FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From ____________ to ___________
Commission File Number: 1-14659
WILMINGTON TRUST CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0328154
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890
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(Address of principal executive offices) (Zip Code)
(302) 651-1000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of issuer's common stock ($1.00 par value) outstanding
at March 31, 2003 - 65,704,655 shares
Wilmington Trust Corporation and Subsidiaries
Form 10-Q
Index
Page
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Part I. Financial Information
Item 1 - Financial Statements (unaudited)
Consolidated Statements of Condition 1
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 34
Item 4 - Controls and Procedures 35
Part II. Other Information
Item 1 - Legal Proceedings 36
Item 2 - Changes in Securities and Use of Proceeds 36
Item 3 - Defaults Upon Senior Securities 36
Item 4 - Submission of Matters to a Vote of Security Holders 36
Item 5 - Other Information 36
Item 6 - Exhibits and Reports on Form 8-K 36
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
March 31, December 31,
(in thousands) 2003 2002
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ASSETS
Cash and due from banks $ 207,303 $ 248,850
----------------------------
Federal funds sold and securities purchased
under agreements to resell 3,832 32
----------------------------
Investment securities available for sale:
U.S. Treasury and government agencies 451,648 489,525
Obligations of state and political subdivisions 13,010 13,039
Other securities 1,075,452 841,335
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Total investment securities available for sale 1,540,110 1,343,899
----------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions 3,546 3,592
Other securities 1,093 1,195
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Total investment securities held to maturity (market values
of $4,960 and $5,131, respectively) 4,639 4,787
----------------------------
Loans:
Commercial, financial, and agricultural 2,153,971 2,137,465
Real estate-construction 604,042 591,877
Mortgage-commercial 1,054,861 1,065,907
Mortgage-residential 627,129 677,205
Consumer 1,568,462 1,553,042
Unearned income (291) (392)
------------------------------------------------------------------------------------------------------------------
Total loans net of unearned income 6,008,174 6,025,104
Reserve for loan losses (86,010) (85,157)
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Net loans 5,922,164 5,939,947
----------------------------
Premises and equipment, net 154,007 155,166
Goodwill, net of accumulated amortization
of $29,785 in 2003 and 2002 240,072 240,173
Other intangible assets, net of accumulated amortization
of $8,246 in 2003 and $8,125 in 2002 21,394 21,672
Accrued interest receivable 38,544 38,593
Other assets 135,929 138,156
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Total assets $8,267,994 $ 8,131,275
============================
1
March 31, December 31,
(in thousands) 2003 2002
------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 919,080 $ 1,189,610
Interest-bearing:
Savings 366,495 349,322
Interest-bearing demand 2,129,982 1,833,516
Certificates under $100,000 867,455 884,137
Certificates $100,000 and over 2,294,047 2,080,508
------------------------------------------------------------------------------------------------------------------
Total deposits 6,577,059 6,337,093
----------------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 603,940 658,828
U.S. Treasury demand 10,663 41,889
Line of credit 24,000 34,000
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Total short-term borrowings 638,603 734,717
----------------------------------
Accrued interest payable 28,855 29,708
Other liabilities 108,150 127,983
Long-term debt 160,500 160,500
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Total liabilities 7,513,167 7,390,001
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Minority interest 21 5
----------------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78,528 78,528
Capital surplus 49,965 49,115
Retained earnings 896,827 884,203
Accumulated other comprehensive income (1,837) (1,209)
------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 1,023,483 1,010,637
Less: Treasury stock, at cost, 12,823,691 and
12,900,601 shares, respectively (268,677) (269,368)
------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 754,806 741,269
----------------------------------
Total liabilities and stockholders' equity $8,267,994 $ 8,131,275
==================================
See Notes to Consolidated Financial Statements
2
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
For the three months ended
March 31,
--------------------------
(in thousands; except per share data) 2003 2002
--------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $ 77,067 $ 80,748
Interest and dividends on investment securities:
Taxable interest 13,685 13,720
Tax-exempt interest 230 247
Dividends 1,722 1,441
Interest on federal funds sold and securities
purchased under agreements to resell 84 112
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Total interest income 92,788 96,268
-------------------------
Interest on deposits 18,633 22,547
Interest on short-term borrowings 3,219 5,902
Interest on long-term debt 2,641 2,641
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Total interest expense 24,493 31,090
-------------------------
Net interest income 68,295 65,178
Provision for loan losses (4,935) (5,295)
-------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 63,360 59,883
-------------------------
NONINTEREST INCOME
Advisory fees 48,011 52,655
Service charges on deposit accounts 7,293 6,885
Loan fees and late charges 2,012 1,865
Card fees 2,636 2,420
Securities losses (1) --
Other noninterest income 1,212 846
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Total noninterest income 61,163 64,671
-------------------------
Net interest and noninterest income 124,523 124,554
-------------------------
NONINTEREST EXPENSE
Salaries and employment benefits 48,870 46,974
Net occupancy 5,395 4,639
Furniture and equipment 6,014 6,588
Stationery and supplies 1,277 1,404
Advertising and contributions 1,851 1,656
Servicing and consulting fees 3,994 2,624
Travel, entertainment, and training 1,480 1,459
Originating and processing fees 1,827 1,545
3
Other noninterest expense 8,925 8,391
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Total noninterest expense 79,633 75,280
-------------------------
NET INCOME
Income before income taxes and minority
interest 44,890 49,274
Income tax expense 15,287 17,119
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Net income before minority interest 29,603 32,155
Minority interest 226 59
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Net income $ 29,377 $ 32,096
=========================
Net income per share:
Basic $ 0.45 $ 0.49*
=========================
Diluted $ 0.44 $ 0.48*
=========================
Weighted average shares outstanding:
Basic 65,692 65,619*
Diluted 66,174 66,510*
*Reflects the two-for-one stock split in the form of a 100% stock
dividend paid on June 17, 2002.
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
For the three months ended
March 31,
(in thousands) 2003 2002
------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 29,377 $ 32,096
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses 4,935 5,295
Provision for depreciation 4,727 5,444
Amortization of other intangible assets 625 399
Minority interest in net income 16 59
Compensation expense - nonemployee stock options -- 30
Amortization of investment securities available for sale
discounts and premiums 2,478 4,041
Amortization of investment securities held to maturity
discounts and premiums -- 2
Deferred income taxes (978) 4
Originations of residential mortgages available for sale (55,068) (39,980)
Gross proceeds from sales of loans 56,263 40,499
Gains on sales of loans (1,195) (519)
Securities losses 1 --
Decrease/(increase) in other assets 6,970 (8,479)
(Decrease)/increase in other liabilities (24,342) 11,745
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Net cash provided by operating activities 23,809 50,636
----------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 135 13,506
Proceeds from maturities of investment securities available for sale 258,419 211,937
Proceeds from maturities of investment securities held to maturity 148 575
Purchases of investment securities available for sale (458,031) (168,797)
Investments in affiliates -- (2,375)
Cash paid for purchase of subsidiary -- (1,151)
Purchases of loans (276) (85)
Net decrease/(increase) in loans 13,124 (54,039)
Purchases of premises and equipment (5,492) (9,494)
Dispositions of premises and equipment 1,924 4,987
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Net cash used for investing activities (190,049) (4,936)
----------------------------
FINANCING ACTIVITIES
Net increase/(decrease) in demand, savings, and interest-bearing
demand deposits 43,109 (38,960)
Net increase/(decrease) in certificates of deposit 196,857 (132,869)
Net (decrease)/increase in federal funds purchased and securities sold
under agreements to repurchase (54,888) 121,030
Net decrease in U.S. Treasury demand (31,226) (67,505)
Net decrease in line of credit (10,000) (6,900)
5
Cash dividends (16,753) (15,745)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 1,876 3,965
Payments for common stock acquired through buybacks (465) (7,512)
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Net cash provided by/(used for) financing activities 128,510 (144,496)
----------------------------
Effect of foreign currency translation on cash (17) --
----------------------------
Decrease in cash and cash equivalents (37,747) (98,796)
Cash and cash equivalents at beginning of period 248,882 315,103
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 211,135 $ 216,307
============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 25,346 $ 26,111
Taxes 1,049 2,711
Loans transferred during the period:
To other real estate owned $ 816 $ 121
From other real estate owned -- 15
In conjunction with the acquisition of Balentine, liabilities were
assumed as follows:
Fair value of assets acquired $ -- $ 14,484
Common stock issued -- (8,836)
Cash paid -- (1,151)
------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ -- $ 4,497
============================
See Notes to Consolidated Financial Statements
6
Notes to Unaudited Consolidated Financial Statements
Note 1 - Stock-Based Compensation Plans
At March 31, 2003, the Corporation had three types of stock-based compensation
plans, which are described in Note 15 to the consolidated financial statements
included in the Corporation's Annual Report to Shareholders for 2002. The
Corporation applies Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for these plans. No stock-based compensation cost
has been recognized in the accompanying consolidated financial statements for
those plans. If compensation cost for the Corporation's three types of
stock-based compensation plans had been determined based on the fair value at
the grant dates for awards under those plans consistent with the methods
outlined in Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Corporation's net income would
have been as follows:
For the three months ended
March 31,
-------------------------
(in thousands, except per share amounts) 2003 2002
-------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 29,377 $ 32,096
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (396) (794)
-------------------------------------------------------------------------------------------------------------
Pro forma net income $ 28,981 $ 31,302
Basic earnings per share:
As reported $ 0.45 $ 0.49
Pro forma 0.44 0.48
Diluted earnings per share:
As reported $ 0.44 $ 0.48
Pro forma 0.44 0.47
Note 2 - Accounting and Reporting Policies
The accounting and reporting policies of Wilmington Trust Corporation (the
Corporation), a holding company that owns all of the issued and outstanding
shares of capital stock of Wilmington Trust Company, Wilmington Trust of
Pennsylvania, Wilmington Trust FSB, WT Investments, Inc., Rodney Square
Management Corporation, and Wilmington Trust (UK) Limited, conform to accounting
principles generally accepted in the United States of America (GAAP) and
practices in the banking industry for interim financial information. The
information for the interim periods is unaudited and includes all adjustments
that are of a normal recurring nature and that management believes to be
necessary for fair presentation. Results for the interim periods are not
necessarily indicative of the results that may be expected for the full year.
The consolidated financial statements presented herein should be read in
conjunction with the notes to the consolidated financial statements included in
the Corporation's Annual Report to Shareholders for 2002. Certain prior
year amounts have been reclassified to conform to current year presentation.
Note 3 - Comprehensive Income
The following table depicts other comprehensive income as required by Statement
of Financial Accounting Standards (SFAS) No. 130:
For the three months ended
March 31,
------------------------
(in thousands) 2003 2002
-------------------------------------------------------------------------------------------------------
Net income $ 29,377 $ 32,096
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities (505) (3,950)
Reclassification adjustment for securities gains included in net income 1 --
Net unrealized holding gains arising during the period on derivatives
used for cash flow hedge -- --
Reclassification adjustment for derivitive gains included in net income (30) (15)
Foreign currency translation adjustments (94) --
Minimum pension liability adjustment -- --
------------------------
Total comprehensive income $ 28,749 $ 28,131
7
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings
per share:
For the three months ended
March 31,
-------------------------
(in thousands; except per share data) 2003 2002
-------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 29,377 $ 32,096
-------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 65,692 65,619*
-------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 482 891*
-------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 66,174 66,510*
-------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.45 $ 0.49*
=============================================================================================================
Diluted earnings per share $ 0.44 $ 0.48*
=============================================================================================================
Cash dividends per share $ 0.255 $ 0.24*
The number of anti-dilutive stock options excluded was 2.0 million for the
period ended March 31, 2003, and 439,000 for the corresponding period of 2002.
*Reflects the two-for-one stock split in the form of a 100% stock dividend paid
on June 17, 2002.
Note 5 - Segment Reporting
For the purposes of reporting our results, we divide our business activities
into two segments. Our banking and advisory fee-based segments comprise the
services we provide to customers. The banking and advisory fee-based segments
are managed separately but have overlapping markets, customers, and systems. The
Corporation's strategy to develop full relationships across a broad product
array allows these two segments to market separate products and services to a
common base of customers.
The banking segment includes lending, deposit-taking, and branch banking in our
primary banking markets of Delaware, Pennsylvania, and Maryland, along with
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 advisory fee-based segment includes wealth advisory services, asset
management, mutual fund, corporate client services to individuals and
corporations in the United States and more than 50 other countries, and the
results of Balentine & Company. Wealth advisory service activities include
investment management, trust services, private banking, estate settlement,
financial planning, and tax preparation. Asset management activities include a
broad range of portfolio management services, including fixed-income, short-term
cash management, and contributions resulting from affiliations with Cramer
Rosenthal McGlynn, LLC and Roxbury Capital Management, LLC.
8
Corporate client services include custody services, trusteeships for capital
leases, collateralized securities, corporate restructurings and bankruptcies,
and entity management services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Corporation evaluates
performance based on profit or loss from operations before income taxes and
without including nonrecurring gains and losses. The Corporation generally
records intersegment sales and transfers as if the sales or transfers were to
third parties (i.e., at current market prices). Profit or loss from infrequent
events such as the sale of a business are reported separately for each segment.
Financial data by segment for March 31, 2003 vs. March 31, 2002 is as follows:
---------------------------------------------------------------------------------------------------------
Banking Fee-Based
Quarter ended March 31, 2003 (in thousands) Business Business Totals
---------------------------------------------------------------------------------------------------------
Net interest income $ 60,875 $ 7,420 $ 68,295
Provision for loan losses (4,935) -- (4,935)
---------------------------------------------------------------------------------------------------------
Net interest income after provision 55,940 7,420 63,360
Total advisory fees:
Wealth advisory services 667 32,968 33,635
Corporate client services 391 14,536 14,927
Affiliate managers -- (223) (223)
Amortization of other intangibles -- (328) (328)
Other noninterest income 12,547 606 13,153
Securities losses (1) -- (1)
---------------------------------------------------------------------------------------------------------
Net interest and noninterest income 69,544 54,979 124,523
Noninterest expense (36,956) (42,677) (79,633)
---------------------------------------------------------------------------------------------------------
Segment profit from operations 32,588 12,302 44,890
---------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 32,588 $ 12,302 $ 44,890
=========================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 4,774 3,056 7,830
Investment in equity method investees -- 241,164 241,164
Segment average assets 6,625,794 1,533,454 8,159,248
Quarter ended March 31, 2002 (in thousands)
---------------------------------------------------------------------------------------------------------
Net interest income $ 56,078 $ 9,100 $ 65,178
Provision for loan losses (5,146) (149) (5,295)
---------------------------------------------------------------------------------------------------------
Net interest income after provision 50,932 8,951 59,883
Total advisory fees:
Wealth advisory services 1,587 28,821 30,408
Corporate client services 784 13,675 14,459
Affiliate managers -- 7,870 7,870
Amortization of other intangibles and goodwill -- (82) (82)
Other noninterest income 11,401 615 12,016
9
Securities gains -- -- --
---------------------------------------------------------------------------------------------------------
Net interest and noninterest income 64,704 59,850 124,554
Noninterest expense (37,660) (37,620) (75,280)
---------------------------------------------------------------------------------------------------------
Segment profit from operations 27,044 22,230 49,274
---------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 27,044 $ 22,230 $ 49,274
=========================================================================================================
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 6,510 3,376 9,886
Investment in equity method investees -- 226,126 226,126
Segment average assets 6,242,005 1,133,757 7,375,762
Note 6 - Derivative and Hedging Activities
The Corporation previously has entered into interest rate swap and interest rate
floor contracts in managing interest rate risk to reduce the impact of
fluctuations in interest rates of identifiable asset categories, principally
floating-rate commercial loans and commercial mortgage loans.
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts.
Floors are contracts that generate interest payments to the Corporation based on
the difference between the floating-rate index and a predetermined strike rate
of the specific floor when the index is below the strike rate. When the index is
equal to or above the strike rate, no payments are made or received by the
Corporation.
Changes in the fair value of the floors attributed to the change in "time value"
are excluded in assessing the hedge's effectiveness and are recorded to "Other
noninterest income" in the Consolidated Statements of Income. Changes in the
fair value that are determined to be ineffective are also recorded to "Other
noninterest income" in the Consolidated Statements of Income. The effective
portion of the change in fair value is recorded in "Other comprehensive income"
in the Consolidated Statements of Condition. For the first quarter of 2003,
approximately $77,000 of gains in "Accumulated other comprehensive income" were
reclassified to earnings. During the 12 months ending March 31, 2004,
approximately $308,000 of gains in "Accumulated other comprehensive income" are
expected to be reclassified to earnings.
The Corporation does not hold or issue derivative financial instruments for
trading purposes.
Note 7 - Subsequent Event
The Corporation issued $250 million of unsecured subordinated notes due April
15, 2013. Semi-annual interest payments are due on April and October 15th of
each year beginning October 15, 2003 at a rate of 4.875%. The notes are not
redeemable prior to maturity and will not be subject to any sinking fund.
10
Note 8 - Goodwill and Other Intangible Assets
A summary of goodwill and other intangible assets at March 31 is as follows:
2003 2002
-----------------------------------------------------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in thousands) amount amortization amount amount amortization amount
--------------------------------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $ 269,857 $ 29,785 $ 240,072 $ 269,958 $ 29,785 $ 240,173
=========================================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 5,810 $ 3,246 $ 2,564 $ 5,400 $ 3,032 $ 2,368
Customer lists 15,137 3,345 11,792 15,209 3,022 12,187
Acquisition costs 1,140 1,026 114 1,635 1,464 171
Other intangibles 722 629 93 722 607 115
Nonamortizing
Other intangible assets 6,831 -- 6,831 6,831 -- 6,831
--------------------------------------------------------------------------------------------------------------------------------
Total other intangibles $ 29,640 $ 8,246 $ 21,394 $ 29,797 $ 8,125 $ 21,672
=========================================================================================
Amortization expense of other intangible assets for the three months ended March
31 is as follows:
(in thousands) 2003 2002
--------------------------------------------------------------------------------------------------------------------------------
Amortization expense $ 625 $ 399
The estimated amortization expense of other intangible assets for each of the
five succeeding fiscal years is as follows:
Estimated annual amortization expense (in thousands)
--------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2004 $ 2,051
For the year ended December 31, 2005 1,976
For the year ended December 31, 2006 1,234
For the year ended December 31, 2007 1,044
For the year ended December 31, 2008 983
11
The changes in the carrying amount of goodwill for the three months ended March
31 are as follows:
2003 2002
-----------------------------------------------------------------------------------------
Banking Fee-Based Banking Fee-Based
(in thousands) business business Total business business Total
--------------------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2002 $ 3,752 $ 236,421 $ 240,173 $ 3,752 $ 209,099 $ 212,851
Goodwill acquired -- -- -- -- 9,694 9,694
Impairment loss -- -- -- -- (576) (576)
Decrease in carrying value
due to foreign currency
translation adjustments -- (101) (101) -- -- --
--------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2003 $ 3,752 $ 236,320 $ 240,072 $ 3,752 $ 218,217 $ 221,969
=========================================================================================
The goodwill acquired above includes $4.2 million recorded in connection with
the acquisition of Balentine Holdings, Inc. and $2.0 million recorded in
connection with the Corporation's investment in Camden Partners Holdings, LLC.
During 2002, a loss was recognized for $1.2 million, the Corporation's remaining
investment in Clemente Capital, Inc. (Clemente), a global investment management
adviser. Clemente's financial performance and account retention led to the
Corporation's writeoff of this investment. $576,000 of this loss was recognized
during the first quarter of 2002. This loss is recorded in the "Other
noninterest expense" line of the Corporation's Consolidated Statements of
Income.
Other intangible assets acquired in the first three months of 2003 are as
follows:
Weighted
average
amortization
Amount Residual period
(in thousands) assigned value in years
--------------------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights $ 410 -- 8
12
Note 9 - Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (the FASB) issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of this Statement did not
have an impact on the Corporation's consolidated earnings, financial condition,
or equity.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends APB
13
Opinion No. 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The requirements for SFAS No. 148 are
effective for financial statements for fiscal years ended and interim periods
beginning after December 15, 2002. The Corporation uses the "intrinsic value"
approach to accounting for stock-based compensation as permitted under APB
Opinion No. 25. The Corporation has adopted the disclosure provisions of SFAS
No. 148. The disclosure provisions had no impact on the Corporation's
consolidated earnings, financial condition, or equity. On April 22, 2003, the
FASB announced its intention to require that all companies expense the value of
employee stock options. The FASB plans to issue a new exposure draft later this
year that could become effective in 2004. Until the new Statement is issued, the
provisions of Statement No. 123 remain in effect. See "Stock-based employee
compensation" under "Critical Accounting Policies and Estimates."
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including derivatives embedded
in other contracts and hedging activities. This Statement amends Statement No.
133 for decisions made by the FASB as part of its Derivatives Implementation
Group process. This Statement also amends Statement No. 133 to incorporate
clarifications of the definition of a derivative. This Statement is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003. The provisions of this Statement are not expected to have a
material impact on the Corporation's consolidated earnings, financial condition,
or equity.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This is an interpretation of FASB Nos. 5, 57, and 107,
and the rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures required to be made by a guarantor in both its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of the guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions are to be applied on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's year-end.
Accounting for guarantees issued prior to the date of this Interpretation's
initial application will not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of Accounting Research Bulletin
(ARB) No. 51, "Consolidated Financial Statements." This Interpretation addresses
the consolidation by business enterprises of variable interest entities to which
the normal conditions for consolidation do not apply, due to the entities' lack
of a voting interest or lack of control through ownership of a voting interest.
The Interpretation requires that an enterprise review its degree of involvement
in a variable interest entity to determine if it is the primary beneficiary.
Certain disclosures about the variable interest entity and the enterprise's
involvement are required by both the primary beneficiary and by the enterprise
that has a significant interest in a variable interest entity. Enterprises with
variable interests in variable interest entities created after January 31, 2003,
must apply the provisions of the Interpretation to those entities immediately.
Enterprises with a variable interest in a variable interest entity before
February 1, 2002, must apply the provisions of the Interpretation to those
entities no later than the beginning of the first interim or annual reporting
period beginning after June 15, 2003. If it is reasonably possible that an
enterprise will consolidate or disclose information about the variable interest
entity when this Interpretation becomes effective, the enterprise must make
similar disclosures in all financial statements issued after January 31, 2002,
regardless of the date on which the variable interest entity was created. The
Corporation does not expect this Interpretation to have an impact on its
consolidated earnings, financial condition, or equity.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPANY OVERVIEW
Wilmington Trust Corporation (the Corporation) is a financial services holding
company. Through its primary wholly owned subsidiaries, Wilmington Trust
Company, Wilmington Trust of Pennsylvania, and Wilmington Trust FSB, which
serves as the platform for the Corporation's activities beyond Delaware and
Pennsylvania, the Corporation engages in regional banking services for clients
throughout the Delaware Valley region; specialty trust and administrative
services for national and international corporate clients; and wealth advisory
services for high-net-worth individuals and families throughout the United
States and in many foreign countries.
The Corporation and its affiliates have offices in California, Delaware,
Florida, Georgia, Maryland, Nevada, New Jersey, New York, Pennsylvania,
Tennessee, the Cayman Islands, the Channel Islands, and London, and other
affiliates in Dublin and Milan.
SUMMARY OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2003
During the first quarter of 2003, all of the Corporation's core businesses
experienced growth and sales momentum was good. Loan balances rose in the face
of an interest rate environment that led many clients to refinance existing
loans. Fee-based revenue from the wealth advisory and corporate client
businesses increased. Credit quality remained stable and expense growth was
limited.
Despite this success, the convergence of three economic factors prevented the
Corporation from surpassing its performance for the first quarter of 2002:
- The lowest interest rates in 40 years caused a 22-basis-point drop in the
net interest margin, due primarily to a high level of refinancings in the
loan portfolio and repricings in the investment portfolio.
- Persistent volatility and declines in the equity markets offset the growth
in advisory revenue, a large portion of which is tied to market valuations.
- The contribution from the affiliate asset managers dropped from $7.9
million for the 2002 first quarter to a negative $223,000 for the first
quarter of 2003, because of lower equity market valuations and business
that was lost as more clients shifted their investments to less risky
alternatives.
As a result, net income was $29.4 million, which was 8.5% lower than the $32.1
million recorded for the first quarter of 2002. Earnings per share, on a diluted
basis, were $0.44 for the 2003 first quarter, which was 8.3% lower than the
$0.48 reported for the 2002 first quarter. The 2002 first quarter earnings per
share number has been revised to reflect the 2-for-1 stock split in the form of
a 100% stock dividend that was paid on June 17, 2002.
Loan balances for the quarter were $6.0 billion on a period-end as well as on an
average basis. On a period-end basis, this amount was equal to balances at
December 31, 2002, and 8.5% higher than balances at March 31, 2002. On average,
loan balances rose 1.4% from the 2002 fourth quarter and 9.4% from the 2002
first quarter.
The provision for loan losses was 11.2% lower than for the fourth quarter of
2002, and 6.8% lower than for the year-ago first quarter.
Net interest income was 4.8% higher than for the year-ago first quarter due
primarily to loan growth. The net interest margin declined from 3.97% to 3.75%,
as asset yields declined at a more rapid pace than deposit costs due primarily
to refinancing activity and maturing investments.
Noninterest income was 5.4% lower than for the first quarter of 2002, due
primarily to equity market declines that masked growth in advisory revenue and
contributed to lower revenue from the affiliate asset managers.
15
Noninterest expenses were 5.8% higher than for the year-ago first quarter.
Noninterest revenue and noninterest expenses included results from the
acquisition of SPV Management Limited, which were not consolidated until April
2002.
Assets under management at Wilmington Trust totaled $22.6 billion. Assets under
management at value-style affiliate asset manager Cramer Rosenthal McGlynn were
$3.2 billion. Assets under management at value-style affiliate asset manager
Roxbury Capital Management were $3.2 billion. Combined assets under management
totaled $28.9 billion. On an annualized basis, the first quarter 2003 return on
average assets was 1.46% and return on average stockholders' equity was 15.96%,
compared with 1.76% and 18.73%, respectively, for the 2002 first quarter.
The Corporation's Board of Directors raised the quarterly cash dividend 5.9%,
from $0.255 to $0.27, or $1.08 on an annualized basis. This marks the 22nd
consecutive year that Wilmington Trust has raised its dividend.
STATEMENT OF CONDITION
This section discusses changes in the balance sheet from the prior period, which
comprised the period ended December 31, 2002.
Total assets, total earning assets, the investment portfolio, loan balances, and
core deposit balances all rose, both on a period-end and average-balance basis.
The increases were due to growth in the Corporation's regional banking business
and additions to the investment portfolio.
At March 31, 2003, total assets were $8.3 billion, which was 1.7% higher than
the $8.1 billion recorded at December 31, 2002.
Total earning assets at March 31, 2003, were $7.6 billion, compared with $7.4
billion at December 31, 2002.
The size of the investment portfolio increased 15%, from $1.3 billion at
December 31, 2002, to $1.5 billion at March 31, 2003. Investments in
mortgage-backed securities accounted for the majority of the increase, and were
$213.8 million higher than at the end of 2002.
The Corporation is using mortgage-backed securities to help offset lower
residential mortgage loan balances, which are declining due to prepayments,
refinancings, and the sale of all new production into the secondary market. The
Corporation believes that duration and risk can be better managed with
mortgage-backed securities than by retaining residential mortgages.
At March 31, 2003, mortgage-backed securities represented 30%, the largest
percentage, of the investment portfolio. Treasuries accounted for 20%;
collateralized mortgage obligations, 15%; corporate issues, 14%; agencies, 9%;
money market preferred stocks, 8%; municipal bonds, 1%; and other securities,
3%.
Period-end loan balances at March 31, 2003, were $6.0 billion, which was even
with December 31, 2002, period-end balances. Average balances also reached $6.0
billion, which was 1.4% higher than average balances for the fourth quarter of
2002. The Corporation regards average balances as a better indicator of trends
in the regional banking business than period-end balances.
The growth in loan balances on average occurred predominantly in the Delaware
Valley region, where the Corporation focuses its regional banking business. This
region is defined as the area along the I-95 corridor from Princeton to
Baltimore, the state of Delaware, and Maryland's Eastern Shore. Compared to
other parts of the United States, this region's economic health is relatively
strong. According to the U.S. Bureau of Labor Statistics, Delaware's
unemployment rate is the fifth lowest in the nation.
16
The growth in loan balances on average was split evenly between activity in
Delaware and southeastern Pennsylvania. In Delaware, the growth represented new
business development. In southeastern Pennsylvania, much of the growth occurred
from gains in market share, as more clients preferred the geographic proximity
of the Corporation's headquarters and accessibility of its management.
In the commercial loan portfolio, period-end balances at March 31, 2003, were
$3.8 billion, the same as at December 31, 2002, and represented 63.5% of the
overall loan portfolio. Commercial loan balances, on average, also totaled $3.8
billion, which was 3.0% higher than the $3.7 billion recorded for the fourth
quarter of 2002.
Commercial loan balances are reported in three categories:
- Commercial, financial, and agricultural loans, which accounted for 56.5% of
the total commercial portfolio at March 31, 2003;
- Commercial mortgage, which accounted for 27.7%; and
- Real estate construction, which represented 15.8%.
Period-end commercial loan balances at March 31, 2003, and December 31, 2002,
reflect a reclassification of approximately $192 million, or 5%, of the
commercial portfolio. The $192 million was removed from the commercial,
financial, and agricultural category. Of that amount, approximately $102 million
was reclassified as commercial mortgage loans, and the remaining $90 million was
classified as real estate construction loans. During the quarter, an analysis
revealed inconsistencies in the way certain banks were classified.
The Corporation targets its commercial lending activity to privately held
businesses with annual sales of $5 million to $250 million, and where the
opportunity exists for a combined credit and financial advisory relationship.
In the retail loan portfolio, retail loan balances at period-end and on average
for the 2003 first quarter were $2.2 billion, essentially unchanged from the
prior period. Consumer balances were slightly higher, due to increased
collateral lending, primarily to wealth advisory clients. The growth in consumer
balances was offset by a decline in residential mortgage balances, which
occurred because:
- the low interest rate environment prompted a high volume of prepayments and
refinancings, and
- the Corporation continues to sell new residential mortgage production into
the secondary market.
Between December 31, 2002, and March 31, 2003, the composition of the overall
loan portfolio remained relatively unchanged:
Loan portfolio composition March 31, 2003 December 31, 2002
---------------------------------------------------------------------------------------
Commercial, financial, and agricultural 36% 39%
Real estate construction 10% 8%
Commercial mortgage 18% 16%
Residential mortgage 10% 11%
Consumer 26% 26%
The reserve for loan losses at March 31, 2003, was $86.0 million, or 1.43% of
loans outstanding at period end. This compares with the reserve for loan losses
at December 31, 2002, of $85.2 million, which was 1.41% of period-end loans
outstanding. For the first quarter of 2003, the provision for loan losses was
$4.9 million, which was 6.8% lower than the first quarter 2002 provision of $5.3
million. The levels of the reserve and provision for loan losses reflect the
internal portfolio risk ratings and the level of net charge-offs.
Core deposits - demand deposits, savings, interest-bearing demand deposits,
certificates of deposit under $100,000, and local certificates $100,000 and over
- were $4.4 billion at period end and $4.2 billion, on average, for the 2003
first quarter. This was slightly higher than the corresponding balances for the
prior period. The $270.5 million decline in noninterest-bearing
17
demand deposit balances was more than offset by the $296.5 million increase in
interest-bearing demand deposits balances, which occurred because money market
account balances rose 16.3%, or $289.5 million.
Balances for national certificates of deposit in amounts of $100,000 or more
rose 10% to $2.3 billion. Of this amount, $2.2 billion represented wholesale
funding that was purchased to leverage the investment portfolio and support loan
growth. The low interest rate environment made these certificates an attractive
source of funding. In comparison, the December 31, 2002, balance for these CDs
included $1.94 billion in wholesale funding.
Stockholders' equity rose 1.8% to $754.8 million. Earnings of $29.4 million
contributed to the increase, as did $2.0 million of stock issued under employee
benefit programs. Offsetting the increase were $16.8 million in cash dividends
and treasury stock acquisitions of $465,000. The Corporation bought back 16,008
of its shares during the quarter, which brought the total purchased under the
current 8 million-share program to 64,742.
STATEMENT OF INCOME
The Corporation's mix of businesses generates a diversified stream of interest
income and noninterest income. The regional banking business primarily produces
net interest income and related banking fees. The wealth advisory and corporate
client businesses primarily produce noninterest income from fees charged for
services provided. Both interest revenue and noninterest revenue were lower for
the 2003 first quarter than for the 2002 first quarter, due to economic factors
that offset sales growth and business momentum.
While the interest rate environment drove the decline in interest income, it
also caused a reduction in interest expense. As a result, net interest income
rose 4.8% from $65.2 million for the 2002 first quarter to $68.3 million for the
2003 first quarter.
This improvement was not sufficient to offset the lower noninterest income and
higher noninterest expenses, which led net income for the first quarter of 2003
to decline to $29.4 million, or 8.5%, lower than the $32.1 million recorded for
the first quarter of 2002.
Management believes that by having a revenue stream that is balanced between net
interest income and fee income, the Corporation will be better positioned to
weather economic cycles. Management measures this balance using a ratio of fee
income as a percentage of operating revenue.
Management calculates operating revenue by adding net interest income before the
loan loss provision (which is not a revenue item) and total fee income.
Management excludes from this calculation securities gains and/or losses and
amortization expense related to goodwill and other intangible assets from
affiliate asset manager acquisitions. Because of these adjustments, what
management considers to be operating revenue does not equal the sum of net
interest income and noninterest income as reported in the consolidated income
statements. The use of operating revenue, therefore, is deemed to be a non-GAAP
performance measure.
By excluding securities gains and losses, as well as amortization expense,
management removes them from both the numerator and denominator of the operating
revenue calculation. Management believes that securities transactions are
discretionary and not reflective of day-to-day business activity. In addition,
management believes that netting affiliate manager amortization against fee
income masks the true growth of affiliate manager fees in relation to other
sources of revenue. Accordingly, management believes that, in certain
circumstances, its discussion of operating revenue and total fees provides a
more meaningful measurement of its ongoing revenue.
For the first quarter of 2003, total fees comprised 47.4% of operating revenue,
versus 49.8% for the first quarter of 2002. On a GAAP basis, first quarter 2003
noninterest income accounted for 49.1% of net interest and noninterest income,
versus 51.9% for the 2002 first quarter.
18
Net interest and noninterest income
Revenue % of Operating % of Operating
(in thousands) Three Months 2003 Revenue Three Months 2002 Revenue
----------------------------------------------------------------------------------------------------------------------
Net interest income $ 68,295 53% $ 65,178 50%
----------------------------------------------------------------------------------------------------------------------
Fee income:
----------------------------------------------------------------------------------------------------------------------
Advisory fees 48,339 37% 52,737 41%
----------------------------------------------------------------------------------------------------------------------
Service charges 7,293 6% 6,885 5%
----------------------------------------------------------------------------------------------------------------------
Other income 5,860 4% 5,131 4%
----------------------------------------------------------------------------------------------------------------------
Total fee income 61,492 47% 64,753 50%
----------------------------------------------------------------------------------------------------------------------
Total operating revenue $ 129,787 100% $ 129,931 100%
----------------------------------------------------------------------------------------------------------------------
Provision for loan losses (4,935) (5,295)
----------------------------------------------------------------------------------------------------------------------
Affiliate managers, other
intangibles, and goodwill
amortization (328) (82)
----------------------------------------------------------------------------------------------------------------------
Securities gains or (losses) (1) --
----------------------------------------------------------------------------------------------------------------------
Net interest and noninterest
income $ 124,523 $ 124,554
----------------------------------------------------------------------------------------------------------------------
Net interest income, expenses, and margin
Net interest income is the difference between the interest income received on
earning assets, such as loans and investment securities, and the expense of
interest paid on liabilities, such as deposits and short-term borrowings.
Due to low levels of interest rates, first quarter 2003 interest income declined
to $92.8 million, which was $3.5 million, or 3.6%, lower than the $96.3 million
recorded for the 2002 first quarter.
Likewise, interest expense was lower, and declined 21.2%, or $6.6 million, from
$31.1 million for the first quarter of 2002 to $24.5 million for the first
quarter of 2003.
To compute the net interest margin, annualized net interest income on a fully
tax-equivalent (FTE) basis is divided by the average of total earning assets
during the quarter. Interest rate movements, and the relative levels of earnings
assets and interest-bearing liabilities held by the Corporation, affect the net
interest margin and the resulting net interest income.
On an FTE basis, interest income for the 2003 first quarter was $94.0
million, which was 3.6%, or $3.5 million, lower than for the first quarter of
2002. Interest expense was $24.5 million, compared with $31.1 million for the
2002 first quarter. Net interest income, on an FTE basis, was $69.6 million,
which was 4.6% higher than for the first quarter of 2002.
The net interest margin was 3.75%, which was 22 basis points lower than for the
first quarter of 2002.
A combination of factors led to the decline in the margin, including an interest
rate environment that was more challenging than expected, the company's
interest-rate sensitivity positioning, and a flattening yield curve:
- First quarter 2003 was the first quarter to reflect fully the rate
reduction made by the Federal Reserve Board in November 2002, which brought
the prime rate to 4.25%, its lowest since 1959.
- Loan yields fell, as clients paid off loans or refinanced them at lower
rates and new loans came on at lower spreads.
- The average rate earned on loans fell 77 basis points, from 5.98% for the
2002 first quarter to 5.21% for the 2003 first quarter.
- The Corporation's average prime lending rate was 4.25%, which was 50 basis
points lower than the 4.75% for the 2002 first quarter.
- Approximately $1 billion of the total commercial loan portfolio is tied to
LIBOR rates. The 3-month LIBOR declined 10 basis points during the quarter,
from 1.38% at December 31, 2002, to 1.28% at March 31, 2003.
19
- The average yield on earning assets fell 76 basis points, from 5.83% for
the 2002 first quarter to 5.07% for the 2003 first quarter.
- Deposit pricing on many products continued to reach new lows. The average
rate paid on interest-bearing deposits fell to 1.36%, which was 64 basis
points lower than the 2.00% for the 2002 first quarter.
- Yields from investment securities declined 68 basis points from the 2002
first quarter and 25 basis points from the 2002 fourth quarter. Prepayments
and calls exceeded $150 million, as issuers redeemed instruments prior to
their scheduled maturities. Approximately $108 million, on average, was
added to the portfolio during the quarter, but these investments were made
at yields lower than those of the prepayments and calls.
Roughly 8 basis points of the margin decline can be accounted for as follows:
- Approximately $108 million, on average, in new commercial mortgage loans
was added during the quarter, with lower spreads. This accounted for 2
basis points of the decline.
- Approximately $80 million of total commercial loan balances refinanced
during the quarter, accounting for 2 basis points of the decline.
- Turnover in the investment portfolio, plus additions to the portfolio
during the quarter, accounted for 4 basis points of the decline.
Additional loan and investment repricing could compress the net interest margin
by 10 additional basis points during the second quarter of 2003. Any action by
the Federal Reserve to lower key interest rates might further compress the
margin.
The following tables present comparative net interest income data and a
rate/volume analysis of the changes in net interest income for the first
quarters of 2003 and 2002.
20
QUARTERLY ANALYSIS OF EARNINGS
2003 First Quarter 2002 First Quarter
------------------------------------ --------------------------------------
(in thousands; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense Rate balance expense rate
--------------------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 24,061 $ 84 1.40% $ 15,091 $ 112 2.97%
U.S. Treasury and government
agencies 460,914 4,177 3.73 573,879 6,333 4.51
State and municipal 16,546 354 8.97 17,515 378 8.95
Preferred stock 114,021 2,200 7.68 80,394 1,749 8.35
Asset-backed securities 642,614 7,835 4.97 430,532 6,315 6.01
Other 227,475 1,841 3.17 143,263 1,290 3.52
----------------------------------------------------------------------- -------------------------
Total investment securities 1,461,570 16,407 4.55 1,245,583 16,065 5.23
---------------------------------------------------------------------------
Commercial, financial, and
agricultural 2,214,827 25,061 4.53 1,811,611 22,935 5.07
Real estate-construction 544,643 6,066 4.45 421,034 5,327 5.06
Mortgage-commercial 1,007,982 14,179 5.63 1,020,595 16,624 6.52
Mortgage-residential 648,964 11,051 6.82 841,819 14,910 7.08
Consumer 1,561,231 21,201 5.49 1,369,422 21,606 6.38
----------------------------------------------------------------------- -------------------------
Total loans 5,977,647 77,558 5.21 5,464,481 81,402 5.98
---------------------------------------------------------------------------
Total earning assets $7,463,278 94,049 5.07 $6,725,155 97,579 5.83
===========================================================================
Funds supporting earning assets
Savings $ 357,289 203 0.23 $ 348,671 216 0.25
Interest-bearing demand 2,062,931 2,400 0.47 1,539,153 2,493 0.66
Certificates under $100,000 874,629 6,574 3.05 896,695 8,344 3.77
Certificates $100,000 and over 2,217,365 9,456 1.71 1,751,245 11,494 2.63
----------------------------------------------------------------------- -------------------------
Total interest-bearing
deposits 5,512,214 18,633 1.36 4,535,764 22,547 2.00
---------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 778,733 3,199 1.64 918,163 5,694 2.48
U.S. Treasury demand 8,069 20 0.99 56,946 208 1.46
----------------------------------------------------------------------- -------------------------
Total short-term borrowings 786,802 3,219 1.64 975,109 5,902 2.42
---------------------------------------------------------------------------
Long-term debt 160,500 2,641 6.58 160,500 2,641 6.58
----------------------------------------------------------------------- -------------------------
Total interest-bearing
liabilities 6,459,516 24,493 1.52 5,671,373 31,090 2.20
---------------------------------------------------------------------------
Other noninterest funds 1,003,762 -- -- 1,053,782 -- --
----------------------------------------------------------------------- -------------------------
Total funds used to support
earning assets $7,463,278 24,493 1.32 $6,725,155 31,090 1.86
===========================================================================
21
Net interest income/yield 69,556 3.75 66,489 3.97
Tax-equivalent adjustment (1,261) (1,311)
-------- --------
Net interest income $ 68,295 $ 65,178
======== ========
Average rates are calculated using average balances based on historical cost and
do not reflect the market valuation adjustment required by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
January 1, 1994.
22
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
------------------------------------
For the three months ended March 31,
------------------------------------
2003/2002
Increase (Decrease)
due to change in
------------------------------------
(in thousands) Volume(1) Rate(2) Total
-------------------------------------------------------------------------------
Interest income:
Federal funds sold and
securities purchased under
agreements to resell $ 67 $ (95) $ (28)
--------------------------------
U.S. Treasury and
government agencies (1,283) (873) (2,156)
State and municipal * (24) 0 (24)
Preferred stock * 643 (192) 451
Asset-backed securities 3,169 (1,649) 1,520
Other * 757 (206) 551
-------------------------------------------------------------------------------
Total investment
Securities 3,262 (2,920) 342
--------------------------------
Commercial, financial, and
agricultural * 5,041 (2,915) 2,126
Real estate-construction 1,542 (803) 739
Mortgage-commercial * (203) (2,242) (2,445)
Mortgage-residential (3,367) (492) (3,859)
Consumer 3,017 (3,422) (405)
-------------------------------------------------------------------------------
Total loans 6,030 (9,874) (3,844)
-------------------------------------------------------------------------------
Total interest income $ 9,359 $(12,889) $ (3,530)
================================
Interest expense:
Savings $ 5 $ (18) $ (13)
Interest-bearing demand 852 (945) (93)
Certificates under $100,000 (205) (1,565) (1,770)
Certificates $100,000 and over 3,065 (5,103) (2,038)
-------------------------------------------------------------------------------
Total interest-bearing
deposits 3,717 (7,631) (3,914)
--------------------------------
23
Federal funds purchased and
securities sold under
agreements to repurchase (864) (1,631) (2,495)
U.S. Treasury demand (178) (10) (188)
-------------------------------------------------------------------------------
Total short-term
borrowings (1,042) (1,641) (2,683)
--------------------------------
Long-term debt -- -- --
-------------------------------------------------------------------------------
Total interest expense $ 2,675 $ (9,272) $ (6,597)
================================
Changes in net interest income $ 3,067
========
* 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 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.
24
Noninterest income and expenses
Noninterest income comprises fees generated by the advisory business, service
charges on deposit accounts, other operating income, the amortization of
goodwill associated with affiliate asset manager acquisitions and investments,
and securities gains or losses. The majority of noninterest income is generated
by the two advisory businesses, wealth advisory services and corporate client
services.
For the 2003 first quarter, total noninterest income totaled $61.2 million,
which was $3.5 million, or 5.4%, lower than for the 2002 first quarter. Of that
amount, $48.3 million was advisory fee income, which comprises the contributions
from wealth advisory services, corporate client services, and affiliate asset
managers. Advisory fees were $4.4 million, or 8.3%, lower than for the year-ago
first quarter, due primarily to the effects of the extended downturn in equity
markets.
As a result of an internal management reorganization that took effect at the
beginning of 2003, some fees that previously were reported as corporate client
fees are now recorded as wealth advisory fees, including discount brokerage
trading fees and institutional asset management fees. Amounts stated for the
2002 first quarter reflect this revision.
Wealth advisory fees rose despite the declines in equity markets, and reached
$33.6 million, which was $2.3 million, or 7.4%, ahead of the $31.3 million
recorded for the 2002 first quarter. Wealth advisory business development
continued, with most of the growth occurring because of client demand for the
open-architecture investment process of Balentine & Company, the Corporation's
investment counseling firm. Since results from Balentine were first consolidated
in the year-ago first quarter, the 2003 first quarter results demonstrate the
momentum in the wealth advisory business, as does a comparison of the growth in
wealth advisory fees to the performance of the major equity market indices:
Changes in wealth advisory fees vs. changes in equity market indices
--------------------------------------------------------------------
First quarter 2003 vs. first quarter 2002
Wealth advisory fees 7.4%
Dow Jones Industrial Average (average) (19.2)%
S&P 500 (average) (23.9)%
NASDAQ Composite Index (average) (28.9)%
Approximately 70% of wealth advisory fees are tied to the market value of assets
held in client portfolios. Wealth advisory fees are calculated using market
values on the last day of each month, meaning that first quarter fees reflect
valuations on the last days of December 2002, January 2003, and February 2003.
The declines in the indices shown above reflect the average of the market closes
on those days. Of the three indices noted, the S&P 500 most closely matches the
composition of client portfolios.
Corporate client fees for the 2003 first quarter were $14.9 million, which was
10.1% higher than the $13.6 million recorded for the 2002 first quarter. This
marked the highest-ever level of first quarter fees recorded for this business.
The corporate client business prices fees according to the complexity of the
services provided, which include trustee and related administrative services for
financing structures that clients create in preferred jurisdictions;
administrative services that help clients establish and maintain legal residency
requirements in preferred jurisdictions; and trustee services for retirement
plans. Many of these services are performed on a multi-year contract basis,
which generates an annuity-like stream of income and accounts for the majority
of corporate client fees. Approximately 25% of corporate client fees are tied to
asset valuations, most of which are associated with the retirement plan assets
for which the Corporation serves as trustee.
The entity management component of the corporate client business generated most
of the 2003 first quarter growth. Fees from SPV Management Limited, the
Corporation's European entity management services firm, were $1.4 million. SPV
Management's results were first consolidated in the second quarter of 2002.
25
Fees from the two affiliate asset managers, Cramer Rosenthal McGlynn (CRM) and
Roxbury Capital Management (RCM), were $8.1 million lower than for the 2002
first quarter. Both affiliates were affected by persistent declines in the
equity markets and lost business due to investor caution.
On a combined basis, the Corporation's share of affiliate operations was a loss
of $0.2 million for the 2003 first quarter, versus $7.9 million of income that
was recorded for the 2002 first quarter. All of the revenue of the affiliate
managers is based on equity market valuations. The Corporation's share of
operating results is recorded according to a formula based on the Corporation's
ownership position in each.
Fees from CRM, a value-style manager, were $0.7 million for the first quarter of
2003, which was 80.8% lower than the $3.5 million recorded for the 2002 first
quarter. At March 31, 2003, the Corporation held a 63.47% equity interest in
CRM. At March 31, 2002, the Corporation's position was a 56% equity interest.
RCM, the growth-style manager, recorded a loss of $0.9 million for the first
quarter of 2003. For the first quarter of 2002, fees from RCM were $4.3 million.
At March 31, 2003, the Corporation held a 40.91% interest in RCM's common shares
and a 30% preferred interest in its gross fees. This position is unchanged from
March 31, 2002.
The levels of assets under management at Wilmington Trust, CRM, and RCM further
illustrate the impact of market declines and the economic environment:
Changes in assets under management
Company March 31, 2003 March 31, 2002 Change
-------------------------------------------------------------------------------------------
Wilmington Trust $22.6 billion $24.2 billion (6.6)%
Cramer Rosenthal McGlynn $ 3.2 billion $ 6.9 billion (53.6)%
Roxbury Capital Management $ 3.2 billion $ 5.1 billion (37.3)%
At March 31, 2003, the composition of assets under management at Wilmington
Trust was equities, 54%; fixed income investments, 26%; cash and equivalent
instruments, 12%; mutual funds, 5%; and miscellaneous assets, 3%.
Service charges on deposit accounts for the 2003 first quarter were $7.3
million, which was $408,000, or 5.9%, more than for the 2002 first quarter. A
higher volume of returned items accounted for most of the increase.
Other noninterest income for the 2003 first quarter was $1.2 million, which was
$366,000, or 43.3%, higher than for the 2002 first quarter. The increase was due
to more favorable results on the sale of leased autos and residential mortgages.
Noninterest expenses for the 2003 first quarter were $79.6 million, which was
$4.4 million, or 5.8%, higher than for the 2002 first quarter. Approximately $1
million of that amount represented expenses from SPV Management, which were not
consolidated until the second quarter of 2002.
Salary and benefit expenses rose 4%, from $47.0 million in the 2002 first
quarter to $48.9 million in the 2003 first quarter. Contributing to the increase
were staff expenses related to SPV Management, incentive payments that reflected
the increased volume in sales, and higher pension expense.
Pension expense for the 2003 first quarter nearly doubled from the 2002 first
quarter to $1.5 million, as the performance of financial markets prompted
changes in actuarial assumptions, and the Corporation lowered its discount rate
and growth assumptions. For 2003, the discount rate was lowered from 7.25% to
6.75%, and the assumption on returns was reduced from 9.5% to 8.5%.
26
Net occupancy expense rose $756,000, or 16.3%, from $4.6 million in the 2002
first quarter to $5.4 million in the 2003 first quarter. The SPV Management
acquisition added $190,000.
Furniture and equipment expense declined $574,000, or 8.7%, from $6.6 million
for the 2002 first quarter to $6.0 million for the 2003 first quarter. The
reduction was due primarily to reduced depreciation expense and the timing of
annual maintenance contract renewals.
Servicing and consulting expense was $4.0 million, which was $1.4 million, or
52%, higher than for the 2002 first quarter. Much of the increase reflected the
fees paid by Balentine to third-party investment managers. Audit and regulatory
examination fees also added to the increase.
The provision for income taxes was $15.3 million, which was $1.8 million, or
10.7%, lower than the $17.1 million recorded for the 2002 first quarter, as
pre-tax income declined $4.4 million, or 8.8%.
The Corporation's effective tax rate for the 2003 first quarter was 34.2%,
compared with 34.7% for the 2002 first quarter, due to the decline in pre-tax
income and lower revenue from the affiliate asset managers, which reduced
California and New York state taxes.
LIQUIDITY
A financial institution's liquidity demonstrates its ability to meet, in a
timely manner, cash flow requirements that may arise from increases in demand
for loans or other assets, or from decreases in deposits or other funding
sources. Liquidity management, therefore, contains both asset and liability
components.
The maturity and marketability of loans and investments provide liquidity, as do
time deposits at other banks, federal funds sold, and securities purchased under
agreements to resell. Liquidity also results from internally generated capital,
core deposits, large certificates of deposit, federal funds purchased,
securities sold under agreements to repurchase, and other credit facilities.
For the first quarter of 2003, the proportion of funding provided by core
deposits was 61.3%, compared with 62.1% for the fourth quarter of 2002.
The Corporation is a guarantor for 63.47% -- its ownership interest - of two
obligations of its affiliate, CRM. The guaranty is for two lines of credit, at
LIBOR plus 2%, which total $8 million and expire on December 8, 2003. At March
31, 2003, the balance of these two lines was $3 million.
Management continuously monitors the Corporation's existing and projected
liquidity requirements, and believes that its standing in the national markets
will enable it to obtain additional funding if the need arises. Wilmington Trust
Company is a member of the Federal Home Loan Bank of Pittsburgh, and has $1
billion in available borrowing capacity secured by collateral.
ASSET QUALITY AND LOAN LOSS PROVISION
Credit quality remained stable and the composition of the portfolio remained
well diversified and relatively unchanged. The internal analysis of portfolio
risk ratings also was relatively unchanged, and more than 95% of loans in the
portfolio received a pass rating.
The provision for loan losses was reduced from the year-ago quarter to reflect
the Corporation's internal portfolio risk rating and low net charge-off ratio.
For the first quarter of 2003, the provision for loan losses was $4.9 million.
This was $360,000, or 6.8%, lower than the provision for the 2002 first quarter.
Due to growth in the loan portfolio, the reserve for loan losses was increased.
The reserve for loan losses at the end of the 2003 first quarter was $86.0
million, which was $853,000, or 1.0%, higher than the $85.2 million recorded for
the 2002 year-
27
end. The period-end ratio of the reserve to loans outstanding was 1.43%, which
was 2 basis points higher than at December 31, 2002.
The Corporation believes that the most meaningful measure of asset quality is
the level of net charge-offs. Net charge-offs totaled $4.1 million for the 2003
first quarter, which was $194,000, or 4.5%, lower than for the 2002 first
quarter. The ratio of net charge-offs to loans on average was 7 basis points,
which was 1 basis point lower than for the 2002 first quarter.
Period-end loans past due 90 days totaled $8.3 million, which was $4.2 million,
or 33.6%, lower than for the 2002 year-end. The ratio of period-end loans past
due 90 days to total loans was 14 basis points, which was 7 basis points lower
than for the 2002 year-end.
Nonaccruing loans at March 31, 2003, totaled $64.6 million, which was $22.3
million, or 52.6%, higher than the $42.4 million recorded at December 31, 2002.
Almost all of the increase represented a single relationship with a
Delaware-based client who operates a specialty restaurant and entertainment
business in several locations throughout the U.S.
Other real estate owned (OREO) rose from $3.1 million at December 31, 2002, to
$3.9 million at March 31, 2003. Almost all of this increase represented a
residential construction project at a beach resort in Maryland on which the
Corporation does not expect to incur a loss.
The increase in nonaccuring loans and OREO accounted for the increase in the
ratio of period-end nonperforming assets to loans, which rose from 75 basis
points at December 31, 2002, to 114 basis points at March 31, 2003.
The following table presents a comparison of risk elements in the Corporation's
loan portfolio:
----------------------------------------------------------------------------------------------
(in thousands) March 31, 2003 December 31, 2002 March 31, 2002
----------------------------------------------------------------------------------------------
Nonaccruing loans $ 64,642 $ 42,352 $ 33,932
----------------------------------------------------------------------------------------------
Past due 90 days or more 8,304 12,497 6,981
----------------------------------------------------------------------------------------------
Total $ 72,946 $ 54,849 $ 40,913
----------------------------------------------------------------------------------------------
Percent of loans at period end 1.21% 0.91% 0.74%
----------------------------------------------------------------------------------------------
Other real estate owned $ 3,934 $ 3,118 $ 504
----------------------------------------------------------------------------------------------
The following table shows changes in the internal risk rating analysis:
Category March 31, 2003 December 31, 2002
---------------------------------------------------------------
Pass 95.52% 95.65%
Watchlisted 2.48% 2.57%
Substandard 1.79% 1.53%
Doubtful 0.21% 0.25%
28
If the economy in markets where the Corporation lends remains sluggish or
deteriorates further, the ability of some borrowers to repay their loans in full
may be impaired. In that event, management would expect levels of nonperforming
assets, credit losses, and the provision for loan losses to increase.
To minimize the likelihood and impact of such conditions, management continually
monitors the entire loan portfolio to identify potential problem loans and avoid
disproportionately high concentrations of loans to individual borrowers and
industry sectors. An integral part of this process is a regular analysis of all
past due loans.
At March 31, 2003, loans past due 90 days or more totaled $8.3 million. Of this
amount, approximately 50% was in the commercial portfolio; 31% was in the
residential mortgage portfolio; and 19% was in the consumer portfolio. The
corresponding ratios at December 31, 2002, were 68%, 23%, and 9%, respectively.
As a result of the scrutiny of the portfolio, management has identified
approximately $32.2 million in loans about which serious doubt exists as to the
borrowers' ability to continue to repay their loans on a timely basis. Currently
these loans either are performing in accordance with their terms, or are less
than 90 days past due. This compares with the $36.2 million of loans about which
management had similar doubts at December 31, 2002.
In light of current levels of past due, nonaccruing, and problem loans,
management believes that the reserve for loan losses is a reasonable estimate of
the known and inherent losses in the loan portfolio. The methodology used to
calculate the reserve has provided a high degree of reserve adequacy over an
extended period of time and the Corporation believes the methodology is sound.
The reserve reflects estimated credit losses specifically identified, as well as
estimated, probable losses inherent in the remainder of the portfolio based on
loan type and risk rating classification.
The reserve methodology includes an analysis of the business climate and its
potential effect on credit losses, which serves as the basis for the unallocated
portion of the reserve. The business climate analysis reviews shifts in current
market conditions; the average loan size and complexity within the portfolio;
trends in delinquency; the direction of risk rating migration within the
portfolio; the level of loans about which management has serious doubt; the
potential for recoveries; and bankruptcy trends.
The allocated and unallocated portions of the reserve are assessed quarterly as
part of the regular application of the reserve methodology. In accordance with
the growth in loan balances, a portion of the reserve is allocated to new loans
within the parameters of the reserve methodology.
At March 31, 2003, approximately $6.1 million, or 7%, of the reserve for loan
losses was unallocated. This was the same amount and percentage as at December
31, 2002.
CAPITAL RESOURCES
Management reviews the Corporation's capital position and makes adjustments as
needed to assure that the capital base is sufficient to satisfy existing and
impending regulatory requirements; to meet appropriate standards of safety; and
to provide for future growth.
The Corporation's capital rose $13.5 million in the first three months of 2003,
due primarily to earnings and stock issuances. First quarter 2003 earnings of
$29.4 million, net of $16.8 million in cash dividends, added $12.6 million to
capital. The issuance of common stock under employment benefit plans added $2
million.
The Corporation's repurchase of 16,008 of its shares reduced capital $465,000.
These purchases brought the total number of shares bought under the current
8-million-share program to 64,742, at a cost of $1.8 million.
29
The annualized capital generation rate for the 2003 first quarter was 6.9%,
compared with an annualized rate of 9.6% for the 2002 first quarter, and 9.8%
for the 2002 full year.
Minimum levels of capital for a bank holding company are established by the
Federal Reserve Board's risk-based capital guidelines. These guidelines are
intended to reflect the varying degrees of risk associated with different on-
and off-balance sheet items. The following table shows that the Corporation
exceeded the guidelines for both well-capitalized and adequately capitalized
institutions and changes in the ratios for the 3-month periods ended March 31,
2003, and December 31, 2002.
Guidelines for Guidelines for
Wilmington Trust Wilmington Trust adequately capitalized well-capitalized
Capital ratio March 31, 2003 December 31, 2002 institutions institutions
---------------------------------------------------------------------------------------------------------------------------
Total risk-based capital 10.20% 10.15% 8% 10%
Tier 1 risk-based capital 7.11% 7.03% 4% 6%
Tier 1 leverage capital 6.15% 6.08% 4% 5%
On April 17, 2003, the Corporation's Board of Directors increased the quarterly
dividend from $0.255 per share to $0.27 per share. This marked the 22nd
consecutive year that the Corporation has raised its dividend.
In April, the Corporation issued $250 million of 10-year 4.875% subordinated
notes.
INFLATION
The Corporation's asset and liability structure is substantially different from
that of an industrial company, since virtually all of the assets and liabilities
of a financial institution are monetary in nature. Accordingly, changes in
interest rates may have a significant impact on a bank holding company's
performance. Interest rates do not necessarily move in the same direction or at
the same magnitude as the prices of goods and services. The impact, therefore,
of inflation on a bank holding company's financial performance is
indeterminable.
OTHER INFORMATION
Accounting pronouncements
In June 2002, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
adoption of this Statement did not have an impact on the Corporation's
consolidated earnings, financial condition, or equity.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends Accounting Principles Board (APB)
30
Opinion No. 28, "Interim Financial Reporting," to require disclosure about
those effects in interim financial information. The requirements for SFAS No.
148 are effective for financial statements for fiscal years ended and interim
periods beginning after December 15, 2002. The Corporation uses the "intrinsic
value" approach to accounting for stock-based compensation as permitted under
APB Opinion No. 25. The Corporation has adopted the disclosure provisions of
SFAS No. 148. The disclosure provisions had no impact on the Corporation's
consolidated earnings, financial condition, or equity. On April 22, 2003, the
FASB announced its intention to require that all companies expense the value of
employee stock options. The FASB plans to issue a new exposure draft later this
year that could become effective in 2004. Until the new Statement is issued, the
provisions of Statement No. 123 remain in effect. See "Stock-based employee
compensation" under "Critical Accounting Policies and Estimates."
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including derivatives embedded
in other contracts and hedging activities. This Statement amends Statement No.
133 for decisions made by the FASB as part of its Derivatives Implementation
Group process. This Statement also amends Statement No. 133 to incorporate
clarifications of the definition of a derivative. This Statement is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003. The provisions of this Statement are not expected to have a
material impact on the Corporation's consolidated earnings, financial condition,
or equity.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This is an interpretation of FASB Nos. 5, 57, and 107,
and the rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures required to be made by a guarantor in both its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of the guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions are to be applied on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's year-end.
Accounting for guarantees issued prior to the date of this Interpretation's
initial application will not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of Accounting Research Bulletin
(ARB) No. 51, "Consolidated Financial Statements." This Interpretation addresses
the consolidation by business enterprises of variable interest entities to which
the normal conditions for consolidation do not apply, due to the entities' lack
of a voting interest or lack of control through ownership of a voting interest.
The Interpretation requires that an enterprise review its degree of involvement
in a variable interest entity to determine if it is the primary beneficiary.
Certain disclosures about the variable interest entity and the enterprise's
involvement are required by both the primary beneficiary and by the enterprise
that has a significant interest in a variable interest entity. Enterprises with
variable interests in variable interest entities created after January 31, 2003,
must apply the provisions of the Interpretation to those entities immediately.
Enterprises with a variable interest in a variable interest entity before
February 1, 2002, must apply the provisions of the Interpretation to those
entities no later than the beginning of the first interim or annual reporting
period beginning after June 15, 2003. If it is reasonably possible that an
enterprise will consolidate or disclose information about the variable interest
entity when this Interpretation becomes effective, the enterprise must make
similar disclosures in all financial statements issued after January 31, 2002,
regardless of the date on which the variable interest entity was created. The
Corporation does not expect this Interpretation to have an impact on its
consolidated earnings, financial condition, or equity.
31
Critical Accounting Policies and Estimates
Discussion and analysis of the financial condition and results of operations are
based on the consolidated financial statements of the Corporation, which are
prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses, as well as related disclosure of
contingent assets and liabilities at the date of the financial statements and
during the reporting period. Management evaluates estimates on an ongoing basis,
including those estimates related to the reserve for loan losses, stock-based
employee compensation, consolidation of certain variable interest entities,
affiliate fee income, impairment of goodwill, recognition of corporate trust
fees, loan origination fees, and mortgage servicing assets. Management bases its
estimates on historical experience and various other factors and assumptions
that are believed to be reasonable under the circumstances. This forms the basis
for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and the estimates that are used in preparation of its
consolidated financial statements: reserve for loan losses, stock-based employee
compensation, consolidation of certain variable interest entities, and
impairment of goodwill.
Reserve for loan losses
The Corporation maintains a reserve for loan losses that is management's best
estimate of known and inherent estimated losses, based on subjective judgments
regarding the collectibility of loans within the portfolio. The reserve is
reduced by actual credit losses, and is increased by the provision for loan
losses and recoveries from loans previously charged-off. Personnel independent
of the various lending functions evaluate the reserve on a quarterly basis. The
level is determined by assigning specific reserves to individually identified
problem credits, and a general reserve to all other loans. In evaluating the
reserve, specific consideration is given to current micro- and macro-economic
factors, historical net loss experience, current delinquency trends, and
movement within the internally reported loan quality classifications. The
methodology used to determine the necessary level of the reserve has been
applied on a basis consistent with prior periods.
A portion of the reserve is not specifically allocated to either the commercial
or retail portfolio, and represents probable or inherent losses that could be
caused by certain business conditions not accounted for otherwise. Typically,
business conditions, including current economic and market conditions, portfolio
complexity, payment performance, loan portfolio risk rating migration, the level
of serious doubt loans, litigation impact, and bankruptcy trends, are the core
of the unallocated reserve position. The determination of the reserve is
inherently subjective, and it requires material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans, that
may be susceptible to significant change. Because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that increases to the reserve will not be necessary, should the
quality of any loans deteriorate as a result of the factors discussed above.
Management believes that it uses the best information available to make
determinations about the reserve and that it has established its existing
reserve for loan losses in accordance with generally accepted accounting
principles. If circumstances differ substantially from the assumptions used in
making the determinations, future adjustments to the reserve may be necessary
and results of operations could be affected.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's banking affiliates'
reserve for losses on loans. Such agencies may require the Corporation to
32
recognize additions to the reserve based on their judgments about information
available to them at the time of their examination.
Stock-based employee compensation
The Corporation accounts for its stock-based employee compensation plans under
the "intrinsic value" approach, in accordance with the provisions of APB Opinion
No. 25, rather than the "fair value" approach prescribed in SFAS No. 123. The
"intrinsic value" approach limits the compensation expense to the excess of a
stock option's market price on the grant date over the option's exercise price.
Since the Corporation's stock-based employee compensation option plans have
exercise prices equal to market values on the grant date, no compensation
expense is recognized in the financial statements. The "fair value" approach
under SFAS No. 123 takes into account the time value of the option and will
generally result in compensation expense being recorded. Each year since the
inception of SFAS No. 123, the Corporation has disclosed, in the notes to the
financial statements contained in its annual report to shareholders, what the
earnings impact would have been had the Corporation elected the "fair value"
approach under SFAS No. 123. Such disclosure is now included in the
Corporation's interim financial statements in accordance with SFAS No. 148.
Future earnings would be impacted if any change in generally accepted accounting
principles were to limit the continued use of the "intrinsic value" approach.
Consolidation of certain variable interest entities
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which defines
a "qualifying special purpose entity" and precludes its consolidation in the
financial statements of a transferor or affiliate. On January 17, 2003, the FASB
issued Interpretation 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51, Consolidated Financial Statements." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities to which the normal conditions for consolidation do not apply,
due to the entity's lack of a voting interest or lack of control through
ownership of a voting interest. The Interpretation requires that an enterprise
review its degree of involvement in a variable interest entity to determine if
it is the primary beneficiary. The primary beneficiary is required to
consolidate the variable interest entity into its consolidated financial
statements.
The Corporation, through its corporate client business and its U.K. subsidiary,
SPV Management, acts as agent/trustee in more than 8,000 transactions involving
variable interest entities. The Corporation acts in a fee-for-service capacity
in each of these transactions. The Corporation believes that, under existing and
proposed generally accepted accounting principles relating to consolidations,
its capacity in relation to these variable interest entities precludes it from
consolidating them into its financial statements. A change in generally accepted
accounting principles relating to the rules for consolidation that would require
consolidation of variable interest entities, due to the Corporation's capacity
as service provider or trustee could significantly increase the assets and
liabilities shown in the Corporation's consolidated statement of condition and
consequently could have an adverse affect on its regulatory capital ratios.
Impairment of goodwill
Through a series of acquisitions, the Corporation has accumulated goodwill with
a net carrying value of $240 million at March 31, 2003. Through 2001, this
goodwill was subject to periodic amortization, in accordance with the provisions
of APB No. 17, "Intangible Assets." This treatment provided for a gradual
reduction in the book value of the assets over their useful lives. Amortization
could be changed if later events and circumstances warranted a revised estimate
of the useful lives of the assets. Additionally, under APB No. 17, estimations
of value and future benefits could indicate that the unamortized cost should be
reduced by a reduction in net income.
The 2002 adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
eliminated the requirement to amortize goodwill, and substituted impairment
testing. The purpose of impairment testing is to ensure that an amount presented
in the financial statements for goodwill does not exceed its actual fair value.
A methodology that is consistent with how the acquired entity or business was
originally valued is to be utilized in testing for
33
impairment on an annual basis. If this testing indicates that the fair value of
the asset is less than its book value, an impairment expense must be recorded in
the period that the asset has been determined to have a permanent reduction in
value. There may be more volatility in reported income than under the previous
standard, because impairment losses are likely to occur irregularly and in
varying amounts. A major portion of the goodwill on the Corporation's books is
related to its affiliate asset manager acquisitions. A decline in the fair value
of the investment in either of these firms could incur an impairment expense.
Cautionary statement
Estimates, predictions, opinions, or statements of belief in this report might
be construed to be forward-looking statements with the meaning of the Private
Securities Litigation Reform Act of 1995. Examples of such statements could
relate to identification of trends, statements about the adequacy of the reserve
for loan losses, credit quality, the impact of FASB pronouncements on the
Corporation, and the effects of asset sensitivity, interest rate changes, and
information concerning market risk described in Item 3 below. Forward-looking
statements are based on current expectations and assessments of potential
developments. The Corporation's ability to achieve the results reflected in
those statements could be affected by, among other things, changes in national
or regional economic conditions, changes in market interest rates, significant
changes in banking laws or regulations, increased competition in our businesses,
higher-than-expected credit losses, the effects of acquisitions and integration
of acquired businesses, unanticipated changes in regulatory, judicial, or
legislative tax treatment of business transactions, and economic uncertainty
created by unrest in other parts of the world.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Net interest income is an important determinant of the Corporation's financial
performance. Through management of its interest rate risk, the Corporation seeks
to maximize the growth of net interest income on a consistent basis by
minimizing the effects of fluctuations associated with changing market interest
rates.
The Corporation employs simulation models to assess interest rate exposure and
the effect of variations in interest rates on net interest income. The models
evaluate numerous factors, including:
- the composition of assets, liabilities, and off-balance sheet instruments;
- their respective repricing and maturity characteristics;
- the level of market interest rates; and
- other external factors.
The simulations compare multiple interest rate scenarios against a stable
interest rate environment. As a general rule, the model employs scenarios in
which rates gradually move up or down 250 basis points over one year. The
Corporation's objective is to keep market interest rate changes from reducing
net interest income by 10% or more within a one-year period.
Because of 2003's low interest rate levels, as of March 31, 2003, the declining
rate scenario in the simulation model gradually moved down only 125 basis
points, until the federal funds rate equaled zero. This ensured that negative
rates were not created within the model. The rising rate scenario remained able
to accommodate a 250-basis-point upside move.
As of March 31, 2003, the simulation projected that a gradual 250-basis-point
increase in market interest rates would cause net interest income to rise 6.16%
over a one-year period. At December 31, 2002, the scenario predicted an 8.53%
increase.
If interest rates were to experience a gradual decline of 125 basis points, the
model projected that net interest income would decrease 5.73% over a one-year
period. At December 31, 2002, the model employed a 125-basis-point-decline
scenario and projected that net interest income would decrease 7.17%.
The preceding paragraphs contain certain forward-looking statements regarding
the anticipated effects on the Corporation's net interest income resulting from
hypothetical changes in market interest rates. The assumptions the
34
Corporation uses regarding the effects of changes in interest rates on the
adjustment of retail deposit rates and the prepayment of residential mortgages,
asset-backed securities, and collateralized mortgage obligations play a
significant role in the results the simulation model projects. Rate and
prepayment assumptions used in the Corporation's simulation model differ for
both assets and liabilities in rising, as compared to declining, interest rate
environments. Nevertheless, these assumptions are inherently uncertain and, as a
result, the simulation model cannot predict precisely the impact of changes in
interest rates on net interest income. Management reviews the exposure to
interest rate risk regularly, and may employ a variety of strategies as needed
to adjust its sensitivity. This includes changing the relative proportions of
fixed-rate and floating-rate assets and liabilities; changing the number and
maturity of funding sources; securitizing assets; and utilizing derivative
contracts such as interest rate swaps and interest rate floors.
ITEM 4. CONTROLS AND PROCEDURES.
Within 90 days prior to the date of this report, the Chairman of the Board and
Chief Executive Officer of the Corporation and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Corporation's disclosure
controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based
on that evaluation, the Chairman of the Board and Chief Executive Officer and
the Chief Financial Officer concluded that the Corporation's disclosure controls
and procedures are effective in alerting them on a timely basis to material
information about the Corporation (including its consolidated subsidiaries)
required to be included in the periodic filings it makes with the Securities and
Exchange Commission. There have been no significant changes in the Corporation's
internal controls or in other factors that could significantly affect those
controls subsequent to the date of that evaluation.
35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Corporation and its subsidiaries are subject to various
legal proceedings that arise from time to time in the ordinary
course of their businesses and operations. Some of these seek
relief or damages in amounts that may be substantial. Because
of the complex nature of some of these proceedings, it may be
a number of years before they are ultimately resolved. While
it is not feasible to predict the outcome of these
proceedings, the Corporation's management does not believe the
ultimate resolution of any of them will have a material
adverse effect on the Corporation's consolidated financial
condition. Further, the Corporation's management believes that
some of the claims may be covered by insurance, and has
advised its insurance carriers of the proceedings.
The Corporation has not accrued any expenses associated with
the outcome of these proceedings as of March 31, 2003.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Corporation's Annual Shareholders' Meeting held on
April 17, 2003 (the Annual Meeting), the nominees for
directors of the Corporation proposed were elected. The votes
cast for those nominees were as follows:
For Withheld
--- --------
Ted T. Cecala 56,481,096 750,399
Richard R. Collins 55,997,483 1,234,011
Hugh E. Miller 55,977,518 1,253,976
David P. Roselle 56,809,940 421,554
Thomas P. Sweeney 56,822,579 408,916
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit
Number Exhibit
------ -------
3.1 Amended and Restated Certificate of Incorporation of the Corporation(1)
3.2 Amended and Restated Bylaws of the Corporation(2)
------------------
36
(1) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K of Wilmington Trust Corporation filed March 30, 1996.
(2) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K of Wilmington Trust Corporation filed on March 27, 2003.
The Corporation filed a current report on Form 8-K on April 3, 2003
under Item 5 reporting the pricing of $250 million of its debt securities
and furnished a current report on Form 8-K on April 17, 2003 under Item 12
reporting its financial condition and results of operations for the first
quarter of 2003.
37
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2003 /s/ Ted T. Cecala
------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and
Chief Executive Officer
(Authorized Officer)
/s/ David R. Gibson
------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATIONS
I, Ted T. Cecala, Chairman of the Board and Chief Executive Officer of
Wilmington Trust Corporation, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wilmington Trust
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
38
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ Ted T. Cecala
---------------------------
Ted T. Cecala
Chairman of the Board and
Chief Executive Officer
CERTIFICATIONS
I, David R. Gibson, Executive Vice President and Chief Financial Officer of
Wilmington Trust Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wilmington Trust
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
39
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ David R. Gibson
-----------------------------
David R. Gibson
Executive Vice President and
Chief Financial Officer
40
CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002
The undersigned certify that, to their knowledge, the Form 10-Q of Wilmington
Trust Corporation (the "Corporation") for the first quarter of 2003 fully
complies with the requirements of section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in that report fairly presents, in
all material respects, the financial condition and results of operation of the
Corporation.
/s/ Ted T. Cecala
-----------------------------
Ted. T. Cecala
Chairman of the Board and
Chief Executive Officer
/s/ David R. Gibson
-----------------------------
David R. Gibson
Executive Vice President and
Chief Financial Officer
41