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 June 30, 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
June 30, 2003 - 65,903,127 shares
Wilmington Trust Corporation and Subsidiaries
Form 10-Q
Index
Page
----
Part I. Financial Information
Item 1 - Financial Statements (unaudited)
Consolidated Statements of Condition 1
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 42
Item 4 - Controls and Procedures 43
Part II. Other Information
Item 1 - Legal Proceedings 43
Item 2 - Changes in Securities and Use of Proceeds 44
Item 3 - Defaults Upon Senior Securities 44
Item 4 - Submission of Matters to a Vote of Security Holders 44
Item 5 - Other Information 44
Item 6 - Exhibits and Reports on Form 8-K 44
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
June 30, December 31,
(in millions) 2003 2002
------------- ---- ----
ASSETS
Cash and due from banks $ 214.5 $ 248.9
-------- --------
Federal funds sold and securities purchased
under agreements to resell 180.9 --
-------- --------
Investment securities available for sale:
U.S. Treasury and government agencies 548.6 489.6
Obligations of state and political subdivisions 13.1 13.0
Other securities 1,404.6 841.3
-------- --------
Total investment securities available for sale 1,966.3 1,343.9
-------- --------
Investment securities held to maturity:
Obligations of state and political subdivisions 3.5 3.6
Other securities 1.1 1.2
-------- --------
Total investment securities held to maturity
(market values of $4.9 and $5.1, respectively) 4.6 4.8
-------- --------
Loans:
Commercial, financial, and agricultural 2,219.8 2,137.5
Real estate-construction 602.1 591.9
Mortgage-commercial 1,038.0 1,065.9
Mortgage-residential 592.3 677.2
Consumer 1,037.0 1,046.7
Secured with liquid collateral 574.6 506.3
Unearned income (0.2) (0.4)
-------- --------
Total loans net of unearned income 6,063.6 6,025.1
Reserve for loan losses (87.6) (85.2)
-------- --------
Net loans 5,976.0 5,939.9
-------- --------
Premises and equipment, net 152.1 155.2
Goodwill, net of accumulated amortization
of $29.8 in 2003 and 2002 247.3 240.2
Other intangible assets, net of accumulated amortization
of $8.9 in 2003 and $8.1, in 2002 21.3 21.7
Accrued interest receivable 39.2 38.6
Other assets 137.0 138.1
-------- --------
Total assets $8,939.2 $8,131.3
======== ========
1
June 30, December 31,
(in millions) 2003 2002
------------- ---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 944.4 $1,189.6
Interest-bearing:
Savings 368.7 349.3
Interest-bearing demand 2,302.5 1,833.6
Certificates under $100,000 836.7 884.1
Local CDs $100,000 and over 125.8 135.3
-------- --------
Total core deposits 4,578.1 4,391.9
National CDs $100,000 and over 1,910.2 1,945.2
-------- --------
Total deposits 6,488.3 6,337.1
-------- --------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,059.4 658.8
U.S. Treasury demand 32.5 41.9
Line of credit 24.0 34.0
-------- --------
Total short-term borrowings 1,115.9 734.7
-------- --------
Accrued interest payable 28.7 29.7
Other liabilities 104.5 128.0
Long-term debt 420.8 160.5
-------- --------
Total liabilities 8,158.2 7,390.0
-------- --------
Minority interest (0.1) --
-------- --------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 52.6 49.2
Retained earnings 911.7 884.2
Accumulated other comprehensive income 4.6 (1.2)
-------- --------
Total contributed capital and retained earnings 1,047.4 1,010.7
Less: Treasury stock, at cost, 12,625,219 and
12,900,601 shares, respectively (266.3) (269.4)
-------- --------
Total stockholders' equity 781.1 741.3
-------- --------
Total liabilities and stockholders' equity $8,939.2 $8,131.3
======== ========
See Notes to Consolidated Financial Statements
2
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
For the three months For the six months
ended ended
-------------------- ---------------------
June 30, June 30,
(in millions; except per share data) 2003 2002 2003 2002
------------------------------------ ---- ---- ---- ----
NET INTEREST INCOME
Interest and fees on loans $ 76.9 $ 84.4 $ 154.0 $ 165.1
Interest and dividends on investment securities:
Taxable interest 15.7 13.4 29.3 27.1
Tax-exempt interest 0.3 0.2 0.5 0.5
Dividends 1.7 1.5 3.5 2.9
Interest on federal funds sold and
securities purchased under
agreements to resell 0.1 0.1 0.2 0.2
------- ------- -------- --------
Total interest income 94.7 99.6 187.5 195.8
------- ------- -------- --------
Interest on deposits 16.9 21.9 35.7 44.4
Interest on short-term borrowings 3.9 4.5 7.0 10.4
Interest on long-term debt 3.7 2.6 6.3 5.3
------- ------- -------- --------
Total interest expense 24.5 29.0 49.0 60.1
------- ------- -------- --------
Net interest income 70.2 70.6 138.5 135.7
Provision for loan losses (5.9) (6.1) (10.8) (11.4)
------- ------- -------- --------
Net interest income after provision
for loan losses 64.3 64.5 127.7 124.3
------- ------- -------- --------
NONINTEREST INCOME
Advisory fees 49.2 51.2 97.2 103.9
Service charges on deposit accounts 7.8 7.4 15.1 14.3
Loan fees and late charges 2.4 1.6 4.4 3.5
Card fees 2.4 2.7 5.0 5.1
Other noninterest income 1.2 1.4 2.5 2.2
------- ------- -------- --------
Total noninterest income 63.0 64.3 124.2 129.0
------- ------- -------- --------
Net interest and noninterest income 127.3 128.8 251.9 253.3
------- ------- -------- --------
NONINTEREST EXPENSE
Salaries and employment benefits 44.4 44.5 93.2 91.5
Net occupancy 5.0 4.8 10.4 9.4
Furniture, equipment, and supplies 7.3 8.2 14.7 16.2
Advertising and contributions 2.8 3.0 4.6 4.6
Servicing and consulting fees 3.9 2.9 7.9 5.5
Travel, entertainment, and training 1.9 2.1 3.4 3.5
3
Originating and processing fees 1.8 2.0 3.6 3.6
Other noninterest expense 10.0 8.4 18.9 16.8
------- ------- -------- --------
Total noninterest expense 77.1 75.9 156.7 151.1
------- ------- -------- --------
NET INCOME
Income before income taxes and
minority interest 50.2 52.9 95.2 102.2
Income tax expense 17.4 18.5 32.8 35.7
------- ------- -------- --------
Net income before minority interest 32.8 34.4 62.4 66.5
Minority interest 0.2 0.2 0.4 0.2
------- ------- -------- --------
Net income $ 32.6 $ 34.2 $ 62.0 $ 66.3
======= ======= ======== ========
Net income per share:
basic $ 0.50 $ 0.52 $ 0.94 $ 1.01
======= ======= ======== ========
diluted $ 0.49 $ 0.52 $ 0.94 $ 1.00
======= ======= ======== ========
Weighted average shares outstanding:
basic 65,790 65,635 65,741 65,627
diluted 66,195 66,381 66,184 66,445
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
For the six
months ended
June 30,
(in millions) 2003 2002
------------- ---- ----
OPERATING ACTIVITIES
Net income $ 62.0 $ 66.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 10.8 11.4
Provision for depreciation 9.3 10.9
Amortization of goodwill and other intangible
assets 1.2 0.8
Minority interest in net income 0.4 0.2
Compensation expense - nonemployee stock
options -- 0.1
Amortization of investment securities
available for sale discounts and premiums 6.3 8.4
Deferred income taxes (1.0) --
Originations of residential mortgages
available for sale (94.4) (69.6)
Gross proceeds from sales of loans 96.5 70.6
Gains on sales of loans (2.1) (1.0)
Decrease in other assets 4.6 --
Decrease in other liabilities (31.3) (17.4)
--------- -------
Net cash provided by operating activities 62.3 80.7
--------- -------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for
sale 0.2 0.7
Proceeds from maturities of investment securities
available for sale 598.1 384.4
Proceeds from maturities of investment securities held to
maturity 0.2 0.8
Purchases of investment securities available for sale (1,218.0) (387.9)
Purchases of investment securities held to maturity -- (0.1)
Investments in affiliates (7.0) (3.1)
Cash paid for purchase of subsidiary -- (6.4)
Purchases of loans (2.4) (3.0)
Net increase in loans (44.5) (257.1)
Purchases of premises and equipment (14.1) (13.8)
Dispositions of premises and equipment 7.9 5.7
--------- -------
Net cash used for investing activities (679.6) (279.8)
--------- -------
FINANCING ACTIVITIES
Net increase in demand, savings, and interest-bearing
demand deposits 243.1 100.8
Net (decrease)/increase in certificates of deposit (91.9) 364.0
Net increase/(decrease) in federal funds purchased and
securities sold under agreements to repurchase 400.6 (18.5)
Net decrease in U.S. Treasury demand (9.4) (30.4)
Proceeds from issuance of long-term debt 260.3 --
5
Net decrease in line of credit (10.0) (6.9)
Cash dividends (34.5) (32.5)
Distributions to minority shareholders (0.5) (0.1)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 6.6 9.1
Payments for common stock acquired through buybacks (0.5) (14.2)
--------- -------
Net cash provided by financing activities 763.8 371.3
--------- -------
Increase in cash and cash equivalents 146.5 172.2
Cash and cash equivalents at beginning of period 248.9 315.1
--------- -------
Cash and cash equivalents at end of period $ 395.4 $ 487.3
========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 50.0 $ 113.0
Taxes 38.0 35.6
Loans transferred during the period:
To other real estate owned $ 2.2 $ 0.2
From other real estate owned 2.1 0.3
In conjunction with the acquisitions of Balentine & Company,
SPV Management Limited, Cramer Rosenthal McGlynn, LLC,
Roxbury Capital Management, LLC, and Camden Partners
Holdings, LLC liabilities were assumed as follows:
Fair value of assets acquired $ 6.9 $ 29.1
Common stock issued -- (8.8)
Cash paid (6.9) (13.3)
--------- -------
Liabilities assumed $ -- $ 7.0
========= =======
See Notes to Consolidated Financial Statements
6
Notes to Unaudited Consolidated Financial Statements
Note 1 - Stock-Based Compensation Plans
At June 30, 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 For the six
months ended months ended
June 30, June 30,
-------------------- --------------------
(in millions, except per share amounts) 2003 2002 2003 2002
--------------------------------------- ---- ---- ---- ----
Net income:
As reported $ 32.6 $ 34.2 $ 62.0 $ 66.3
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (1.4) (1.5) (1.8) (2.6)
------- ------- ------- -------
Pro forma net income $ 31.2 $ 32.7 $ 60.2 $ 63.7
Basic earnings per share:
As reported $ 0.50 $ 0.52 $ 0.94 $ 1.01
Pro forma 0.47 0.50 0.92 0.97
Diluted earnings per share:
As reported $ 0.49 $ 0.52 $ 0.94 $ 1.00
Pro forma 0.47 0.49 0.91 0.96
7
Note 2 - Accounting and Reporting Policies
The accounting and reporting policies of Wilmington Trust Corporation (the
Corporation), a holding company that owns all of the issued and outstanding
shares of capital stock of Wilmington Trust Company, Wilmington Trust of
Pennsylvania, Wilmington Trust FSB, WT Investments, Inc. (WTI), Rodney Square
Management Corporation, Wilmington Trust (UK) Limited, and Balentine Holdings,
Inc., conform to accounting principles generally accepted in the United States
of America (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 SFAS No.
130:
For the six months ended
June 30,
------------------------
(in millions) 2003 2002
------------- ---- ----
Net income $ 62.0 $ 66.3
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities 5.8 3.3
Reclassification adjustment for derivative gains included (0.1) (0.1)
in net income
Foreign currency translation adjustments 0.1 0.1
Minimum pension liability adjustment -- --
------- -------
Total comprehensive income $ 67.8 $ 69.6
======= =======
s
8
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings
per share:
For the three For the six
months ended months ended
June 30, June 30,
------------------- --------------------
(in millions; except per share data) 2003 2002 2003 2002
------------------------------------ ---- ---- ---- ----
Numerator:
Net income $ 32.6 $ 34.2 $ 62.0 $ 66.3
------- ------- ------- -------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 65.8 65.6 65.7 65.6
------- ------- ------- -------
Effect of dilutive securities:
Employee stock options 0.4 0.7 0.4 0.8
------- ------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 66.2 66.3 66.1 66.4
------ ----- ----- ------
Basic earnings per share $ 0.50 $ 0.52 $ 0.94 $ 1.01
======= ======= ======= =======
Diluted earnings per share $ 0.49 $ 0.52 $ 0.94 $ 1.00
======= ======= ======= =======
Cash dividends per share $ 0.27 $ 0.255 $ 0.525 $ 0.495
The number of anti-dilutive stock options excluded was 2.7 million for the
three- and six-month periods ended June 30, 2003, and 921,000 for the
corresponding periods of 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 (CRM) and Roxbury Capital Management, LLC
9
(Roxbury). 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.
Segment reporting for June 30, 2002 has been revised to reflect a change in
methodology implemented for June 30, 2003. This new methodology employs
activity-based costing principles to assign corporate overhead expenses to each
segment. In addition, transfer pricing concepts are used to credit and charge
segments for funds provided and funds used.
Financial data by segment for the quarters and year-to-date periods ended June
30, 2003 vs. June 30, 2002 is as follows:
Banking Fee-Based
Quarter ended June 30, 2003 (in millions) Business Business Totals
----------------------------------------- -------- -------- ------
Net interest income $ 62.2 $ 8.0 $ 70.2
Provision for loan losses (5.6) (0.3) (5.9)
-------- -------- --------
Net interest income after provision 56.6 7.7 64.3
Total advisory fees:
Wealth advisory services 0.6 32.5 33.1
Corporate client services 0.3 16.2 16.5
Affiliate managers -- (0.1) (0.1)
Amortization of other intangibles -- (0.3) (0.3)
Other noninterest income 13.4 0.4 13.8
Securities gains -- -- --
-------- -------- --------
Net interest and noninterest income 70.9 56.4 127.3
Noninterest expense (35.6) (41.5) (77.1)
-------- -------- --------
Segment profit from operations 35.3 14.9 50.2
Segment gain from infrequent events -- -- --
-------- -------- --------
Segment profit before income taxes $ 35.3 $ 14.9 $ 50.2
======== ======== ========
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 5.7 3.3 9.0
Quarter ended June 30, 2002 (in millions)
Net interest income $ 64.8 $ 5.8 $ 70.6
Provision for loan losses (5.4) (0.7) (6.1)
-------- -------- --------
Net interest income after provision 59.4 5.1 64.5
Total advisory fees:
Wealth advisory services 0.7 31.0 31.7
Corporate client services 0.5 14.8 15.3
Affiliate managers -- 4.4 4.4
Amortization of other intangibles and -- (0.2) (0.2)
goodwill
10
Other operating income 13.0 0.1 13.1
Securities gains -- -- --
-------- -------- --------
Net interest and noninterest income 73.6 55.2 128.8
Noninterest expense (38.0) (37.9) (75.9)
-------- -------- --------
Segment profit from operations 35.6 17.3 52.9
Segment gain from infrequent events -- -- --
-------- -------- --------
Segment profit before income taxes $ 35.6 $ 17.3 $ 52.9
======== ======== ========
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 7.1 3.1 10.2
Banking Fee-Based
Year-to-Date June 30, 2003 (in millions) Business Business Totals
---------------------------------------- -------- -------- ------
Net interest income $ 123.2 $ 15.3 $ 138.5
Provision for loan losses (10.3) (0.5) (10.8)
-------- -------- --------
Net interest income after provision 112.9 14.8 127.7
Total advisory fees:
Wealth advisory services 1.2 65.5 66.7
Corporate client services 0.7 30.7 31.4
Affiliate managers -- (0.3) (0.3)
Amortization of other intangibles -- (0.6) (0.6)
Other noninterest income 26.2 0.8 27.0
Securities gains -- -- --
-------- -------- --------
Net interest and noninterest income 141.0 110.9 251.9
Noninterest expense (70.9) (85.8) (156.7)
-------- -------- --------
Segment profit from operations 70.1 25.1 95.2
Segment gain from infrequent events -- -- --
-------- -------- --------
Segment profit before income taxes $ 70.1 $ 25.1 $ 95.2
======== ======== ========
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 10.5 6.3 16.8
Investment in equity method investees -- 245.2 245.2
Segment average assets 6,807.5 1,557.0 8,364.5
11
Year-to-Date June 30, 2002 (in millions)
Net interest income $ 124.9 $ 10.8 $ 135.7
Provision for loan losses (10.4) (1.0) (11.4)
-------- -------- --------
Net interest income after provision 114.5 9.8 124.3
Total advisory fees:
Wealth advisory services 1.5 61.5 63.0
Corporate client services 0.9 27.9 28.8
Affiliate managers -- 12.3 12.3
Amortization of other intangibles and
goodwill -- (0.2) (0.2)
Other noninterest income 24.8 0.3 25.1
Securities gains -- -- --
-------- -------- --------
Net interest and noninterest income 141.7 111.6 253.3
Noninterest expense (73.8) (77.3) (151.1)
-------- -------- --------
Segment profit from operations 67.9 34.3 102.2
Segment gain from infrequent events -- -- --
-------- -------- --------
Segment profit before income taxes $ 67.9 $ 34.3 $ 102.2
======== ======== ========
Intersegment revenue $ -- $ -- $ --
Depreciation and amortization 13.6 6.5 20.1
Investment in equity method investees -- 222.4 222.4
Segment average assets 6,051.6 1,394.7 7,446.3
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 second quarter of 2003,
approximately $77,100 of gains in "Accumulated other comprehensive income" were
reclassified to earnings. During the 12 months ending June 30, 2004,
approximately $308,400 of gains in "Accumulated other comprehensive income" are
expected to be reclassified to earnings.
The Corporation does not hold or issue derivative financial instruments for
trading purposes.
12
Note 7 - Goodwill and Other Intangible Assets
A summary of goodwill and other intangible assets at June 30 is as follows:
June 30, 2003 December 31, 2002
----------------------------------- -----------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount amortization amount amount amortization amount
------------- ------ ------------ ------ ------ ------------ ------
Goodwill (nonamortizing) $277.1 $ 29.8 $247.3 $270.0 $ 29.8 $240.2
====== ====== ====== ====== ====== ======
Other intangibles
Amortizing:
Mortgage servicing rights $ 6.2 $ 3.5 $ 2.7 $ 5.4 $ 3.0 $ 2.4
Customer lists 15.3 3.7 11.6 15.2 3.0 12.2
Acquisition costs 1.1 1.0 0.1 1.7 1.5 0.2
Other intangibles 0.8 0.7 0.1 0.7 0.6 0.1
Nonamortizing
Other intangible assets 6.8 -- 6.8 6.8 -- 6.8
------ ------ ------ ------ ------ ------
Total other intangibles $ 30.2 $ 8.9 $ 21.3 $ 29.8 $ 8.1 $ 21.7
====== ====== ====== ====== ====== ======
Amortization expense of other intangible assets for the three and six months
ended June 30 is as follows:
For the three For the six
months ended months ended
June 30, June 30,
----------------- -----------------
(in millions) 2003 2002 2003 2002
------------- ---- ---- ---- ----
Amortization expense $ 0.6 $ 0.4 $ 1.2 $ 0.8
The estimated amortization expense of other intangible assets for each of the
five succeeding fiscal years is as follows:
Estimated annual amortization expense (in millions)
---------------------------------------------------
For the year ended December 31, 2004 $ 2.1
For the year ended December 31, 2005 2.0
For the year ended December 31, 2006 1.4
For the year ended December 31, 2007 1.0
For the year ended December 31, 2008 1.0
13
\The changes in the carrying amount of goodwill for the six months ended June 30
are as follows:
2003 2002
------------------------------------- ---------------------------------------
Banking Fee-Based Banking Fee-Based
(in millions) Business Business Total Business Business Total
------------- -------- -------- ----- -------- -------- -----
Balance as of January 1, 2002 $ 3.8 $ 236.4 $ 240.2 $ 3.8 $ 209.1 $ 212.9
Goodwill acquired -- 6.9 6.9 -- 13.4 13.4
Impairment loss -- -- -- -- (0.6) (0.6)
Increase in carrying value
due to foreign currency
translation adjustments -- 0.2 0.2 -- -- --
------- ------- ------- ------- ------- -------
Balance as of June 30, 2003 $ 3.8 $ 243.5 $ 247.3 $ 3.8 $ 221.9 $ 225.7
======= ======= ======= ======= ======= =======
The goodwill acquired in 2003 above includes $6.7 million recorded in connection
with increases in WTI's equity interest in CRM. The goodwill acquired in 2002
above includes $4.4 million recorded in connection with the acquisition of
Balentine Holdings, Inc., $2.4 million recorded in connection with WTI's
investment in Camden Partners Holdings, LLC, $5.9 million recorded in connection
with the acquisition of SPV Management Limited, and $700,000 recorded in
connection with WTI's investment in Roxbury.
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. $575,582 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 six months of 2003 are as follows:
2003 2002
---- ----
Weighted Weighted
average average
amortization amortization
Amount Residual period Amount Residual period
(in millions) assigned value in years assigned value in years
------------- -------- ----- -------- -------- ------ --------
Mortgage servicing rights $ 0.8 -- 8 $ 0.6 -- 8
Customer lists -- -- -- 10.0 -- 18
Other intangibles -- -- -- 1.7 -- --
-------------------- ---------------------
Total $ 0.8 -- 12.3 --
==================== =====================
14
Note 8 - Accounting Pronouncements
SFAS No. 146: In June 2002, the Financial Accounting Standards Board (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.
SFAS No. 148: In December, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This Statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also amends
the disclosure provisions of that Statement to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, this
Statement amends APB Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial information. The
requirements for SFAS No. 148 are effective for financial statements for fiscal
years ended and interim periods beginning after December 15, 2002. The
Corporation uses the "intrinsic value" approach to accounting for stock-based
compensation as permitted under APB Opinion No. 25. The Corporation has adopted
the disclosure provisions of SFAS No. 148. The disclosure provisions had no
impact on the Corporation's consolidated earnings, financial condition, or
equity. On April 22, 2003, the FASB announced its intention to require that all
companies expense the value of employee stock options. The FASB 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."
SFAS No. 149: 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. The
Statement amends Statement No. 133 for decisions made by the FASB as part of its
Derivatives Implementation Group process. The Statement also amends Statement
No. 133 to incorporate clarifications of the definition of a derivative. The
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.
SFAS No. 150: In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify these financial instruments as a liability (or, in
certain circumstances, an asset). Previously these financial instruments would
have been classified entirely as equity, or between the liabilities section and
equity section of the statement of financial condition. This Statement also
addresses questions about the classification of certain financial instruments
that embody obligations to issue equity shares. The provisions of this Statement
are effective for interim periods beginning after June 15, 2003. Management does
not expect the adoption of this Statement to have an impact on the Corporation's
consolidated earnings, financial condition, or equity.
FIN No. 45: 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 rescinds FASB Interpretation No. 34. The
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
15
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. The application of this Interpretation did not have a
material impact on the Corporation's consolidated earnings, financial condition,
or equity.
FIN No. 46: 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 created 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. This Interpretation has had no material
impact on the Corporation's consolidated earnings, financial condition, or
equity, nor has there been any additional requirement for disclosures.
The Corporation does not expect this
Interpretation to have an impact on its consolidated earnings, financial
condition, or equity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPANY OVERVIEW
The Corporation is a financial services holding company that specializes in
wealth advisory services, corporate client services, and regional banking. The
Corporation delivers these services 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 wealth advisory business provides a variety of financial planning and asset
management services for high-net-worth individuals and families throughout the
United States and in many foreign countries. The corporate client services
business provides a variety of specialty trust and administrative services for
national and multinational institutions. The regional banking business targets
consumer and middle-market commercial clients throughout the Delaware Valley
region.
Wilmington Trust Company was founded in 1903 and today is the 15th largest
personal trust provider in the U.S. The Corporation and its affiliates have
offices in California, Delaware, Florida, Georgia, Maryland, Nevada, 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 AND SIX MONTHS ENDED JUNE 30, 2003
The economic dynamics that affected first quarter results continued in the
second quarter. The impact of the low interest rate environment and equity
markets that remained below their year-ago levels offset strong sales momentum
in each of the Corporation's businesses. As result, net income and earnings per
share for the second quarter and first six months of 2003 were lower than for
the corresponding year-ago periods.
Net income for the second quarter of 2003 was $32.6 million, which was 4.7%, or
$1.6 million, less than the 2002 second quarter net income of $34.2 million.
Earnings per share, on a diluted basis, were $0.49, which was 5.8% less than the
year-ago quarter earnings per share of $0.52.
For the first six months of 2003, net income totaled $62.0 million, which was
6.5%, or $4.3 million, less than the $66.3 million recorded for the first six
months of 2002. Earnings per share, on a diluted basis, were $0.94, which was
6.0% less than the $1.00 per share recorded for the first half of 2002.
16
The relatively stable and healthy economy throughout the Delaware Valley drove
growth in the regional banking business. At June 30, 2003, loan balances were
$6.06 billion, which was up slightly from December 31, 2002, and 5.6% higher
than at June 30, 2002. Credit quality remained stable. Net charge-offs remained
in line with historical trends.
Factors associated with the low interest rate environment caused continued
compression in the net interest margin. Although loan balances rose, yields
declined, as new loans were added at lower rates and a high volume of existing
loans was refinanced at lower rates. Lower yields also offset an increase in the
size of the investment portfolio.
The average yields on the investment portfolio, loan balances, and total earning
assets have declined steadily over the past five quarters. The cost of funds to
support earning assets has likewise declined, but to a much lesser extent.
For the 2003 second quarter, the net interest margin was 3.62%, which was 53
basis points lower than for the 2002 second quarter. For the first six months of
2003, the net interest margin was 3.68%, which was 38 basis points lower than
for the first six months of 2002.
In April, the Corporation used the low interest rate environment to its
advantage by issuing long-term debt of $250 million in 10-year subordinated
notes. The debt issue enabled the Corporation to strengthen its capital
position, and add to net interest income. The proceeds were used to leverage the
investment portfolio. While the size of the investment portfolio increased, the
narrow spread on the invested proceeds of the debt issue accounted for 8 basis
points of the decline in the net interest margin from the first quarter.
In the wealth advisory and corporate client services businesses, strong sales
activity led to higher income for the second quarter and first six months of
2003 than for the corresponding year-ago periods, opposite double-digit declines
in financial markets.
Results from the two affiliate money managers continued to reflect a combination
of lower valuations and lost business. Income from value-style manager CRM was
equal in the 2003 second quarter to the 2002 second quarter level, but 61.7%
lower on a 2003 to 2002 year-to-date basis.
Growth-style manager Roxbury recorded a $1.2 million loss for the 2003 second
quarter opposite income of $3.3 million for the 2002 second quarter. This
brought Roxbury's loss for the first six months of 2003 to $2.1 million,
compared with $7.6 million of income for the first six months of 2002. Since
each $1 million of the Corporation's income represents approximately $0.01 per
share, the six-month change at Roxbury represented approximately $0.10 per
share.
On a combined basis, assets under management at Wilmington Trust, CRM, and
Roxbury totaled $30.9 billion. This was a 6.9% increase from December 31, 2002,
but a 2.5% decline from June 30, 2002.
Noninterest expense was higher in the second quarter and first six months of
2003 than for the corresponding year-ago periods. The increase was due to higher
salary, healthcare, and pension expenses, as well as higher occupancy costs and
payments made to third-party advisers associated with investment consulting
services.
The pace of expense growth slowed considerably during the 2003 second quarter.
Noninterest expense was $2.5 million, or 3.1%, lower for the 2003 second quarter
than for the 2003 first quarter.
Most of this reduction was the result of the elimination of the Corporation's
profit-sharing bonus plan, which lowered incentive and bonus expense for the
2003 second quarter by approximately $3.5 million. On a full-time-equivalent
basis, headcount was 2,319 at June 30, 2003, compared with 2,361 at December 31,
2002, and 2,332 at June 30, 2002.
On an annualized basis, the second quarter 2003 return on average assets was
1.53% and return on average stockholders' equity was 17.04%, compared with 1.83%
and 19.36%, respectively, for the 2002 second quarter. For the first six months
of 2003, on an annualized basis, the return on average assets was 1.49% and
return on average stockholders' equity was 16.52%, compared with 1.80% and
19.05%, respectively, for the first six months of 2002.
17
In April, the Corporation announced its 22nd consecutive annual increase in the
cash dividend. The quarterly dividend was raised 5.9%, from $0.255 to $0.27,
which amounts to $1.08 on an annualized basis.
STATEMENT OF CONDITION
This section discusses changes in the balance sheet for the period between
December 31, 2002, and June 30, 2003.
Total assets at June 30, 2003, were $8.94 billion, which was $807.9 million, or
9.9%, higher than at December 31, 2002. The increase was due to growth in total
earning assets, including loan balances and investments.
Loan balances increased due to the strength of the regional banking business in
the difficult interest rate environment. The changes also reflected how the
Corporation strengthened its capital position by issuing $250 million of
long-term subordinated debt.
Total earning assets at June 30, 2003, were $8.22 billion, which was $841.6
million, or 11.4%, higher than at year-end 2002. Total earning assets were
higher primarily due to the increase in the size of the investment portfolio,
which accounted for $622.2 million, or 73.9%, of the growth in total earning
assets.
Investment securities
At period-end, the investment portfolio totaled $1.97 billion. This was 46.1%
higher than the $1.35 billion recorded at year-end 2002. The size of the
investment portfolio was increased to offset the effects of maturities and calls
of securities, the volume of prepayments and refinancings in the loan portfolio,
and lower residential mortgage balances, as new production is sold into the
secondary market. Proceeds from the Corporation's $250 million long-term debt
issue, which were invested mainly in mortgage-backed securities, contributed to
the growth in the investment portfolio.
The percentage of the portfolio invested in mortgage-backed securities rose
40.5% from December 31, 2002, and 57.6% from June 30, 2002. The Corporation
believes that duration and risk can be better managed with mortgage-backed
securities than by retaining individual residential mortgages. Approximately 99%
of the mortgage-backed securities in the portfolio are invested in 15-year,
fixed-rate instruments.
The average life of investments in the total securities portfolio is
approximately 4.52 years. Duration is approximately 2.21 years.
Investment portfolio composition
Following is a comparison of changes in the composition of the investment
securities portfolio.
SECURITY JUNE 30, 2003 DECEMBER 31, 2002 JUNE 30, 2002
-------- ------------- ----------------- -------------
Mortgage-backed securities and
collateralized mortgage obligations 52% 37% 33%
Treasuries 17% 24% 31%
Corporate issues 11% 15% 12%
Agencies 10% 11% 13%
Money market preferred stocks 8% 10% 8%
Municipal bonds 1% 2% 2%
Other 1% 1% 1%
18
Loan balances
Period-end loan balances at June 30, 2003, were $6.06 billion, which was $38.5
million, or 0.6%, higher than the $6.02 billion recorded at December 31, 2002.
On average, loan balances for the 2003 second quarter were $6.04 billion, which
was $400.9 million, or 7.1%, higher than the $5.64 billion recorded for the
second quarter of 2002. For the first six months of 2003, loan balances, on
average, were $6.01 billion, compared with $5.55 billion for the first six
months of 2002. The Corporation considers average balances to be more indicative
of trends in the regional banking business than period-end balances.
Approximately 99% of the growth in loan balances, on average, occurred 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. The
economy in this region is well diversified among the financial services,
technology, life sciences, manufacturing, retail, agriculture, and tourism
sectors, and remains relatively strong compared to many other parts of the U.S.
Additional business development in the state of Delaware, where Wilmington Trust
is the leading banking company, contributed 45.6% of the loan growth for the
first six months of 2003, compared with 64.2% for 2002. Business throughout
southeastern Pennsylvania accounted for 53.9% of the growth for the first six
months of 2003, up from 24.1% for 2002. Most of the growth in Pennsylvania was a
result of gains made in capturing market share.
Commercial loans
The majority of the growth in total loan balances occurred in the commercial
loan portfolio. At June 30, 2003, commercial loan balances totaled $3.86
billion. This was $64.8 million, or 1.7%, higher than the $3.79 billion recorded
at December 31, 2002. On average, commercial loan balances were $3.80 billion
for the first six months of 2003, which was 14.3% higher than the $3.33 billion
reported for 2002.
Commercial loan balances are reported in three categories:
- Commercial, financial, and agricultural (C and I) loans,
- Commercial mortgage loans, and
- Commercial real estate construction loans.
At June 30, 2003, C and I loans accounted for 57.5% of total commercial loan
balances, up from 56.3% at December 31, 2002. Commercial mortgage loans
accounted for 26.9% of total commercial balances, down from 28.1% at the
prior-year-end. Commercial real estate construction balances represented 15.6%
of total commercial balances at both June 30, 2003, and December 31, 2002. On an
average balance basis, C and I loans and commercial mortgage loans declined
slightly as a percentage of total average commercial balances, while commercial
real estate construction loans increased slightly.
On a period-end basis, C and I loans totaled $2.22 billion at June 30, 2003.
This was 3.9% higher than at December 31, 2002, and represented the largest
increase among the three commercial loan categories. Commercial real estate
construction loans were $602.1 million, an increase of 1.7%, and commercial
mortgage loans totaled $1.04 billion, a 2.6% decrease.
For the first six months of 2003, on an average balance basis, commercial real
estate loans posted the largest percentage increase, rising 30% from $436.9
million for 2002 to $567.8 million at June 30, 2003. C and I loan balances were
$2.20 billion, on average, for the first six months of 2003, which was a 17.4%
increase from 2002. Commercial mortgage balances, on average, were $1.03
billion, which was 1.7% higher.
Period-end commercial loan balances at December 31, 2002, reflect a
reclassification of approximately $192 million, or 5%, of the commercial
portfolio. The $192 million was removed from the C and I loan 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 first quarter of 2003, an analysis revealed inconsistencies in
the way certain loans were classified.
19
Retail loans
On a period-end basis, retail loan balances totaled $2.20 billion at June 30,
2003, which was 1.18% lower than the $2.23 billion recorded at December 31,
2003. Consumer loan balances were $1.61 billion, which was an increase of 3.8%.
This growth was offset by residential mortgage loan balances, which decreased
12.5% to $592.3 million. The decline in residential mortgage loan balances was
due to a high volume of refinancings and prepayments and the Corporation's
long-standing practice of selling most new residential mortgage production into
the secondary market.
At June 30, 2003, approximately 26% of period-end consumer loan balances were
loans to individuals that were secured with liquid collateral, compared with
approximately 23% at December 31, 2002. At June 30, 2003, loans secured with
liquid collateral totaled $574.6 million, compared with $506.3 million at
December 31, 2002. These loans are tied primarily to relationships with wealth
advisory clients.
On average, retail loan balances for the first six months of 2003 were $2.21
billion, which was 0.8% lower than the $2.22 billion reported for 2002. Consumer
balances, on average, were $1.58 billion, up 12.6% from $1.40 billion for 2002.
As with the period-end balances, this growth was offset by residential mortgage
balances, which were $626.7 million, on average, for the first six months of
2003. This was a 23.7% decline from the $820.9 million, on average, reported for
2002 residential mortgage balances, on average.
Year-to-date balances, on average, for loans secured with liquid collateral were
$565.4 million, which was 13.3% higher than the $499.2 million reported for
2002.
Loan portfolio composition
Between December 31, 2002, and June 30, 2003, the composition of the total loan
portfolio remained relatively unchanged, as the following table illustrates.
LOAN PORTFOLIO COMPOSITION JUNE 30, 2003 MARCH 31, 2003 DECEMBER 31, 2002
-------------------------- ------------- -------------- -----------------
Commercial/financial/agricultural 37% 36% 35%
Commercial real estate construction 10% 10% 10%
Commercial mortgage 17% 18% 18%
Residential mortgage 10% 10% 11%
Consumer 26% 26% 26%
Reserve and provision
At June 30, 2003, the reserve for loan losses was $87.6 million, or 1.44% of
loans outstanding. This compares with the reserve at March 31, 2003, of $86.0
million, or 1.43% of loans outstanding, and the reserve at December 31, 2002, of
$85.2 million, which was 1.41% of loans outstanding.
For the first six months of 2003, the provision for loan losses was $10.8
million. This was 5.3% lower than the provision of $11.4 million for the first
six months of 2002.
For the second quarter of 2003, the provision was $5.9 million. This was a
decrease of 3.3% from the 2002 second quarter provision of $6.1 million.
Changes in the levels of the reserve and provision for losses reflected the
Corporation's internal risk rating analysis, reserve methodology, and the level
of net charge-offs.
Net charge-offs for the 2003 second quarter totaled $4.4 million, which was $2.7
million lower than for the 2002 fourth quarter, and $3.2 million higher than for
the 2002 second quarter. The year-over-year increase was primarily due to a
Delaware-based client in the specialty restaurant and entertainment business.
20
Deposit balances
At June 30, 2003, total deposit balances were $6.49 billion, which was 2.4%
higher than the $6.34 billion recorded at December 31, 2003. For the first six
months of 2003, noninterest-bearing demand deposits decreased 20.6%, from $1.19
billion at December 31, 2002, to $944.4 million at June 30, 2003. This decline
was more than offset by a 25.6% increase in interest-bearing demand deposits,
which rose from $1.83 billion at December 31, 2002, to $2.30 billion at June 30,
2003. Savings account balances also increased.
Core deposits, which comprise noninterest-bearing demand, savings,
interest-bearing demand, and certificates of deposit, totaled $4.58 billion at
June 30, 2003. This was 4.2% higher than core deposits at December 31, 2002,
which amounted to $4.39 billion.
Between December 31, 2002, and June 30, 2003, period-end balances of
certificates of deposit (CDs) in amounts of $100,000 or more declined 2.1%. At
December 31, 2002, these CDs totaled $2.08 billion. Of this amount, $1.94
billion, or 93.5% of the total, represented wholesale funding that was purchased
to leverage the investment portfolio and support loan growth. At June 30, 2003,
CDs in amounts of $100,000 or more totaled $2.04 billion. Of this amount, $1.91
billion, or 93.8% of the total, represented purchased funding.
Short-term borrowings
While purchased CD balances declined $35.0 million from December 31, 2002, to
June 30, 2003, total short-term borrowings rose $381.2 million, or 51.9%, from
$734.7 million to $1.12 billion. This was due primarily to a 60.8% increase in
federal funds purchased and securities sold under agreements to repurchase. At
December 31, 2002, these funds and securities totaled $658.8 million and
comprised 89.7% of total short-term borrowings. At June 30, 2003, they were
$400.6 million higher and totaled $1.06 billion, which represented 94.9% of
total short-term borrowings.
U.S. Treasury demand balances declined 22.4%, from $41.9 million to $32.5
million.
Other liabilities
Long-term debt increased significantly, from $160.5 million at December 31,
2002, to $420.8 million at June 30, 2003. The increase was due primarily to the
Corporation's issuance in April of $250 million of 10-year-subordinated notes.
Stockholders' equity
For the first six months of 2003, stockholders' equity rose 5.4%, from $741.3
million to $781.1 million. Earnings of $62.0 million contributed to the
increase, as did $7.0 million of stock issued under employment benefit programs.
Offsetting the increase were $34.5 million in cash dividends and treasury stock
acquisitions of $0.5 million. Year-to-date, the Corporation has repurchased
17,367 of its shares, 1,359 of which were bought back during the second quarter.
This brings the total purchased under the current 8-million-share program to
66,101.
INCOME STATEMENT
The Corporation's mix of businesses generates a diversified stream of interest
income and noninterest income. Interest income is income the Corporation earns
on assets such as loans and investment securities, and is produced primarily by
the regional banking business. Noninterest income is income the Corporation
earns from fees it charges for services it provides. The majority of noninterest
income is generated by the wealth advisory and corporate client services
businesses. Noninterest income also includes the contributions from the two
affiliate money managers, service charges on deposit accounts, the amortization
of other intangibles associated with acquisitions and investments in the two
affiliate money managers, securities gains or losses, and other noninterest
sources of income.
21
The two main sources of revenue remained balanced and, on a percentage basis,
relatively unchanged. For the 2003 second quarter, net interest income accounted
for 52.7% of total net interest and noninterest income, compared with 52.3% for
the 2002 second quarter. For the first half of 2003, net interest income
accounted for 52.7% of the total, compared with 51.3% for the first half of
2002.
Interest income and expense
Interest income, interest expense, and the net interest margin were lower for
the second quarter and first six months of 2003 than they were for the
corresponding periods in 2002. Net interest income was slightly lower for the
2003 second quarter than for the year-ago quarter, but it was 2.1% higher for
the first half of 2003 than for the first half of 2002.
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.
Interest rate movements, and the relative levels of earnings assets and
interest-bearing liabilities the Corporation holds, affect the net interest
margin and the resulting net interest income.
For the 2003 second quarter, total interest income was $94.7 million, which was
4.9% lower than the $99.6 million reported for the 2002 second quarter. Interest
and dividends received on investments were $2.6 million higher, but interest and
fees earned on loans was $7.5 million lower.
For the first six months of 2003, total interest income was $187.5 million,
which was 4.2% lower than the $195.8 million recorded for the first six months
of 2002. Year-to-date interest and dividends on securities rose $2.8 million,
but interest and fees from loans fell $11.1 million.
Total interest expense for the 2003 second quarter was $24.5 million, which was
a 15.5% decrease from the $29 million recorded for the 2002 second quarter, as
interest paid on deposits and short-term borrowings was lower. The same was true
for the first six months of 2003, when total interest expense was $49.0 million,
which was 18.5% lower than the $60.1 million reported for the first six months
of 2002.
As a result, net interest income for the 2003 second quarter was $70.2 million,
which was $0.4 million less than for the 2002 second quarter. For the first six
months of 2003, net interest income totaled $138.5 million, which was $2.8
million higher than for the corresponding period in 2002.
To compute the net interest margin, the Corporation annualizes net interest
income on a fully tax-equivalent (FTE) basis, and then divides that number by
average total earning assets.
On an FTE basis, net interest income for the 2003 second quarter was $95.9
million, which was 5.0%, or $5.0 million, lower than for the second quarter of
2002. Total earning assets, on average, were $7.87 billion for the 2003 second
quarter, compared with $6.90 billion for the 2002 second quarter.
For the first six months of 2003, net interest income on an FTE basis was $190.0
million, compared with $198.4 million for the first half of 2002. Total earning
assets, on average, for the first half of 2003 were $7.67 billion, compared with
$6.82 billion for the first half of 2002.
Net interest margin
For the 2003 second quarter, the net interest margin was 3.62%. This was 53
basis points lower than the 2002 second quarter margin of 4.15%, and 40 basis
points lower than the full-year 2002 margin of 4.02%.
For the first six months of 2003, the net interest margin was 3.68%. This was 38
basis points lower than the margin of 4.06% for the first half of 2002, and 34
basis points lower than the full-year 2002 margin.
22
A combination of factors, caused chiefly by the low interest rate environment,
balance sheet expansion, and the Corporation's asset sensitivity, contributed to
compression in the net interest margin. Growth in loan balances was offset by
declining yields on new loan production as well as on a high volume of loans
that were paid down or refinanced. Likewise, falling yields on investments
offset the increase in the size of the investment portfolio. These declines in
asset yields far outpaced the declines in funding costs.
For the 2003 second quarter, the drop in the average yield on total earning
assets was more than double the decline in the cost of funds used to support
those assets. The average yield on total earning assets for the 2003 second
quarter was 4.86%, which was 96 basis points lower than for the 2002 second
quarter. In comparison, the average cost of funds used to support those assets
was 1.24%, a decline of 43 basis points.
On a year-to-date basis, the average yield on total earnings assets fell 86
basis points, which was nearly double the 48-basis-point decline in the average
cost of funds to support earning assets. The average yield on total earnings
assets for the first half of 2003 was 4.96%, while the average cost of funds was
1.28%.
For the second quarter of 2003, average balances in the investment portfolio
were $544.7 million higher than for the second quarter of 2002. At the same
time, the low rate environment reduced the average yield on the portfolio 93
basis points, from 5.08% to 4.15%.
For the first six months of 2003, average balances in the investment portfolio
were $381.3 million higher than for the first six months of 2002. The average
yield for the first half of 2003 was 4.33%, which was 82 basis points lower than
the average yield of 5.15% for the first half of 2002.
Proceeds from the Corporation's long-term debt issue contributed to the growth
in the investment portfolio. Most of the proceeds were invested at a net average
spread of 1.65%. This narrow spread accounted for 8 basis points of the second
quarter decline in the net interest margin.
For the second quarter as well as the first half of 2003, the Corporation's
average prime lending rate index was 4.25%, compared with 4.75% for the second
quarter and first half of 2002.
In the loan portfolio, average balances for the 2003 second quarter were 7.1%
higher than for the 2002 second quarter, while the average yield for the
corresponding period fell 15.0%, or 90 basis points, from 5.99% to 5.09%. For
the first half of 2003 versus the first half of 2002, average loan balances were
8.2% higher, while the average yield fell 13.9%, or 83 basis points, from 5.98%
to 5.15%.
The yield declines opposite loan growth were especially pronounced in the
commercial portfolio, which contributed the majority of the growth in total loan
balances. On average, commercial loan balances for the 2003 second quarter were
12.8% higher than for the 2002 second quarter, while the average yield declined
16.7%, or 95 basis points, from 5.70% to 4.75%. For the first half of 2003,
commercial loan balances, on average, were 10.9% higher than for the first half
of 2002. This compares with a decline in the average yield in the corresponding
period of 14.8%, or 83 basis points, from 5.61% to 4.78%.
Contributing to the lower yields in the commercial loan portfolio was the fact
that approximately one-third, or $1 billion, of commercial loans is tied to the
LIBOR. The LIBOR fell 16 basis points during the second quarter, versus a
decline of 10 basis points during the first quarter.
Among the largest contributors to growth in the total loan portfolio was the
increase in balances of loans secured by liquid collateral. For the 2003 second
quarter, these balances, on average, were 29.6%, or $129.1 million, higher than
for the 2002 second quarter. For the first six months of 2003, these balances,
on average, were 32.8%, or $135.5 million, higher than for the first half of
2002.
Loans secured by liquid collateral are tied primarily to relationships with
wealth advisory clients, and carry the lowest yields in the total loan
portfolio. For the second quarter of 2003, the average yield on these loans was
2.73%, which was a 71-basis-point drop from the average yield of 3.44% for the
2002 second quarter. For the first six months of 2003, the average yield on
these loans was 2.80%, which was 71 basis points lower than the average yield
for the first half of 2002 of 3.51%.
23
The magnitude of the yield declines in the loan and investment portfolios
exceeded the corresponding adjustments to core deposit pricing. The average rate
paid on core interest-bearing deposits for the 2003 second quarter reached a new
low of 1.05%, which was 40 basis points lower than for the 2002 second quarter.
For the first six months of 2003, the average rate paid on core interest-bearing
deposits was 1.11%, which was 45 basis points lower than for the corresponding
period in 2002.
The declines in the net interest margin for the second quarter and first half of
2003 did not reflect the 25-basis-point rate reduction enacted by the Federal
Reserve at the end of June. The Corporation estimates that, during the 2003
third quarter, this move could further compress the margin 10 to 15 basis
points, and that asset sensitivity could cause another 5 basis points of
compression, for a total decline of as much as 20 basis points during the 2003
third quarter.
The following tables present comparative net interest income data and a
rate/volume analysis of the changes in net interest income for the second
quarters of 2003 and 2002 and for the first six months of 2003 and 2002.
24
QUARTERLY ANALYSIS OF EARNINGS
2003 Second Quarter 2002 Second Quarter
--------------------------------------- ---------------------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
--------------------- ------- ------- ---- ------- ------- ----
Earning assets
Federal funds sold and
securities purchased
under agreements to
resell $ 38.4 $ 0.1 1.32% $ 17.3 $ 0.1 2.46%
U.S. Treasury and
government agencies 528.8 4.3 3.29 582.6 6.2 4.31
State and municipal 16.6 0.4 9.01 17.4 0.4 8.97
Preferred stock 120.1 2.1 7.40 80.4 1.8 8.33
Mortgage-backed
securities 888.8 9.8 4.47 400.9 5.8 5.99
Other 240.9 1.8 2.93 169.2 1.6 3.59
-------- -------- -------- --------
Total
investment securities 1,795.2 18.4 4.15 1,250.5 15.8 5.08
-------- -------- -------- -------- -------- --------
Commercial, financial,
and agricultural 2,190.8 24.7 4.45 1,941.1 26.8 5.45
Real estate-construction 590.8 6.8 4.56 452.6 5.9 5.19
Mortgage-commercial 1,054.6 14.6 5.47 1,007.5 16.3 6.40
Mortgage-residential 604.7 10.2 6.77 800.3 13.8 6.90
Consumer 1,031.4 17.2 6.68 999.0 18.4 7.38
Secured with liquid collateral 565.4 3.9 2.73 436.3 3.8 3.44
-------- -------- -------- --------
Total loans 6,037.7 77.4 5.09 5,636.8 85.0 5.99
-------- -------- -------- -------- -------- --------
Total earning assets $7,871.3 95.9 4.86 $6,904.6 100.9 5.82
======== ======== ======== ======== ======== ========
Funds supporting earning assets
Savings $ 369.4 0.1 0.15 364.8 0.2 0.25
Interest-bearing demand 2,127.0 2.4 0.45 1,818.0 2.6 0.57
Certificates under $100,000 851.5 6.0 2.80 884.7 7.7 3.50
Local CDs $100,000 and
over 139.7 0.6 1.78 180.1 1.2 2.70
National CDs $100,000
and over 1,979.4 7.8 1.56 1,764.3 10.2 2.26
-------- -------- -------- --------
Total interest-bearing
deposits 5,467.0 16.9 1.23 5,011.9 21.9 1.74
-------- -------- -------- -------- -------- --------
Federal funds purchased
and securities sold under
agreements to repurchase
985.3 3.9 1.54 794.6 4.4 2.19
U.S. Treasury demand 8.4 -- 1.04 15.9 0.1 1.50
-------- -------- -------- --------
Total short-term borrowings 993.7 3.9 1.54 810.5 4.5 2.18
-------- -------- -------- -------- -------- --------
Long-term debt 407.9 3.7 3.62 160.5 2.6 6.60
-------- -------- -------- --------
Total interest-bearing
liabilities 6,868.6 24.5 1.42 5,982.9 29.0 1.93
-------- -------- -------- -------- -------- --------
Other noninterest funds 1,002.7 -- -- 921.7 -- --
-------- -------- -------- --------
25
Total funds used to
support earning assets $7,871.3 24.5 1.24 $6,904.6 29.0 1.67
======== ======== ======== ======== ======== ========
Net interest income/yield 71.4 3.62 71.9 4.15
Tax-equivalent adjustment (1.2) (1.3)
-------- --------
Net interest income $ 70.2 $ 70.6
======== ========
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.
26
YEAR-TO-DATE ANALYSIS OF EARNINGS
Year-to-Date 2003 Year-to-Date 2002
---------------------------------------- ----------------------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense Rate
--------------------- ------- ------- ---- ------- ------- ----
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 31.2 $ 0.2 1.35% $ 16.2 $ 0.2 2.70%
U.S. Treasury and government
agencies 495.0 8.4 3.49 578.2 12.5 4.41
State and municipal 16.6 0.7 8.99 17.5 0.8 8.96
Preferred stock 117.1 4.4 7.54 80.4 3.5 8.34
Mortgage-backed
securities 766.4 17.7 4.67 415.6 12.2 6.00
Other 234.2 3.6 3.05 156.3 2.8 3.56
-------- -------- -------- --------
Total investment securities 1,629.3 34.8 4.33 1,248.0 31.8 5.15
-------- -------- -------- -------- -------- --------
Commercial, financial,
and agricultural 2,202.8 49.7 4.49 1,876.8 49.7 5.26
Real estate-construction 567.8 12.9 4.51 436.9 11.3 5.13
Mortgage-commercial 1,031.4 28.8 5.55 1,014.0 32.9 6.46
Mortgage-residential 626.7 21.3 6.79 820.9 28.7 6.99
Consumer 1,029.8 34.6 6.77 988.8 36.5 7.44
Secured with liquid
collateral 549.3 7.7 2.80 413.7 7.3 3.51
-------- -------- -------- --------
Total loans 6,007.8 155.0 5.15 5,551.1 166.4 5.98
-------- -------- -------- -------- -------- --------
Total earning assets $7,668.3 190.0 4.96 $6,815.3 198.4 5.82
======== ======== ======== ======== ======== ========
Funds supporting earning assets
Savings $ 363.4 0.3 0.19 $ 356.8 0.4 0.25
Interest-bearing demand 2,095.1 4.8 0.46 1,679.4 5.1 0.61
Certificates under $100,000 863.0 12.6 2.93 890.7 16.1 3.64
Local CDs $100,000 and over 145.4 1.4 1.88 165.2 2.3 2.74
National CDs $100,000 and over 2,022.6 16.6 1.62 1,683.1 20.5 2.44
-------- -------- -------- --------
Total interest-bearing
deposits 5,489.5 35.7 1.30 4,775.2 44.4 1.86
-------- -------- -------- -------- -------- --------
Federal funds purchased and
securities sold under
agreements to repurchase 882.6 7.0 1.59 856.0 10.1 2.35
U.S. Treasury demand 8.2 -- 1.02 36.3 0.3 1.47
-------- -------- -------- -------- -------- --------
Total short-term
borrowings 890.8 7.0 1.58 892.3 10.4 2.31
-------- -------- -------- -------- -------- --------
Long-term debt 284.9 6.3 4.45 160.5 5.3 6.59
27
Total interest-bearing
liabilities 6,665.2 49.0 1.47 5,828.0 60.1 2.06
-------- -------- -------- -------- -------- --------
Other noninterest funds 1,003.1 -- -- 987.3 -- --
-------- -------- -------- --------
Total funds used to
support earning
assets $7,668.3 49.0 1.28 $6,815.3 60.1 1.76
======== ======== ======== ======== ======== ========
Net interest income/yield 141.0 3.68 138.3 4.06
Tax-equivalent adjustment (2.5) (2.6)
-------- --------
Net interest income $ 138.5 $ 135.7
======== ========
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.
28
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
For the three months For the six months
ended June 30, ended June 30,
--------------------------------- -----------------------------------
2003/2002 2003/2002
Increase (Decrease) Increase (Decrease)
due to change in due to change in
--------------------------------- -----------------------------------
1 2 1 2
(in millions) Volume Rate Total Volume Rate Total
------------- ------ ---- ----- ------ ---- -----
Interest income:
Federal funds sold and
securities purchased under
agreements to resell $ 0.1 $(0.1) -- $ 0.2 $(0.2) --
----- ----- ----- ----- ----- -----
U.S. Treasury and government agencies (0.6) (1.3) (1.9) (1.9) (2.2) (4.1)
Preferred stock * 0.7 (0.3) 0.4 1.4 (0.5) 0.9
Asset-backed securities 7.3 (3.3) 4.0 10.5 (5.0) 5.5
Other * 0.6 (0.4) 0.2 1.4 (0.6) 0.8
----- ----- ----- ----- ----- -----
Total investment securities 8.0 (5.3) 2.7 11.4 (8.3) 3.1
----- ----- ----- ----- ----- -----
Commercial, financial,
and agricultural * 3.4 (5.5) (2.1) 8.5 (8.5) --
Real estate-construction 1.8 (0.9) 0.9 3.3 (1.7) 1.6
Mortgage-commercial * 0.8 (2.5) (1.7) 0.5 (4.7) (4.2)
Mortgage-residential (3.4) (0.2) (3.6) (6.7) (0.7) (7.4)
Consumer 0.6 (1.8) (1.2) 1.5 (3.4) (1.9)
Secured with liquid collateral 2.2 (2.1) 0.1 2.3 (1.9) 0.4
----- ----- ----- ----- ----- -----
Total loans 5.4 (13.0) (7.6) 9.4 (20.9) (11.5)
----- ----- ----- ----- ----- -----
Total interest income $13.5 $(18.4) $(4.9) $21.0 $(29.4) $(8.4)
===== ===== ===== ===== ===== =====
Interest expense:
Savings $ 0.0 $(0.1) $(0.1) $ 0.0 $(0.1) $(0.1)
Interest-bearing demand 0.4 (0.6) (0.2) 1.3 (1.5) (0.2)
Certificates under $100,000 (0.3) (1.5) (1.8) (0.5) (3.0) (3.5)
Local CDs $100,000 and over (0.3) (0.3) (0.6) (0.3) (0.6) (0.9)
National CDs $100,000 and over 1.2 (3.5) (2.3) 4.2 (8.3) (4.1)
----- ----- ----- ----- ----- -----
29
Total interest-bearing deposits 1.0 (6.0) (5.0) 4.7 (13.5) (8.8)
----- ----- ----- ----- ----- -----
Federal funds purchased
and securities sold
under agreements to
repurchase 1.0 (1.6) (0.6) 0.3 (3.4) (3.1)
U.S. Treasury demand -- -- -- (0.2) -- (0.2)
----- ----- ----- ----- ----- -----
Total short-term borrowings 1.0 (1.6) (0.6) 0.1 (3.4) (3.3)
----- ----- ----- ----- ----- -----
Long-term debt 4.1 (3.0) 1.1 4.1 (3.0) 1.1
----- ----- ----- ----- ----- -----
Total interest expense $ 6.1 ($10.6) ($4.5) $ 8.9 ($19.9) ($11.0)
===== ===== ===== ===== ===== =====
Changes in net interest income ($0.4) $ 2.6
===== =====
* 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.
30
Noninterest income
For the 2003 second quarter, total noninterest income was $63.0 million, which
was $1.3 million, or 2.0%, lower than for the 2002 second quarter. For the first
six months of 2003, noninterest income totaled $124.2 million, which was $4.8
million, or 3.7%, lower than for the first half of 2002. The declines were
caused primarily by the impact on advisory revenue of the extended downturn in
equity markets.
Total advisory fee income, before amortization expense, totaled $49.5 million
for the 2003 second quarter, which was $1.9 million, or 3.7%, lower than the
$51.4 million recorded for the 2002 second quarter. For the first six months of
2003, total advisory fee income, before amortization expense, was $97.8 million,
which was a decline of $6.3 million, or 6.1%, from the first half of 2002.
Total advisory income comprises wealth advisory services, corporate client
services, and the affiliate money managers, CRM and Roxbury. For the second
quarter and first six months of 2003, income from the wealth advisory and
corporate client services businesses was higher than for the corresponding
year-ago periods, but was not strong enough to offset the results of the
affiliate money managers.
Wealth advisory services
Wealth advisory income for the 2003 second quarter was $33.1 million, which was
4.4%, or $1.4 million, higher than for the 2002 second quarter. For the first
half of 2003, wealth advisory income totaled $66.7 million, which was 5.9%, or
$3.7 million, higher than for the first half of 2002.
This growth occurred opposite equity markets that posted declines for the
corresponding periods, and demonstrated the strength of wealth advisory sales
activity. An increase in assets under management also reflected sales activity.
Assets under management at Wilmington Trust were $23.8 billion at June 30, 2003,
up 9.7% from $21.7 billion at December 31, 2002, and 8.2% higher than at June
30, 2002.
Approximately 70% of wealth advisory fees are tied to the market value of assets
held in client portfolios, and approximately 50% of that amount is tied to the
equity markets. Wealth advisory fees are priced either in advance at the
beginning of each quarter, or monthly at the beginning of each month. Both
pricing methods use valuations taken on the final day of the previous month.
To compare wealth advisory growth against equity market performance, the
Corporation averages market performance for the corresponding pricing period.
The second quarter comparison uses the average market closes at the end of
March, April, and May. The year-to-date comparison uses the average market
closes at the end of every month from December through May. As a result, the
2003 second quarter and year-to-date wealth advisory results do not reflect much
of the improvement in equity market performance that occurred in June.
The following table compares changes in wealth advisory revenue with the three-
and six-month average declines in key equity market indices:
CHANGES IN WEALTH ADVISORY FEES VS. SECOND QUARTER FIRST SIX MONTHS
INDEX DECLINES, ON AVERAGE 2003 VS. 2002 2003 VS. 2002
-------------------------- ------------- -------------
Wealth advisory fee growth 4.4% 5.9%
Dow Jones Industrial Average (average) (16.4)% (17.8%)
S&P 500 (average) (17.1)% (20.5)%
NASDAQ Composite Index (average) (14.5)% (22.0)%
The Corporation regards the S&P 500 as the most relevant index for comparison,
since its composition most closely reflects client holdings.
31
The wealth advisory growth was driven by demand for planning services and advice
on asset allocation, as well as by sales of the open-architecture investment
consulting service. Investment consulting products and services have been
immensely successful in attracting new business as well as additional business
from existing clients. The open-architecture investing products are spearheaded
by Balentine & Company, which, due to its full integration into the wealth
advisory business, is considered a source of products and core growth, rather
than a separate entity. Balentine's assets under management, income, and
expenses have been consolidated fully in the Corporation's financial statements
since January 2002.
While Delaware generated most of the wealth advisory growth for the second
quarter and first six months of 2003, markets outside of the Corporation's home
state contributed increasing percentages of the growth. In particular, the New
York and Pennsylvania markets showed gains in sales momentum in the 2003 second
quarter and year to date, compared with the corresponding periods in 2002.
Portion of new business generated in key wealth advisory markets
The following table shows the percentage of sales generated in the Corporation's
key wealth advisory markets. The percentages will not add up to 100, since other
smaller sources of growth are not included here.
SECOND QUARTER SECOND QUARTER YEAR-TO-DATE YEAR-TO-DATE
MARKET 2003 2002 2003 2002
------ ---- ---- ---- ----
California 6% 8% 8% 7%
Delaware 54% 61% 52% 63%
Florida 6% 8% 7% 7%
New York 17% 12% 16% 11%
Pennsylvania 15% 9% 15% 10%
Corporate client services
Second quarter 2003 income from corporate client services was $16.5 million,
which was 7.8%, or $1.2 million, higher than for the 2002 second quarter. For
the first half of 2003, corporate client services income totaled $31.4 million,
which was 9.0%, or $2.6 million, higher than for the first half of 2002.
Income from all three components of the corporate client services business was
higher in the 2003 second quarter than in the prior-year second quarter.
Year-to-date 2003 versus 2002, the entity management and retirement services
components posted increased income, and the capital markets component was flat.
For the second quarter as well as the first six months of 2003, the capital
markets business comprised the largest component of corporate client services
revenue, while the entity management business produced the most growth. The same
was true for the corresponding periods in 2002.
Income from the capital markets business was $8.9 million for the 2003 second
quarter, which was slightly ahead of the 2002 second quarter. This was due
mainly to an increase in the number of trust appointments on corporate debt
issues, as issuers took advantage of low interest rates. Year-to-date in 2003,
capital markets income was $16.5 million, equal to the corresponding 2002 level.
Income from entity management services was $5.3 million for the 2003 second
quarter. This was 20.5%, or $0.9 million, higher than for the 2002 second
quarter. For the first half of 2003, entity management income totaled $10.2
million, which was 27.5%, or $2.2 million, higher than for the corresponding
period in 2002. The growth was due primarily to higher sales, mainly in European
jurisdictions, of trust and administrative services that support asset-backed
securitizations. SPV Management's income and expenses have been consolidated
fully in the Corporation's financial statements since April 2002.
Income from corporate retirement services was $2.3 million for the 2003 second
quarter, which was 9.5% higher than for the 2002 second quarter. For the first
half of 2003, retirement services income totaled $4.7 million, which was 9.3%
ahead of the first half of 2002.
32
The following table shows the changes in income of the three components of the
corporate client services business:
SECOND SECOND
QUARTER QUARTER % YTD YTD %
REVENUE (in millions) 2002 2003 CHANGE 2002 2003 CHANGE
--------------------- ---- ---- ------ ---- ---- ------
Capital markets services $ 8.9 $ 8.8 1.1% $16.5 $16.5 ---
Entity management services $ 5.3 $ 4.4 20.5% $10.2 $ 8.0 27.5%
Retirement services $ 2.3 $ 2.1 9.5% $ 4.7 $ 4.3 9.3%
Total corporate client services $16.5 $15.3 7.8% $31.4 $28.8 9.0%
The corporate client services 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 services fees. Approximately 25% of
corporate client services fees are tied to asset valuations, most of which are
associated with the retirement plan assets for which the Corporation serves as
trustee.
Cramer Rosenthal McGlynn
For the second quarter of 2003, income from CRM was $1.1 million, which was
equal to 2002 second quarter income. CRM was able to maintain this level of
income even though its assets under management were nearly 20% lower at June 30,
2003, than they were at June 30, 2002.
For the first half of 2003, income from CRM totaled $1.8 million. This was 61.7%
lower than for the first half of 2002. Most of the decline was due to lower
market valuations.
At June 30, 2003, CRM's assets under management totaled $3.8 billion, which was
8.6% higher than the $3.5 billion at December 31, 2002, but 19.1% lower than the
$4.7 billion at June 30, 2002.
The 2003 income reported for CRM reflects the Corporation's current 69.14%
equity interest in the firm. At June 30, 2002, the Corporation held a 63.47%
equity interest in CRM.
Roxbury Capital Management
The equity market downturns and volatility continued to impact Roxbury. Assets
under management remained below prior levels, due to the loss of business as
well as declines in market valuations. Roxbury's assets under management at June
30, 2003, were $3.3 billion, which was 10.8% lower than at December 31, 2002,
and 34.0% lower than at June 30, 2002.
For the second quarter of 2003, Roxbury recorded a loss of $1.2 million,
opposite income of $3.3 million for the 2002 second quarter. For the first half
of 2003, the loss at Roxbury totaled $2.1 million, opposite $7.6 million of
income for the corresponding year-ago period.
The Roxbury results recorded on the Corporation's income statement reflect the
Corporation's current 41.04% interest in Roxbury's common shares and 30%
preferred interest in Roxbury's gross revenue. At June 30, 2002, the
Corporation's investment in Roxbury consisted of a 40.81% interest in common
shares and a 30% preferred interest in gross revenue.
The Corporation anticipates that Roxbury will narrow its quarterly losses during
the second half of 2003 and resume making a positive contribution by early 2004.
Since June 2002, monthly net outflows have declined 26% and monthly expenses are
$500,000 lower. Headcount has been reduced through attrition and the elimination
of noncritical support staff. Headcount at June 30, 2003, was 75, down from 103
at June 30, 2002.
33
Assets under management
The following tables compare changes in assets under management at Wilmington
Trust and its two affiliated money managers:
ASSETS UNDER MANAGEMENT (in billions) JUNE 30, 2003 DECEMBER 31, 2002 JUNE 30, 2002
------------------------------------- ------------- ----------------- -------------
Wilmington Trust $23.8 $21.7 $22.0
Cramer Rosenthal McGlynn $ 3.8 $ 3.5 4.7
Roxbury Capital Management $ 3.3 $ 3.7 $ 5.0
Total $30.9 $28.9 $31.7
PERCENT CHANGE IN ASSETS UNDER MANAGEMENT (at FROM FROM
June 30, 2003) DECEMBER 31, 2002 JUNE 30, 2002
-------------- ----------------- -------------
Wilmington Trust 9.7% 8.2%
Cramer Rosenthal McGlynn 8.6% (19.1)%
Roxbury Capital Management (10.8)% (34.0)%
Total 6.9% (2.5)%
At June 30, 2003, the composition of assets under management at Wilmington Trust
was 53% equities; 27% fixed income; 11% cash and equivalent instruments; 6%
mutual funds; and 3% miscellaneous assets.
This compares with the composition at June 30, 2002, which was 59% equities; 23%
fixed income; 10% cash and equivalent instruments; 5% mutual funds; and 3%
miscellaneous assets.
Other noninterest income
For the second quarter of 2003, service charges on deposit accounts were $7.8
million, which was 5.4% higher than for the year-ago second quarter. For the
first six months of 2003, service charges on deposit accounts were $15.1
million, which was 5.6% higher than for the first half of 2002. The increase was
due mainly to higher volumes of returned items.
Loan fees and late charges, at $2.4 million, were 50% higher for the 2003 second
quarter than for the 2002 second quarter. Prepayment penalties on fixed-rate
loans that were paid off early accounted for most of the growth. For the first
half of 2003 versus the first half of 2002, loan fees and late charges rose
25.7%.
Other noninterest income declined 14.3% from the 2002 second quarter to the 2003
second quarter, but was 13.6% higher for the first half of 2003 than for the
first half of 2002. Most of the year-to-date growth was due to more favorable
results on the sale of leased autos and residential mortgages.
Noninterest expense
Noninterest expense for the 2003 second quarter was $77.1 million. This was $1.2
million, or 1.6%, higher than for the 2002 second quarter. For the first six
months of 2003, noninterest expense totaled $156.7 million, which was $5.6
million, or 3.7%, higher than for the first six months of 2002. Approximately $1
million of the growth on a year-to-date basis represented first quarter 2003
expense from SPV Management, which was acquired and consolidated in the 2002
second quarter.
Salary and wage expense was $31.2 million for the second quarter of 2003. This
was $1.8 million, or 6.1%, higher than for the 2002 second quarter. Most of this
increase was due to a higher accrual for earned but unused vacation. Full-time
equivalent (FTE) headcount at June 30, 2003, was 2,319, which was 13 fewer than
at June 30, 2002.
34
For the first half of 2003, salary and wage expense totaled $61.0 million, which
was $2.1 million, or 3.6%, higher than for the first half of 2002. Approximately
20% of this increase was related to salary and wage expense for SPV Management,
which was not acquired and consolidated until the 2002 second quarter. Much of
the remainder was due to merit increases. The June 30, 2003, FTE headcount was
42 fewer than at December 31, 2002.
Incentive and bonus expense for the 2003 second quarter was $4.3 million, which
was 41.1%, or $3 million, lower than for the 2002 second quarter. For the first
half of 2003, incentive and bonus expense totaled $13.7 million, which was
16.5%, or $2.7 million, lower than the $16.4 million recorded for the first half
of 2002. This reduction reflected the elimination of the Corporation's
profit-sharing plan.
Employee benefit expense for the 2003 second quarter was $8.9 million, which was
14.1%, or $1.1 million, higher than the $7.8 million recorded for the 2002
second quarter. Year to date in 2003, employee benefit expense totaled $18.5
million, which was 14.2%, or $2.3 million, higher than the $16.2 million
recorded for the first half of 2002. The increase reflected higher health
insurance and pension costs.
The year-to-date pension expense was $2.7 million, which was $1.0 million higher
than for the corresponding year-ago period. The increase in pension expense
reflected changes that were made in actuarial assumptions due to the performance
of financial markets. For 2003, the Corporation lowered its discount rate from
7.25% to 6.75%, and the assumption on returns was reduced from 9.5% to 8.5%.
Net occupancy expense was slightly higher for the second quarter, and $1 million
higher for the first six months of 2003, than for the corresponding year-ago
periods, respectively. Most of the year-to-date growth reflected SPV Management
expense that was not consolidated in the 2002 first quarter.
Furniture, equipment, and supplies expense declined $0.9 million, or 11.0%, from
$8.2 million for the 2002 second quarter to $7.3 million for the 2003 second
quarter. This category of expense declined $1.5 million, or 9.3%, from $16.2
million for the first half of 2002 to $14.7 million for the first half of 2003.
This was due mainly to lower depreciation expense, annual maintenance contract
renewals, and the deferral of certain projects as part of the Corporation's
expense management initiative.
Advertising and contributions expense was 6.7%, or $200,000, lower for the 2003
second quarter than for the 2002 second quarter, and was equal, on a
year-to-date basis, to the first six months of 2002.
Servicing and consulting expense was $3.9 million, which was $1.0 million, or
34.5%, higher than for the 2002 second quarter. Year to date, servicing and
consulting expense totaled $7.9 million, which was $2.4 million, or 43.6%,
higher than for the first half of 2002. Higher consulting expense for the
third-party investment advisers used in the open architecture investment
services accounted for most of the increase.
Other noninterest expense for the 2003 second quarter was $10.0 million. This
was $1.6 million, or 19%, higher than for the 2002 first quarter. For the first
half of 2003, other noninterest expense totaled $18.9 million, which was $2.1
million, or 12.5%, above the first half of 2002. Higher legal and auditing costs
contributed to the increase.
Income taxes
The provision for income taxes for the 2003 second quarter was $17.4 million,
which was $1.1 million, or 5.9%, lower than the $18.5 million recorded for the
2002 second quarter, as pre-tax income declined $2.7 million, or 5.1%. For the
first six months of 2003, the provision for income taxes totaled $32.8 million,
which was $2.9 million, or 8.1%, lower than the $35.7 million recorded for the
first six months of 2002, as pre-tax income declined $7 million, or 6.8%.
The Corporation's effective tax rate for the 2003 second quarter was 34.66%,
compared with 34.97% for the 2002 second quarter. This was due to the decline in
pre-tax income and lower revenue from the affiliate asset managers, which
reduced California and New York taxes.
35
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. In
April 2003, the Corporation issued $250 million in 10-year subordinated notes.
For the second quarter of 2003, the proportion of funding provided by core
deposits - demand deposits, interest-bearing demand deposits, and certificates
of deposit - was 60.2%, compared with 62.1% for the fourth quarter of 2002 and
60.4% for the 2002 second quarter.
The Corporation is a guarantor for 69.14%, which represents 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 June 30, 2003, the balance of these two lines was $3.0 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 in the second quarter and first half of 2003 remained stable. The
composition of the loan portfolio remained well diversified and relatively
unchanged. The Corporation's internal analysis of credits showed that more than
95% of the loans were rated pass, as they have been since 2000. Changes in the
provision and reserve for loan losses reflected the growth in loan balances, the
net charge-off ratio, and the results of the Corporation's internal risk rating
analysis.
For the second quarter of 2003, the provision for loan losses was $5.9 million.
Compared with the year-ago second quarter, the provision was 3.3%, or $200,000,
lower. For the six months ended at June 30, 2003, the provision totaled $10.8
million. This was 5.3% lower than the provision of $11.4 million for the six
months ended June 30, 2002.
The period-end reserve for loan losses at June 30, 2003, was $87.6 million. This
was $2.4 million more than at December 31, 2002, and $1 million more than at
June 30, 2002. The ratio of the period-end reserve to loans was 1.44% at June
30, 2003. This was 3 basis points higher than at December 31, 2002, but 7 basis
points lower than at June 30, 2002.
The Corporation believes that the most meaningful measure of asset quality is
the ratio of net charge-offs to loan balances on average. For the second quarter
of 2003, the net charge-off ratio was 7 basis points. This was 5 basis points
higher than for the 2002 second quarter.
Net charge-offs for the 2003 second quarter totaled $4.4 million, which was $2.7
million lower than for the 2002 fourth quarter, and $3.2 million higher than for
the 2002 second quarter. The year-over-year increase was primarily due to a
Delaware-based client in the specialty restaurant and entertainment business.
Nonaccruing loans at June 30, 2003, totaled $60.4 million. This was $18.0
million, or 42.5%, higher than the $42.4 million recorded at December 31, 2002,
and $13.3 million, or 28.2%, higher than the $47.1 million recorded at June 30,
2002. Almost all of the increase represented a credit relationship with a
Delaware-based client in the specialty restaurant and
36
entertainment business that became nonaccruing at the end of the 2003 first
quarter. This credit also accounted for the majority of the increase in loans
rated "doubtful" in the Corporation's internal risk rating analysis.
Other real estate owned (OREO) at June 30, 2003, totaled $3.2 million. This was
an increase of $0.1 million from December 31, 2002, and $2.9 million from June
30, 2002. Almost all of this increase represented a residential construction
project at a beach resort in Maryland that was classified as OREO in December
2002. Units in this project are being marketed successfully, and the Corporation
does not expect to incur a loss on this project.
The increase in nonaccuring loans and OREO accounted for the increase in the
ratio of period-end nonperforming assets to loans, which was 1.05% at June 30,
2003. This was 29 basis points higher than at December 31, 2002, and 22 basis
points higher than at June 30, 2002.
Period-end loans past due 90 days at June 30, 2003, totaled $7.1 million. This
was $5.4 million, or 43.2%, lower than at year-end 2002, and $1.6 million, or
29.1%, higher than at June 30, 2002. The ratio of period-end loans past due 90
days to total loans at June 30, 2003, was 12 basis points, which was 9 basis
points lower than at the 2002 year-end, and 2 basis points higher than at June
30, 2002.
The following table provides a six- and 12-month comparison of the risk elements
in the Corporation's loan portfolio:
NONPERFORMING ASSETS (in thousands) JUNE 30, 2003 DECEMBER 31, 2002 JUNE 30, 2002
----------------------------------- ------------- ----------------- -------------
Nonaccruing loans $60.4 $42.4 $47.1
Past due 90 days or more $ 7.1 $12.5 $ 5.5
Total $67.5 $54.9 $52.6
Percentage of period-end loans 1.11% 0.91% 0.92%
Other real estate owned $3.2 $ 3.1 $ 0.3
The following table shows changes in the composition of the loan portfolio:
LOAN PORTFOLIO COMPOSITION JUNE 30, 2003 DECEMBER 31, 2002 JUNE 30, 2002
-------------------------- ------------- ----------------- -------------
Commercial/financial/agricultural 37% 35% 35%
Commercial real estate construction 10% 10% 8%
Commercial mortgage 17% 18% 17%
Residential mortgage 10% 11% 14%
Consumer 26% 26% 26%
The following table shows changes in the internal risk rating analysis:
CATEGORY JUNE 30, 2003 DECEMBER 31, 2002 JUNE 30, 2002
-------- ------------- ----------------- -------------
Pass 95.62% 95.65% 95.23%
Watchlisted 2.60% 2.57% 2.41%
Substandard 1.23% 1.53% 2.26%
Serious doubt 0.55% 0.25% 0.10%
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 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.
37
Of the loans past due 90 days or more at June 30, 2003, approximately 68% were
in the commercial portfolio; 17% were in the residential mortgage portfolio; and
15% were in the consumer portfolio. The corresponding ratios at December 31,
2002, were 68%, 23%, and 9%, respectively. At June 30, 2002, the corresponding
ratios were 44%, 35%, and 21%, respectively.
As a result of scrutinizing the portfolio, management identifies loans about
which serious doubt exists as to whether the borrowers will be able to continue
to repay their loans on a timely basis. At June 30, 2003, management identified
approximately $30.4 million in such loans. 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
doubt at December 31, 2002, and $45.1 million at June 30, 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 June 30, 2003, approximately $6.1 million, or 7%, of the reserve for loan
losses was unallocated. This compares with $6.1 million, or 7%, at December 31,
2002, and $6.3 million, or 7%, at June 30, 2002.
CAPITAL RESOURCES
At June 30, 2003, stockholders' equity was $781.1 million. This was an increase
of $39.8 million, or 5.4%, from the December 31, 2002, amount of $741.3 million.
Year-to-date, earnings of $62.0 million, net of $34.5 million in cash dividends,
added $27.5 million to capital. The issue of common stock under employment
benefit plans added $7.0 million. The rise in the market value of the
Corporation's available-for-sale investment portfolio added $5.8 million.
During the 2003 second quarter, the Corporation repurchased 1,359 of its shares,
at a total cost of $38,000. Year to date, the Corporation bought back 17,367 of
its shares, which reduced year-to-date capital by $0.5 million. Repurchases in
the first six months of the year brought the total number of shares bought under
the current 8-million-share program, which was authorized in April 2002, to
66,101, at a cost of $1.8 million.
The annualized capital generation rate for the first six months of 2003 was
7.4%, compared with an annualized rate of 10.0% for the first six months of
2002, and 9.8% for the 2002 full year.
The Corporation's capital ratios continued to exceed the Federal Reserve Board's
minimum guidelines for both well-capitalized and adequately capitalized
institutions, which are intended to reflect the varying degrees of risk
associated with different on- and off-balance sheet items. The following table
compares the Corporation's capital levels with the guidelines, and shows the
changes in the ratios for the six-month period ended June 30, 2003, and the year
ended December 31, 2002.
ADEQUATELY WELL-
WILMINGTON TRUST WILMINGTON TRUST CAPITALIZED CAPITALIZED
CAPITAL RATIO JUNE 30, 2003 DECEMBER 31, 2002 MINIMUM MINIMUM
------------- ------------- ----------------- ------- -------
Total risk-based capital 11.90% 10.15% 8% 10%
38
Tier 1 risk-based capital 7.09% 7.03% 4% 6%
Tier 1 leverage capital 6.01% 6.08% 4% 5%
The Corporation's issuance in April of $250 million of 10-year 4.875%
subordinated notes contributed to the improvement in the total risk-based
capital ratio.
On April 17, 2003, the Corporation's Board of Directors increased the quarterly
dividend 5.9%, from $0.255 per share to $0.27 per share. This marked the 22nd
consecutive year that the Corporation has raised its dividend.
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.
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
SFAS No. 146: In June 2002, 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.
SFAS No. 148: In December, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This Statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also amends
the disclosure provisions of that Statement to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, this
Statement amends APB Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial information. The
requirements for SFAS No. 148 are effective for financial statements for fiscal
years ended and interim periods beginning after December 15, 2002. The
Corporation uses the "intrinsic value" approach to accounting for stock-based
compensation as permitted under APB Opinion No. 25. The Corporation has adopted
the disclosure provisions of SFAS No. 148. The disclosure provisions had no
impact on the Corporation's consolidated earnings, financial condition, or
equity. On April 22, 2003, the FASB announced its intention to require that all
companies expense the value of employee stock options. The FASB 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."
SFAS No. 149: 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. The
Statement amends
39
Statement No. 133 for decisions made by the FASB as part of its
Derivatives Implementation Group process. The Statement also amends Statement
No. 133 to incorporate clarifications of the definition of a derivative. The
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.
SFAS No. 150: In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify these financial instruments as a liability (or, in
certain circumstances, an asset). Previously these financial instruments would
have been classified entirely as equity, or between the liabilities section and
equity section of the statement of financial condition. This Statement also
addresses questions about the classification of certain financial instruments
that embody obligations to issue equity shares. The provisions of this Statement
are effective for interim periods beginning after June 15, 2003. Management does
not expect the adoption of this provision to have an impact on the Corporation's
consolidated earnings, financial condition, or equity.
FIN No. 45: 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 rescinds FASB Interpretation No. 34. The
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.
The application of this Interpretation did not have a material impact on the
Corporation's consolidated earnings, financial condition, or equity.
FIN No. 46: On January 17, 2003, the FASB issued Interpretation No. 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 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 created
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.
This Interpretation has had no material impact on the Corporation's consolidated
earnings, financial condition, or equity.
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 allowance for loan losses, stock-based
employee compensation, affiliate fee income, impairment of goodwill, recognition
of corporate
40
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. These form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and the estimates that are used in preparation of its
consolidated financial statements: the reserve for loan losses, stock-based
employee compensation, and impairment of goodwill.
Reserve for loan losses
The Corporation maintains a reserve for loan losses that is management's best
estimate of known and inherent estimated losses, based on subjective judgments
regarding the collectibility of loans within the portfolio. The reserve is
reduced by actual credit losses, and is increased by the provision for loan
losses and recoveries from loans previously charged-off. Personnel independent
of the various lending functions evaluate the reserve on a quarterly basis. The
level 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 if the quality of
loans deteriorates as a result of the factors discussed above.
Management believes that it uses the best information available to make
determinations about the reserve and that it has established its existing
reserve for loan losses in accordance with generally accepted accounting
principles. If circumstances differ substantially from the assumptions used in
making 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. These agencies may require the Corporation to
recognize additions to the reserve based on their judgments about information
available to them at the time of their examination.
Stock-based employee compensation
The Corporation accounts for its stock-based employee compensation plans under
the "intrinsic value" approach, in accordance with the provisions of 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 upon grant. Each year
since the inception of SFAS No. 123, the Corporation has disclosed, in the notes
to the financial statements
41
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. Future earnings would be impacted if any change in generally accepted
accounting principles were to limit the continued use of the "intrinsic value"
approach.
Impairment of goodwill
Through a series of acquisitions, the Corporation has accumulated goodwill with
a net carrying value of $247.3 million at June 30, 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 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 result in an impairment expense.
Cautionary statement
Estimates, predictions, opinions, or statements of belief in this report might
be construed to be forward-looking statements 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
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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 June 30, 2003, the declining
rate scenario in the simulation model gradually moved down only 100 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 June 30, 2003, the simulation projected that a gradual 250-basis-point
increase in market interest rates would cause net interest income to rise 5.30%
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 100 basis points, the
model at June 30, 2003, projected that net interest income would decrease 2.90%
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 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.
The Chairman of the Board and Chief Executive Officer of the Corporation and its
Chief Financial Officer conducted an evaluation of the effectiveness of the
Corporation's disclosure controls and procedures as of the end of the period
covered by this report, pursuant to Securities Exchange Act Rule 13a-14. Based
on that evaluation, the Chairman of the Board and Chief Executive Officer and
the Chief Financial Officer concluded that the Corporation's disclosure controls
and procedures are effective in alerting them on a timely basis to material
information about the Corporation (including its consolidated subsidiaries)
required to be included in the periodic filings it makes with the Securities and
Exchange Commission. There have been no significant changes in the Corporation's
internal controls or in other factors that could significantly affect those
controls subsequent to the date of that evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Corporation and its subsidiaries are subject to various legal proceedings
that arise from time to time in the ordinary course of their businesses and
operations. Some of these seek relief or damages in amounts that may be
substantial. Because of the complex nature of some of these proceedings, it may
be a number of years before they are ultimately resolved. While it is not
feasible to predict the outcome of these proceedings, the Corporation's
management does not believe the ultimate resolution of any of them will have a
material adverse effect on the 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.
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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.
Not Applicable
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit
Number Exhibit
------ -------
3.1 Amended and Restated Certificate of Incorporation of the Corporation(1)
3.2 Amended and Restated Bylaws of the Corporation(2)
99.1 Section 302 Certifications
99.2 Section 906 Certification
------------------------------
(1) Incorporated by reference to the corresponding exhibit to the Annual
Report on Form 10-K of Wilmington Trust Corporation filed on March 30,
1996.
(2) Incorporated by reference to the corresponding exhibit to the Annual
Report on Form 10-K of Wilmington Trust Corporation filed on March 27,
2003.
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 and
a current report on Form 8-K on July 18, 2003 under Item 12 reporting its
financial condition and results of operations for the second quarter of 2003.
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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: August 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)
45