL AND OTHER INTANGIBLE ASSETS: Before 2002, 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 assets over their useful lives, which for us was generally 10 to 15
years. This treatment allowed changes to amortization 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 may
require that the unamortized cost should be reduced, which would result in a
reduction in net income.
In 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which
eliminated the requirement to amortize goodwill, and substituted impairment
testing in its place. The purpose of impairment testing is to ensure that an
amount we record for goodwill does not exceed the asset's actual fair value. We
test for impairment annually, or more frequently, if necessary, using a
methodology that is consistent with how the value of the associated asset was
assigned originally. If this testing indicates that the fair value of the asset
is less than its book value, we are required to record an impairment expense.
Impairment testing may cause more volatility in reported income than
amortization of goodwill, because impairment losses are likely to occur
irregularly and in varying amounts.
49
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
All of the goodwill on our books is related to acquisitions we have made and
firms in which we have invested, such as affiliate money managers CRM and RCM. A
decline in the fair value of our investment in either of these firms could cause
us to record an impairment expense.
We amortize other intangible assets on the straight-line or
sum-of-the-years'-digits basis over the estimated useful life of the asset. We
currently amortize mortgage servicing rights over an estimated useful life of
approximately eight years, and client lists over an estimated useful life of 15
to 20 years.
OTHER ACCOUNTING POLICIES: For more information about our critical accounting
policies, please refer to Note 1, "Summary of significant accounting policies,"
which begins on page 60 of our 2004 Annual Report to Shareholders, and Note 10,
"Accounting pronouncements," in this report.
CAUTIONARY STATEMENT
This report contains estimates, predictions, opinions, or other statements that
might be construed as "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
current expectations and assessments of potential developments.
Such statements include references to our financial goals; dividend policy;
financial and business trends; new business results and outlook; business
prospects and positioning with respect to market and pricing trends; strategic
initiatives; credit quality and the adequacy of the reserve for loans losses;
the effects of changes in market interest rates; the effects of changes in
securities valuations; the impact of accounting pronouncements; and other
internal and external factors that could affect our financial performance.
Our ability to achieve the results reflected in such 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; the effects of
integrating acquired entities; unanticipated changes in regulatory, judicial, or
legislative tax treatment of business transactions; and economic uncertainty
created by unrest in other parts of the world.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY AND MARKET RISK
Our primary market risks are interest rate risk, which pertains to our banking
business, and financial market risk, which pertains to our advisory businesses.
This section discusses interest rate risk, which is the risk to our earnings
that arises from fluctuations, or volatility, in market interest rates.
Changes in market interest rates, whether they are increases or decreases, and
the pace at which the changes occur, affect our net interest income and our net
interest margin, which are important determinants of our earnings and ability to
produce consistent financial results. Changes in market interest rates can
trigger repricings and changes in the pace of payments, which individually or in
combination may affect our net interest income, positively or negatively.
Most of the yields on our earning assets, including floating-rate loans and
investments, are related to market interest rates. So is our cost of funds,
which includes the rates we pay on interest-bearing deposits. Interest rate
sensitivity occurs when the interest income (yields) we earn on assets changes
at a pace that differs from the interest expense (rates) we pay on liabilities.
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;
50
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
- The level of market interest rates; and
- Other external factors.
Our goal is 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, we want changes in loans and deposits, rather
than changes in market interest rates, to be the primary drivers of growth in
net interest income.
The primary tool we use to assess our exposure to interest rate risk is a
computer modeling technique that simulates the effects of variations in interest
rates on net interest income. The simulations, which we conduct quarterly,
compare multiple hypothetical interest rate scenarios to a stable interest rate
environment. As a rule, our model employs scenarios in which rates gradually
move up or down 250 basis points over a period of 10 months.
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 June 30, 2005, and December 31, 2004.
------------------------------------------------------------------------------------
IMPACT OF INTEREST RATE CHANGES FOR THE 12 MONTHS FOR THE 12 MONTHS
ON NET INTEREST INCOME BEGINNING 6/30/05 BEGINNING 12/31/04
------------------------------------------------------------------------------------
Gradual increase of 250 basis points 2.01% 3.99%
Gradual decrease of 250 basis points (7.83)% (8.11)% (1)
------------------------------------------------------------------------------------
(1) Because the targeted federal funds rate at December 31, 2004, was 2.25%, a
scenario that simulated a 250-basis-point decrease would have been
unreasonable, since that would have created negative interest rates within
the model. Accordingly, the declining-rate scenario for the 12 months
beginning December 31, 2004, modeled a gradual downward movement until the
federal funds rate equaled zero. The rising rate scenario had no
corresponding limit, as rates can increase without limit. As of June 30,
2005, the targeted federal funds rate was 3.25%, allowing for a full
250-basis-point decrease.
The table above shows that, as of June 30, 2005, if the targeted federal funds
rate were to increase gradually by a total of 250 basis points over a 10-month
period, the model projects that net interest income would increase 2.01% over
the year beginning with that period. Similarly, if the targeted federal funds
rate were to decrease gradually over that same span of time by a total of 250
basis points, the model projects that net interest income would decline by 7.83%
for the year beginning with that period.
Assumptions about retail deposits rates, residential mortgage prepayments,
asset-backed securities, and collateralized mortgage obligations play a
significant role in our interest rate simulations. Our assumptions about rates
and the pace of changes in payments differ for assets and liabilities in rising
as well as declining rate environments. These assumptions are inherently
uncertain, and the simulations cannot predict precisely what the actual impact
of interest rate changes might be on our net interest income.
One of the things we do to manage interest rate risk is to reduce our exposure
to fixed-rate residential mortgage loans. We continue to originate new
residential mortgages, but we sell most fixed-rate production into the secondary
market. In a dynamic interest rate environment, selling fixed-rate residential
mortgages eliminates the risk associated with instruments that typically have a
15- to 30-year maturity, and it helps us obtain the best yield opposite the
corresponding risk.
Between 2001 and the end of June 2004, managing interest rate risk was
particularly challenging. During that span of time, the Federal Open Market
Committee (FOMC) instituted a series of downward moves in interest rates that
ultimately brought rates to their lowest levels since 1958. At the end of June
2004, the FOMC instituted its first rate increase since May 2000. Since June
2004, the FOMC has continued to move rates upward, as the following table shows.
51
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
FOMC ACTIONS SINCE JANUARY 1, 2004
--------------------------------------------------------------------------------------------------
QUARTER FOMC ACTIONS TARGET FEDERAL FUNDS RATE AT PERIOD END
--------------------------------------------------------------------------------------------------
2004 Q1 No change 1.00%
2004 Q2 1 upward move of 25 bps 1.25%
2004 Q3 2 upward moves of 25 bps each 1.75%
2004 Q4 2 upward moves of 25 bps each 2.25%
2005 Q1 2 upward moves of 25 bps each 2.75%
2005 Q2 2 upward moves of 25 bps each 3.25%
--------------------------------------------------------------------------------------------------
Between the beginning of 2001 and the end of June 2004, the magnitude of the
FOMC's rate decreases, and the rapid pace at which they occurred, caused the
yields on our earning assets to decline by amounts that were far larger than the
corresponding decreases in our cost of funds. In the second half of 2004, as
interest rates began to rise, this situation reversed, and the increases in our
yield on earning assets began to outpace the increases in our cost of funds.
Our net interest income and net interest margin began to benefit from the rising
interest rate environment during the first quarter of 2005, and this momentum
continued into the second quarter. As the table above shows, rates at the end of
the 2005 second quarter were 200 basis points higher than they were at the end
of the year-ago second quarter, and 100 basis points higher than at the end of
the 2004 fourth quarter. As a result, our average yield on earning assets for
the first half of 2005 was 97 basis points higher than for the corresponding
period last year, opposite an increase of 84 basis points in the cost of funds.
During the first half of 2005, the increases in the yields on earning assets
continued to outpace increases in the cost of funds, and we remained slightly
asset sensitive.
The following table presents a comparison of key yields and rates. For a more
detailed analysis of our yields and rates, please refer to the "Analysis of
earnings" section of this report.
--------------------------------------------------------------------------------------------------------------
AVERAGE YIELDS/RATES 6 MOS. ENDED 6/30/05 12 MOS. ENDED 12/31/04 6 MOS. ENDED 6/30/04
--------------------------------------------------------------------------------------------------------------
Loan balances 5.93% 4.87% 4.61%
Total earning assets 5.58% 4.67% 4.46%
Core interest-bearing deposits 1.29% 0.85% 0.75%
Total cost of funds 1.92% 1.10% 0.94%
--------------------------------------------------------------------------------------------------------------
The following table presents a comparison of the percentages of fixed- and
floating-rate loans in our portfolio, and of our prime lending rate, which
serves as a point of reference for a substantial number of the floating-rate
loans in our commercial loan portfolio.
-----------------------------------------------------------------------------------------------------------------
SELECTED LOAN YIELD INDICATORS AT 6/30/05 AT 12/31/04 AT 6/30/04
-----------------------------------------------------------------------------------------------------------------
Wilmington Trust prime lending rate (period-end) 6.25% 5.25% 4.25%
Percentage of floating-rate loans 77.33% 77.0% 75.94%
Percentage of fixed-rate loans 22.67% 23.0% 24.06%
----------------------------------------------------------------------------------------------------------------
At June 30, 2005, pricing for approximately 29% of the total commercial loan
portfolio was based on LIBOR.
Changes in the yields on our floating-rate loans may not correlate directly with
market interest rate changes, because:
- Most of our floating-rate loans reprice within 30 to 45 days of a rate
change;
- Not all of our floating-rate loans are pegged to the targeted federal
funds rate; and
- We factor competitive considerations into our pricing decisions.
52
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
The preceding paragraphs contain forward-looking statements about the
anticipated effects on net interest income that may result from hypothetical
changes in market interest rates. 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.
FINANCIAL MARKET RISK
Financial market risk is the risk that arises from fluctuations, or volatility,
in the equity markets, the fixed income markets, or both. Changes in the market
values of financial assets, the stability of particular securities markets, and
the level of volatility in financial markets could affect the value of client
assets we manage or hold in custody. Changes in the value of these client assets
could affect the revenue from our advisory businesses, our total noninterest
income, and our overall results.
The following components of noninterest income are based on financial market
valuations:
- Wealth Advisory trust and investment advisory fees
- Corporate Client retirement services fees
- Corporate Client cash management fees
- Affiliate money manager revenue
As the following table shows, 51% - or $38.7 million - of total noninterest
income for the 2005 second quarter was subject to financial market risk. For the
first six months of 2005, half of total noninterest income - or $77.5 million -
was subject to financial market risk.
-------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME BASED ON MARKET VALUATIONS 2005 Q2 2004 Q2 2005 YTD 2004 YTD
-------------------------------------------------------------------------------------------------------------
WAS trust and investment advisory (in millions) $ 30.0 $ 26.9 $ 59.7 $ 53.7
CCS retirement services (in millions) 3.2 3.2 6.4 5.9
CCS cash management services (in millions) 1.3 1.5 2.6 3.3
Affiliate manager revenue (in millions) 4.2 2.7 8.8 5.0
Total $ tied to market valuations (in millions) $ 38.7 $ 34.3 $ 77.5 $ 67.9
% of total noninterest income tied to market values 51% 49% 50% 48%
-------------------------------------------------------------------------------------------------------------
ECONOMIC RISK
A primary factor in our continued loan growth is the economic environment in
Delaware Valley region. The regional economy is well diversified across the life
sciences, financial services, health care, education, construction,
manufacturing, agriculture, and tourism sectors. Economic indicators in the
region remained positive:
- According to the Delaware Department of Labor, as of June 2005, Delaware's
unemployment rate was 4.1%, versus the national rate of 5.0%. Delaware's
unemployment rate has remained below the national average since at least
1990.
- According to Regional Economic Conditions published by the Federal Deposit
Insurance Corporation, the unemployment rate for the metropolitan
Philadelphia area was 4.7% as of the fourth quarter of 2004 (the most
recent report available).
- The Federal Reserve Bank of Philadelphia issued Economic Activity Indexes
for Delaware, Pennsylvania, and New Jersey that reported increases in
economic activity in all three states over the past 12 months (as of May
2005, the most recent report available).
- The Federal Deposit Insurance Corporation reported that Delaware had the
12th highest rate of employment growth in the United States in the 2005
first quarter.
- According to the U.S. Census Bureau, Delaware is the
seventh-fastest-growing state in the United States, and the fifth most
popular for attracting permanent residents aged 65 and older.
53
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
- Kiplinger's ranks Delaware among the top U.S. retirement destinations, due
to the state's favorable tax environment, affordable housing relative to
other mid-Atlantic states, and convenient location along the New
York/Washington, D.C. corridor.
- According to the Delaware Department of Labor, the health care,
construction, leisure, hospitality, professional services, and technical
business services sectors combined have added 6,700 jobs in Delaware since
June 2004.
- In October 2004, Juniper Bank announced plans to add 780 jobs in Delaware
over the next four years.
- On July 26, the Delaware Economic Development Office announced that
Paris-based Air Liquide had committed to add more than 100 scientists to
its workforce in Delaware.
In June 2005, Bank of America Corporation announced its intention to acquire
MBNA Corporation, and said that it plans to eliminate as many as 6,000 jobs
between the two companies after the transaction is complete. According to their
respective 2004 annual reports, Bank of America has approximately 176,000
full-time equivalent (FTE) employees and MBNA has approximately 26,300 FTE
employees.
MBNA has approximately 10,500 employees in Delaware, and is the state's largest
employer. Bank of America has approximately 1,300 employees in Delaware. Since
neither company has indicated when or where those job eliminations will occur,
it is impossible to predict what effect potential job losses at either company
would have on Delaware's economy or on our company's financial condition.
OPERATIONAL RISK AND FIDUCIARY RISK
Operational risk is the risk of unexpected losses attributable to human error,
systems failures, fraud, or inadequate internal controls and procedures. To
mitigate this risk, we employ a system of internal controls that is designed to
keep operating risk at levels we believe are acceptable, in view of the risks
inherent in the markets and businesses in which we engage. Our internal controls
include policies and procedures for authorizing, approving, documenting, and
monitoring transactions.
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 employ policies and
procedures to reduce the risk of failing to discharge our obligations to clients
faithfully and in compliance with applicable legal and regulatory requirements.
These policies and procedures pertain to creating, selling, and managing
investment products; trading securities; and selecting counterparties.
All of our staff members share responsibility for adhering to our policies,
procedures, and external regulations. Our internal auditors monitor the overall
effectiveness of our system of internal controls on an ongoing basis.
Section 404 of the Sarbanes-Oxley Act requires us to assess the design and
effectiveness of our internal controls over financial reporting. We evaluate the
documentation of our control processes and test our primary controls
continually, remediating them as needed. In addition, each quarter, designated
managers in each business unit certify to the chairman and chief executive
officer, as well as to the chief financial officer, as to the effectiveness of
the internal controls within their respective areas of responsibility.
REGULATORY RISK
Regulatory risk is the risk of sanctions that various state and federal
authorities may impose on us if we fail to comply adequately with regulatory
requirements, including those specified by the Bank Secrecy Act, the USA Patriot
Act, the Sarbanes-Oxley Act, and other applicable legal and regulatory
requirements. To limit this risk, we employ policies and procedures to reduce
the risk of failing to comply with these requirements.
LEGAL RISK
We and our subsidiaries are subject to various legal proceedings that arise from
time to time in the ordinary course of business. 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.
54
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
While it is not feasible to predict the outcome of these proceedings, we do not
believe that the ultimate resolution of any of them will have a materially
adverse effect on our consolidated financial condition. Furthermore, some of
these proceedings involve claims that we believe may be covered by insurance,
and we have advised our insurance carriers accordingly.
OTHER RISK
We are exposed to a variety of risks in the normal course of our business. We
monitor these risks closely and take every step to safeguard the assets of our
clients and our company. From time to time, however, we may incur losses related
to these risks, and there can be no assurance that such losses will not occur in
the future.
ITEM 4. CONTROLS AND PROCEDURES.
Our chairman and chief executive officer, and our chief financial officer,
evaluated 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, they concluded that our disclosure
controls and procedures were effective in alerting them on a timely basis to
material information about the Corporation (including our consolidated
subsidiaries) that we are required to include 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 second quarter or first half of 2005
that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
55
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table shows our repurchases of Wilmington Trust stock during the
second quarter.
------------------------------------------------------------------------------------------------------
(d) Maximum Number
(or Approximate
(a) Total Number (b) (c) Total Number of Dollar Value) of
of Shares (or Average Price Shares (or Units) Shares (or Units)
Units) Purchased Paid per Purchased as Part that May Yet Be
Share (or of Publicly Purchased Under
Unit) Announced Plans or the Plans or
Period Programs Programs
------------------------------------------------------------------------------------------------------
Month #1 4,892 $34.54 4,892 7,327,703
April 1, 2005 -
April 30, 2005
Month #2
May 1, 2005 -
May 31, 2005 2,153 $35.42 2,153 7,325,550
Month #3
June 1, 2005 -
June 30, 2005 - - - 7,325,550
Total 7,045 $34.81 7,045 7,325,550
------------------------------------------------------------------------------------------------------
In April 2002, we announced a plan to repurchase up to 8 million shares of our
stock.
The Federal Reserve Board's policy is that bank holding companies should not pay
dividends unless the institution's prospective earnings retention rate is
consistent with its capital needs, asset quality, and overall financial
condition. We believe our payment of dividends during the first half of 2005 was
consistent with the Federal Reserve Board's policy.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
56
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Shareholders' Meeting on April 21, 2005 (Annual Meeting), the
nominees for directors of the Corporation proposed were elected. Shareholders
cast votes for those nominees as follows:
--------------------------------------------------------------------
NOMINEE FOR WITHHELD
--------------------------------------------------------------------
Carolyn S. Burger 56,189,286.789 2,179,660.738
Roberts V.A. Harra Jr. 57,834,625.405 534,322.122
Rex L. Mears 57,746,902.204 622,045.323
Robert W. Tunnell Jr. 57,705,739.621 663,208.906
--------------------------------------------------------------------
The terms of Ted T. Cecala, Richard R. Collins, Charles S. Crompton Jr., R.
Keith Elliott, Rex L. Mears, Hugh E. Miller, Stacey J. Mobley, David P. Roselle,
H.Rodney Sharp III, and Thomas P. Sweeney continued after the Annual Meeting.
In other business at the Annual Meeting, shareholders approved our 2005
Long-term Incentive Plan. That plan, which is designed to help us attract and
retain key staff members, directors, and advisory board members, is for a term
of three years, and it authorized the issuance of up to 4,000,000 shares of our
common stock. Shareholders cast votes for that plan as follows:
-------------------------------------------------------------------------------------------------
OTHER MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS FOR AGAINST ABSTAIN
-------------------------------------------------------------------------------------------------
2005 Long-term incentive plan 37,550,410.639 7,586,877.071 959,016.817
-------------------------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
Exhibit
Number Exhibit
------- ---------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the
Corporation (Commission File Number 1-14659)(1)
3.2 Amended Certificate of Designation of Series A Junior
Participating Preferred Stock of the Corporation (Commission
File Number 1-14659) (2)
3.3 Amended and Restated Bylaws of the Corporation (Commission
File Number 1-14659) (3)
31 Rule 13a 14(a)/15d-14(a) Certifications (4)
32 Section 1350 Certification (4)
(1) Incorporated by reference to Exhibit 3(a) to the Report on Form S-8 of
Wilmington Trust Corporation filed on October 31, 1991.
(2) Incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form
10-Q of Wilmington Trust Corporation filed on May 9, 2005.
(3) Incorporated by reference to Exhibit 1 to the Current Report on Form 8-K
of Wilmington Trust Corporation filed on December 22, 2004.
(4) Filed herewith.
57
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2005
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: August 9, 2005 /s/ Ted T. Cecala
---------------------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and Chief Executive
Officer
(Authorized Officer)
Date: August 9, 2005 /s/ David R. Gibson
---------------------------------------------------
Name: David R. Gibson
Title: Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
58