UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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
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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 (I.R.S. Employer
of 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 by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of September 30, 2005
------------------------------ ------------------------------------
COMMON STOCK - PAR VALUE $1.00 67,820,167
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
THIRD 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 57
Item 4 Controls and Procedures 62
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 63
Item 1A Risk Factors 63
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 63
Item 3 Defaults upon Senior Securities 64
Item 4 Submission of Matters to a Vote of Security Holders 64
Item 5 Other Information 64
Item 6 Exhibits 64
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
----------------------------
September 30, December 31,
(In millions, except share amounts) 2005 2004
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ASSETS
Cash and due from banks $ 286.8 $ 248.6
------------------------
Federal funds sold and securities purchased
under agreements to resell 64.0 63.3
------------------------
Investment securities available for sale:
U.S. Treasury and government agencies 526.2 441.3
Obligations of state and political subdivisions 9.0 9.8
Other securities 1,389.1 1,359.1
---------------------------------------------------------------------------------
Total investment securities available for sale 1,924.3 1,810.2
------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions
(market values of $2.3 and $2.8 respectively) 2.2 2.6
Other securities (market value of $0.5) 0.5 0.5
---------------------------------------------------------------------------------
Total investment securities held to maturity 2.7 3.1
------------------------
Loans:
Commercial, financial, and agricultural 2,511.4 2,505.2
Real estate - construction 1,032.0 735.4
Mortgage - commercial 1,260.8 1,246.8
---------------------------------------------------------------------------------
Total commercial loans 4,804.2 4,487.4
------------------------
Mortgage - residential 450.9 431.3
Consumer 1,414.8 1,239.6
Secured with liquid collateral 622.9 604.7
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Total retail loans 2,488.6 2,275.6
------------------------
Total loans net of unearned income 7,292.8 6,763.0
Reserve for loan losses (93.4) (89.7)
---------------------------------------------------------------------------------
Net loans 7,199.4 6,673.3
------------------------
Premises and equipment, net 147.2 150.3
Goodwill 344.3 337.0
Other intangible assets 40.2 43.8
Accrued interest receivable 49.2 38.3
Other assets 135.8 142.3
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Total assets $10,193.9 $9,510.2
========================
1
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
----------------------------
September 30, December 31,
(In millions, except share amounts) 2005 2004
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 1,060.8 $1,118.8
Interest-bearing:
Savings 332.7 355.5
Interest-bearing demand 2,317.5 2,442.5
Certificates under $100,000 840.6 765.4
Local CDs $100,000 and over 411.0 305.4
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Total core deposits 4,962.6 4,987.6
National CDs $100,000 and over 2,586.3 1,884.3
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Total deposits 7,548.9 6,871.9
------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,104.4 1,120.2
U.S. Treasury demand 12.9 37.1
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Total short-term borrowings 1,117.3 1,157.3
------------------------
Accrued interest payable 41.9 25.6
Other liabilities 114.3 141.4
Long-term debt 403.1 408.6
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Total liabilities 9,225.5 8,604.8
------------------------
Minority interest 0.2 0.1
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Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 102.4 95.2
Retained earnings 1,080.3 1,015.3
Accumulated other comprehensive loss (36.2) (22.7)
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Total contributed capital and retained earnings 1,225.0 1,166.3
Less: Treasury stock, at cost, 10,708,179 and
11,122,924 shares, respectively (256.8) (261.0)
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Total stockholders' equity 968.2 905.3
------------------------
Total liabilities and stockholders' equity $10,193.9 $9,510.2
========================
See Notes to Consolidated Financial Statements
2
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
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For the three months ended For the nine months ended
September 30, September 30,
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2005 2004 2005 2004
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(In millions; except share data)
NET INTEREST INCOME
Interest and fees on loans $114.3 $79.4 $311.8 $226.2
Interest and dividends on investment securities:
Taxable interest 18.6 16.3 52.9 48.1
Tax-exempt interest 0.1 0.1 0.5 0.4
Dividends 1.4 1.9 4.5 5.5
Interest on federal funds sold and securities
purchased under agreements to resell 0.5 0.1 0.7 0.2
--------------------------------------------------------------------------------------------------------------
Total interest income 134.9 97.8 370.4 280.4
------------------------------------------
Interest on deposits 36.5 14.9 89.4 40.4
Interest on short-term borrowings 9.2 5.4 24.7 12.4
Interest on long-term debt 5.5 3.5 14.9 9.6
--------------------------------------------------------------------------------------------------------------
Total interest expense 51.2 23.8 129.0 62.4
------------------------------------------
Net interest income 83.7 74.0 241.4 218.0
Provision for loan losses (2.9) (2.9) (9.8) (11.6)
--------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 80.8 71.1 231.6 206.4
------------------------------------------
NONINTEREST INCOME
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory fees 32.0 27.4 91.6 81.1
Mutual fund fees 5.2 5.0 14.5 15.1
Planning and other services 6.3 4.6 23.3 17.8
--------------------------------------------------------------------------------------------------------------
Total Wealth Advisory Services 43.5 37.0 129.4 114.0
------------------------------------------
Corporate Client Services:
Capital markets services 8.7 7.1 24.5 23.3
Entity management services 5.7 5.8 17.5 16.8
Retirement services 3.3 2.9 9.7 8.9
Cash management services 1.4 1.4 4.0 4.6
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Total Corporate Client Services 19.1 17.2 55.7 53.6
------------------------------------------
Cramer Rosenthal McGlynn 3.4 2.5 11.8 7.1
Roxbury Capital Management 0.3 0.3 0.8 0.7
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Advisory fees 66.3 57.0 197.7 175.4
Amortization of affiliate other intangibles (1.0) (0.6) (3.1) (1.5)
--------------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate other intangibles 65.3 56.4 194.6 173.9
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3
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
-------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------------------------------
2005 2004 2005 2004
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(In millions; except share data)
Service charges on deposit accounts 7.4 7.8 20.9 24.1
Loan fees and late charges 2.0 1.7 5.3 4.6
Card fees 2.0 2.1 6.0 6.5
Other noninterest income 3.0 0.8 5.9 2.6
Securities gains -- 0.6 0.8 0.6
------------------------------------------------------------------------------------------------------------
Total noninterest income 79.7 69.4 233.5 212.3
---------------------------------------------
Net interest and noninterest income 160.5 140.5 465.1 418.7
---------------------------------------------
NONINTEREST EXPENSE
Salaries and wages 35.4 33.8 103.3 98.6
Incentives and bonuses 7.6 7.1 24.3 21.8
Employment benefits 11.6 10.3 35.8 31.2
Net occupancy 5.5 5.2 16.3 15.5
Furniture, equipment, and supplies 8.7 8.1 26.3 23.5
Advertising and contributions 2.4 1.9 6.6 6.2
Servicing and consulting fees 2.3 3.4 7.3 8.4
Subadvisor expense 2.7 2.5 6.9 7.0
Travel, entertainment, and training 2.6 2.2 6.2 6.2
Originating and processing fees 2.8 2.1 7.7 6.2
Legal and auditing fees 1.6 1.3 5.2 3.9
Other noninterest expense 8.6 9.0 24.9 24.0
------------------------------------------------------------------------------------------------------------
Total noninterest expense 91.8 86.9 270.8 252.5
---------------------------------------------
NET INCOME
Income before income taxes and minority
interest 68.7 53.6 194.3 166.2
Income tax expense 24.2 19.2 69.2 58.9
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Net income before minority interest 44.5 34.4 125.1 107.3
Minority interest 0.1 -- 0.2 0.7
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Net income $ 44.4 $ 34.4 $ 124.9 $ 106.6
=============================================
Net income per share:
Basic $ 0.66 $ 0.51 $ 1.85 $ 1.60
=============================================
Diluted $ 0.65 $ 0.50 $ 1.82 $ 1.57
=============================================
Weighted average shares outstanding:
Basic (000s) 67,788 67,321 67,630 66,596
Diluted (000s) 68,699 68,468 68,440 67,805
See Notes to Consolidated Financial Statements
4
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Wilmington Trust Corporation and Subsidiaries
-------------------------
For the nine months ended
September 30,
-------------------------
(In millions) 2005 2004
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OPERATING ACTIVITIES
Net income $ 124.9 $ 106.6
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 9.8 11.6
Provision for depreciation and other amortization 14.5 14.4
Amortization of other intangible assets 4.0 2.5
Minority interest in net income 0.2 0.7
Amortization of investment securities available for sale
discounts and premiums 3.1 10.1
Deferred income taxes (0.1) (0.7)
Originations of residential mortgages available for sale (79.1) (59.2)
Gross proceeds from sales of residential mortgages 80.3 60.3
Gains on sales of residential mortgages (1.2) (1.1)
Securities gains (0.8) (0.6)
Income tax benefit realized on employee exercise of stock options 0.8 1.1
Increase in other assets (17.6) (3.5)
Decrease in other liabilities (3.3) (5.7)
-------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 135.5 136.5
-------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 32.2 30.7
Proceeds from maturities of investment securities available for sale 392.8 995.4
Proceeds from maturities of investment securities held to maturity 0.5 1.0
Purchases of investment securities available for sale (561.8) (1,027.0)
Purchases of investment securities held to maturity (0.1) --
Investments in affiliates -- (15.7)
Cash paid for purchase of subsidiary (0.6) (33.0)
Purchase of minority interest -- (1.3)
Purchases of residential mortgages (7.6) (5.2)
Net increase in loans (528.3) (395.7)
Purchases of premises and equipment (11.9) (32.6)
Dispositions of premises and equipment 0.8 19.3
-------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (684.0) (464.1)
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5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
-------------------------
For the nine months ended
September 30,
-------------------------
(In millions) 2005 2004
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FINANCING ACTIVITIES
Net (decrease)/increase in demand, savings, and interest-bearing
demand deposits (205.8) 109.4
Net increase in certificates of deposit 882.8 302.7
Net (decrease)/increase in federal funds purchased and securities sold
under agreements to repurchase (15.8) 291.1
Net (decrease)/increase in U.S. Treasury demand (24.2) 30.3
Net decrease in line of credit -- (8.0)
Cash dividends (59.9) (55.9)
Distributions to minority shareholders (0.1) (0.8)
Proceeds from common stock issued under employment benefit plans 12.3 14.2
Payments for common stock acquired through buybacks (1.7) (19.6)
-------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 587.6 663.4
---------------
Effect of foreign currency translation on cash (0.2) --
---------------
Increase in cash and cash equivalents 38.9 335.8
Cash and cash equivalents at beginning of period 311.9 214.0
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Cash and cash equivalents at end of period $350.8 $549.8
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $112.7 $ 62.3
Taxes 54.4 65.7
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 0.1 $ 6.4
Goodwill and other intangible assets acquired 8.2 92.7
---------------
Fair value of assets acquired 8.3 99.1
Common stock issued -- (48.4)
Cash paid (0.6) (50.7)
-------------------------------------------------------------------------------------------------------------
Liabilities assumed $ 7.7 $ --
===============
See Notes to Consolidated Financial Statements
6
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - STOCK-BASED COMPENSATION PLANS
At September 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.
We account for our stock-based employee compensation plans under the "intrinsic
value" approach, in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25 and related interpretations, rather than under the
"fair value" approach prescribed in Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." For information on
the differences between these two methods, please refer to the discussion of
"Stock-based employee compensation" in the "Critical accounting policies and
estimates" section of this report, or Note 1, "Summary of significant accounting
policies," which begins on page 60 of our 2004 Annual Report to Shareholders.
If we had accounted for stock-based compensation under SFAS No. 123, our net
income would have been as shown in the following pro forma disclosure. We used
the Black-Scholes option-pricing model to determine stock compensation expense.
--------------------------------------------------------
STOCK OPTION EXPENSE PRO FORMA For the three months ended For the nine months ended
September 30, September 30,
--------------------------------------------------------
(In millions, except per share amounts) 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------
Net income:
As reported $44.4 $34.4 $124.9 $106.6
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1.5) (1.3) (4.3) (3.9)
-----------------------------------------------------------------------------------------------------------------
Pro forma net income $42.9 $33.1 $120.6 $102.7
Basic earnings per share:
As reported $0.66 $0.51 $ 1.85 $ 1.60
Pro forma 0.63 0.49 1.78 1.54
Diluted earnings per share:
As reported $0.65 $0.50 $ 1.82 $ 1.57
Pro forma 0.62 0.48 1.76 1.51
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 nine months ended
September 30, September 30,
-------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------
Restricted stock award expense (in millions) $0.1 $-- $0.3 $0.1
7
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
NOTE 2 - ACCOUNTING AND REPORTING POLICIES
We have prepared the accompanying consolidated financial statements in
accordance with U.S. generally accepted accounting principles (GAAP), 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
------------------------------------------------------
OTHER COMPREHENSIVE INCOME For the three months ended For the nine months ended
September 30, September 30,
------------------------------------------------------
(in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------------
Net income $44.4 $34.4 $124.9 $106.6
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities (7.8) 13.9 (12.5) (3.3)
Reclassification adjustment for securities gains
included in net income -- (0.4) (0.5) (0.4)
Net unrealized holding gains arising during the
period on derivatives used for cash flow hedge -- 0.1 -- 0.1
Reclassification adjustment for derivative gains
included in net income -- (0.1) (0.1) (0.2)
Foreign currency translation adjustments (0.1) -- (0.4) (0.1)
------------------------------------------
Total comprehensive income $36.5 $47.9 $111.4 102.7
==========================================
8
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
-------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------------------------------
(In millions; except per share data) 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------
Numerator:
Net income $44.4 $ 34.4 $124.9 $106.6
-------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 67.8 67.3 67.6 66.6
-------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 0.9 1.2 0.8 1.2
-------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 68.7 68.5 68.4 67.8
-------------------------------------------------------------------------------------------------------
Basic earnings per share $0.66 $ 0.51 $ 1.85 $ 1.60
=======================================================================================================
Diluted earnings per share $0.65 $ 0.50 $ 1.82 $ 1.57
=======================================================================================================
Cash dividends per share $0.30 $0.285 $0.885 $ 0.84
The number of anti-dilutive stock options excluded was 0.0 and 0.7 million for
the three- and nine-month periods ended September 30, 2005. The number of
anti-dilutive stock options excluded was 1.0 million for the three- and
nine-month periods ended September 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
9
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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.
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.
The following tables present financial data by segment for the three- and
nine-month periods ended September 30, 2005, and September 30, 2004.
-----------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Three months ended Regional Advisory Client Money
September 30, 2005 (in millions) Banking Services Services Managers Totals
-----------------------------------------------------------------------------------------------------
Net interest income $ 77.7 $ 6.0 $ 2.6 $(2.6) $ 83.7
Provision for loan losses (2.7) (0.2) -- -- (2.9)
-----------------------------------------------------------------------------------------------------
Net interest income after provision 75.0 5.8 2.6 (2.6) 80.8
Advisory fees:
Wealth Advisory Services 0.4 40.4 2.7 -- 43.5
Corporate Client Services 0.3 -- 18.8 -- 19.1
Affiliate Money Managers -- -- -- 3.7 3.7
-----------------------------------------------------------------------------------------------------
Advisory fees 0.7 40.4 21.5 3.7 66.3
Amortization of other intangibles -- (0.8) -- (0.2) (1.0)
-----------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.7 39.6 21.5 3.5 65.3
Other noninterest income 13.6 0.4 0.4 -- 14.4
-----------------------------------------------------------------------------------------------------
Net interest and noninterest income 89.3 45.8 24.5 0.9 160.5
Noninterest expense (39.2) (34.2) (18.4) -- (91.8)
-----------------------------------------------------------------------------------------------------
Segment profit before income taxes 50.1 11.6 6.1 0.9 68.7
Applicable income taxes and minority interest 17.4 4.1 2.3 0.5 24.3
-----------------------------------------------------------------------------------------------------
Segment net income $ 32.7 $ 7.5 $ 3.8 $ 0.4 $ 44.4
====================================================================================================
Depreciation and amortization $ 4.1 $ 1.8 $ 1.4 $ 0.1 $ 7.4
10
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
Wealth Corporate Affiliate
Three months ended Regional Advisory Client Money
September 30, 2004 (in millions) Banking Services Services Managers Totals
----------------------------------------------------------------------------------------------------
Net interest income $ 68.0 $ 5.1 $ 2.4 $(1.5) $ 74.0
Provision for loan losses (3.2) 0.3 -- -- (2.9)
----------------------------------------------------------------------------------------------------
Net interest income after provision 64.8 5.4 2.4 (1.5) 71.1
Total advisory fees:
Wealth Advisory Services 0.5 34.3 2.2 -- 37.0
Corporate Client Services 0.1 -- 17.1 -- 17.2
Affiliate Money Managers -- -- -- 2.8 2.8
----------------------------------------------------------------------------------------------------
Advisory fees 0.6 34.3 19.3 2.8 57.0
Amortization of other intangibles -- (0.3) (0.1) (0.2) (0.6)
----------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.6 34.0 19.2 2.6 56.4
Other noninterest income 12.8 (0.8) 0.4 -- 12.4
----------------------------------------------------------------------------------------------------
Securities gains 0.6 -- -- -- 0.6
Net interest and noninterest income 78.8 38.6 22.0 1.1 140.5
Noninterest expense (35.4) (33.6) (17.9) -- (86.9)
----------------------------------------------------------------------------------------------------
Segment profit before income taxes 43.4 5.0 4.1 1.1 53.6
Applicable income taxes and minority interest 15.3 1.8 1.6 0.5 19.2
----------------------------------------------------------------------------------------------------
Segment net income $ 28.1 $ 3.2 $ 2.5 $ 0.6 $ 34.4
====================================================================================================
Depreciation and amortization $ 5.6 $ 2.1 $ 1.4 $ 0.1 $ 9.2
11
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Nine months ended Regional Advisory Client Money
September 30, 2005 (in millions) Banking Services Services Managers Totals
------------------------------------------------------------------------------------------------------
Net interest income $ 223.7 $ 16.9 $ 7.8 $ (7.0) $ 241.4
Provision for loan losses (9.3) (0.5) -- -- (9.8)
------------------------------------------------------------------------------------------------------
Net interest income after provision 214.4 16.4 7.8 (7.0) 231.6
Total advisory fees:
Wealth Advisory Services 1.3 121.0 7.1 -- 129.4
Corporate Client Services 0.7 -- 55.0 -- 55.7
Affiliate Money Managers -- -- -- 12.6 12.6
------------------------------------------------------------------------------------------------------
Advisory fees 2.0 121.0 62.1 12.6 197.7
Amortization of other intangibles -- (2.2) (0.3) (0.6) (3.1)
------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 2.0 118.8 61.8 12.0 194.6
Other noninterest income 36.0 1.0 1.1 -- 38.1
Securities gains 0.8 -- -- -- 0.8
------------------------------------------------------------------------------------------------------
Net interest and noninterest income 253.2 136.2 70.7 5.0 465.1
Noninterest expense (111.1) (105.2) (54.5) -- (270.8)
------------------------------------------------------------------------------------------------------
Segment profit before income taxes 142.1 31.0 16.2 5.0 194.3
Applicable income taxes and minority interest 49.5 11.0 6.1 2.8 69.4
------------------------------------------------------------------------------------------------------
Segment net income $ 92.6 $ 20.0 $ 10.1 $ 2.2 $ 124.9
======================================================================================================
Depreciation and amortization $ 10.9 $ 6.4 $ 3.8 $ 0.5 $ 21.6
Investment in equity method investees -- -- -- 253.7 253.7
Segment average assets 7,920.2 1,318.6 186.8 259.4 9,685.0
12
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Nine months ended Regional Advisory Client Money
September 30, 2004 (in millions) Banking Services Services Managers Totals
------------------------------------------------------------------------------------------------------
Net interest income $ 196.7 $ 18.0 $ 7.3 $ (4.0) $ 218.0
Provision for loan losses (11.6) -- -- -- (11.6)
------------------------------------------------------------------------------------------------------
Net interest income after provision 185.1 18.0 7.3 (4.0) 206.4
Total advisory fees:
Wealth Advisory Services 1.4 105.7 6.9 -- 114.0
Corporate Client Services 0.7 -- 52.9 -- 53.6
Affiliate Money Managers -- -- -- 7.8 7.8
------------------------------------------------------------------------------------------------------
Advisory fees 2.1 105.7 59.8 7.8 175.4
Amortization of other intangibles -- (0.6) (0.4) (0.5) (1.5)
------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 2.1 105.1 59.4 7.3 173.9
Other noninterest income 35.8 0.9 1.1 -- 37.8
Securities gains 0.6 -- -- -- 0.6
------------------------------------------------------------------------------------------------------
Net interest and noninterest income 223.6 124.0 67.8 3.3 418.7
Noninterest expense (104.9) (98.6) (49.0) -- (252.5)
------------------------------------------------------------------------------------------------------
Segment profit before income taxes 118.7 25.4 18.8 3.3 166.2
Applicable income taxes and minority interest 41.3 9.6 7.1 1.6 59.6
------------------------------------------------------------------------------------------------------
Segment net income $ 77.4 $ 15.8 $ 11.7 $ 1.7 $ 106.6
======================================================================================================
Depreciation and amortization $ 16.5 $ 5.8 $ 4.3 $ 0.4 $ 27.0
Investment in equity method investees -- -- -- 253.7 253.7
Segment average assets 7,417.8 1,180.7 203.1 247.5 9,049.1
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.
13
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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.
At September 30, 2005, we had entered into a total of $1.1 billion notional
amount of interest rate swaps as follows:
- $364.4 million of swaps were associated with loan clients for whom we
exchanged floating rates for fixed rates.
- To offset the exposure from changes in the market value of those swaps,
$364.4 million of swaps were made with other financial institutions that
exchanged fixed rates for floating rates.
- $375.0 million of swaps associated with our long-term subordinated debt
issues were made with other financial institutions.
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 third quarter of 2005, we reclassified to earnings approximately $26,764
of gains from our sale of interest rate floors in 2001. During the remainder of
2005, we do not expect to reclassify any gains in "Accumulated other
comprehensive income" to earnings.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
-----------------------------------------------------------------------------------------------------
September 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) $374.1 $29.8 $344.3 $366.8 $29.8 $337.0
=====================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 8.8 $ 5.8 $ 3.0 $ 8.0 $ 4.9 $ 3.1
Client lists 42.8 10.8 32.0 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 $ 59.2 $19.0 $ 40.2 $ 58.8 $15.0 $ 43.8
=====================================================================
The amortization expense of other intangible assets for the three and nine
months ended September 30 was as follows:
-------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------------------------------
(In millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Amortization expense $1.3 $0.9 $4.0 $2.5
14
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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 $3.8
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 nine
months ended September 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 -- -- 8.2 -- 8.2
Decrease in carrying value due to foreign
currency translation adjustments -- -- (0.9) -- (0.9)
------------------------------------------------------------------------------------------------
Balance as of September 30, 2005 $3.8 $84.3 $17.6 $238.6 $344.3
==================================================
2004
----------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(In millions) Banking Services Services Managers Total
---------------------------------------------------------------------------------------
Balance as of January 1, 2004 $3.8 $ 4.4 $7.8 $227.2 $243.2
Goodwill acquired -- 70.7 -- 11.7 82.4
---------------------------------------------------------------------------------------
Balance as of September 30, 2004 $3.8 $75.1 $7.8 $238.9 $325.6
==================================================
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.
- $0.9 million associated with the acquisition of Charleston Captive
Management Company, recorded under Corporate Client Services.
The goodwill acquired in 2004 consists of:
- $70.4 million recorded in connection with the payment of a portion of the
purchase price for our interest in Balentine Delaware Holding Company,
LLC.(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)
- $11.7 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 nine months ended September 30, 2005
The following table lists other intangible assets acquired during the nine
months ended September 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 $ 0.8 -- 8 $ 0.6 -- 8
Client lists -- -- 12.4 -- 20
Client list (decrease)/
increase in carrying value
due to foreign currency
translation adjustments (0.4) -- 0.1 --
---------------- ---------------
$ 0.4 -- $13.1 --
=============== ===============
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 nine months ended September 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.
Pension SERP Postretirement
benefits benefits benefits
For the three months ended --------------------------------------------
September 30, 2005 (in millions) 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 2.0 $ 1.7 $0.2 $0.2 $0.2 $0.2
Interest cost 2.4 2.2 0.3 0.4 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 0.2 0.1 0.2
--------------------------------------------------------------------------------------
Net periodic benefit cost $ 1.9 $ 1.3 $0.7 $0.9 $0.9 $1.0
===========================================
Employer contributions $25.0 $12.0 $0.2 $0.1 $1.1 $1.0
16
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
Pension SERP Postretirement
benefits benefits benefits
For the nine months ended --------------------------------------------
September 30, 2005 (in millions) 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 5.6 $ 4.9 $0.6 $0.5 $0.6 $0.7
Interest cost 7.6 6.6 1.0 0.9 1.7 1.9
Expected return on plan assets (9.3) (8.5) -- -- -- --
Amortization of transition
obligation/(asset) -- (0.6) -- -- -- --
Amortization of prior service cost 0.6 0.6 0.3 0.3 -- --
Recognized actuarial (gain)/loss 1.2 0.6 0.3 0.4 0.5 0.6
---------------------------------------------------------------------------------------
Net periodic benefit cost $ 5.7 $ 3.6 $2.2 $2.1 $2.8 $3.2
===========================================
Employer contributions $25.0 $12.0 $0.5 $0.4 $3.3 $2.8
Expected annual contribution $25.0 $0.6 $4.4
NOTE 9 - TEMPORARILY IMPAIRED INVESTMENT SECURITIES
We periodically review the securities in our investment portfolio in order to
determine if their market value is equal to, less than, or exceeds their book
value. When the market value of securities 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 debt 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 debt securities to
increase. As their market value rises, the unrealized loss diminishes or
disappears.
We consider these impairments temporary because we hold the debt 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 debt 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 debt 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.
The following table shows the estimated market value and gross unrealized loss
of debt and marketable equity securities that were temporarily impaired as of
September 30, 2005.
17
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
Less than 12 months 12 months or more Total
------------------------------------------------------------------------
Estimated Estimated Estimated
market Unrealized market Unrealized market Unrealized
(In millions) value losses value losses value losses
-------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2005
Other securities:
U.S. Treasury and government agencies $389.0 $ (4.6) $ 67.5 $ (1.3) $ 456.5 $ (5.9)
Preferred stock 49.7 (0.9) 0.9 (0.1) 50.6 (1.0)
Mortgage-backed securities 467.5 (6.3) 429.4 (13.9) 896.9 (20.2)
Other debt securities 63.5 (0.7) 48.5 (0.9) 112.0 (1.6)
-----------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities $969.7 $(12.5) $546.3 $(16.2) $1,516.0 $(28.7)
====================================================================
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. 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 nine months ended September 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 in 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, and provides captive insurance
management services.
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.
19
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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 September 30, 2005, WTC had 44 branch offices in Delaware - more than
any other bank in the state.
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 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.
- Grant Tani Barash & Altman, LLC (GTBA) and Grant, Tani, Barash &
Altman Management, Inc. GTBA is the Beverly Hills-based firm through
which we offer business management and family office services.
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 conduct the business of
GTBA and Grant, Tani, Barash & Altman Management, Inc.
In addition to the locations noted above, we and our affiliates have offices in
South Carolina, Vermont, 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.
20
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005
SUMMARY
Third quarter 2005 earnings per share (on a diluted basis) were $0.65 - 30% more
than for the year-ago third quarter, and 10% more than for the 2005 second
quarter. Net income for the 2005 third quarter was $44.4 million. This was 29%
more than for the year-ago third quarter, and 10% more than for the 2005 second
quarter.
The main factors in the 2005 third quarter results were:
- Growth momentum in each of the three businesses, which produced
year-over-year double-digit increases in revenue for each;
- The rising interest rate environment;
- Continued strong credit quality; and
- Expense management.
Here are some specific highlights of the 2005 third quarter:
- Period-end loan balances rose 10% year-over-year to $7.29 billion.
- On average, loan balances surpassed $7 billion for the first time, rising
9% year-over-year to $7.13 billion.
- On the strength of loan growth, total balance sheet assets reached $10.2
billion. This marked the first time in our history that the balance sheet
exceeded $10 billion.
- Assets continued to reprice faster than liabilities, and the net interest
margin was 3.66% -- 15 basis points higher than for the third quarter of
2004.
- Net interest income (after the provision for loan losses) increased 14%, to
$81 million.
- Noninterest income, which amounted to $80 million, was 15% higher.
- Wealth Advisory Services revenue was 18% higher, and exceeded $43 million.
- There was a rebound in capital markets activity, and Corporate Client
Services revenue increased 11% to $19 million.
- Assets under management at value-style manager Cramer Rosenthal McGlynn
reached a new high of $8.5 billion, which drove revenue from the affiliate
money managers to nearly $4 million, a 32% increase.
- Noninterest expense totaled $92 million, a year-over-year increase of 6%.
Staffing-related costs accounted for almost all of this increase, and
reflected expense from Grant Tani Barash & Altman (GTBA), the family office
and business management firm we acquired in October 2004. There were no
GTBA expenses recorded for the year-ago third quarter, because we did not
consolidate their financial results with ours until the fourth quarter of
2004.
- Key measures of credit quality continued to be among the strongest in our
company's history. The net charge-off ratio was 3 basis points, and the
percentage of loans rated "pass" in our internal risk rating analysis was
0.04% shy of 97%.
Income for the 2005 third quarter included gains of approximately $2 million on
executive life insurance policies. We invest in life insurance contracts to fund
future obligations of the supplemental executive retirement plan we have for
selected officers. This plan is described in our 2004 Annual Report to
Shareholders.
Third quarter 2005 results, on an annualized basis, generated a return on
average assets of 1.77% and a return on average stockholders' equity (ROE) of
18.39%. The corresponding returns for the third quarter of 2004 were 1.48% and
15.71%, respectively. These ratios increased because net income increased at a
faster pace than capital.
Our capital position remained strong, and our Board of Directors declared a
regular quarterly cash dividend of $0.30 per share. The quarterly dividend will
be paid on November 15, 2005, to shareholders of record on November 1, 2005.
21
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
Results for the first nine months of 2005 reflected the strong third quarter and
continuation of the growth momentum we have seen since the beginning of the
year. Comparing the first nine months of 2005 with the first nine months of
2004:
- Net income was $124.9 million, a 17% increase.
- Earnings per share (on a diluted basis) were $1.82, a 16% increase.
- The net interest margin was 3.65%, 13 basis points higher.
BUSINESS DEVELOPMENTS
In other activity during the 2005 third quarter:
- We added Vermont to the list of jurisdictions in which we offer captive
insurance management services, and we opened an office in Burlington.
Vermont is an attractive market for captive insurance management because,
according to the Captive Insurance Company Association, more captive
insurance companies are domiciled in Vermont than in any other state. This
expansion follows our July 2005 acquisition of Charleston Captive
Management Company, and the addition during the third quarter of captive
management staff in Delaware. Captive management services are a logical
extension of the entity management services we already offer in the
Corporate Client business.
- In the Wealth Advisory business, we continued to integrate GTBA's expertise
in family office management into our spectrum of holistic wealth management
capabilities.
- Three of our Wealth Advisory staff members were listed among the top 100
wealth advisors in the United States, as chosen by Worth magazine in its
October 2005 issue.
- We continued to consolidate our asset management activities under
Wilmington Trust Investment Management (WTIM), the investment management
arm of our Wealth Advisory business, and we added quantitative equity
research and portfolio management staff.
- WTIM received the Gold Iceberg Award from the Plexus Group for superior
trade execution quality. WTIM's trade execution efficiency ranked among the
top quartile in the universe of funds and asset managers analyzed by
Plexus.
- In the Regional Banking business, we broke ground on two new branches in
Sussex County, the southernmost county in Delaware and one of the state's
most rapidly growing areas. One will replace our existing branch in
Rehoboth Beach, where we are the only full-service bank within city limits.
The other will be our first branch in Millville, in the western part of the
county.
- In Pennsylvania, commercial banking staff moved into new office space in
Doylestown, Bucks County. The new space is nearly 50% larger than the space
we formerly occupied there, and reflects the loan growth we are generating
in that part of Pennsylvania and north into the Lehigh Valley.
STATEMENT OF CONDITION
This section discusses the changes in our balance sheet between December 31,
2004, and September 30, 2005. We present amounts as of September 30, 2004, for
historical reference. All balances cited are period-end balances unless
otherwise noted.
ASSETS
Period-end balances totaled $10.2 billion at September 30, 2005. This was the
first time in our history that balance sheet assets exceeded $10 billion.
22
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
Our mix of assets remained relatively unchanged. As the following table shows,
loans comprised the majority of our assets, and accounted for most of the growth
in assets. The amount of goodwill increased because of our acquisitions of GTBA
and the minority interests held by former principals of Balentine.
ASSET BALANCES (IN MILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04
--------------------------------------------------------------------
Investment securities $ 1,927.0 $1,813.3 $1,864.0
Loans 7,292.8 6,763.0 6,616.0
Other 723.2 686.6 916.6
Reserve for loan losses (93.4) (89.7) (91.3)
Goodwill 344.3 337.0 325.6
-------------------------------------------------------------------
Total assets $10,193.9 $9,510.2 $9,630.9
-------------------------------------------------------------------
Loans also continued to comprise the majority of our earning assets, which were
7.5% higher than at December 31, 2004, and 5.4% higher than at September 30,
2004. 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 9/30/05 AT 12/31/04 AT 9/30/04
------------------------------------------------------------------------------
Total earning assets (in millions) $9,283.8 $8,639.6 $8,812.1
% represented by loans 78.6% 78.3% 75.1%
% represented by investment securities 20.7% 21.0% 21.2%
% represented by other 0.7% 0.7% 3.7%
INVESTMENT SECURITIES PORTFOLIO
The investment securities portfolio increased $113.7 million, or 6%, 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 9/30/05 AT 12/31/04 AT 9/30/04
--------------------------------------------------------------------------------------
Mortgage-backed securities 28% 34% 33%
Collateralized mortgage obligations 19% 17% 18%
U.S. treasuries 7% 8% 10%
Corporate issues 18% 16% 16%
U.S. government agencies 20% 17% 13%
Money market preferred stocks 5% 5% 7%
Municipal bonds 1% 1% 1%
Other 2% 2% 2%
Almost all of the mortgage-backed securities we held at September 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.
23
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
The following table compares changes in average life in the portfolio.
AVERAGE LIFE IN THE INVESTMENT SECURITIES PORTFOLIO (IN YEARS) AT 9/30/05 AT 12/31/04 AT 9/30/04
-------------------------------------------------------------------------------------------------------
Mortgage-backed instruments 4.15 3.96 4.00
Total portfolio 6.21 6.41 6.06
For mortgage-backed instruments, the slight increase in average life reflected
extensions resulting from the fact that market interest rates were 150 basis
points higher at September 30, 2005, than at December 31, 2004.
For the total portfolio, average life shortened somewhat because of a slight
change in the mix of instruments. During the first nine months of 2005, the
percentage of the portfolio invested in corporate instruments with shorter
average lives increased, opposite a decrease in the percentage of
mortgage-backed securities that carried higher extension risk.
The following table compares changes in duration.
DURATION IN THE INVESTMENT SECURITIES PORTFOLIO (IN YEARS) AT 9/30/05 AT 12/31/04 AT 9/30/04
--------------------------------------------------------------------------------------------------
Mortgage-backed instruments 3.68 3.72 3.88
Total portfolio 2.74 2.66 2.62
The duration of mortgage-backed instruments was relatively unchanged because we
added well-structured collateralized mortgage obligation securities with stable
payment cycles.
Duration for the total portfolio was relatively unchanged because the addition
of shorter-duration corporate securities balanced longer-duration
mortgage-backed instruments.
LOANS
Loan balances rose for the 18th consecutive quarter and totaled $7.29 billion at
September 30, 2005. This was 8% higher than at the end of 2004 and 10% higher
than at September 30, 2004. On average, loans for the 2005 third quarter were
$7.13 billion.
While most of the growth in total loans occurred in the commercial portfolio,
the retail portfolio continued to represent an increasing percentage of the
growth. Retail loans accounted for 40% of the increase in total loan balances
for the first nine months of 2005, versus 18% for the first nine months of 2004.
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 9/30/05 AT 12/31/04 AT 9/30/04
------------------------------------------------------------------------------
Commercial loans $4,804.2 $4,487.4 $4,374.2
Retail loans 2,488.6 2,275.6 2,241.8
------------------------------------------------------------------------------
Total loans $7,292.8 $6,763.0 $6,616.0
------------------------------------------------------------------------------
More than half of our loan growth for the first nine months of 2005 came from
Delaware, while the Pennsylvania market contributed 19% of the growth. Loan
balances from the Pennsylvania market were $1.50 billion, on average, for the
first nine months of 2005.
24
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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 9 MOS. 2004 FULL YEAR 2004 FIRST 9 MOS.
------------------------------------------------------------------------------------------------
Commercial loans $4,608.3 $4,274.8 $4,242.6
Retail loans 2,338.5 2,195.6 $2,177.1
--------------------------------------------------------------------------------------------
Total loans $6,946.8 $6,470.4 $6,419.7
--------------------------------------------------------------------------------------------
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 discussion on economic
risk in the "Quantitative and qualitative disclosures about market risk" section
of this report.
COMMERCIAL LOANS
Between December 31, 2004, and September 30, 2005, the commercial loan portfolio
increased $316.8 million, or more than 7%. Commercial real estate/construction
(CRE) lending, driven mainly by population growth, accounted for most of the
increase in total loans since the beginning of 2005.
PERIOD-END COMMERCIAL LOANS (IN MILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04
---------------------------------------------------------------------------------
Commercial and industrial (C&I) $2,511.4 $2,505.2 $2,428.6
Commercial real estate/construction (CRE) 1,032.0 735.4 759.0
Commercial mortgage 1,260.8 1,246.8 1,186.6
--------------------------------------------------------------------------------
Total commercial loans $4,804.2 $4,487.4 $4,374.2
--------------------------------------------------------------------------------
Strong housing demand, particularly in Delaware, drove the increase in CRE
balances. Almost all of the 2005 third quarter growth, and most of the growth
for the first nine months of 2005, in CRE lending supported single-family
residential tract development projects.
Nearly half of the 2005 third quarter growth in CRE loans came from Delaware. Of
the new CRE loans made in Delaware during the third quarter, more than 90% were
for residential and other projects in the southern part of the state, where
population growth and housing demand are most robust.
In its fall 2005 profile of Delaware, the Federal Deposit Insurance Corporation
noted that "employment gains, healthy income growth, and low mortgage rates have
contributed to robust housing activity in the state," and that "lower home
prices relative to some neighboring states, and a favorable tax climate, have
contributed to increased demand for retirement living, particularly in Sussex
and Kent Counties."
Approximately 35% of the 2005 third quarter growth in CRE loans funded projects
in southeastern Pennsylvania. All of these CRE loans were for residential
projects dispersed throughout the counties surrounding the Philadelphia
metropolitan area.
Projects in the Baltimore area and central New Jersey also contributed to the
CRE loan growth.
25
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
We do not believe we have undue concentration or credit risk in the CRE
portfolio, because:
- Population growth is spurring the housing demand;
- We have long-standing relationships with the local developers to whom we
lend; and
- We apply disciplined underwriting standards in our CRE lending.
We prefer to work with local developers who own their businesses and have solid
reputations, diverse streams of cash flow, personal liquidity, and experience in
all market cycles. Our target size for CRE loans is $1 million to $10 million.
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 credit quality, please refer to the "Asset quality" section of
this report.
RETAIL LOANS
Between December 31, 2004, and September 30, 2005, the retail loan portfolio
increased $213.0 million, or 9%. More than 82% of this growth occurred in the
consumer portfolio.
In our retail lending activities, we make most of our residential mortgage and
consumer loans to clients in the state of Delaware. The other category of retail
loans, loans secured with liquid collateral, represents loans that are extended
mainly to Wealth Advisory clients throughout the United States. Balance changes
in loans secured with liquid collateral reflect Wealth Advisory client demand.
PERIOD-END RETAIL LOANS (IN MILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04
-----------------------------------------------------------------------------
Residential mortgage $ 450.9 $ 431.3 $ 439.8
Consumer 1,414.8 1,239.6 1,182.6
Secured with liquid collateral 622.9 604.7 619.4
----------------------------------------------------------------------------
Total retail loans $2,488.6 $2,275.6 $2,241.8
----------------------------------------------------------------------------
RESIDENTIAL MORTGAGE LOANS
Most of the growth in residential mortgage balances during the first nine months
of 2005 occurred during the second quarter, when period-end balances rose $16.2
million from their March 31, 2005, level. Between the ends of June and September
2005, residential mortgage balances increased $6.4 million. These increases are
the first linked-quarter increases we have had since the third quarter of 2000,
and the first year-over-year increase since the third quarter of 2000.
We are a leading residential mortgage originator in Delaware, but we sell most
new fixed-rate production into the secondary market. Selling these loans is one
of the ways we manage interest rate risk. We discuss this strategy more fully in
the "Quantitative and qualitative disclosures about market risk" section of this
report.
We continue to market residential mortgages actively, but the sales of new
fixed-rate residential mortgages, plus the effects of prepayments and
refinancings, partially offset origination volumes. As the following table
shows, opposite
26
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
minimal growth in balances, residential mortgage originations
(dollar volume) for the 2005 third quarter were 72% higher year-over-year, and
19% higher on a linked-quarter basis.
RESIDENTIAL MORTGAGE ACTIVITY AS OF THE 3 MONTHS ENDED 9/30/05 6/30/05 3/31/05 12/31/04 9/30/04
-------------------------------------------------------------------------------------------------------------
Residential mortgage originations (number of loans) 305 269 182 209 214
Residential mortgage originations (volume in millions) $ 65.2 $ 54.9 $ 31.9 $ 35.1 $ 38.0
Residential mortgage balances (in millions, at period-end) $450.9 $444.5 $428.3 $431.3 $439.8
CONSUMER LOANS
Consumer loan balances rose $175.2 million, or 14%, during the first nine months
of 2005.
PERIOD-END CONSUMER LOANS (IN MILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04
-------------------------------------------------------------------------------
Home equity $ 331.0 $ 305.8 $ 285.4
Indirect 633.8 566.8 558.8
Credit card 58.8 59.2 56.1
Other consumer 391.2 307.8 282.3
------------------------------------------------------------------------------
Total consumer loans $1,414.8 $1,239.6 $1,182.6
------------------------------------------------------------------------------
As of September 30, 2005, indirect loans (loans made to clients through auto
dealers) comprised the largest percentage of loans within the consumer
portfolio. Indirect balances increased 12% during the first nine months of 2005,
and accounted for 38% of the growth in total consumer loan balances for that
period. The growth in indirect lending reflected the strong relationships we
have with many of the leading auto dealers in the Delaware Valley region and
northeastern Maryland. We supply commercial loans for auto dealers' inventory
(known as "floor plan" loans), and our relationship extends to indirect lending
to their customers.
Historically, we have made most of our indirect auto loans for late-model used
cars, because used car loans typically have shorter terms and higher yields than
loans for new cars. In the second and third quarters of 2005, we experienced
higher demand for loans on new cars, which we attributed to the promotional
pricing programs offered by auto manufacturers. Since the auto manufacturers did
not offer preferential financing as part of their pricing programs, auto buyers
who sought financing turned to sources other than the manufacturers' captive
lenders (finance companies owned by auto manufacturers that lend directly to
buyers).
Loans recorded as "other consumer" loans comprised the second largest percentage
of the total consumer portfolio. Other consumer balances rose 27% during the
first nine months of 2005, and accounted for nearly half of the growth in total
consumer loans for that period. These loans represented a variety of personal
and installment loans, mainly to clients in Delaware.
Home equity loan balances, which accounted for 23% of total consumer loan
balances at September 30, 2005, increased 8% during the first nine months of
2005. Credit card balances were slightly behind their December 31, 2004, levels,
and accounted for 4% of total consumer loans at September 30, 2005.
RESERVE FOR LOAN LOSSES
The reserve for loan losses at September 30, 2005, was $93.4 million, which was
higher than the reserve at September 30, 2004, December 31, 2004, and June 30,
2005. For the first nine months of 2005, the reserve increased 4%, or $3.7
million, opposite 8% growth in loan balances, to $7.29 billion. Loan growth and
the high percentage of loans rated "pass" in our internal risk rating analysis
influenced the changes in the reserve.
27
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
At September 30, 2005, the loan loss reserve ratio was 1.28%, down from 1.31% at
June 30, 2005, 1.33% at December 31, 2004, and 1.38% at September 30, 2004.
For more information about our credit quality, please refer to the "Asset
Quality" section of this report.
LIABILITIES AND STOCKHOLDERS' EQUITY
During the first nine months of 2005, total liabilities increased 7% and
stockholders' equity rose 7%. 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.
LIABILITIES AND STOCKHOLDERS' EQUITY (IN MILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04
------------------------------------------------------------------------------------------
Total deposits $ 7,548.9 $6,871.9 $6,989.3
Short-term borrowings 1,117.3 1,157.3 1,190.2
Other liabilities 559.3 575.6 560.9
Total liabilities 9,225.5 8,604.8 8,740.4
Minority interest 0.2 0.1 --
Stockholders' equity 968.2 905.3 890.5
-----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,193.9 $9,510.2 $9,630.9
-----------------------------------------------------------------------------------------
Our mix of liabilities remained relatively unchanged, with deposits continuing
to account for the majority. Total deposits accounted for 82% of total
liabilities at September 30, 2005, compared with 80% at December 31, 2004.
DEPOSITS
Deposit balances grew $677.0 million, or 10%, during the first nine months of
2005. Balances of national certificates of deposit $100,000 (national CDs) and
over rose $702 million, or 37%, and accounted for all of the increase in total
deposits. Core deposits accounted for 66% of total deposits at September 30,
2005, compared with 73% at December 31, 2004, and 69% at September 30, 2004.
DEPOSITS (IN MILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04
----------------------------------------------------------------------
Core deposits $4,962.6 $4,987.6 $4,811.4
National CDs $100,000 and over 2,586.3 1,884.3 2,177.9
---------------------------------------------------------------------
Total deposits $7,548.9 $6,871.9 $6,989.3
---------------------------------------------------------------------
The increase in national CD balances reflected the strategy we use to fund loan
growth. Loan growth is exceeding core deposit growth because the size of the
market in which we lend is far larger than the size of the market in which we
gather most of our core deposits. We make loans throughout the Delaware Valley
region, but the vast majority of our core deposits come from clients in the
state of Delaware, where we focus our retail banking activities.
To fund the gap inherent in this strategy, we use a combination of national CDs
and short-term borrowings. The mix of these two sources of wholesale funds is
dependent on which instruments offer rates that are more favorable. Although the
rates on wholesale funds are somewhat 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-
28
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
scale expansion of our branch office network beyond Delaware or than using other
sources of funding. For more details on our funding strategy, please refer to
the "Liquidity and Funding" section of this report.
CORE DEPOSITS
Core deposits (deposits generated by Regional Banking clients, primarily in
Delaware) were $25.0 million lower at September 30, 2005, than they were at
December 31, 2004. Clients in Delaware continued to account for approximately
94% of total core deposits.
PERIOD-END CORE DEPOSITS (IN MILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04
--------------------------------------------------------------------------------
Noninterest-bearing demand $1,060.8 $1,118.8 $1,167.5
Savings 332.7 355.5 358.1
Interest-bearing demand 2,317.5 2,442.5 2,342.4
CDs under $100,000 840.6 765.4 762.3
Local CDs $100,000 and more 411.0 305.4 181.1
Total core deposits $4,962.6 $4,987.6 $4,811.4
% of core deposits from Delaware clients 93.8% 94.2% 94.5%
The main cause of the decrease in total core deposits was a decline in
interest-bearing demand deposits, which were $125 million less at September 30,
2005, than at December 31, 2004. Interest-bearing demand deposit balances fell
mainly because of the activity of one Corporate Client Services (CCS) client.
Opposite the decreases in other categories of core deposits, balances for CDs
under $100,000 rose $75.2 million and balances for local CDs $100,000 and over
(local CDs) rose $105.6 million. We count local CDs as core deposits because
they are client deposits, not brokered CDs. Local CD balances mainly reflect
activity from clients within the Delaware Valley region, including commercial
banking clients and local municipalities, who frequently use local CDs to
generate returns on their excess cash.
Several clients purchased local CDs in very large amounts during the fourth
quarter of 2004, which is why the balances of local CDs $100,000 and over were
so much higher at September 30, 2005, than at September 30, 2004. As the
following table shows, the majority of these local CDs were purchased by
consumer banking clients in Delaware.
TYPES OF CLIENTS PURCHASING LOCAL CDS $100,000 AND MORE 2005 Q3 2005 Q2 2005 Q1
--------------------------------------------------------------------------------------
Consumer clients in Delaware 66% 68% 60%
Commercial clients in the Delaware Valley 17% 22% 20%
Wealth Advisory clients 16% 8% 18%
Corporate Client Services clients 1% 2% 2%
CCS client activity frequently causes disparities between period-end and average
deposit balances, because CCS clients typically deposit funds for very short
spans of time, often over the ends of financial reporting periods. This is why
we believe average balances, rather than period-end balances, are the better
indicator of trends in our Regional Banking business.
On an average-balance basis, core deposits were $4.82 billion for the first nine
months of 2005, which was 7% higher than for the first nine months of 2004.
29
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
INCOME STATEMENT
This section compares our income and expenses for the third quarter and first
nine months of 2005 with the corresponding periods in 2004. Year-to-date (YTD)
references are as of September 30.
Net income was 29% higher for the 2005 third quarter, and 17% higher for the
first nine months of the year. Earnings per share (diluted) were 30% higher for
the third quarter, and 16% higher for the first nine months of the year.
The percentage increase amounts for net income and earnings per share were
different because the average number of shares outstanding (diluted) was 635,000
higher for the first nine months of 2005 than for the first nine months of 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 Q3 2004 Q3 2005 YTD 2004 YTD
----------------------------------------------------------------------
Net income (in millions) $44.4 $34.4 $124.9 $106.6
Earnings per share (diluted) $0.65 $0.50 $ 1.82 $ 1.57
The main factors in third 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 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. As the following table shows,
for the third quarter and first nine months of 2005:
- 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.
SOURCES OF NET INTEREST AND NONINTEREST INCOME 2005 Q3 2004 Q3 2005 YTD 2004 YTD
----------------------------------------------------------------------------------------------
% from advisory business income (after amortization) 40.7% 40.1% 41.8% 41.5%
% from total noninterest income 49.7% 49.4% 50.2% 50.7%
% from net interest income (after provision) 50.3% 50.6% 49.8% 49.3%
30
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
NET INTEREST INCOME
Net interest income, after the provision for loan losses, was $80.8 million for
the 2005 third quarter and $231.6 million for the first nine months of the year.
These were increases of 14% and 12%, respectively.
NET INTEREST INCOME (IN MILLIONS) 2005 Q3 2004 Q3 2005 YTD 2004 YTD
-------------------------------------------------------------------------------
Interest income $134.9 $97.8 $370.4 $280.4
Interest expense 51.2 23.8 129.0 62.4
Net interest income 83.7 74.0 241.4 218.0
Provision for loan losses (2.9) (2.9) (9.8) (11.6)
------------------------------------------------------------------------------
Net interest income (after provision) 80.8 71.1 231.6 206.4
------------------------------------------------------------------------------
The primary reasons for the increases in net interest income were:
- Loan growth. On average, loan balances were 9% higher for the third quarter
and 8% more for the first nine months of 2005 than for the corresponding
periods in 2004.
- Credit quality. Opposite the loan growth, the provision for loan losses was
the same for the 2005 third quarter as for the year-ago third quarter.
Provisioning reflected net charge-offs that were among the lowest in our
history, and the fact that our internal risk rating analysis generated a
"pass" rating for nearly 97% of the loan portfolio.
- Year to date, the provision was $1.8 million less, mainly because we
recovered approximately $1.1 million during the 2005 first quarter that we
previously had charged off.
- The net interest margin. The margin was higher because we experienced
little pressure on our deposit pricing, and increases in the yield on our
earning assets continued to outpace increases in our cost of funds.
NET INTEREST MARGIN
The net interest margin for the 2005 third quarter was 3.66%. This was the same
as for the 2005 second quarter, and 15 basis points higher than for the third
quarter of 2004.
For the first nine months 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 Q3 2004 Q3 2005 YTD 2004 YTD
-----------------------------------------------------------------------
FTE (1) net interest income $ 84.7 $ 75.0 $ 244.3 $ 221.4
Earning assets, on average $9,111.3 $8,423.5 $8,844.6 $8,314.7
-----------------------------------------------------------------------
Net interest margin 3.66% 3.51% 3.65% 3.52%
-----------------------------------------------------------------------
(1) Fully tax-equivalent
31
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
The margin improved for the third quarter and first nine months 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 third quarter, the average yield on earning
assets rose 125 basis points, while the average cost of funds increased 110
basis points. Two main factors contributed to the favorable spread:
- Rising market interest rates. Market interest rates were 200 basis points
higher at September 30, 2005, than at September 30, 2004, due to the eight
rate increases enacted by the FOMC during that 12-month span.
- Favorable deposit pricing, as 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 third quarter with the year-ago
third quarter, the average yield on loans was 151 basis points higher,
while the average rate on core deposits was 61 basis points higher, as the
following table shows.
BASIS POINT INCREASES (AVERAGE RATES/YIELDS) 2005 Q3 VS. 2005 Q2 2005 Q3 VS. 2004 Q3
----------------------------------------------------------------------------------------
Commercial loans 47 bps 184 bps
Total loans 39 bps 151 bps
Core interest-bearing deposits 16 bps 61 bps
Total interest-bearing deposits 32 bps 120 bps
ANALYSIS OF EARNINGS
The following tables present comparative rate/volume and net interest income
data for the third quarters and first nine months of 2005 and 2004. In order to
ensure the comparability of yields and rates and their impact on net interest
income, we use average balances at historical cost to calculate average rates.
Average rates do not reflect the market valuation adjustment required by SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
32
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
QUARTERLY ANALYSIS OF EARNINGS
2005 Third Quarter 2004 Third Quarter
---------------------------- ----------------------------
(In millions) Average Income/ Average Average Income/ Average
(Rates on tax-equivalent basis) balance expense rate balance Expense rate
-----------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 52.9 $ 0.5 3.45% $ 28.5 $ 0.1 1.48%
U.S. Treasury and government
agencies 525.1 4.9 3.67 449.6 4.0 3.53
State and municipal 11.3 0.2 8.76 12.7 0.3 8.75
Preferred stock 92.5 1.7 7.58 121.2 2.3 7.42
Mortgage-backed securities 931.9 9.5 4.02 960.4 9.9 4.08
Other 369.2 4.5 4.84 322.2 2.5 3.04
--------------------------------------------------------- ----------------------
Total investment securities 1,930.0 20.8 4.27 1,866.1 19.0 4.02
---------------------------------------------------------
Commercial, financial, and
agricultural 2,494.6 40.3 6.32 2,403.3 27.6 4.51
Real estate - construction 955.9 16.9 6.94 718.1 9.0 4.93
Mortgage - commercial 1,254.4 21.0 6.55 1,186.4 14.7 4.85
------------------------------------------------------------------------------------
Total commercial loans 4,704.9 78.2 6.51 4,307.8 51.3 4.67
---------------------------------------------------------
Mortgage - residential 443.8 6.6 5.99 440.2 6.6 6.02
Consumer 1,369.7 22.2 6.43 1,164.1 17.2 5.84
Secured with liquid collateral 610.0 7.6 4.89 616.8 4.6 2.93
--------------------------------------------------------- -------------------
Total retail loans 2,423.5 36.4 5.96 2,221.1 28.4 5.07
---------------------------------------------------------
Total loans net of
unearned income 7,128.4 114.6 6.32 6,528.9 79.7 4.81
Total earning assets $9,111.3 135.9 5.87 $8,423.5 98.8 4.62
=========================================================
33
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
2005 Third Quarter 2004 Third Quarter
---------------------------- ---------------------------
(In millions) Average Income/ Average Average Income/ Average
(Rates on tax-equivalent basis) balance expense Rate balance Expense Rate
--------------------------------------------------------------------------------------------------
Funds supporting earning assets
Savings $ 345.1 0.2 0.28 $ 368.4 0.2 0.21
Interest-bearing demand 2,257.2 5.1 0.90 2,297.1 3.0 0.52
Certificates under $100,000 825.0 5.5 2.64 763.9 3.8 1.95
Local CDs $100,000 and over 409.3 3.2 3.04 189.0 0.7 1.40
-------------------------------------------------------- -----------------
Total core interest-
bearing deposits 3,836.6 14.0 1.45 3,618.4 7.7 0.84
National CDs $100,000
and over 2,500.6 22.5 3.51 1,937.1 7.2 1.48
-------------------------------------------------------- -----------------
Total interest-bearing
deposits 6,337.2 36.5 2.26 5,555.5 14.9 1.06
----------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,056.7 9.1 3.37 1,289.8 5.4 1.62
U.S. Treasury demand 12.1 0.1 3.41 3.8 -- 1.54
-------------------------------------------------------- -----------------
Total short-term
borrowings 1,068.8 9.2 3.37 1,293.6 5.4 1.62
----------------------------------------------------------
Long-term debt 408.7 5.5 5.39 403.2 3.5 3.44
-------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 7,814.7 51.2 2.58 7,252.3 23.8 1.29
----------------------------------------------------------
Other noninterest funds 1,296.5 -- -- 1,171.2 -- --
-------------------------------------------------------- -----------------
Total funds used to support
earning assets $9,111.6 51.2 2.21 $8,423.5 23.8 1.11
==========================================================
Net interest income/yield 84.7 3.66 75.0 3.51
Tax-equivalent adjustment (1.0) (1.0)
----- -----
Net interest income $83.7 $74.0
===== =====
34
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
YEAR-TO-DATE ANALYSIS OF EARNINGS
Year-to-Date 2005 Year-to-Date 2004
--------------------------- ---------------------------
(In millions) Average Income/ Average Average Income/ Average
(Rates on tax-equivalent basis) balance Expense rate balance expense rate
---------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 31.5 $ 0.7 3.05% $ 20.6 $ 0.2 1.25%
U.S. Treasury and government
agencies 470.7 12.8 3.60 448.3 11.6 3.49
State and municipal 11.7 0.7 8.74 13.9 0.9 8.67
Preferred stock 95.4 5.3 7.48 120.3 6.7 7.42
Mortgage-backed securities 940.6 29.1 4.06 986.1 30.3 4.05
Other 347.9 11.8 4.52 305.8 6.8 2.97
---------------------------------------------------------------- -----------------
Total investment securities 1,866.3 59.7 4.23 1,874.4 56.3 3.99
---------------------------------------------------------
Commercial, financial, and
agricultural 2,504.6 111.6 5.88 2,363.4 77.1 4.29
Real estate-construction 856.4 42.3 6.47 726.1 25.4 4.60
Mortgage-commercial 1,247.3 58.4 6.17 1,153.1 42.2 4.81
---------------------------------------------------------------- -----------------
Total commercial loans 4,608.3 212.3 6.07 4,242.6 144.7 4.49
---------------------------------------------------------
Mortgage-residential 434.5 19.3 5.92 460.3 20.9 6.05
Consumer 1,301.2 61.3 6.28 1,111.1 49.5 5.93
Secured with liquid collateral 602.8 20.1 4.40 605.7 12.2 2.64
---------------------------------------------------------------- -----------------
Total retail loans 2,338.5 100.7 5.73 2,177.1 82.6 5.04
---------------------------------------------------------
Total loans net of unearned income 6,946.8 313.0 5.96 6,419.7 227.3 4.67
Total earning assets $8,844.6 373.4 5.58 $8,314.7 283.8 4.51
=========================================================
35
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
Year-to-Date 2005 Year-to-Date 2004
--------------------------- ----------------------------
(In millions) Average Income/ Average Average Income/ Average
(Rates on tax-equivalent basis) balance Expense rate balance expense rate
--------------------------------------------------------------------------------------------------------------
Funds supporting earning assets
Savings $ 351.3 0.7 0.26 $ 373.3 0.4 0.16
Interest-bearing demand 2,298.0 14.3 0.83 2,294.5 7.3 0.42
Certificates under $100,000 798.5 14.4 2.41 768.6 11.6 2.01
Local CDs $100,000 and over 386.2 8.1 2.75 152.6 1.7 1.45
------------------------------------------------------------------------------ -----------------
Total core interest-bearing deposits 3,834.0 37.5 1.30 3,589.0 21.0 0.78
National CDs $100,000 and over 2,249.7 51.9 3.05 2,046.9 19.4 1.25
-------------------------------------------------------------------- ----------------
Total interest-bearing deposits 6,083.7 89.4 1.95 5,635.9 40.4 0.95
----------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,095.7 24.4 2.94 1,108.1 12.3 1.46
U.S. Treasury demand 12.8 0.3 2.75 9.3 0.1 0.89
-------------------------------------------------------------------------------------------------------------
Total short-term borrowings 1,108.5 24.7 2.93 1,117.4 12.4 1.46
Long-term debt 407.3 14.9 4.87 406.4 9.6 3.15
-------------------------------------------------------------------- ----------------
Total interest-bearing liabilities 7,599.5 129.0 2.25 7,159.7 62.4 1.15
Other noninterest funds 1,245.1 -- -- 1,155.0 -- --
-------------------------------------------------------------------- -----------------
Total funds used to support earning assets $8,844.6 129.0 1.93 $8,314.7 62.4 0.99
==========================================================
Net interest income/yield 244.4 3.65 221.4 3.52
Tax-equivalent adjustment (3.0) (3.4)
------ ------
Net interest income $241.4 $218.0
====== ======
36
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
For the three months ended For the nine months ended
September 30, 2005/2004 September 30, 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 $ 0.1 $ 0.3 $ 0.4 $ 0.1 $ 0.4 $ 0.5
U.S. Treasury and
government agencies 0.7 0.2 0.9 0.8 0.4 1.2
State and municipal * -- (0.1) (0.1) (0.1) (0.1) (0.2)
Preferred stock * (0.6) -- (0.6) (1.6) 0.2 (1.4)
Mortgage-backed securities (0.3) (0.1) (0.4) (1.2) -- (1.2)
Other * 0.3 1.7 2.0 0.9 4.1 5.0
----------------------------------------------------------------------------------------------------------------------
Total investment securities 0.1 1.7 1.8 (1.2) 4.6 3.4
------------------------------------------------------------------
Commercial, financial, and
agricultural * 1.0 11.7 12.7 4.5 30.0 34.5
Real estate - construction 3.0 4.9 7.9 4.5 12.4 16.9
Mortgage - commercial * 0.8 5.5 6.3 3.4 12.8 16.2
----------------------------------------------------------------------------------------------------------------------
Total commercial loans 4.8 22.1 26.9 12.4 55.2 67.6
------------------------------------------------------------------
Mortgage - residential 0.1 (0.1) -- (1.2) (0.4) (1.6)
Consumer 3.0 2.0 5.0 8.4 3.4 11.8
Secured with liquid collateral (0.1) 3.1 3.0 (0.1) 8.0 7.9
----------------------------------------------------------------------------------------------------------------------
Total retail loans 3.0 5.0 8.0 7.1 11.0 18.1
------------------------------------------------------------------
Total loans net of unearned income 7.8 27.1 34.9 19.5 66.2 85.7
----------------------------------------------------------------------------------------------------------------------
Total interest income $ 8.0 $29.1 $34.9 $18.4 $71.2 $89.6
------------------------------------------------------------------
37
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
For the three months ended For the nine months ended
September 30, 2005/2004 September 30, 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 $ -- $ -- $ -- $ -- $ 0.3 $ 0.3
Interest-bearing demand (0.1) 2.2 2.1 -- 7.0 7.0
Certificates under $100,000 0.3 1.4 1.7 0.4 2.4 2.8
Local CDs $100,000 and over 0.8 1.7 2.5 2.6 3.8 6.4
---------------------------------------------------------------------------------------------------------------------
Total core interest-bearing deposits 1.0 5.3 6.3 3.0 13.5 16.5
National CDs $100,000 and over 2.1 13.2 15.3 1.9 30.6 32.5
---------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 3.1 18.5 21.6 4.9 44.1 49.0
------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase (0.9) 4.6 3.7 (0.1) 12.2 12.1
U.S. Treasury demand -- 0.1 0.1 -- 0.2 0.2
---------------------------------------------------------------------------------------------------------------------
Total short-term borrowings (0.9) 4.7 3.8 (0.1) 12.4 12.3
Long-term debt -- 2.0 2.0 -- 5.3 5.3
---------------------------------------------------------------------------------------------------------------------
Total interest expense $ 2.2 $25.2 $27.4 $ 4.8 $61.8 $66.6
Changes in net interest income $ 5.8 $ 3.9 $ 9.7 $13.6 $ 9.4 $23.0
==================================================================
* 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.
38
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
NONINTEREST INCOME
Noninterest income (after amortization) for the 2005 third quarter was 15%
higher than for the year-ago third quarter. Revenue from Wealth Advisory
Services and Corporate Client Services, which rebounded nicely during the 2005
third quarter, accounted for most of that growth.
For the first nine months of 2005, noninterest income was 10% higher than for
the first nine months of 2004. Advisory business revenue accounted for almost
all of that growth. The year-to-date increase came mainly from the Wealth
Advisory business and value-style affiliate money manager Cramer Rosenthal
McGlynn (CRM).
NONINTEREST INCOME (IN MILLIONS) 2005 Q3 2004 Q3 2005 YTD 2004 YTD
------------------------------------------------------------------------------
Advisory business revenue (1) $65.3 $56.4 $194.6 $173.9
Service charges on deposit accounts 7.4 7.8 20.9 24.1
Other noninterest income 7.0 4.6 17.2 13.7
Securities gains/(losses) -- 0.6 0.8 0.6
-----------------------------------------------------------------------------
Total noninterest income $79.7 $69.4 $233.5 $212.3
-----------------------------------------------------------------------------
(1) After amortization.
Noninterest income for the 2005 third quarter included approximately $2 million
of gains from executive life insurance policies. There was no tax effect on this
amount, which equated to approximately $0.03 per share. We invest in life
insurance contracts to fund future obligations of the supplemental executive
retirement plan we have for selected officers. This plan is described in our
2004 Annual Report to Shareholders.
For the first nine months of 2005, noninterest income included, in addition to
the life insurance gains, 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.
39
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
- 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.
% CHANGE FROM
ASSETS UNDER MANAGEMENT ------------------
(DOLLAR AMOUNTS IN BILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04 12/31/04 9/30/04
------------------------------------------------------------------------------------------
Wilmington Trust (1) $26.3 $26.5 $24.6 (0.7)% 6.9%
Cramer Rosenthal McGlynn 8.5 6.9 5.8 23.2% 46.5%
Roxbury Capital Management 3.2 3.1 2.9 3.2% 10.3%
----------------------------------------------------------------------------------------
Total assets under management $38.0 $36.5 $33.3 4.1% 14.1%
----------------------------------------------------------------------------------------
(1) Includes estimates for values associated with certain assets that lack
readily ascertainable values, such as limited partnership interests.
Managed assets at Wilmington Trust were higher at September 30, 2005, than at
September 30, 2004, mainly because of Wealth Advisory Services activity. Managed
assets at Wilmington Trust were slightly lower at September 30, 2005, than at
December 31, 2004, mainly because of a decrease during the 2005 second quarter
of managed assets associated with 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 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 9/30/05 AT 12/31/04 AT 9/30/04
--------------------------------------------------------------------
Equities 55% 59% 42%
Fixed income 23% 23% 25%
Cash and equivalents 13% 12% 13%
Mutual funds (2) 0% 0% 8%
Other assets 9% 6% 12%
(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.
40
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
CLIENT ASSETS AT WILMINGTON TRUST (EXCLUDING CRM AND RCM) % CHANGE FROM
----------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN BILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04 12/31/04 9/30/04
----------------------------------------------------------------------------------------------
Assets under management (1) $26.3 $26.5 $ 24.6 (0.7)% 6.9%
Assets under administration 70.6 72.5 75.6 (2.6)% (6.6)%
Total client assets $96.9 $99.0 $100.2 (2.1)% (3.3)%
(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 Services (WAS) 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.
WAS revenue was 18% higher for the third quarter of 2005, and 14% higher for the
first nine months of 2005, than for the corresponding periods in 2004. Business
development activities with new as well as existing clients accounted for these
increases.
WEALTH ADVISORY REVENUE (IN MILLIONS) 2005 Q3 2004 Q3 2005 YTD 2004 YTD
-------------------------------------------------------------------------------
Trust and investment advisory fees $32.0 $27.4 $ 91.6 $ 81.1
Mutual fund fees 5.2 5.0 14.5 15.1
Planning and other services fees 6.3 4.6 23.3 17.8
------------------------------------------------------------------------------
Total Wealth Advisory revenue $43.5 $37.0 $129.4 $114.0
==============================================================================
Most of the increases in total WAS revenue were generated by trust and
investment advisory activities, which is the revenue our core asset management
services generate. This was mainly the result of business development, not
market appreciation, as comparisons with a key equity market index illustrate.
Trust and investment advisory revenue was 17% higher for the third quarter of
2005 than for third quarter of 2004. In comparison, the increase in S&P 500,
which we believe is a good proxy for the equity investments in our clients'
portfolios, was 10% during that 12-month span.
For the first nine months of 2005, trust and investment advisory revenue was 13%
higher. In comparison, the increase in the S&P 500 between December 31, 2004,
and September 30, 2005, was less than 2%.
Revenue from planning and other services was 37% higher for the third quarter
and 31% higher for the first nine months of 2005 than for the corresponding
periods in 2004. Almost all of this growth reflected revenue from the family
office and business management services provided by Grant Tani Barash & Altman
(GTBA), which we
41
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
acquired in October 2004. We did not consolidate GTBA's financial results with
ours until the fourth quarter of 2004.
In each of the quarters since then, GTBA has accounted for approximately $2
million of quarterly revenue from planning and other services, which has helped
replace nonrecurring fees from highly specialized financial planning activities.
New fees (sales) for the first nine months of 2005 were approximately $13.6
million (annualized), compared with approximately $16.0 million for the first
nine months of 2004. New fees for highly specialized plans were $3.5 million
less for the first nine months of 2005 than for the first nine months of 2004,
as demand for these types of plans was lower.
Business development from markets outside Delaware continued to gain momentum,
as the following table shows. New fees from markets outside Delaware comprised
approximately 64% of total new fees for the 2005 third quarter, up from
approximately 54% for the third quarter of 2004. For the first nine months of
2005, markets outside Delaware accounted for approximately 47% of total new
fees, up from 45% for the first nine months of 2004.
AS A PERCENTAGE OF TOTAL
NEW WEALTH ADVISORY FEES
FOR THE FIRST 9 MONTHS OF 2005 2004
---------------------------------------
California 5% 6%
Delaware (1) 53% 55%
Florida 8% 4%
Georgia 6% 8%
Maryland 3% 2%
New York 11% 12%
Pennsylvania 14% 13%
(1) Delaware's contribution includes business development with clients in other
states who seek Delaware's trust advantages. We serve these clients from
our headquarters in Wilmington.
CORPORATE CLIENT SERVICES
We report Corporate Client Services (CCS) 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.
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 Q3 2004 Q3 2005 YTD 2004 YTD
------------------------------------------------------------------------
Capital markets $ 8.7 $ 7.1 $24.5 $23.3
Entity management 5.7 5.8 17.5 16.8
Retirement services 3.3 2.9 9.7 8.9
Cash management 1.4 1.4 4.0 4.6
-----------------------------------------------------------------------
Total Corporate Client revenue $19.1 $17.2 $55.7 $53.6
=======================================================================
42
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
Total CCS revenue was 11% higher for the third quarter of 2005 than for the
third quarter of 2004. The capital markets component of the business accounted
for almost all of this increase.
After a period of prolonged weakness, the capital markets industry rebounded
during the 2005 third quarter. Revenue from capital markets services was 22%
higher than for the year-ago third quarter. Sales of capital markets services
were 13% higher than for the year-ago third quarter.
Of the various capital markets services we offer, sales of custody and trust
services accounted for more than half of the total capital markets sales for the
2005 third quarter. Several large domestic equipment leasing transactions and
several collateral trust transactions involving distressed airlines contributed
to the improvement.
Sales of services that support asset-backed securitizations (ABS) also
contributed to the 2005 versus 2004 third quarter growth in capital markets
revenue. ABS sales for the 2005 third quarter were 13% higher than for the
year-ago third quarter. This increase mainly reflected higher levels of activity
from existing clients.
Capital markets revenue for the 2005 third quarter also benefited from new
issues of trust-preferred securities, as real estate investment trusts began to
use more of these instruments in their financing activities.
In the entity management component of the CCS business, revenue for the 2005
third quarter was slightly lower than for the 2004 third quarter. Lower
recurring fee and new business volume from clients in Europe as well as in the
United States accounted for most of this decrease.
In the retirement services component, revenue for the 2005 third quarter was 14%
higher than for the year-ago third quarter. Sales of services that support
executive compensation plans, as well as higher market valuations of retirement
plan assets we hold in custody, accounted for most of this revenue growth.
The third quarter 2005 results significantly improved year-to-date results for
the CCS business. Compared with the first nine months of 2004, CCS revenue was
$2.1 million higher. In contrast, CCS revenue for the first six months of 2005
was only $400,000 more than for the first six months of 2004.
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.
AFFILIATE MANAGER REVENUE (IN MILLIONS) 2005 Q3 2004 Q3 2005 YTD 2004 YTD
---------------------------------------------------------------------------------
Cramer Rosenthal McGlynn $3.4 $2.5 $11.8 $7.1
Roxbury Capital Management 0.3 0.3 0.8 0.7
-------------------------------------------------------------------------------
Total affiliate manager income $3.7 $2.8 $12.6 $7.8
-------------------------------------------------------------------------------
43
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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 third quarter of 2005, when CRM's managed
assets reached $8.5 billion. This was an increase of $2.7 billion from September
30, 2004, and $1.6 billion more than 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, third quarter 2005 income from our
investment in CRM was $900,000, or 36%, more than for the year-ago third
quarter. For the first nine months of 2005, it was $4.7 million, or 66%, higher
than for the first nine months of 2004.
At September 30, 2005, our ownership interest in CRM was 77.24%, the same as it
was at December 31, 2004, and September 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.
Managed assets at RCM were $3.2 billion at September 30, 2005, up from $2.9
billion at September 30, 2004, and $3.1 billion at December 30, 2004.
For the 2005 third quarter, income from our investment in RCM was $0.3 million,
equal to the amount for the year-ago third quarter. Income from RCM for the
first nine months of 2005 was $0.8 million, which was $0.1 million more than for
the corresponding period last year. This increase reflected RCM's ongoing
efforts to reduce expenses and improve efficiency.
At September 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 September 30, 2004, and December 31, 2004.
SERVICE CHARGES ON DEPOSIT ACCOUNTS
Income from service charges on deposit accounts was $7.4 million for the 2005
third quarter, $400,000 less than for the year-ago third quarter. For the first
nine months of 2005, service charge income was $20.9 million, $3.2 million less
than for the first nine months 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.
Opposite these year-over-year declines, service charge revenue for the 2005
third quarter was $700,000 higher than for the 2005 second quarter. This
increase reflected a 45% linked-quarter increase in automated teller machine
(ATM) fees. Since April 2005, we have added 52 new ATMs in New Jersey and
Delaware, resulting in higher ATM surcharge income.
44
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
NONINTEREST EXPENSE
Compared to the corresponding periods in 2004, noninterest expenses were higher
by 6% for the third quarter of 2005, and 7% higher for the first nine months of
2005. Almost all of the third 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-related costs continued to
account for approximately 60% of total noninterest expense.
STAFFING AND TOTAL NONINTEREST EXPENSE 2005 Q3 2004 Q3 2005 YTD 2004 YTD
---------------------------------------------------------------------------------
Staffing-related expense (in millions) $54.6 $51.2 $163.4 $151.6
---------------------------------------------------------------------------------
Total noninterest expense (in millions) $91.8 $86.9 $270.8 $252.5
---------------------------------------------------------------------------------
NUMBER OF STAFF MEMBERS AT 9/30/05 AT 12/31/04 AT 9/30/04
----------------------------------------------------------------------
Full-time equivalent headcount 2,439 2,428 2,375
The number of staff members increased mainly because we:
- Added staff in every department of our company and in every one of our
markets throughout 2004, in order to better serve clients; and
- Acquired GTBA, which added 43 staff members in October 2004, and accounted
for 44 staff members at the end of the 2005 third quarter.
In other changes in expenses between the third quarters of 2005 and 2004:
- Advertising expense increased mainly because charitable contributions were
higher than for the year-ago third quarter.
- Servicing and consulting expense was $1.1 million lower, mainly because
costs associated with Sarbanes-Oxley Act compliance were lower.
- Subadvisor expense rose because demand for investment management services
was higher.
- Travel and entertainment expense included sponsorship costs.
- Originating and processing expense increased $700,000 because costs
associated with loan originations, filing fees, and check processing were
higher.
The increase in total noninterest expense for the first nine months of 2005
reflected, in addition to higher staffing-related expense, higher
telecommunications, insurance, and audit costs.
Total noninterest expense for the first nine months of 2005 includes two items
that 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. Absent this credit, subadvisor expenses would have
been approximately $1 million higher.
- The amount recorded for "other noninterest expense" included approximately
$1 million of expenses associated with product development. Absent this
amount, other noninterest expense would have been approximately $1 million
lower.
We recorded both of these items in the 2005 second quarter.
45
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
INCOME TAXES
Income tax expense for the third quarter and first nine months of 2005 was
higher than for the corresponding periods last year mainly because our pretax
income was higher. In addition, state income tax expense was higher as a result
of the GTBA acquisition and increased revenue from Cramer Rosenthal McGlynn.
INCOME TAXES AND TAX RATE 2005 Q3 2004 Q3 2005 YTD 2004 YTD
--------------------------------------------------------------------------
Pretax income (in millions) $68.7 $53.6 $194.3 $166.2
Income tax expense (in millions) $24.2 $19.2 $ 69.2 $ 58.9
Effective tax rate 35.2% 35.8% 35.6% 35.4%
CAPITAL RESOURCES
Our capital position remained strong during the first nine months of 2005.
Stockholders' equity rose 7%; the returns on equity and assets improved; the
capital generation rate 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 regular
quarterly dividends on July 21, 2005, and October 20, 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.
9 MOS. ENDED YEAR ENDED 9 MOS. ENDED
CAPITAL STRENGTH 9/30/05 12/31/04 9/30/04
----------------------------------------------------------------------------------------------
Stockholders' equity (period-end, in millions) $968.2 $905.3 $890.5
Return on average stockholders' equity (annualized) 17.88% 16.68% 15.71%
Return on average assets (annualized) 1.72% 1.56% 1.48%
Capital generation rate (annualized) 9.57% 8.35% 8.44%
Dividend payout ratio 47.9% 52.8% 52.4%
During the first nine months of 2005, we added $62.9 million to capital,
including:
- $65.0 million, which reflected earnings of $124.9 million net of $59.9
million in cash dividends; and
- $13.1 million from the issue of common stock under employment benefit
plans.
Offsetting these additions were $15.2 million of reductions in capital, which
consisted of:
- $12.5 million in unrealized losses on securities, net of taxes;
- $0.1 million in derivative losses included in net income, net of taxes;
- $0.4 million in foreign currency exchange adjustments;
- $1.7 million for the repurchase of shares; and
- $0.5 million of security gains reclassified from other comprehensive
income.
46
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
Our share repurchase activity was minimal during the first nine months of 2005,
as we elected to replenish capital that we expended on the GTBA acquisition and
other expansion activities in 2004. During the 2005 third quarter, we bought
back 7,980 of our shares at an average per-share price of $38.45 and a total
cost of $0.3 million. The total number of shares we repurchased during the first
nine months of 2005 was 47,837, at an average per-share price of $35.49 and a
total cost of $1.7 million. This brought the total number of shares repurchased
under the current 8-million-share program, which commenced in April 2002, to
682,430, leaving 7,317,570 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 9/30/05 12/31/04 ADEQUATELY CAPITALIZED WELL CAPITALIZED
------------------------------------------------------------------------------------------
Total risk-based capital 12.12% 11.60% 8% 10%
Tier 1 risk-based capital 7.33% 6.94% 4% 6%
Tier 1 leverage capital 6.30% 5.92% 4% 5%
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 nine 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
September 30, 2005, loan balances rose 8%, but core deposit balances remained
essentially the same. On average, loan balances were 9% higher for the 2005
third quarter than for the year-ago third quarter, while core deposit balances
were 6% higher.
We use purchased funds, which consist of national CDs $100,000 and over
(national CDs), and short-term borrowings to augment growth in earning assets.
We base the mix between national CDs 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.
47
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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 9/30/05 AT 12/31/04 AT 9/30/04
------------------------------------------------------------------------------
Core deposits 48.7% 52.4% 50.0%
Core deposits and stockholders' equity 58.2% 62.0% 59.2%
National CDs and short-term borrowings 36.3% 32.0% 35.0%
Between December 31, 2004, and September 30, 2005, the combined balances of
purchased funds and short-term borrowings increased 22%. All of the increase was
in national CD balances, as the balances of short-term borrowings declined $40.0
million.
The average rate on core interest-bearing deposits for the first nine months of
2005 was 1.30%. The average rate for national CDs was 3.05%, and the average
rate for total short-term borrowings was 2.93%. 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 instead of other funding
strategies because:
- It lets us add deposits without making capital investments to support the
physical expansion of our branch network beyond Delaware;
- It helps us curb growth in the annual operating expense associated with
staffing and maintaining additional branch offices outside of Delaware;
- 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.
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 $268 million of cash over the next 12 months from
maturities, calls, and income. At September 30, 2005, the balance of the
investment portfolio was $1.93 billion.
- The Federal Home Loan Bank of Pittsburgh, of which Wilmington Trust Company
is a member. As of September 30, 2005, we had $0.9 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 $100.0 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. We have undergone no
credit rating changes in 2005; in August, Standard & Poor's reaffirmed their
credit ratings of Wilmington Trust Corporation and Wilmington Trust Company. 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.
48
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
Among our liquidity risks is a partial guaranty of a line of credit obligation
for affiliate money manager Cramer Rosenthal McGlynn (CRM). At September 30,
2005, this line of credit was $3.0 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.
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 NINE MONTHS ENDED SEPTEMBER 30, 2005
During the first nine months of 2005, all key measures of credit quality
improved:
- Net charge-offs and nonaccruing loans decreased from the levels recorded at
December 31, 2004.
- Also lower than their 2004 year-end levels were the loan loss reserve
ratio, the nonperforming assets ratio, and the net charge-off ratio.
- The percentage of loans rated "pass" in the internal risk-rating analysis
remained at nearly 97%.
49
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
We believe that the primary indicator of credit quality is the net charge-off
ratio.
NET CHARGE-OFFS 2005 Q3 2004 Q3 2005 YTD 2004 YTD
-----------------------------------------------------------------------------
Gross charge-offs (in millions) $ 3.1 $ 5.8 $ 9.4 $14.7
Recoveries (in millions) (1.2) (1.7) (3.3) (4.5)
Net charge-off amount (in millions) 1.9 4.1 6.1 10.2
Net charge-off ratio (1) 0.03% 0.06% 0.09% 0.16%
(1) We calculate the year-to-date net charge-off ratio 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 September 30, 2005, was 12 basis points. In
comparison, the annualized net charge-off ratio at September 30, 2004, was 21
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 nine months of 2005.
NONPERFORMING ASSETS (DOLLARS IN MILLIONS) AT 9/30/05 AT 12/31/04 AT 9/30/04
----------------------------------------------------------------------------------
Nonaccruing loans $49.9 $56.4 $60.7
% of nonaccruing loans to total loans 0.68% 0.83% 0.92%
Other real estate owned (OREO) $ 0.2 $ 0.2 $ 0.2
% of OREO to total loans -- -- --
Renegotiated loans (nonaccruing) $ 4.8 $ 5.2 --
Total nonperforming assets $54.9 $61.8 $60.9
% of nonperforming assets to total loans 0.75% 0.91% 0.92%
Nonaccruing loans were lower at September 30, 2005, than at December 31, 2004,
and September 30, 2004. Total nonperforming assets were lower mainly because a
$5.1 million loan was renegotiated during the 2004 fourth quarter.
On October 28, 2005, we entered into a settlement agreement with Royal Indemnity
Company under which we received $11 million. We recorded approximately $8.5
million of this amount as a reduction to nonaccruing loans, and approximately
$2.5 million as a recovery. The $8.5 million reduction in nonaccruing loans
represents 17% of the amount of nonaccruing loans at September 30, 2005.
Loans past due 90 days or more (past-due loans) were higher at September 30,
2005, than at December 31, 2004, and September 30, 2004, as the following table
shows.
LOANS PAST DUE 90 DAYS OR MORE AT 9/30/05 AT 12/31/04 AT 9/30/04
------------------------------------------------------------------------------------
Loans past due 90 days or more (in millions) $14.9 $5.5 $7.6
% in the commercial portfolio 85% 56% 69%
% in the residential mortgage portfolio 8% 22% 18%
% in the consumer portfolio 7% 22% 13%
The increase in past-due loans was associated primarily with a Wealth Advisory
Services client, not Regional Banking clients. Nearly $6.0 million of the $14.9
million past due at September 30, 2005, returned to current status in early
October 2005. Had this amount been current prior to the end of the reporting
period, past-due loans at
50
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
September 30, 2005, would have amounted to approximately $8.9 million, compared
with $7.6 million at September 30, 2004.
In our internal risk rating analysis, the percentage of loans rated "pass"
remained at 97%. The 2005 third quarter marked the sixth 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 9/30/05 AT 12/31/04 AT 9/30/04
---------------------------------------------------------------------
Pass 96.96% 96.58% 96.74%
Watchlisted 2.00% 1.82% 1.81%
Substandard 0.82% 1.35% 1.21%
Doubtful 0.22% 0.25% 0.24%
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 9/30/05 AT 12/31/04 AT 9/30/04
---------------------------------------------------------------------------
Commercial/financial/agricultural 35% 37% 37%
Commercial real estate/construction 14% 11% 11%
Commercial mortgage 17% 18% 18%
Residential mortgage 6% 6% 7%
Consumer 19% 19% 18%
Secured with liquid collateral 9% 9% 9%
Changes in our provision and reserve for loan losses reflected loan growth, the
results of the internal risk rating analysis, the level of loan repayments and
recoveries, and the Delaware Valley economic environment. At September 30, 2005,
in light of the levels of past due, nonaccruing, and problem 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 Q3 2004 Q3 2005 YTD 2004 YTD
---------------------------------------------------------------------------------
Provision for loan losses (in millions) $2.9 $2.9 $9.8 $11.6
51
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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 9/30/05 AT 12/31/04 AT 9/30/04
--------------------------------------------------------------------------------
Reserve for loan losses (in millions) $93.4 $89.7 $91.3
Loan loss reserve ratio 1.28% 1.33% 1.38%
Unallocated reserve amount (in millions) $ 6.1 $ 6.1 $ 6.1
% of total reserve that is unallocated 6.6% 6.8% 6.7%
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 September 30, 2005, we had serious doubt that $7.7 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 9/30/05 AT 12/31/04 AT 9/30/04
-------------------------------------------------------------------------
Serious-doubt loans (in millions) $7.7 $4.1 $5.5
The increase in the amount of serious-doubt loans reflected one commercial
banking client in Delaware.
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 September 30, 2005, we had entered into a total of $1.1 billion of
interest rate swaps as follows:
- $364.4 million of swaps for loan clients for whom we exchanged floating
rates for fixed rates.
- $364.4 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.
52
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
As of September 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
$46.2 million. Many of our branch offices in Delaware, and all of our
offices outside Delaware, are leased.
- A 77.24% guaranty of a $3.0 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 $3.8 billion.
- Letters of credit, unfunded loan commitments, and unadvanced lines of
credit amounting to $3.22 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 $3,837.9 $3,556.7 $199.9 $ 56.6 $ 24.7
Long-term debt obligations 537.6 28.4 183.6 66.5 259.1
Operating lease obligations 46.2 8.6 19.6 12.3 5.7
Guaranty obligations 2.3 2.3 -- -- --
------------------------------------------------------------------------------------------------------
Total $4,424.0 $3,596.0 $403.1 $135.4 $289.5
------------------------------------------------------------------------------------------------------
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."
53
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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.
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.
54
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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 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. 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
55
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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.
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.
56
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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;
- 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.
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.
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.
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.
The following table presents how the simulation model projected the impact of
gradual and sustained interest rate changes on net interest income over 12-month
periods beginning September 30, 2005, and December 31, 2004.
57
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
IMPACT OF INTEREST RATE CHANGES FOR THE 12 MONTHS FOR THE 12 MONTHS
ON NET INTEREST INCOME BEGINNING 9/30/05 BEGINNING 12/31/04
-----------------------------------------------------------------------------
Gradual increase of 250 basis points 2.25% 3.99%
Gradual decrease of 250 basis points (5.62)% (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 September
30, 2005, the targeted federal funds rate was 3.75%, allowing for a full
250-basis-point decrease.
The table above shows that, as of September 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
2.25% 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 5.62% for the year beginning with that period.
In 2005, the market interest rate environment has been considerably different
than it was in 2004. During the first half of 2004, market interest rates were
at their lowest levels since 1958. At the end of June 2004, the Federal Open
Market Committee (FOMC) instituted its first rate increase since May 2000. Since
then, the FOMC has continued to move rates upward. At September 30, 2005, the
targeted federal funds rate (as set by the FOMC) was 200 basis points higher
than at September 30, 2004, and 150 basis points higher than at December 31,
2004.
Because changes in the yields on our floating-rate loans did not correlate
directly with the changes in market interest rates, our net interest income and
net interest margin first began to benefit from the rising interest rate
environment during the first quarter of 2005. This momentum continued in the
second and third quarters. For the first nine months of 2005, the increases in
the yields on earning assets rose in concert with the increases in market
interest rates, but we did not experience corresponding pressure to increase
deposit rates at the same pace. As a result, we remained slightly
asset-sensitive, and our net interest margin expanded.
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.
The following tables present 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.
9 MONTHS 12 MONTHS 9 MONTHS
AVERAGE YIELDS AND RATES ENDED 9/30/05 ENDED 12/31/04 ENDED 9/30/04
-------------------------------------------------------------------------------
Loan balances 5.96% 4.87% 4.67%
Total earning assets 5.58% 4.67% 4.51%
Core interest-bearing deposits 1.30% 0.85% 0.78%
Total cost of funds 1.93% 1.10% 0.99%
-------------------------------------------------------------------------------
Net interest margin 3.65% 3.57% 3.52%
-------------------------------------------------------------------------------
58
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
BASIS POINT INCREASES 9/30/05 VS.12/31/04 9/30/05 VS. 9/30/04
---------------------------------------------------------------------------
Investment securities portfolio 23 bps 25 bps
Commercial loans 133 bps 184 bps
Total loans 109 bps 151 bps
Total earning assets 91 bps 276 bps
Core interest-bearing deposits 45 bps 61 bps
Total interest-bearing deposits 89 bps 120 bps
Total cost of funds 83 bps 110 bps
Net interest margin 8 bps 13 bps
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 9/30/05 AT 12/31/04 AT 9/30/04
----------------------------------------------------------------------------------------
Wilmington Trust prime lending rate (period-end) 6.75% 5.25% 4.75%
Percentage of floating-rate loans 77% 77% 77%
Percentage of fixed-rate loans 23% 23% 23%
The repricing characteristics of the loan portfolio closely matched those of the
funding sources. As of September 30, 2005:
- Approximately 77% of total loans were floating rate loans.
- The pricing on approximately 63% of commercial floating-rate loans was tied
to a prime lending rate of 6.75%.
- The pricing on approximately 33% of commercial floating-rate loans was tied
to the 1-month LIBOR.
- Approximately 91% of national CDs $100,000 and over had maturities of 90
days or less.
- Approximately 93% of interest-bearing short-term borrowings (federal funds
purchased and securities sold under agreements to repurchase) had
maturities of 90 days or less.
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 our
sensitivity to it. 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
59
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
As the following table shows, 51% - or $40.4 million - of total noninterest
income for the 2005 third quarter was subject to financial market risk. For the
first nine months of 2005, 51% of total noninterest income - or $117.9 million -
was subject to financial market risk.
NONINTEREST INCOME BASED ON MARKET VALUATIONS 2005 Q3 2004 Q3 2005 YTD 2004 YTD
---------------------------------------------------------------------------------------------
WAS trust and investment advisory (in millions) $32.0 $27.4 $ 91.6 $ 81.1
CCS retirement services (in millions) 3.3 2.9 9.7 8.9
CCS cash management services (in millions) 1.4 1.4 4.0 4.6
Affiliate manager revenue (in millions) 3.7 2.8 12.6 7.8
Total $ tied to market valuations (in millions) $40.4 $34.5 $117.9 $102.4
% of total noninterest income tied to market values 51% 50% 51% 48%
ECONOMIC RISK
A primary factor in the continued loan growth of our Regional Banking business
and loan balances is the economic environment in the 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 September 2005,
Delaware's unemployment rate was 4.1%, versus the national rate of 5.1%.
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 August
2005, the most recent report available).
- The Federal Deposit Insurance Corporation reported that Delaware had the
8th highest rate of employment growth in the United States in the 2005
second quarter. This was an improvement from the 2005 first quarter, when
Delaware ranked 12th.
- 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.
- 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.
60
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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 include those that 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. 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.
61
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
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 third quarter or first nine months
of 2005 that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
62
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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 1A. RISK FACTORS.
Not applicable.
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
third quarter.
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
(b) Shares (or Units) Shares (or Units)
(a) Total Number of Average Price Purchased as Part of that May Yet Be
Shares (or Units) Paid per Share Publicly Announced Purchased Under the
Period Purchased (or Unit) Plans or Programs Plans or Programs
-------------------------------------------------------------------------------------------------------
Month #1
July 1, 2005 -
July 31, 2005 7,980 $38.45 7,980 7,317,570
Month #2
August 1, 2005 -
August 31, 2005 -- -- -- 7,317,570
Month #3
September 1, 2005 -
September 30, 2005 -- -- -- 7,317,570
Total 7,980 $38.45 7,980 7,317,570
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.
63
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2005
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
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)
10.40 Settlement Agreement dated as of October 28, 2005, between Royal
Indemnity Company and Wilmington Trust of Pennsylvania (4)
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.
64
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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: November 9, 2005 /s/ Ted T. Cecala
----------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and Chief
Executive Officer (Authorized
Officer)
Date: November 9, 2005 /s/ David R. Gibson
----------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
65