UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2004
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
---------------------- to ------------------------
Commission File Number: 1-14659
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WILMINGTON TRUST CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0328154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
RODNEY SQUARE NORTH, 1100 NORTH MARKET STREET,
WILMINGTON, DELAWARE 19890
----------------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(302) 651-1000
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(Registrant's telephone number, including area code)
NONE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of June 30, 2004
------------------------------ -------------------------------
COMMON STOCK - PAR VALUE $1.00 66,372,579
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
SECOND QUARTER 2004 FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Statements of Condition 1
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3 Quantitative and Qualitative Disclosures About Market Risk 43
Item 4 Controls and Procedures 45
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 45
Item 2 Changes in Securities and Use of Proceeds 46
Item 3 Defaults upon Senior Securities 46
Item 4 Submission of Matters to a Vote of Security Holders 46
Item 5 Other Information 47
Item 6 Exhibits and Reports on Form 8-K 47
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------------
June 30, December 31,
(in millions) 2004 2003
-----------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 402.6 $ 210.2
---------------------------
Federal funds sold and securities purchased
under agreements to resell 67.5 3.8
---------------------------
Investment securities available for sale:
U.S. Treasury and government agencies 416.9 470.0
Obligations of state and political subdivisions 11.0 12.9
Other securities 1,398.8 1,392.3
-----------------------------------------------------------------------------------------------------------
Total investment securities available for sale 1,826.7 1,875.2
---------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions 3.0 3.1
Other securities 0.5 1.1
-----------------------------------------------------------------------------------------------------------
Total investment securities held to maturity (market values
of $3.7 and $4.5, respectively) 3.5 4.2
---------------------------
Loans:
Commercial, financial, and agricultural 2,408.7 2,275.2
Real estate-construction 695.9 699.8
Mortgage-commercial 1,195.8 1,078.2
-----------------------------------------------------------------------------------------------------------
Total commercial loans 4,300.4 4,053.2
---------------------------
Mortgage-residential 447.6 489.6
Consumer 1,132.1 1,077.1
Secured with liquid collateral 603.1 605.4
-----------------------------------------------------------------------------------------------------------
Total retail loans 2,182.8 2,172.1
---------------------------
Total loans net of unearned income 6,483.2 6,225.3
Reserve for loan losses (92.5) (89.9)
-----------------------------------------------------------------------------------------------------------
Net loans 6,390.7 6,135.4
---------------------------
1
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Premises and equipment, net 152.5 152.3
Goodwill, net of accumulated amortization
of $29.8 in 2004 and 2003 268.7 243.2
Other intangible assets, net of accumulated amortization
of $12.6 in 2004 and $11.1 in 2003 28.7 24.0
Accrued interest receivable 37.4 39.5
Other assets 111.3 132.4
---------------------------------------------------------------------------------------------------------
Total assets $ 9,289.6 $8,820.2
=========================
2
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
---------------------------
June 30, December 31,
(in millions) 2004 2003
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 1,207.2 $1,025.5
Interest-bearing:
Savings 373.4 369.0
Interest-bearing demand 2,296.5 2,364.1
Certificates under $100,000 762.7 788.3
Local CDs $100,000 and over 155.5 130.3
-----------------------------------------------------------------------------------------------------------
Total core deposits 4,795.3 4,677.2
National CDs $100,000 and over 1,627.0 1,900.0
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Total deposits 6,422.3 6,577.2
---------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,434.9 820.5
U.S. Treasury demand 64.1 48.3
Line of credit -- 8.0
-----------------------------------------------------------------------------------------------------------
Total short-term borrowings 1,499.0 876.8
---------------------------
Accrued interest payable 20.9 23.6
Other liabilities 121.6 134.5
Long-term debt 398.0 407.1
-----------------------------------------------------------------------------------------------------------
Total liabilities 8,461.8 8,019.2
---------------------------
Minority interest 1.4 0.2
---------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 67.9 54.6
Retained earnings 983.8 948.4
Accumulated other comprehensive loss (33.5) (16.1)
-----------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 1,096.7 1,065.4
Less: Treasury stock, at cost, 12,155,767 and
12,465,014 shares, respectively (270.3) (264.6)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 826.4 800.8
---------------------------
Total liabilities and stockholders' equity $ 9,289.6 $8,820.2
===========================
See Notes to Consolidated Financial Statements
3
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
-----------------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
-----------------------------------------------------------------
(in millions; except per share data) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $ 74.0 $ 76.9 $ 146.8 $ 154.0
Interest and dividends on investment securities:
Taxable interest 15.6 15.7 31.6 29.3
Tax-exempt interest 0.1 0.3 0.4 0.5
Dividends 1.9 1.7 3.7 3.5
Interest on federal funds sold and securities
purchased under agreements to resell -- 0.1 0.1 0.2
---------------------------------------------------------------------------------------------------------------------------
Total interest income 91.6 94.7 182.6 187.5
----------------------------------------------------------------
Interest on deposits 12.3 16.9 25.5 35.7
Interest on short-term borrowings 3.8 3.9 7.0 7.0
Interest on long-term debt 3.3 3.7 6.1 6.3
---------------------------------------------------------------------------------------------------------------------------
Total interest expense 19.4 24.5 38.6 49.0
----------------------------------------------------------------
Net interest income 72.2 70.2 144.0 138.5
Provision for loan losses (3.2) (5.9) (8.8) (10.8)
---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 69.0 64.3 135.2 127.7
----------------------------------------------------------------
NONINTEREST INCOME
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory fees 26.9 23.2 53.7 46.0
Mutual fund fees 4.9 5.6 10.1 11.3
Other service fees 5.6 4.3 13.2 9.4
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Total Wealth Advisory Services 37.4 33.1 77.0 66.7
----------------------------------------------------------------
Corporate Client Services:
Capital markets services 8.3 7.6 16.2 13.9
Entity management services 5.4 5.3 10.9 10.2
Retirement services 3.2 2.3 5.9 4.7
Cash management services 1.5 1.3 3.3 2.6
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Total Corporate Client Services 18.4 16.5 36.3 31.4
----------------------------------------------------------------
Cramer Rosenthal McGlynn 2.5 1.1 4.6 1.8
Roxbury Capital Management 0.2 (1.2) 0.4 (2.1)
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Advisory fees 58.5 49.5 118.3 97.8
4
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Amortization of affiliate other intangibles (0.5) (0.3) (0.8) (0.6)
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Advisory fees after amortization
of affiliate other intangibles 58.0 49.2 117.5 97.2
----------------------------------------------------------------
Service charges on deposit accounts 8.1 7.8 16.3 15.1
Loan fees and late charges 1.2 2.4 2.9 4.4
Card fees 2.3 2.4 4.4 5.0
Other noninterest income 0.6 1.2 1.8 2.5
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Total noninterest income 70.2 63.0 142.9 124.2
----------------------------------------------------------------
Net interest and noninterest income 139.2 127.3 278.1 251.9
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NONINTEREST EXPENSE
Salaries and wages 32.4 31.2 64.8 61.0
Incentives and bonuses 6.4 4.3 14.7 13.7
Employment benefits 10.0 8.9 20.9 18.5
Net occupancy 5.0 5.0 10.3 10.4
Furniture, equipment, and supplies 7.8 7.3 15.4 14.7
Advertising and contributions 2.8 2.8 4.4 4.6
Servicing and consulting fees 5.0 3.9 9.6 7.9
Travel, entertainment, and training 2.3 1.9 4.0 3.4
Originating and processing fees 2.0 1.8 4.1 3.6
Other noninterest expense 8.7 10.0 17.4 18.9
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Total noninterest expense 82.4 77.1 165.6 156.7
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NET INCOME
Income before income taxes and minority
interest 56.8 50.2 112.5 95.2
Income tax expense 19.9 17.4 39.6 32.8
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Net income before minority interest 36.9 32.8 72.9 62.4
Minority interest 0.4 0.2 0.8 0.4
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Net income $ 36.5 $ 32.6 $ 72.1 $ 62.0
================================================================
Net income per share:
Basic $ 0.55 $ 0.50 $ 1.09 $ 0.94
================================================================
Diluted $ 0.54 $ 0.49 $ 1.07 $ 0.94
================================================================
Weighted average shares outstanding:
Basic 66,309 65,790 66,234 65,741
Diluted 67,454 66,195 67,474 66,184
See Notes to Consolidated Financial Statements
5
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------------
For the six months ended
June 30,
---------------------------
(in millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 72.1 $ 62.0
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 8.8 10.8
Provision for depreciation and other amortization 9.4 9.5
Amortization of other intangible assets 1.5 1.2
Minority interest in net income 0.8 0.4
Amortization of investment securities available for sale
discounts and premiums 6.9 6.3
Deferred income taxes (0.7) (1.0)
Originations of residential mortgages available for sale (40.1) (94.4)
Gross proceeds from sales of residential mortgages 40.9 96.5
Gains on sales of residential mortgages (0.8) (2.1)
(Increase)/decrease in other assets 21.4 4.4
Decrease in other liabilities (5.8) (31.3)
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Net cash provided by operating activities 114.4 62.3
---------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 6.7 0.2
Proceeds from maturities of investment securities available for sale 657.3 598.1
Proceeds from maturities of investment securities held to maturity 0.7 0.2
Purchases of investment securities available for sale (649.3) (1,218.0)
Investments in affiliates (16.3) (7.0)
Purchases of residential mortgages (5.2) (2.4)
Net increase in loans (258.9) (44.5)
Purchases of premises and equipment (26.2) (14.1)
Dispositions of premises and equipment 16.8 7.9
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Net cash used for investing activities (274.4) (679.6)
---------------------------
6
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
FINANCING ACTIVITIES
Net increase in demand, savings, and interest-bearing
demand deposits 118.5 243.1
Net decrease in certificates of deposit (273.4) (91.9)
Net increase in federal funds purchased and securities sold
under agreements to repurchase 614.4 400.6
Net increase/(decrease) in U.S. Treasury demand 15.8 (9.4)
Proceeds from issuance of long-term debt -- 260.3
Maturity of long-term debt (9.1) --
Net decrease in line of credit (8.0) (10.0)
Cash dividends (36.7) (34.5)
Distributions to minority shareholders (0.8) (0.5)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 10.6 6.6
Payments for common stock acquired through buybacks (15.2) (0.5)
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 416.1 763.8
-------------------------
Increase in cash and cash equivalents 256.1 146.5
Cash and cash equivalents at beginning of period 214.0 248.9
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Cash and cash equivalents at end of period $ 470.1 $ 395.4
=========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 41.4 $ 50.0
Taxes 47.0 38.0
In conjunction with the acquisition of Balentine & Company, LLC, Cramer
Rosenthal McGlynn, LLC, Roxbury Capital Management, LLC, and Camden
Partners Holdings, LLC, liabilities were assumed as follows:
Fair value of assets acquired $ 18.0 $ 6.9
Goodwill acquired 13.2 --
Common stock issued (12.9) --
Cash paid (18.3) (6.9)
-------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ -- $ --
=========================
See Notes to Consolidated Financial Statements
7
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Notes to Unaudited Consolidated Financial Statements
Note 1 - Stock-based Compensation Plans
---------------------------------------
At June 30, 2004, 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 2003 Annual Report to Shareholders.
The Corporation applies Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for these plans.
No stock-based compensation cost has been recognized in the accompanying
consolidated financial statements for those plans.
If compensation cost for the Corporation's three types of stock-based
compensation plans had been determined based on the fair value at the grant
dates for awards under those plans consistent with the methods outlined in
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," the Corporation's net income would have been as
follows:
------------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
------------------------------------------------------------
(in millions, except per share amounts) 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 36.5 $ 32.6 $ 72.1 $ 62.0
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1.9) (1.4) (2.6) (1.8)
--------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 34.6 $ 31.2 $ 69.5 $ 60.2
Basic earnings per share:
As reported $ 0.55 $ 0.50 $ 1.09 $ 0.94
Pro forma 0.52 0.47 1.05 0.92
Diluted earnings per share:
As reported $ 0.54 $ 0.49 $ 1.07 $ 0.94
Pro forma 0.51 0.47 1.03 0.91
The Corporation made grants of restricted stock to certain employees. The value
of these awards is amortized into compensation expense over the applicable
vesting period. Forfeitures are recorded as incurred. During the restriction
period, award holders have the rights of stockholders, including the right to
vote and receive cash dividends, but they cannot transfer ownership. The
Corporation recognized expense in connection with restricted stock awards for
the three- and six-month periods ended June 30, 2004, of $0.0 million and $0.1
million, respectively.
8
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
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 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 Consolidated Financial Statements" included in
the Corporation's 2003 Annual Report to Shareholders. Certain prior year amounts
have been reclassified to conform to current year presentation.
Note 3 - Comprehensive Income
-----------------------------
The following table depicts other comprehensive income as required by SFAS No.
130:
--------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
--------------------------------------------------------
(in millions) 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------------------
Net income $ 36.5 $ 32.6 $ 72.1 $ 62.0
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities (24.8) 6.3 (17.2) 5.8
Reclassification adjustment for derivative gains
included in net income (0.1) (0.1) (0.1) (0.1)
Foreign currency translation adjustments -- 0.2 (0.1) 0.1
--------------------------------------------------------
Total comprehensive income $ 11.6 $ 39.0 $ 54.7 $ 67.8
========================================================
9
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Note 4 - Earnings Per Share
----------------------------
The following table sets forth the computation of basic and diluted net earnings
per share:
------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
------------------------------------------------------
(in millions; except per share data) 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 36.5 $ 32.6 $ 72.1 $ 62.0
--------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 66.3 65.8 66.2 65.7
--------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 1.2 0.4 1.3 0.5
--------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 67.5 66.2 67.5 66.2
--------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.55 $ 0.50 $ 1.09 $ 0.94
==============================================================================================================
Diluted earnings per share $ 0.54 $ 0.49 $ 1.07 $ 0.94
==============================================================================================================
Cash dividends per share $ 0.285 $ 0.27 $ 0.555 $ 0.525
The number of anti-dilutive stock options excluded was 1.0 million for the
three- and six-month periods ended June 30, 2004. The number of anti-dilutive
stock options excluded was 2.7 million for the three- and six-month periods
ended June 30, 2003.
Note 5 - Segment Reporting
---------------------------
For the purposes of segment reporting, the Corporation discusses its business in
four segments. There is a segment for each of the Corporation's three
businesses, which are Regional Banking, Wealth Advisory Services, and Corporate
Client Services, as well as a segment for Affiliate Money Managers.
This segment reporting methodology was first implemented for the three and nine
months ended September 30, 2003, and included in the Form 10-Q the Corporation
filed with the Securities and Exchange Commission on November 14, 2003. Segment
reporting for the three months and six months ended June 30, 2003, has been
revised to reflect that change, and all prior period amounts have been restated
accordingly. The new methodology employs activity-based costing principles to
assign corporate overhead expenses to each segment. In addition, funds transfer
pricing concepts are used to credit and charge segments for funds provided and
funds used.
The Regional Banking segment includes lending, deposit-taking, and branch
banking in the Corporation's primary banking markets of Delaware, southeastern
Pennsylvania, and Maryland's Eastern Shore. It also includes institutional
deposit taking on a national basis. Lending activities include commercial loans,
commercial and residential mortgages, and construction and consumer loans.
Deposit products include demand checking, certificates of deposit, negotiable
order of withdrawal accounts, and various savings and money market accounts.
10
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
The Wealth Advisory Services segment includes financial planning, asset
management, investment counseling, trust services, estate settlement, private
banking, tax preparation, mutual fund services, broker-dealer services, and
insurance services. Results from Balentine & Company are fully consolidated in
the Wealth Advisory Services segment.
The Corporate Client Services segment includes a variety of trust, custody, and
administrative services that support capital markets transactions, entity
management, and retirement plan assets. Results of SPV Management Limited are
fully consolidated in the Corporate Client Services segment.
The Affiliate Money Managers segment includes contributions from Cramer
Rosenthal McGlynn (CRM) and Roxbury Capital Management (RCM), which are based on
the Corporation's partial ownership interest in each firm. Services provided by
these two affiliates include fixed income and equity investing services and
investment portfolio management services. Neither CRM's or RCM's results are
consolidated in the Corporation's financial statements.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in "Note 1" to the "Consolidated
Financial Statements" in the Corporation's 2003 Annual Report to Shareholders.
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 (e.g., at current market prices). Profit or
loss from infrequent events, such as the sale of a business, is reported
separately for each segment.
11
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Financial data by segment for the quarters ended June 30, 2004, and June 30,
2003, is as follows:
--------------------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended June 30, 2004 (in millions) Banking Services Services Managers Totals
--------------------------------------------------------------------------------------------------------------------
Net interest income $ 65.3 $ 5.9 $ 2.1 $ (1.1) $ 72.2
Provision for loan losses (3.1) (0.1) -- -- (3.2)
--------------------------------------------------------------------------------------------------------------------
Net interest income after provision 62.2 5.8 2.1 (1.1) 69.0
Advisory fees:
Wealth Advisory Services 0.5 34.6 2.3 -- 37.4
Corporate Client Services 0.2 -- 18.2 -- 18.4
Affiliate Money Managers -- -- -- 2.7 2.7
--------------------------------------------------------------------------------------------------------------------
Advisory fees 0.7 34.6 20.5 2.7 58.5
Amortization of other intangibles -- (0.1) (0.2) (0.2) (0.5)
--------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.7 34.5 20.3 2.5 58.0
Other noninterest income 10.3 1.5 0.4 -- 12.2
--------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 73.2 41.8 22.8 1.4 139.2
Noninterest expense (35.7) (31.2) (15.5) -- (82.4)
--------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 37.5 $ 10.6 $ 7.3 $ 1.4 $ 56.8
====================================================================================================================
Depreciation and amortization $ 5.3 $ 2.0 $ 1.4 $ 0.2 $ 8.9
--------------------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended June 30, 2003 (in millions) Banking Services Services Managers Totals
--------------------------------------------------------------------------------------------------------------------
Net interest income $ 63.1 $ 6.5 $ 2.8 $ (2.2) $ 70.2
Provision for loan losses (5.7) (0.2) -- -- (5.9)
--------------------------------------------------------------------------------------------------------------------
Net interest income after provision 57.4 6.3 2.8 (2.2) 64.3
Total advisory fees:
Wealth Advisory Services 0.7 30.0 2.4 -- 33.1
Corporate Client Services 0.3 -- 16.2 -- 16.5
Affiliate Money Managers -- -- -- (0.1) (0.1)
--------------------------------------------------------------------------------------------------------------------
Advisory fees 1.0 30.0 18.6 (0.1) 49.5
Amortization of other intangibles -- (0.1) (0.2) -- (0.3)
--------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 1.0 29.9 18.4 (0.1) 49.2
Other noninterest income 12.9 0.4 0.5 ---- 13.8
--------------------------------------------------------------------------------------------------------------------
12
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Net interest and noninterest income 71.3 36.6 21.7 (2.3) 127.3
Noninterest expense (34.2) (27.9) (15.0) ---- (77.1)
--------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 37.1 $ 8.7 $ 6.7 $ (2.3) $ 50.2
====================================================================================================================
Depreciation and amortization $ 5.7 $ 1.9 $ 1.4 $ 0.1 $ 9.1
-----------------------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Year-to-Date June 30, 2004 (in millions) Banking Services Services Managers Totals
-----------------------------------------------------------------------------------------------------------------------
Net interest income $ 129.6 $ 12.4 $ 4.4 $ (2.4) $ 144.0
Provision for loan losses (8.5) (0.3) -- -- (8.8)
-----------------------------------------------------------------------------------------------------------------------
Net interest income after provision 121.1 12.1 4.4 (2.4) 135.2
Total advisory fees:
Wealth Advisory Services 1.0 71.0 5.0 -- 77.0
Corporate Client Services 0.5 -- 35.8 -- 36.3
Affiliate Money Managers -- -- -- 5.0 5.0
-----------------------------------------------------------------------------------------------------------------------
Advisory fees 1.5 71.0 40.8 5.0 118.3
Amortization of other intangibles -- (0.2) (0.3) (0.3) (0.8)
-----------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 1.5 70.8 40.5 4.7 117.5
Other noninterest income 23.0 1.7 0.7 -- 25.4
-----------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 145.6 84.6 45.6 2.3 278.1
Noninterest expense (69.8) (64.1) (31.7) -- (165.6)
-----------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 75.8 $ 20.5 $ 13.9 $ 2.3 $ 112.5
=======================================================================================================================
Depreciation and amortization $ 10.7 $ 3.9 $ 2.8 $ 0.4 $ 17.8
Investment in equity method investees -- -- -- 254.1 254.1
Segment average assets 7,366.1 1,146.3 202.7 242.5 8,957.6
---------------------------------------------------------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Year-to-Date June 30, 2003 (in millions) Banking Services Services Managers Totals
---------------------------------------------------------------------------------------------------------------------
Net interest income $ 124.4 $ 12.5 $ 5.3 $ (3.7) $ 138.5
Provision for loan losses (10.5) (0.3) -- -- (10.8)
---------------------------------------------------------------------------------------------------------------------
Net interest income after provision 113.9 12.2 5.3 (3.7) 127.7
Total advisory fees:
Wealth Advisory Services 1.3 60.5 4.9 -- 66.7
Corporate Client Services 0.7 -- 30.7 -- 31.4
Affiliate Money Managers -- -- -- (0.3) (0.3)
---------------------------------------------------------------------------------------------------------------------
13
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Advisory fees 2.0 60.5 35.6 (0.3) 97.8
Amortization of other intangibles -- (0.2) (0.3) (0.1) (0.6)
---------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 2.0 60.3 35.3 (0.4) 97.2
Other noninterest income 25.3 0.9 0.8 -- 27.0
---------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 141.2 73.4 41.4 (4.1) 251.9
Noninterest expense (69.2) (58.4) (29.1) -- (156.7)
---------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes $ 72.0 $ 15.0 $ 12.3 $ (4.1) $ 95.2
=====================================================================================================================
Depreciation and amortization $ 10.3 $ 3.8 $ 2.7 $ 0.2 $ 17.0
Investment in equity method investees -- -- -- 245.2 245.2
Segment average assets 6,860.9 1,058.3 203.2 242.1 8,364.5
Note 6 - Derivative and Hedging Activities
------------------------------------------
From time to time, the Corporation enters into interest rate swap and interest
rate floor contracts to manage interest rate risk and to reduce the impact of
fluctuations in interest rates of identifiable asset categories, principally
floating-rate commercial loans and commercial mortgage loans.
When the index is equal to or above the strike rate, no payments are made or
received by the Corporation.
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts.
The Corporation employs interest rate swaps so that clients may convert
floating-rate loan payments to fixed-rate loan payments without exposing the
Corporation to interest rate risk. In these arrangements, the Corporation
retains the credit risk associated with the potential failure of
counter-parties. The Corporation also uses interest rate swaps to manage
interest rate risk associated with its issues of long-term subordinated debt.
At June 30, 2004, the Corporation had entered into a total of $988.1 million
notional amount of interest rate swaps as follows:
- $306.5 million of swaps were associated with loan clients for whom the
Corporation exchanged floating rates for fixed rates.
- To offset the exposure from changes in the market value of those swaps,
$306.5 million of swaps were made with other financial institutions that
exchanged fixed rates for floating rates.
- $375.0 million of swaps associated with the Corporation's long-term
subordinated debt issues were made with other financial institutions.
Changes in the fair value that are determined to be ineffective are also
recorded in "Other noninterest income" in the Consolidated Statements of Income.
The effective portion of the change in fair value is recorded in "Other
comprehensive income" in the Consolidated Statements of Condition.
For the second quarter of 2004, approximately $77,100 of gains, resulting from
the sale of floors in 2001, in "Accumulated other comprehensive income" were
reclassified to earnings.
14
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
During the 12 months ending June 30, 2005, 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.
Note 7 - Goodwill and Other Intangible Assets
---------------------------------------------
A summary of goodwill and other intangible assets is as follows:
June 30, 2004 December 31, 2003
----------------------------------------------------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount amortization amount amount amortization amount
----------------------------------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $ 298.5 $ 29.8 $ 268.7 $ 273.0 $ 29.8 $ 243.2
========================================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 7.7 $ 4.5 $ 3.2 $ 7.2 $ 4.0 $ 3.2
Customer lists 24.9 5.8 19.1 19.1 4.8 14.3
Acquisition costs 1.7 1.7 -- 1.7 1.7 --
Other intangibles 0.7 0.7 -- 0.7 0.6 0.1
Nonamortizing
Other intangible assets 6.4 -- 6.4 6.4 -- 6.4
----------------------------------------------------------------------------------------------------------------------------------
Total other intangibles $ 41.4 $ 12.7 $ 28.7 $ 35.1 $ 11.1 $ 24.0
========================================================================================
Amortization expense of other intangible assets for the three months and six
months ended June 30 is as follows:
----------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
----------------------------------------------------------
(in millions) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Amortization expense $ 0.8 $ 0.6 $ 1.5 $ 1.2
The estimated amortization expense of other intangible assets for each of the
five succeeding fiscal years is as follows:
Estimated annual amortization expense (in millions)
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2005 $ 3.7
For the year ended December 31, 2006 3.5
For the year ended December 31, 2007 2.8
For the year ended December 31, 2008 2.3
For the year ended December 31, 2009 2.1
15
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
The changes in the carrying amount of goodwill for the six months ended June 30
are as follows:
2004
-----------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(in millions) Banking Services Services Managers Total
------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2004 $ 3.8 $ 4.4 $ 7.8 $ 227.2 $ 243.2
Goodwill acquired -- 13.2 -- 12.3 25.5
------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2004 $ 3.8 $ 17.6 $ 7.8 $ 239.5 $ 268.7
=======================================================================
2003
-----------------------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(in millions) Banking Services Services Managers Total
------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2003 $ 3.8 $ 4.4 $ 7.2 $ 224.8 $ 240.2
Goodwill acquired -- -- -- 6.9 6.9
Increase in carrying value due
to foreign currency translation
adjustments -- -- 0.2 -- 0.2
------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2003 $ 3.8 $ 4.4 $ 7.4 $ 231.7 $ 247.3
=======================================================================
The goodwill acquired in 2004 includes $12.9 million recorded in connection with
the payment of a portion of the purchase price for the Corporation's interest in
Balentine Delaware Holding Company, LLC, $12.3 million recorded in connection
with an increase in WTI's equity interest in Cramer Rosenthal McGlynn, and $0.3
million recorded in connection with the Balentine Delaware Holding Company, LLC
acquisition of the remaining interests in Balentine & Company of Tennessee, LLC.
The goodwill acquired in 2003 includes $6.7 million recorded in connection with
increases in WTI's equity interest in Cramer Rosenthal McGlynn and $0.2 million
recorded in connection with increases in WTI's equity interest in Camden
Partners Holdings.
16
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
The following table lists other intangible assets acquired during the six months
ended June 30.
2004 2003
---------------------------------------------------------------------------------------
Weighted Weighted
average average
amortization amortization
Amount Residual period Amount Residual period
(in millions) assigned value in years assigned value in years
------------------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights $ 0.5 -- 8 $ 0.8 -- 8
Customer lists 5.6 -- 20 -- -- --
Customer list increase in carrying
value due to foreign currency
translation adjustments 0.1 -- -- --
-------------------- -------------------
$ 6.2 -- $ 0.8 --
==================== ===================
A proforma summary of goodwill and other intangible assets, including the
additional amounts related to the Corporation's acquisition of the remaining
interests in Balentine Delaware Holding Company, LLC, on July 1, 2004, and
described under the caption "Subsequent Event" on page 42, is as follows:
July 1, 2004 December 31, 2003
-----------------------------------------------------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount amortization amount amount amortization amount
----------------------------------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $ 358.9 $ 29.8 $ 329.1 $ 273.0 $ 29.8 $ 243.2
========================================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 7.7 $ 4.5 $ 3.2 $ 7.2 $ 4.0 $ 3.2
Customer lists 31.7 5.8 25.9 19.1 4.8 14.3
Acquisition costs 1.7 1.7 -- 1.7 1.7 --
Other intangibles 0.7 0.7 -- 0.7 0.6 0.1
Nonamortizing
Other intangible assets 6.4 -- 6.4 6.4 -- 6.4
----------------------------------------------------------------------------------------------------------------------------------
Total other intangibles $ 48.2 $ 12.7 $ 35.5 $ 35.1 $ 11.1 $ 24.0
========================================================================================
17
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Note 8 - Components of Net Periodic Benefit Cost
------------------------------------------------
The following table reflects the net periodic benefit cost of the pension plan,
supplemental executive retirement plan (SERP), and other postretirement benefits
for the three and six months ended June 30, 2004, and 2003. Descriptions of
these plans are contained in "Note 15" to the "Consolidated Financial
Statements" in the Corporation's Annual Report to Shareholders for 2003.
Pension benefits SERP benefits Postretirement benefits
For the three months ended -----------------------------------------------------------------------------
June 30, 2004 (in millions) 2004 2003 2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 1.6 $ 1.6 $ 0.1 $ 0.1 $ 0.3 $ 0.2
Interest cost 2.1 2.7 0.3 0.3 0.6 0.6
Expected return on plan assets (2.8) (3.4) -- -- -- --
Amortization of transition
obligation/(asset) (0.2) (0.3) -- -- -- --
Amortization of prior service cost 0.2 0.3 0.1 0.1 -- --
Recognized actuarial (gain)/loss 0.2 -- 0.1 -- 0.2 0.1
-------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1.1 $ 0.9 $ 0.6 $ 0.5 $ 1.1 $ 0.9
=============================================================================
Employer contributions $ -- $ -- $ 0.1 $ 0.1 $ 0.9 $ 0.8
Pension benefits SERP benefits Postretirement benefits
For the six months ended -----------------------------------------------------------------------------
June 30, 2004 (in millions) 2004 2003 2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 3.1 $ 3.2 $ 0.3 $ 0.3 $ 0.5 $ 0.5
Interest cost 4.4 5.5 0.5 0.6 1.4 1.2
Expected return on plan assets (5.6) (6.8) -- -- -- --
Amortization of transition
obligation/(asset) (0.4) (0.5) -- -- -- --
Amortization of prior service cost 0.4 0.5 0.2 0.1 -- --
Recognized actuarial (gain)/loss 0.4 -- 0.2 0.1 0.3 0.3
-------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 2.3 $ 1.9 $ 1.2 $ 1.1 $ 2.2 $ 2.0
=============================================================================
Employer contributions $ -- $ 15.0 $ 0.2 $ 0.2 $ 1.9 $ 1.5
Expected annual contributions -- 0.5 3.8
18
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Note 9 - Temporarily Impaired Investment Securities
---------------------------------------------------
At June 30, 2004, the Corporation's investment portfolio had an estimated market
value of $1.3 billon and gross unrealized losses of $32.1 million. Although the
negative impact of recent corporate scandals on credit spreads and credit
quality has improved, a rise in the benchmark interest rates precipitated by an
improving economy and inflation concerns has caused market values to decline
across all sectors of investments. A continuation of rising rates will adversely
impact the fair value of fixed rate securities and create additional unrealized
losses. This impairment is temporary and will correct itself when the cyclical
nature of the economy causes rates to decline.
The following table shows the estimated market value and gross unrealized loss
of debt and marketable equity securities that are temporarily impaired.
Less than 12 months 12 months or longer Total
---------------------------------------------------------------------------------------
Estimated Estimated Estimated
market Unrealized market Unrealized market Unrealized
(in millions) value losses value losses value losses
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004
Other securities:
U.S. Treasury and government
agencies $ 248.9 $ 2.7 $ -- $ -- $ 248.9 $ 2.7
Preferred stock 32.8 2.9 4.7 0.5 37.5 3.4
Mortgage-backed securities 835.0 14.4 60.5 10.4 895.5 24.8
Other debt securities 99.2 0.8 49.8 0.4 149.0 1.2
----------------------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities $ 1,215.9 $ 20.8 $ 115.0 $ 11.3 $ 1,330.9 $ 32.1
======================================================================================
Note 10 - Accounting Pronouncements
-----------------------------------
FIN No.46R: On December 24, 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 46 (revised December 2003), "Consolidation of
Variable Interest Entities (FIN 46R or the Interpretation)," which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. This Interpretation replaces Interpretation No.
46, "Consolidation of Variable Interest Entities (FIN 46)," which was issued on
January 17, 2003. FIN 46R requires that an enterprise review its degree of
involvement in an entity to determine if consolidation of the entity is required
or if disclosures are required about an enterprise's level of involvement in the
entity. Public companies must apply either FIN 46 or FIN 46R to entities
considered to be special-purpose entities for periods ending after December 15,
2003. Application by public companies for all other types of entities is
required in financial statements for periods ending after March 15, 2004. The
application of this Interpretation did not have a material impact on the
Corporation's consolidated earnings, financial condition, or equity, nor has
there been any requirement for disclosure under the Interpretation.
SFAS No. 148: In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This Statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair
value-based method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of that Statement to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. Finally,
this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in
19
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
interim financial statements. 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 March 31, 2004, the FASB issued an exposure
draft that would eliminate the use of the intrinsic-value method of accounting
for stock-based compensation for fiscal years beginning after December 15, 2004.
The Statement is expected to be finalized in the fourth quarter of 2004 and a
final effective date established at that time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPANY OVERVIEW
----------------
The Corporation is a financial services holding company with a diversified mix
of three businesses - Wealth Advisory Services, Corporate Client Services, and
Regional Banking - which it delivers through its primary wholly owned
subsidiaries:
- Wilmington Trust Company, a Delaware-chartered bank and trust company that
has engaged in commercial and trust banking activities since 1903.
Wilmington Trust Company is the 15th largest personal trust provider in
the United States and the largest full-service bank in Delaware, with 43
branch offices throughout the state.
- Wilmington Trust of Pennsylvania, a Pennsylvania-chartered bank and trust
company. Wilmington Trust of Pennsylvania has offices in center city
Philadelphia, Doylestown, Villanova, and West Chester.
- Wilmington Trust FSB, which serves as the platform for the Corporation's
activities beyond Delaware and Pennsylvania. Wilmington Trust FSB offices
are located in California, Florida, Georgia, Maryland, Nevada, and New
York.
The Corporation and its affiliates also have offices in the Cayman Islands, the
Channel Islands, and London, and other affiliates in Dublin and Milan.
Through its subsidiaries, the Corporation engages in fiduciary, wealth
management, investment advisory, financial planning, insurance, broker-dealer,
and deposit taking services, and residential, consumer, commercial, and
construction lending.
The Wealth Advisory Services business provides a variety of financial planning
and asset management services for high-net-worth individuals and families
throughout the United States and in many foreign countries.
The Corporate Client Services business provides a variety of specialty trust and
administrative services for national and multinational institutions.
The Regional Banking business targets consumer clients in the state of Delaware
and commercial clients throughout the Delaware Valley region. In its commercial
banking business, the Corporation targets family-owned or closely held
businesses with annual sales of up to $250 million where there are opportunities
to develop advisory as well as lending relationships.
The Corporation and its subsidiaries are subject to regulation by the Federal
Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the Delaware Department of Banking, the Pennsylvania Department of
Banking, and certain other federal and state authorities.
In addition to its wholly owned subsidiaries, the Corporation holds ownership
interests in two affiliate money managers:
- Cramer Rosenthal McGlynn, LLC (CRM), which is a New-York based value-style
manager; and
- Roxbury Capital Management, LLC (RCM), which is a Santa Monica-based
growth-style manager.
For the purposes of segment reporting, the income, expenses, and assets that the
Corporation receives from CRM and RCM are combined into one segment. For more
information about segment reporting, please refer to "Note 5" of the "Notes to
Consolidated Financial Statements" in this report.
20
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
SUMMARY OF RESULTS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------------------------
Strong results in each of the Corporation's businesses produced double-digit
growth in net income and earnings per share for the second quarter and first six
months of 2004. This performance was achieved opposite higher expenses and a
lower net interest margin for both periods.
Each business engaged new clients and developed additional business with
existing clients. Results from the affiliate money managers improved
significantly. The economy continued to rebound. Interest rates remained stable
and equity markets stayed above their prior-year levels for both periods. Loan
balances continued to grow and credit quality measures were among the strongest
in the Corporation's history.
For the second quarter of 2004, net income was $36.5 million and earnings per
share, on a diluted basis, were $0.54. These were increases of 12.0% and 10.2%,
respectively, from the 2003 second quarter. Highlights of the 2004 second
quarter included:
- A 13.0% increase in Wealth Advisory Services income;
- An 11.5% increase in Corporate Client Services income;
- Record high assets under management at affiliate money manager Cramer
Rosenthal McGlynn and a doubling of income from that firm;
- Continued profitability at affiliate money manager Roxbury Capital
Management;
- The 13th consecutive quarter of increases in loan balances, which reached
$6.42 billion, on average, and rose 6.3% from the second quarter of last
year;
- Core deposit balances that rose 4.7% to $4.49 billion, on average;
- Stabilization in the net interest margin of 3.52%, which was 10 basis
points lower than for the 2003 second quarter but only 1 basis point lower
than for the 2004 first quarter;
- Exceptionally strong credit quality, with a net charge-off ratio of 3
basis points; and
- A moderate rise in expenses as the Corporation continued to invest for
future business growth.
Second quarter 2004 results followed the strong first quarter performance and
combined to produce year-to-date net income of $72.1 million, which was 16.3%
higher than for the first six months of 2003.
For the first six months of 2004, earnings per share, on a diluted basis, were
$1.07. This was 13.8% higher than for the first half of 2003.
In addition to record levels of loan growth and double-digit increases in
advisory income, year-to-date 2004 increases reflected the comparative weakness
of the first quarter of 2003. During that quarter, the growth in loan balances
and the advisory businesses were offset by the low interest rate environment,
lower equity market levels, a loss in affiliate money manager income, and
continued compression in the net interest margin.
On an annualized basis, second quarter 2004 results produced a return on average
assets of 1.63% and a return on average stockholders' equity of 17.82%. These
were increases from the 2003 annualized second quarter returns of 1.53% and
17.04%, respectively.
In April 2004 the Corporation announced its 23rd consecutive year of increases
in the cash dividend. The quarterly cash dividend was raised by 5.6% from $0.27
per share to $0.285 per share, or $1.14 per share on an annualized basis.
STATEMENT OF CONDITION
----------------------
This section discusses changes in the balance sheet for the period between
December 31, 2003, and June 30, 2004. All balances referenced in this section
are period-end balances unless otherwise noted.
21
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
ASSETS
------
Total assets rose 5.3% to $9.29 billion as a result of higher balances in
earning assets, including the commercial loan portfolio and the investment
securities portfolio. Earning assets increased 3.4% to $8.38 billion.
Approximately 95% of the growth in earning assets was due to an increase in loan
balances of $257.9 million.
INVESTMENT SECURITIES
---------------------
On a percentage basis, the composition of assets within the investment portfolio
remained relatively unchanged, as the following table illustrates.
COMPOSITION AT PERIOD-END 2004 Q2 2003 Q4 2003 Q2
----------------------------------- ------- ------- -------
Mortgage-backed securities and
collateralized mortgage obligations 52% 52% 52%
U.S. treasuries 11% 11% 17%
Corporate issues 14% 14% 11%
U.S. government agencies 13% 13% 10%
Money market preferred stocks 6% 8% 8%
Municipal bonds 1% 1% 1%
Other 3% 1% 1%
At June 30, 2004, approximately 98% of the mortgage-backed securities in the
portfolio were invested in fixed-rate instruments with terms of 15 years or
less. Management believes that duration and risk can be managed more effectively
by investing in mortgage-related instruments than by retaining individual
residential mortgage loans on the balance sheet.
The average life of mortgage-backed instruments in the investment portfolio was
4.67 years at June 30, 2004, and the duration was 4.54. The corresponding life
and duration at December 31, 2003, were 4.50 and 4.50, respectively.
At June 30, 2004, the average life of the total investment portfolio was 6.67
years and the duration was 3.07. In comparison, at December 31, 2003, the
average life was 5.67 years and the duration was 2.81.
The increases in average life and duration reflected the rising interest rate
environment. Most of the changes were associated with callable agency securities
and management's assumptions that these instruments will be held to maturity due
to higher interest rates. In addition, certain short-duration U.S. Treasury
securities matured and were replaced with longer-duration mortgage-backed
securities.
LOAN BALANCES
-------------
The strength of the economy throughout the Delaware Valley region, in which the
Regional Banking business is concentrated, helped propel loan balances to a
record high of $6.48 billion at June 30, 2004. This was an increase of 4.1% and
it was achieved opposite an 8.6% decline in residential mortgage balances.
The $42.0 million decline in residential mortgage balances was due to
prepayments, refinancings, and the Corporation's ongoing practice of selling new
residential mortgage production into the secondary market rather than retaining
the risk on the balance sheet. The Corporation continues to be among the leading
residential mortgage originators in Delaware.
Factors in the loan growth included the broad diversification and relative
health of the Delaware Valley economy and the commercial banking focus on
family-owned or closely held businesses with annual sales of up to $250 million,
where the opportunity exists for a wealth advisory as well as banking
relationship.
22
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
In Delaware, the unemployment rate of 3.7% remained well below the national rate
of 5.6%. The housing market continued to expand, especially in the southern
counties and beach resorts. These areas are experiencing an influx of people who
are choosing to relocate to Delaware because of the state's mid-Atlantic
location, its proximity to the New York/Washington, D.C. corridor, and its
favorable tax climate. U.S. Census Bureau statistics list Delaware as the fifth
most popular state in the nation for attracting residents aged 65 or older.
Economic indicators constructed by the Federal Reserve Bank of Philadelphia
signaled growth in Pennsylvania's economy through the beginning of next year.
The Pennsylvania Leading Economic Index rose from 2.5 in April to 3.7 in May
(the most recent period for which data were available). The June issue of the
Philadelphia Federal Reserve's "Business Outlook Survey" reported positive
employment indicators and expansion in the region's manufacturing sector.
The Corporation remained the market leader among full-service banks in Delaware,
and continued to grow loan balances in southeastern Pennsylvania.
COMMERCIAL LOANS
----------------
The Corporation conducts commercial banking activities throughout the Delaware
Valley region, which management describes as the state of Delaware,
geographically adjacent areas along the I-95 corridor from Princeton, New
Jersey, to Baltimore, Maryland, and Maryland's Eastern Shore.
The commercial portfolio accounted for almost all of the growth in total loan
balances. At June 30, 2004, commercial loan balances were $4.30 billion, which
was $247.2 million, or 6.1%, higher than at December 31, 2003. The Delaware
market and the southeastern Pennsylvania market each generated approximately 40%
of the commercial loan growth.
Commercial loan balances are reported in three categories:
- Commercial, financial, and agricultural loans (commercial and industrial
loans, or C and I);
- Commercial construction/real estate loans (CRE); and
- Commercial mortgage loans.
Most of the commercial loan growth was in C and I balances, which were $2.41
billion at June 30, 2004. This was an increase of $133.5 million, or 5.9%, from
year-end 2003. This growth was fueled by automobile floor plan loans, as dealers
borrowed to support inventory needs for the traditionally strong summer selling
season. In addition, the upturn in Pennsylvania's manufacturing sector and
rising metal prices led to higher construction-related and light manufacturing
borrowings.
Commercial mortgage balances at June 30, 2004, were $1.19 billion. This was
$117.6 million, or 10.9%, more than at year-end 2003. In large part, the
increase reflected refinancing activity for new as well as existing clients, and
included residential, retail, hotel, restaurant, agricultural, industrial park,
and education-related projects. Much of the growth was generated by activity in
southern Delaware and on Maryland's Eastern Shore.
CRE balances were $695.9 million at June 30, 2004, which was a slight decline
from the $699.8 million recorded at December 31, 2003.
RETAIL LOANS
------------
The Corporation's retail banking activities are concentrated in the state of
Delaware. At June 30, 2004, total retail loans were $2.18 billion, which was an
increase of $10.7 million from December 31, 2003.
Retail loans are reported in three categories:
- Residential mortgage loans;
- Consumer loans; and
- Loans secured by liquid collateral. These loans are associated primarily
with Wealth Advisory Services clients throughout the United States.
23
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Total retail loans increased on the strength of consumer lending. Residential
mortgage loans and loans secured by liquid collateral declined, while consumer
balances rose by 5.1%, or $55.0 million, to $1.13 billion. The growth in
consumer balances was due to higher indirect auto lending and home equity lines
of credit, both of which benefited from intensified marketing efforts.
RESERVE FOR LOAN LOSSES
-----------------------
The reserve for loan losses increased 2.9% to $92.5 million. Changes in the
reserve reflected the growth in loan balances and the Corporation's internal
risk rating analysis, reserve methodology, and net charge-off experience.
The loan loss reserve ratio was 1.43% at June 30, 2004, which was 1 basis point
lower than at December 31, 2003. For more information about credit quality,
please refer to the "Asset Quality" section of this report.
LIABILITIES
-----------
Total liabilities increased by 5.5%, or $442.6 million, to $8.46 billion. Most
of the increase resulted from higher short-term borrowings that were used to
fund loan growth.
DEPOSIT BALANCES
----------------
Changes in deposit balances reflect trends in the retail banking business as
well as in funding strategies that management employs when loan demand exceeds
core deposit balances.
Changes in core deposit balances provide the better measure of trends in the
retail banking business. Core deposit balances include certificates of deposit
(CDs) under $100,000 and local CDs $100,000 and over. These CDs reflect
client-driven balances.
Changes in other deposits and short-term borrowings reflect funding strategies.
Other deposits include national CDs $100,000 and over, which are purchased funds
and not indicative of client activity. For more information about funding
sources, please refer to the "Liquidity" section of this report.
Decisions on whether to use national CDs or short-term borrowings typically are
made on the basis of the most favorable rate. As a result, increases in national
CD balances are frequently offset by corresponding decreases in short-term
borrowings, and vice-versa.
This was the case in the first half of 2004, when a $622.2 million increase in
short-term borrowings was offset partially by a $273.0 million decrease in
national CD balances.
Core deposit balances at June 30, 2004, were $4.79 billion, which was $118.1
million, or 2.5%, higher than at December 31, 2004. Almost all of this increase
was due to higher noninterest-bearing demand deposit balances, which primarily
are associated with Corporate Client Services clients who use the Corporation's
cash management and paying agent services. It is not unusual for the funds
associated with the Corporate Client business to be deposited for short periods
of time, particularly over period-ends.
As a result, management regards core deposit balances on average as a better
indicator of trends in deposit balances. On an average balance basis, core
deposit balances for the six months ended June 30, 2004, were slightly higher
than for the year ended December 31, 2003. Although core deposit growth gained
momentum in the 2004 second quarter, it was dampened on a year-to-date basis due
to a first-quarter 2004 decline in CD balances.
24
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
STOCKHOLDERS' EQUITY
--------------------
Stockholders' equity at June 30, 2004, was $826.4 million. This was a 3.2%
increase from the December 31, 2003, amount of $800.8 million. For more
information about this increase and the share buyback program, please refer to
the "Capital Resources" section of this report.
INCOME STATEMENT
----------------
This section compares the Corporation's income and expenses for the second
quarter and first six months of 2004 with those of the corresponding periods of
2003.
For the second quarter of 2004, net income was $36.5 million and earnings per
share, on a diluted basis, were $0.54. These were increases of 12.0% and 10.2%,
respectively, from the 2003 second quarter. For the first six months of 2004,
net income totaled $72.1 million and diluted earnings per share were $1.07.
These were increases of 16.3% and 13.8%, respectively, from the first six months
of 2003.
The increases were attributable to higher revenue from each of the Corporation's
businesses, improved results from the two affiliate money managers, a stable net
interest margin, and a lower provision for loan losses. The size of the increase
also was a reflection of the comparative weakness of the 2003 first quarter.
SOURCES OF INCOME
-----------------
The Corporation has two sources of revenue:
- Net interest income. Net interest income is the difference between the
interest revenue received on earning assets, such as loans and
investments, and the interest paid on liabilities, such as deposits and
short-term borrowings. Net interest income is generated primarily by
banking and funding activities.
- Noninterest income. Noninterest income consists primarily of income from
the advisory businesses, which comprise Wealth Advisory Services,
Corporate Client Services, and the two affiliate money managers, Cramer
Rosenthal McGlynn and Roxbury Capital Management. Noninterest income also
includes service charges on deposit accounts, loan fees and late charges,
card fees, securities gains (or losses), and other noninterest income.
These two sources of revenue generate a diversified stream of income that
enables the Corporation to deliver consistent profitability and growth, with low
volatility, in a variety of economic conditions. The table below shows changes
in the mix of income sources and demonstrates that:
- Advisory income is the predominant source of noninterest income;
- The percentage contribution from noninterest sources of income is rising;
and
- The Corporation's sources of income are diversified and balanced.
Advisory and total noninterest income as a percentage of combined net interest
and noninterest income
------------------------------------------------------------------------------
FOR THE PERIOD ENDED 2004 Q2 2003 Q2 2004 YTD 2003 YTD
------------------------------------- ------- ------- -------- --------
Advisory income (after amortization) 41.7% 38.6% 42.3% 38.6%
Total noninterest income 50.4% 49.5% 51.4% 49.3%
Net interest income (after provision) 49.6% 50.5% 48.6% 50.7%
25
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
NET INTEREST INCOME, EXPENSES, AND MARGIN
-----------------------------------------
Stability in market interest rates helped bring the pace of growth in net
interest income more in line with the pace of growth in loan balances. The end
of June 2004 marked the first completion of a 12-month cycle without a change in
market interest rates since 1994. The consistency in interest rates helped slow
the declines in the net interest margin, but the disparity between the yield on
earning assets and the cost of funds used to support those assets continued to
cause margin compression. Record-high loan growth helped mitigate the disparity.
Net interest income (after the provision for loan losses) was 7.3% higher for
the 2004 second quarter than for the year-ago second quarter. In comparison,
loan balances were higher by 6.9% at June 30, 2004, than they were at June 30,
2003.
Year to date, net interest income (after the provision for loan losses) was 5.9%
higher than for the first half of 2003. In comparison, loan balances at June 30,
2004, were 4.1% more than they were at December 31, 2003.
To compute the net interest margin, the Corporation divides net interest income
on a fully tax-equivalent (FTE) basis by average total earning assets.
On an FTE basis, net interest income for the 2004 second quarter was $73.4
million, compared with $71.4 million for the 2003 second quarter. Total earning
assets were $8.29 billion, on average, for the 2004 second quarter, which was
$424.0 million, or 5.4%, higher than for the year-ago second quarter.
For the 2004 second quarter, the net interest margin was 3.52%. This was 10
basis points lower than for the year-ago second quarter and 1 basis point lower
than for the 2004 first quarter.
For the first half of 2004, net interest income on an FTE basis was $146.4
million, compared with $141.0 million for the first half of 2003. Total earning
assets were $8.26 billion, on average, for the first half of 2004, compared with
$7.67 billion, on average, for the first half of 2003.
Year to date, the net interest margin was 3.52%. This was 16 basis points lower
than for the first six months of 2003.
Compared to the year-ago second quarter, the average yield on earning assets
fell 41 basis points, but the average cost of funds fell only 31 basis points.
Compared to the first half of 2003, the average yield on earning assets fell 50
basis points, but the average cost of funds was only 34 basis points lower.
Yields on the investment portfolio, on average, fell 19 basis points for the
quarter and 36 basis points for the year to date. In comparison, the
corresponding increases in the portfolio size were 3.6% and 15.3%, respectively.
Loan yields, on average, were 49 basis points lower for the quarter even though
loan balances rose 6.3%. Year-to-date loan yields, on average, were 54 basis
points lower, opposite a 5.9% increase in year-to-date loan balances.
The decline in loan yields continued to outpace the corresponding adjustments to
core deposit pricing. The cost of core interest-bearing deposits for the 2004
second quarter, on average, was 72 basis points. This was a historic low and was
5 basis points less than the previous historic low of 77 basis points, which was
the cost for the 2004 first quarter. Compared with the year-ago second quarter
cost of core interest-bearing deposits, it was a decline of 33 basis points, on
average.
Year to date, the cost of core interest-bearing deposits, on average, was 75
basis points. The corresponding cost for the first half of 2003 was 1.11%.
The following tables present comparative net interest income data and
rate/volume analyses for the second quarters and first halves of 2004 and 2003.
26
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
QUARTERLY ANALYSIS OF EARNINGS
2004 Second Quarter 2003 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 $ 16.3 $ -- 1.09% $ 38.4 $ 0.1 1.32%
U.S. Treasury and government
agencies 430.0 3.7 3.50 528.8 4.3 3.29
State and municipal 14.2 0.2 8.71 16.6 0.4 9.01
Preferred stock 119.5 2.2 7.42 120.1 2.2 7.40
Mortgage-backed securities 989.4 10.0 3.94 888.8 9.8 4.47
Other 305.9 2.3 3.07 240.9 1.8 2.93
----------------------------------------------------------------------- ---------------------
Total investment securities 1,859.0 18.4 3.96 1,795.2 18.5 4.15
--------------------------------------------------------------------------
Commercial, financial, and
agricultural 2,361.1 25.0 4.20 2,190.8 24.6 4.45
Real estate-construction 735.2 8.3 4.46 590.8 6.8 4.56
Mortgage-commercial 1,169.2 14.1 4.76 1,054.6 14.6 5.47
----------------------------------------------------------------------- ---------------------
Total commercial loans 4,265.5 47.4 4.40 3,836.2 46.0 4.75
--------------------------------------------------------------------------
Mortgage-residential 459.3 7.0 6.05 604.7 10.2 6.77
Consumer 1,097.6 16.2 5.92 1,031.4 17.2 6.68
Secured with liquid collateral 597.6 3.8 2.49 565.4 3.9 2.73
----------------------------------------------------------------------- ---------------------
Total retail loans 2,154.5 27.0 5.00 2,201.5 31.3 5.69
--------------------------------------------------------------------------
Total loans net of
unearned income 6,420.0 74.4 4.60 6,037.7 77.3 5.09
--------------------------------------------------------------------------
Total earning assets $ 8,295.3 92.8 4.45 $ 7,871.3 95.9 4.86
==========================================================================
Funds supporting earning assets
Savings $ 379.5 0.1 0.13 369.4 0.1 0.15
Interest-bearing demand 2,319.4 2.2 0.37 2,127.0 2.4 0.45
Certificates under $100,000 762.7 3.7 1.95 851.5 6.0 2.80
Local CDs $100,000 and over 133.5 0.5 1.54 139.6 0.6 1.78
----------------------------------------------------------------------- ---------------------
Total core interest-
bearing deposits 3,595.1 6.5 0.72 3,487.5 9.1 1.05
National CDs $100,000 and over 1,980.9 5.8 1.16 1,979.5 7.8 1.56
----------------------------------------------------------------------- ---------------------
Total interest-bearing
deposits 5,576.0 12.3 0.88 5,467.0 16.9 1.23
--------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,139.5 3.8 1.35 985.3 3.9 1.54
U.S. Treasury demand 12.4 -- 0.80 8.4 -- 1.04
----------------------------------------------------------------------- ---------------------
Total short-term
borrowings 1,151.9 3.8 1.34 993.7 3.9 1.54
--------------------------------------------------------------------------
27
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Long-term debt 405.3 3.3 3.21 407.9 3.7 3.62
----------------------------------------------------------------------- ----------------------
Total interest-bearing
liabilities 7,133.2 19.4 1.08 6,868.6 24.5 1.42
-------------------------------------------------------------------------
Other noninterest funds 1,162.1 -- -- 1,002.7 -- --
----------------------------------------------------------------------- ---------------------
Total funds used to support
earning assets $ 8,295.3 19.4 0.93 $ 7,871.3 24.5 1.24
=========================================================================
Net interest income/yield 73.4 3.52 71.4 3.62
Tax-equivalent adjustment (1.2) (1.2)
-------- ------
Net interest income $ 72.2 $ 70.2
======== ======
In order to ensure the comparability of yields and rates and their impact on net
interest income, average rates are calculated using average balances based on
historical cost and do not reflect the market valuation adjustment required by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
28
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
YEAR-TO-DATE ANALYSIS OF EARNINGS
Year-to-Date 2004 Year-to-Date 2003
------------------------------------- ----------------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
--------------------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and securities
purchased under agreements to
resell $ 16.5 $ 0.1 1.05% $ 31.2 $ 0.2 1.35%
U.S. Treasury and government agencies 447.7 7.7 3.47 495.0 8.4 3.49
State and municipal 14.5 0.6 8.63 16.6 0.7 8.99
Preferred stock 119.9 4.4 7.42 117.1 4.5 7.54
Mortgage-backed securities 999.0 20.3 4.03 766.4 17.6 4.67
Other 297.7 4.3 2.93 234.2 3.6 3.05
----------------------------------------------------------------------- ------------------------
Total investment securities 1,878.8 37.3 3.97 1,629.3 34.8 4.33
----------------------------------------------------------------------------
Commercial, financial, and agricultural 2,343.1 49.4 4.18 2,202.8 49.7 4.49
Real estate-construction 730.1 16.4 4.44 567.8 12.9 4.51
Mortgage-commercial 1,136.2 27.5 4.79 1,031.4 28.8 5.55
----------------------------------------------------------------------- ------------------------
Total commercial loans 4,209.4 93.3 4.39 3,802.0 91.4 4.78
----------------------------------------------------------------------------
Mortgage-residential 470.5 14.3 6.06 626.7 21.3 6.79
Consumer 1,084.4 32.4 5.98 1,029.9 34.6 6.77
Secured with liquid collateral 600.1 7.6 2.50 549.2 7.7 2.80
----------------------------------------------------------------------- ------------------------
Total retail loans 2,155.0 54.3 5.03 2,205.8 63.6 5.79
----------------------------------------------------------------------------
Total loans net of unearned
income 6,364.4 147.6 4.61 6,007.8 155.0 5.15
----------------------------------------------------------------------------
Total earning assets $ 8,259.7 185.0 4.46 $7,668.3 190.0 4.96
============================================================================
Funds supporting earning assets
Savings $ 375.8 0.3 0.13 $ 363.4 0.3 0.19
Interest-bearing demand 2,293.2 4.2 0.37 2,095.1 4.9 0.46
Certificates under $100,000 771.0 7.8 2.04 863.0 12.6 2.93
Local CDs $100,000 and over 134.2 1.0 1.49 145.4 1.4 1.88
----------------------------------------------------------------------- ------------------------
Total core interest-bearing
deposits 3,574.2 13.3 0.75 3,466.9 19.2 1.11
National CDs $100,000 and over 2,102.4 12.2 1.14 2,022.6 16.5 1.62
----------------------------------------------------------------------- ------------------------
Total interest-bearing
deposits 5,676.6 25.5 0.89 5,489.5 35.7 1.30
----------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to
repurchase 1,016.3 7.0 1.36 882.6 7.0 1.59
U.S. Treasury demand 12.1 -- 0.78 8.2 -- 1.02
----------------------------------------------------------------------- ------------------------
Total short-term borrowings 1,028.4 7.0 1.35 890.8 7.0 1.58
----------------------------------------------------------------------------
29
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Long-term debt 408.0 6.1 3.01 284.9 6.3 4.45
----------------------------------------------------------------------- -----------------------
Total interest-bearing
liabilities 7,113.0 38.6 1.08 6,665.2 49.0 1.47
----------------------------------------------------------------------------
Other noninterest funds 1,146.7 -- -- 1,003.1 -- --
----------------------------------------------------------------------- -----------------------
Total funds used to support
earning assets $ 8,259.7 38.6 0.94 $7,668.3 49.0 1.28
============================================================================
Net interest income/yield 146.4 3.52 141.0 3.68
Tax-equivalent adjustment (2.4) (2.5)
-------- -------
Net interest income $ 144.0 $ 138.5
======== =======
In order to ensure the comparability of yields and rates and their impact on net
interest income, average rates are calculated using average balances based on
historical cost and do not reflect the market valuation adjustment required by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
30
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
----------------------------------------------------------------------------------
For the three months ended June 30, For the six months ended June 30,
-------------------------------------- ---------------------------------------
2004/2003 2004/2003
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) $ 0.0 $ (0.1) $ (0.1) $ 0.0 $ (0.1)
---------------------------------------------------------------------------------
U.S. Treasury and
government agencies (0.7) 0.1 (0.6) (0.7) 0.0 (0.7)
State and municipal * 0.0 (0.2) (0.2) (0.1) 0.0 (0.1)
Preferred stock * -- -- -- 0.1 (0.2) (0.1)
Mortgage-backed securities 1.4 (1.2) 0.2 5.9 (3.2) 2.7
Other * 0.4 0.1 0.5 0.9 (0.2) 0.7
-------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1.1 (1.2) (0.1) 6.1 (3.6) 2.5
---------------------------------------------------------------------------------
Commercial, financial, and
agricultural * 1.9 (1.5) 0.4 3.1 (3.4) (0.3)
Real estate-construction 1.6 (0.1) 1.5 3.6 (0.1) 3.5
Mortgage-commercial * 1.6 (2.1) (0.5) 2.9 (4.2) (1.3)
-------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 5.1 (3.7) 1.4 9.6 (7.7) 1.9
---------------------------------------------------------------------------------
Mortgage-residential (2.5) (0.7) (3.2) (5.3) (1.7) (7.0)
Consumer 1.1 (2.1) (1.0) 1.8 (4.0) (2.2)
Secured with liquid collateral 0.2 (0.3) (0.1) 0.7 (0.8) (0.1)
-------------------------------------------------------------------------------------------------------------------------------
Total retail loans (1.2) (3.1) (4.3) (2.8) (6.5) (9.3)
---------------------------------------------------------------------------------
Total loans net of
unearned income 3.9 (6.8) (2.9) 6.8 (14.2) (7.4)
-------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 4.9 $ (8.0) $ (3.1) $ 12.8 $ (17.8) $ (5.0)
---------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand $ 0.2 $ (0.4) $ (0.2) $ 0.5 $ (1.2) $ (0.7)
Certificates under $100,000 (0.6) (1.7) (2.3) (1.3) (3.5) (4.8)
Local CDs $100,000 and over -- (0.1) (0.1) (0.1) (0.3) (0.4)
-------------------------------------------------------------------------------------------------------------------------------
31
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Total core interest-bearing
deposits (0.4) (2.2) (2.6) (0.9) (5.0) (5.9)
National CDs $100,000 and over -- (2.0) (2.0) 0.7 (5.0) (4.3)
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits (0.4) (4.2) (4.6) (0.2) (10.0) (10.2)
---------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 0.6 (0.7) (0.1) 1.1 (1.1) --
-------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 0.6 (0.7) (0.1) 1.1 (1.1) --
---------------------------------------------------------------------------------
Long-term debt 0.0 (0.4) (0.4) 2.7 (2.9) (0.2)
-------------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 0.2 $ (5.3) $ (5.1) $ 3.6 $ (14.0) $ (10.4)
---------------------------------------------------------------------------------
Changes in net interest income $ 4.7 $ (2.7) $ 2.0 $ 9.2 $ (3.8) $ 5.4
=================================================================================
* Variances are calculated on a fully tax-equivalent basis, which includes
the effects of any disallowed interest expense.
1 Changes attributable to volume are defined as a change in average balance
multiplied by the prior year's rate.
2 Changes attributable to rate are defined as a change in rate multiplied by
the average balance in the applicable period of the prior year. A change
in rate/volume (change in rate multiplied by change in volume) has been
allocated to the change in rate.
NONINTEREST INCOME
Double-digit increases in advisory income were recorded for the 2004 second
quarter as well as year-to-date. A combination of higher demand for Wealth
Advisory and Corporate Client Services, market appreciation, and stronger
results from the affiliate money managers caused the increases. The advisory
businesses are discussed in greater detail below.
Among the other sources of noninterest income, service charges on deposit
accounts were higher on a second quarter and year-to-date basis because the
volume of returned items increased, due partly to a fee increase that was
instituted in the second quarter of 2003. Loan fees and late charges declined on
a quarterly and year-to-date basis as prepayment penalties declined in
anticipation of a rise in interest rates.
ASSETS UNDER MANAGEMENT
-----------------------
Assets under management are generated by the advisory businesses. The following
table compares changes in assets under management at Wilmington Trust and the
two affiliate money managers.
32
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Changes in assets under management (AUM)
----------------------------------------
AUM AT PERIOD-END (IN BILLIONS) 2004 Q2 2003 Q4 2003 Q2
------------------------------- ------- ------- -------
Wilmington Trust $24.2 $24.4 $22.7
Cramer Rosenthal McGlynn $ 5.5 $ 4.7 $ 3.8
Roxbury Capital Management $ 3.2 $ 3.2 $ 3.3
Total $32.9 $32.3 $29.8
At Wilmington Trust, most managed assets are in personal trusts that are
structured around wealth planning, preservation, and transition considerations.
Changes in the level of managed assets reflect trust distributions and
terminations as well as business flows and financial market movements.
The primary business of the two affiliate money managers is asset management,
and changes in managed asset amounts reflect business flows and financial market
movements.
Approximately 77% of the assets managed by Wilmington Trust are associated with
the Wealth Advisory Services business. These assets are invested in a mix of
instruments designed to help Wealth Advisory clients generate income and
minimize taxes.
The following table compares changes in the investment mix.
Changes in the investment mix of managed assets at Wilmington Trust
-------------------------------------------------------------------
INVESTMENT MIX AT PERIOD-END 2004 Q2 2003 Q4 2003 Q2
---------------------------- ------- ------- -------
Equities 52% 55% 53%
Fixed income 24% 25% 27%
Cash and equivalents 11% 9% 11%
Mutual funds 8% 7% 6%
Other assets 5% 4% 3%
WEALTH ADVISORY SERVICES
------------------------
Income from the Wealth Advisory Services business was $37.4 million for the 2004
second quarter and $77.0 million year-to-date. Compared to the corresponding
periods in 2003, these were increases of 13.0% and 15.4%, respectively.
Wealth Advisory Services income is reported in three categories:
- Trust and investment advisory fees. These fees are tied to movements in
the financial markets. Approximately 75% of these fees are associated with
equity market valuations.
- Mutual fund fees. Approximately 95% of these fees are tied to money market
mutual funds, and do not reflect equity market movements.
- Other service fees. These fees are from financial planning, estate
settlement, and other services. These fees are based on the level and
complexity of the services provided, not on asset valuations, and can vary
widely in amount. Portions of these fees may be nonrecurring. Because
other service fees reflect client demand at any given point in time, it is
not unusual for them to fluctuate up or down from period to period.
These fees are recorded on the income statement on page 4 of this report.
Trust and investment advisory fees continued to account for more than two-thirds
of Wealth Advisory Services income. Fees from these services recorded
double-digit increases for the 2004 second quarter and first six months in
comparison to the corresponding year-ago periods. This was due to new business
development, strong demand for independent investment consulting services, and
market appreciation.
33
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Other service fees rose dramatically. Comparing the 2004 second quarter and
first six months with the corresponding year-ago periods, other service fees
increased 30.2% and 40.4%, respectively. In addition, several of the financial
and estate plans that were completed during the first quarter of 2004 were
highly complex in nature, and commanded higher fees.
Mutual fund fees declined on a quarter-versus-quarter as well as year-over-year
basis, as client demand increased for investments that generate higher returns.
CORPORATE CLIENT SERVICES
-------------------------
Income from the Corporate Client Services business was $18.4 million for the
2004 second quarter and $36.3 million year-to-date. Compared to the
corresponding periods in 2003, these were increases of 11.5% and 15.6%,
respectively. All components of the Corporate Client Services business recorded
income that was higher than for the corresponding year-ago periods.
Corporate Client Services income is reported in four categories:
- Capital markets services. This component of the business provides trust
and administrative services that support the structured finance industry,
and includes such projects as asset-backed securitizations, issues of
pooled trust-preferred securities, large equipment leasing, and structures
associated with companies in distressed financial conditions. Fees for
these services are priced according to the complexity of the activity
performed and are not related to financial market performance. Most of the
capital markets services are performed under multiyear contracts.
- Entity management services. This component provides administrative
services for legal entities in jurisdictions that offer favorable legal
and tax environments. These services include accounting, regulatory and
tax filings, providing independent directors for an entity, and other
activities. As is the case with capital markets services, fees for these
services depend on the scope of the activity provided, are not tied to
financial market performance, and are performed under multiyear contracts.
- Retirement services. This component provides trust and custody services
for institutional defined contribution retirement plans. The majority of
the income from this component is related to the value of the retirement
plan assets held in custody by the Corporation.
- Cash management services. Fees for these services are associated with cash
management services performed in conjunction with the capital markets and
entity management components.
These fees are recorded on the income statement on page 4 of this report.
Capital markets services continued to generate the largest portion of total
Corporate Client Services income. For the 2004 second quarter and first six
months, capital markets income was 9.2% and 16.5% higher, respectively, than for
the corresponding year-ago periods. These increases were due to strong demand
for traditional debt issues, issues of trust-preferred securities,
mortgage-backed securitizations, and credit-card-receivables securitizations.
Entity management services income increased due to higher demand in the
Caribbean and Europe, where the market for such services is less mature than it
is in the United States. In addition, demand for U.S.-based entities was
stronger than in recent periods, reflecting a resumption of activity following
the adoption of new regulatory and accounting standards.
Increases in the retirement services component were attributable to the
acquisition of new business as well as market appreciation.
CRAMER ROSENTHAL MCGLYNN
------------------------
Assets under management at Cramer Rosenthal McGlynn (CRM) reached $5.5 billion
at June 30, 2004. This was 44.7% higher than at June 30, 2003; 17.0% higher than
at December 31, 2003; and the highest amount ever recorded by the value-style
manager. Net new business as well as market appreciation contributed to the
increases.
This propelled the income recorded from CRM to $2.5 million for the 2004 second
quarter and $4.6 million year-to-date. These amounts were more than double the
amounts recorded for the corresponding periods of 2003.
34
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
The amount of income recorded from CRM is based on the Corporation's ownership
interest in the firm, which was 77.24% at June 30, 2004. In comparison, the
Corporation held a 69.14% interest at June 30, 2003, and a 69.14% at December
31, 2003. CRM's results are not consolidated in the Corporation's financial
statements.
Despite the high percentage of its position, the Corporation does not hold a
controlling interest in CRM. CRM retains certain management controls, including
veto powers.
ROXBURY CAPITAL MANAGEMENT
--------------------------
Income recorded for growth-style manager Roxbury Capital Management (RCM)
reflected the firm's return to profitability. Second quarter 2004 income from
RCM was $200,000; the year-to-date amount was $400,000. In comparison, a loss of
$1.2 million was recorded for RCM for the 2003 second quarter, and a loss of
$2.1 million was recorded for the first six months of 2003.
RCM's assets under management at June 30, 2004, declined slightly from the June
30, 2003, and December 31, 2003, levels. Although RCM continued to attract new
assets to its small- and mid-capitalization products, these additions were not
sufficient to offset account terminations in the large capitalization product.
Results recorded for RCM represent the Corporation's ownership interest in the
firm. At June 30, 2004, that interest consisted of 41.23% of RCM's common shares
and 30% of its gross revenue, which was equal to the level at December 31, 2003.
At June 30, 2003, the Corporation's ownership position consisted of 41.04% of
RCM's common shares and 30% of its gross revenue.
NONINTEREST EXPENSE
-------------------
Noninterest expense reflects the costs that the Corporation incurs in the course
of normal operations. It includes expenses associated with employment,
occupancy, supplies, advertising, third-party providers, and other items.
Noninterest expenses totaled $82.4 million for the 2004 second quarter and
$165.6 million year-to-date. These were increases of 6.9% and 5.7%,
respectively, from the corresponding year-ago periods. This was in line with
plan and reflected higher costs associated with staff, expansion, and technology
in support of business growth.
Staffing-related expenses accounted for 83.0% of the quarter-versus-quarter
increase, and 80.9% of the year-over-year increase. Salaries and wages rose
because the number of full-time equivalent staff members was 54 more than at the
end of the 2003 second quarter, and 66 more than at year-end 2003. Incentives
and bonuses increased due to higher sales levels in each of the Corporation's
businesses. Employment benefits expense reflected rising health insurance and
pension costs.
The increases in furniture, equipment, and supplies expense were attributable to
technology projects. The Corporation converted its desk-top operating system,
which added depreciation costs. At the end of May 2004, the Corporation
completed its conversion to a third-party trust accounting system, which will
cause costs to rise by approximately $1 million per quarter for the 2004 third
and fourth quarters. Only one month of this expense was recorded for the 2004
second quarter. Training on the new systems caused travel, entertainment, and
training expenses to increase.
The increases in servicing and consulting fees were due to strong demand for
multi-manager investment consulting capabilities, which led to additional
payments to third-party investment advisors.
Other operating expenses declined for the quarter as well as year-to-date, as
lower legal costs offset higher audit costs and expenses associated with meeting
the requirements of Section 404 of the Sarbanes-Oxley Act.
35
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
HEADCOUNT
---------
At June 30, 2004, full-time equivalent (FTE) headcount was 2,373. In comparison,
at June 30, 2003, FTE headcount was 2,319. At December 31, 2003, FTE headcount
was 2,307.
INCOME TAXES
------------
Income tax expense totaled $19.9 million for the 2004 second quarter and $39.6
million year-to-date. The Corporation's effective tax rate for the 2004 second
quarter was 35.03%, compared with 34.66% for the 2003 second quarter. The
changes reflected higher state income taxes due to higher income, especially
from the affiliate money managers.
LIQUIDITY
---------
The Corporation manages its liquidity to ensure that its cash flows are
sufficient to support its operating, investing, and financing activities.
Liquidity management enables the Corporation to meet increases in demand for
loans or other assets, and decreases in deposits or other funding sources.
Liquidity is affected by the proportion of funding that is provided by core
deposits and stockholders' equity.
The Corporation's sources of funding include deposit balances; cash that is
generated by the investment and loan portfolios; short- and long-term
borrowings, which include national certificates of deposit in amounts of
$100,000 and more and term federal funds; internally generated capital; and
other credit facilities.
Among the Corporation's available sources of funds is the Federal Home Loan Bank
of Pittsburgh, of which Wilmington Trust Company is a member. Wilmington Trust
Company has $1.3 billion in available borrowing capacity secured by collateral.
In addition, at June 30, 2004, the Corporation had $75 million in available
borrowing capacity through two lines of credit that are maintained with major
U.S. financial institutions.
In April 2003 the Corporation added another source of funding by issuing $250
million of long-term subordinated debt. The issue was for general corporate
purposes and the proceeds were invested initially in mortgage-backed securities.
At June 30, 2004, the balance of the investment portfolio was $1.83 billion. The
investment portfolio is expected to generate approximately $600 million of cash
over the next 12 months.
For the 2004 second quarter, the proportion of loan funding provided by core
deposits - demand deposits, interest-bearing demand deposits, and certificates
of deposit - was 60.54%, compared with 60.20% for the 2003 second quarter and
62.75% for the 2003 fourth quarter.
The Corporation is a guarantor for a portion of two line-of-credit obligations
of affiliate money manager Cramer Rosenthal McGlynn (CRM). The Corporation's
guaranty portion is representative of its ownership interest in CRM, which at
June 30, 2004, was 77.24%. The guaranty is for two lines of credit, at LIBOR
plus 2%, which total $8 million and will expire on December 6, 2004. At June 30,
2004, the balance of these two lines was zero.
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 in a timely and cost-effective
manner, should the need arise. A significant change in the Corporation's
financial performance or credit ratings could reduce the availability of funding
or increase the cost of such funding.
ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION
---------------------------------------------------------
Credit quality was exceptionally strong in the second quarter and first six
months of 2004. Lower levels of net charge-offs, the net charge-off ratio,
nonperforming assets, period-end loans past due 90 days, the loan loss reserve
ratio, and the provision for loan losses
36
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
reflected the high quality of the credit portfolio, as did the higher level of
loans rated pass by management's internal risk rating analysis. The composition
of the loan portfolio remained well diversified and relatively unchanged.
The Corporation makes the vast majority of its loans within the Delaware Valley
region and it rarely makes commercial loans outside of its target client market
of family-owned or closely held businesses. This geographic focus enables
management to remain cognizant of economic and other external factors that may
affect credit quality.
In the 2004 second quarter, credit quality measures were enhanced by recoveries,
which were $900,000 higher than for the second quarter of 2003, and $700,000
higher than for the fourth quarter of 2003. This increase was associated
primarily with a previously charged-off loan to a client in the construction
industry.
In addition, credit quality measures for the 2003 second quarter and year-end
reflected a large credit that was transferred to nonaccruing status at the end
of the 2003 first quarter. This credit was associated with a single client in
the family entertainment business. Portions of this credit were paid down and
charged off during 2003.
Management regards the net charge-off ratio as the true indicator of credit
quality. For the 2004 second quarter, net charge-offs were $1.9 million and the
net charge-off ratio was 3 basis points. Compared with the year-ago second
quarter, this was a decline of $2.5 million and 4 basis points. Compared to the
fourth quarter of 2003, this was a decline of $4.5 million and 7 basis points.
On an annualized basis, the net charge-off ratio at June 30, 2004, was 20 basis
points. This was lower than at this time last year, when the annualized net
charge-off ratio was 28 basis points. For the full-year 2003, the net charge-off
ratio was 27 basis points.
The following table provides six- and 12-month comparisons of changes in net
charge-offs.
NET CHARGE-OFFS FOR THE PERIOD ENDED 2004 Q2 2003 Q4 2003 Q2
------------------------------------ ------- ------- -------
Net charge-off ratio 3 basis points 10 basis points 7 basis points
Net charge-offs $1.9 million $6.4 million $4.4 million
The following table presents six- and 12-month comparisons of other risk
elements of credit risk.
NONPERFORMING ASSETS FOR THE PERIOD ENDED 2004 Q2 2003 Q4 2003 Q2
----------------------------------------- ------- ------- -------
Nonaccruing loans (in millions) $41.8 $45.4 $60.4
Loans past due 90 days or more (in millions) $ 5.0 $ 5.6 $ 7.1
Total (in millions) $46.8 $51.0 $67.5
Percentage of period-end loans 0.72% 0.82% 1.11%
Other real estate owned (in millions) $ 0.2 $ 1.4 $ 3.2
Other real estate owned declined for the fifth consecutive quarter. This was due
to the successful work out during the past 12 months of a Maryland beach resort
residential project that first was classified as OREO in December 2002.
Of the loans past due 90 days or more at June 30, 2004, approximately 69% were
in the commercial loan portfolio; 15% were in the residential mortgage
portfolio; and 16% were consumer loans. At December 31, 2003, the corresponding
ratios were 39%, 37%, and 24%. The corresponding ratios at June 30, 2003, were
68%, 17%, and 15%.
The provision for loan losses reflected the charge-off experience in the second
quarter of 2004. The reserve for loan losses was increased concomitant with the
growth in loan balances. The following table presents six- and 12-month
comparisons of changes in these measures of credit quality.
FOR THE PERIOD ENDED 2004 Q2 2003 Q4 2003 Q2
-------------------- ------- ------- -------
Provision for loan losses (in millions) $ 3.2 $ 5.0 $ 5.9
Reserve for loan losses (in millions) $92.5 $89.9 $87.6
Loan loss reserve ratio 1.43% 1.44% 1.44%
37
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Year to date, the 2004 provision totaled $8.8 million, which was a decline of
$2.0 million from the 2003 year-to-date provision of $10.8 million.
The reserve for loan losses reflects management's best estimate, based on
subjective judgments regarding how collectible loans within the portfolio are,
of known and inherent estimated losses. In calculating the reserve, the
Corporation evaluates micro- and macro-economic factors, historical net loss
experience, delinquency trends, and movements within the internal risk rating
classifications, among other things. Management reassesses the reserve on a
quarterly basis as part of the regular application of the reserve methodology.
The process that is used to calculate the reserve has provided a high degree of
reserve adequacy over an extended period of time, and management believes that
it is sound.
To accommodate growth in loan balances, a portion of the reserve is allocated to
new loans within the parameters of the reserve methodology. At June 30, 2004, in
light of the levels of past due, nonaccruing, and problem loans, management
believed that the reserve for loan losses was a reasonable assessment of
estimated and inherent losses in the loan portfolio. The portion of the reserve
allocated to new loans was relatively unchanged.
At June 30, 2004, approximately $6.1 million, or 6.6%, of the reserve for loan
losses was unallocated. In comparison, approximately $6.1 million, or 6.8%, of
the reserve was unallocated at December 31, 2003. At June 30, 2003,
approximately $6.1 million, or 7.0%, of the reserve was unallocated.
Management's quarterly internal analysis of credits showed that more than 96% of
the loans in the portfolio were rated pass. The percentage of loans with pass
ratings has been higher than 92% since 1998 and higher than 95% since 2000.
The internal analysis has four classifications, which are:
- Pass, which identifies loans with no current potential problems;
- Watchlist, which identifies potential problem credits;
- Substandard, which identifies problem credits with some probability of
loss; and
- Doubtful, which identifies problem credits with a higher probability of
loss.
The definitions of problem and potential problem credits are consistent with the
classifications used by regulatory agencies.
The following table presents six- and 12-month comparisons of changes in the
internal risk rating analysis.
FOR THE PERIOD ENDED 2004 Q2 2003 Q4 2003 Q2
-------------------- ------- ------- -------
Pass 96.24% 95.83% 95.62%
Watchlist 2.19% 2.58% 2.60%
Substandard 1.31% 1.27% 1.23%
Doubtful 0.26% 0.32% 0.55%
To minimize the impact on credit quality of economic and other factors,
management endeavors to maintain a loan portfolio that is well diversified
across commercial and consumer lines and industry sectors. The following table
presents six- and 12-month comparisons of changes in loan portfolio composition.
LOAN PORTFOLIO COMPOSITION FOR THE PERIOD ENDED 2004 Q2 2003 Q4 2003 Q2
----------------------------------------------- ------- ------- -------
Commercial/financial/agricultural 37% 37% 37%
Commercial real estate construction 11% 11% 10%
Commercial mortgage 18% 17% 17%
Residential mortgage 7% 8% 10%
Consumer 18% 17% 17%
Secured by liquid collateral 9% 10% 9%
38
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
Management continually monitors the entire loan portfolio to identify potential
problem loans and to avoid disproportionately high concentrations of loans to
any one borrower or industry sector. Integral parts of this process include a
regular analysis of all past-due loans and the identification of loans that
management doubts will be repaid on a timely basis.
Changes in the regional economy or other external factors could impair the
ability of some borrowers to repay their loans. Such an environment would cause
management to anticipate increases in nonperforming assets, credit losses, and
the provision for loan losses.
At June 30, 2004, management identified approximately $27.2 million of loans
that it doubted would be repaid on a timely basis, even though those loans were
performing in accordance with their terms or were less than 90 days past due.
This compares with $28.5 million of such loans at December 31, 2003, and $30.4
million of such loans at June 30, 2003.
CAPITAL RESOURCES
-----------------
The Corporation's capital continued to increase and its capital ratios continued
to exceed the Federal Reserve Board's minimum guidelines during the first half
of 2004.
The annualized capital generation rate for the first half of 2004 was 8.9%,
compared with an annualized rate of 7.4% for the first half of 2003 and a rate
of 8.7% for the 2003 full year.
Stockholders' equity rose 3.2%, or $25.6 million, to $826.4 million. Between
December 31, 2003, and June 30, 2004, additions to capital included:
- $35.4 million, which reflected earnings of $72.1 million net of $36.7
million in cash dividends;
- $10.0 million from the issue of common stock under employment benefit
plans; and
- $12.9 million in common stock issued in connection with the payment of a
portion of the purchase price for Balentine Delaware Holding Company, LLC,
the Corporation's investment counseling firm.
These additions were offset partially by $32.6 million in reductions, which
consisted of:
- $17.2 million in unrealized losses on securities, net of taxes;
- $15.2 million for the repurchase of shares;
- $0.1 million in foreign currency exchange adjustments;
- a reclassification adjustment of $0.1 million for derivative and
securities gains included in net income, net of income taxes.
During the 2004 second quarter, the Corporation purchased 219,518 shares of its
stock at an average price of $35.44 and a total cost of $7.8 million. Year to
date, 420,421 shares were repurchased at an average price of $36.06 and a total
cost of $15.2 million. Since the current 8-million-share program began in April
2002, 504,790 shares have been bought back at a total cost of $17.6 million.
The Corporation's capital ratios continued to exceed the Federal Reserve Board's
minimum guidelines for both well-capitalized and adequately capitalized
institutions. These guidelines are intended to reflect the varying degrees of
risk associated with different on- and off-balance sheet items. The following
table compares the Corporation's ratios to the guidelines.
ADEQUATELY WELL-
CAPITALIZED CAPITALIZED
CAPITAL RATIO JUNE 30, 2004 DECEMBER 31, 2003 MINIMUM MINIMUM
------------- ------------- ----------------- ----------- -----------
Total risk-based capital 12.55% 12.45% 8% 10%
Tier 1 risk-based capital 7.53% 7.46% 4% 6%
Tier 1 leverage capital 6.30% 6.34% 4% 5%
On April 15, 2004, the Corporation's Board of Directors raised the quarterly
cash dividend from $0.27 to $0.285 per share. This was an increase of 5.6%. The
Corporation has paid cash dividends on its common stock every year since 1908,
paid quarterly cash dividends every year since 1916, and increased the dividend
every year since 1982.
39
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
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.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
----------------------------------------------------------
In its day-to-day operations, the Corporation employs various financial
instruments that generally accepted accounting principles deem to be off-balance
sheet arrangements. Under regulatory guidelines, these instruments are
considered for the purpose of calculating risk-based capital ratios. Some of
these instruments, such as stand-by and performance letters of credit, unfunded
loan commitments, unadvanced lines of credit, and interest rate swaps, do not
appear on the Corporation's balance sheet. Other instruments, such as long-term
debt obligations, are included on the Corporation's balance sheet.
The Corporation employs interest rate swaps so that clients may convert
floating-rate loan payments to fixed-rate loan payments without exposing the
Corporation to interest rate risk. In these arrangements, the Corporation
retains the credit risk associated with the potential failure of
counter-parties. The Corporation also uses interest rate swaps to manage
interest rate risk associated with its issues of long-term subordinated debt.
At June 30, 2004, the Corporation had entered into a total of $988.1 million of
interest rate swaps as follows:
- $306.5 million of swaps were associated with loan clients for whom the
Corporation exchanged floating rates for fixed rates.
- To offset the exposure from changes in the market value of those swaps,
$306.5 million of swaps were made with other financial institutions that
exchanged fixed rates for floating rates.
- $375.0 million of swaps associated with the Corporation's long-term
subordinated debt issues were made with other financial institutions.
The Corporation has two outstanding loans that total $35.5 million from the
Federal Home Loan Bank of Pittsburgh. These funds were used to construct
Wilmington Trust Plaza, the Corporation's operations center in Wilmington,
Delaware, which was completed in 1998.
Many of the Corporation's branch offices in Delaware, and all of its offices
outside Delaware, are leased. Lease commitments, net of sublease arrangements,
for these locations totaled $48.3 million at June 30, 2004.
At June 30, 2004, the Corporation was the guarantor of two obligations of
affiliate money manager Cramer Rosenthal McGlynn (CRM). The guaranty is for
77.24%, which represents the Corporation's current ownership interest in CRM, of
two lines of credit totaling $8 million, which will expire on December 6, 2004.
At June 30, 2004, the liquidity exposure of the Corporation that was associated
with letters of credit, unfunded loan commitments, and unadvanced lines of
credit was $3.07 billion.
The following table summarizes the obligations referenced above and the periods
over which they extend.
MORE
CONTRACTUAL OBLIGATION PAYMENTS LESS THAN 1 - 3 3 - 5 THAN 5
DUE BY PERIOD (in millions) TOTAL 1 YEAR YEARS YEARS YEARS
------------------------------- ------ --------- ----- ----- ------
Long-term debt obligations $578.0 $22.8 $75.8 $198.9 $280.5
Operating lease obligations $ 48.3 $ 6.5 $18.3 $ 14.4 $ 9.1
Guaranty obligations $ 8.0 $ 8.0 -- -- --
Total $634.3 $37.3 $94.1 $213.3 $289.6
The long-term debt obligations in the table above refer to the Corporation's two
outstanding subordinated debt issues and its Federal Home Loan Bank advances.
The first debt issue, in the amount of $125 million, was issued in 1998, is due
in 2008, and was used in the acquisitions of affiliate money managers CRM and
Roxbury Capital Management (RCM). The second debt issue, in the amount of $250
million, was issued in 2003, is due in 2013, and was for general liquidity
purposes. All of these debt issues are included in the "Long-term debt" line of
the Corporation's balance sheet.
40
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
In addition, the acquisition agreements for CRM and RCM permit principal members
and certain key employees of each firm, subject to certain restrictions, to put
their interests in their respective firms to the Corporation. For more
information on these acquisition agreements, please refer to "Note 1" of the
"Notes to Consolidated Financial Statements" in the Corporation's 2003 Annual
Report to Shareholders.
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
-------------------------
Please refer to "Note 10" to the "Consolidated Financial Statements" in this
report for a discussion of the impact of recent accounting pronouncements on the
Corporation's financial condition and results of operations.
Critical accounting policies and estimates
------------------------------------------
Management's discussion and analysis of the Corporation's 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 the related disclosures of contingent assets and liabilities at the date
of the financial statements and during the reporting period. Management
evaluates those estimates on an ongoing basis, including those estimates related
to the reserve for loan losses, stock-based employee compensation, affiliate fee
income, impairment of goodwill, recognition of Corporate Client Services fees,
loan origination fees, and mortgage servicing assets. Management bases its
estimates on historical experience and 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 the
consolidated financial statements and relate to 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 of the reserve is determined by assigning specific
amounts to individually identified problem credits. A general amount is reserved
for all other loans. In evaluating the reserve, management gives specific
consideration to current micro- and macro-economic factors, historical net loss
experience, current delinquency trends, and movement within the internal risk
rating classification system. The methodology 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 the individual
components of the portfolio, and represents probable or inherent losses that
could be caused by certain business conditions not accounted for otherwise.
Typically, business conditions, including current economic and market
conditions, portfolio complexity, payment performance, loan portfolio risk
rating migration, the level of serious doubt loans, litigation impact, and
bankruptcy trends, are the core of the unallocated reserve position. The
determination of the reserve is inherently subjective, and it requires material
estimates, including with respect to the amounts and timing of future cash flows
expected to be received on impaired loans, that may be susceptible to
significant
41
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
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 those determinations, future adjustments to the reserve may be necessary
and results of the Corporation's 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 Accounting Principles Board (APB) Opinion No. 25, rather
than the "fair value" approach prescribed in Statement of Financial Accounting
Standards (SFAS) No. 123. The "intrinsic value" approach limits the compensation
expense to the excess of a stock option's market price on the grant date over
the option's exercise price. 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 contained herein and 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.
The Financial Accounting Standards Board (FASB) is considering such changes,
which were outlined in an exposure draft dated March 31, 2004. Upon their
finalization, the new rules would require that options be expensed beginning in
2005.
Impairment of goodwill: Through a series of acquisitions, the Corporation has
accumulated goodwill with a net carrying value of $268.7 million at June 30,
2004. Through 2001, this goodwill was subject to periodic amortization in
accordance with the provisions of APB No. 17, "Intangible Assets." This
treatment provided for a gradual reduction in the book value of the assets over
their useful lives. Amortization could be changed if later events and
circumstances warranted a revised estimate of the useful lives of the assets.
Additionally, under APB No. 17, estimations of value and future benefits could
indicate that the unamortized cost should be reduced, which would result in a
reduction in net income.
The 2002 adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
eliminated the requirement to amortize goodwill, and substituted impairment
testing in its place. The purpose of impairment testing is to ensure that an
amount presented in the financial statements for goodwill does not exceed its
actual fair value. A methodology that is consistent with how the acquired entity
or business was originally valued is to be utilized in testing for impairment on
an annual basis. If this testing indicates that the fair value of the asset is
less than its book value, an impairment expense must be recorded. There may be
more volatility in reported income than under the previous standard, because
impairment losses are likely to occur irregularly and in varying amounts. A
major portion of the goodwill on the Corporation's books is related to certain
of its affiliate asset manager acquisitions. A decline in the fair value of the
investment in any of these firms could result in an impairment expense.
SUBSEQUENT EVENT
----------------
On July 1, 2004, the Corporation consummated a transaction that accelerated 100%
of the earn-out payments to which the minority owners of Balentine Delaware
Holding Company, LLC (LLC) would have been entitled in 2005, 2006, and 2007.
In addition, in this transaction, the Corporation purchased the remaining
limited liability company interests in the LLC from the minority owners. The
Corporation initially had acquired 80% of the limited liability company
interests in the LLC in 2002. As a result of this transaction, the LLC became a
wholly owned subsidiary of the Corporation. The LLC's financial statements were
already consolidated with those of the Corporation.
Payment for the earn-out was in the form of 967,000 shares of restricted stock
of the Corporation that may not be sold for at least three years. Payment for
the remaining limited liability company interests in the LLC was in the form of
a cash payment made at closing.
42
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
CAUTIONARY STATEMENT
--------------------
Estimates, predictions, opinions, or statements of belief in this report might
be construed to be forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Examples of such statements could
relate to identification of trends, statements about the adequacy of the reserve
for loan losses, credit quality, the impact of FASB pronouncements on the
Corporation, and the effects of asset sensitivity, interest rate changes, and
information concerning market risk described in the "Quantitative and
Qualitative Disclosures About Market Risk" section of this report.
Forward-looking statements are based on current expectations and assessments of
potential developments. 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 the
Corporation's 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
INTEREST RATE SENSITIVITY AND MARKET RISK
-----------------------------------------
Management considers interest rate risk to be the most significant market risk
for the Corporation. Interest rate risk is the exposure to adverse changes in
the Corporation's net income as a result of changes in interest rates, both in
the level of change and in the pace at which it occurs.
Fluctuations in interest rates impact net interest income, which is an important
determinant of 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.
In other words, management's objective is for growth in net interest income to
be generated by changes in loans and deposits, not by changes in market interest
rates. At the same time, management's intent is to prevent market interest rate
changes from reducing net interest income by 10% or more within any 12-month
period.
To assess the Corporation's interest rate risk, management considers a number of
balance sheet risks and market variables, which include:
- the mix of assets, liabilities, and off-balance sheet instruments;
- their respective repricing and maturity characteristics;
- the level of market interest rates; and
- other external factors.
Management uses computer-based modeling to quantify these variables and simulate
their impact on net interest income. The simulations compare multiple interest
rate scenarios against a stable interest rate environment. As a general rule,
the model employs scenarios in which rates gradually move up or down 250 basis
points over a period of 12 months.
One of the external factors that must be taken into consideration is the
inability of certain interest rates to decline further. One such example is the
targeted federal funds rate, which was 1.00% from June 25, 2003, until June 30,
2004, when the Federal Reserve Board raised it to 1.25%.
Given this scenario, management considered a declining scenario of 250 basis
points to be unreasonable, since a decline of that magnitude would create
negative interest rates in the model. Instead, until June 30, 2004, the
declining rate scenario employed a gradual downward move of only 100 basis
points, at which point the federal funds rate would equal zero. Following the
rate increase on June 30, 2004, the declining rate scenario mirrored the change
and employed a gradual downward move of 125 basis points.
The rising rate scenario remained able to accommodate a 250-basis-point upside
move.
43
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
The following table presents how the simulation model projected the impact of
gradual and sustained interest rate changes on net interest income over 12-month
periods beginning June 30, 2004, and December 31, 2003.
IMPACT OF CHANGING INTEREST FOR THE 12 MONTHS BEGINNING FOR THE 12 MONTHS BEGINNING
RATES ON NET INTEREST INCOME 6/30/04 12/31/03
---------------------------- ------- --------
Gradual 250 basis point increase 5.08% 6.14%
Gradual 125 basis point decrease (4.48)% (5.33)%
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 such derivative contracts as
interest rate swaps and interest rate floors.
OTHER RISKS
FINANCIAL MARKET RISK
---------------------
Financial market risk is the risk of exposure to adverse changes in the
Corporation's noninterest income as a result of changes to the economic
valuation of assets which the Corporation manages or holds in custody on behalf
of clients. Such changes in valuation could be driven by the equity markets, the
fixed income markets, or both.
Certain components of the noninterest income from the Wealth Advisory Services
business and the Corporate Client Services business are based on fees that are
tied directly to the market valuation of assets that the Corporation manages or
holds in custody on behalf of clients. Income from the affiliate managers is
based entirely on financial market valuations.
The following table presents changes in the percentage of noninterest income for
the Wealth Advisory and Corporate Client Services businesses that were
associated directly with financial market valuations.
Percentage of noninterest income based on financial market valuations
---------------------------------------------------------------------
FOR THE PERIOD ENDED 2004 Q2 2004 YTD 2003 Q2 2003 YTD
-------------------- ------- -------- ------- --------
Wealth Advisory Services 53.9% 52.3% 52.6% 51.7%
Corporate Client Services 25.5% 25.3% 21.8% 23.2%
For more information about the percentage of noninterest income that is tied to
financial market valuations, please refer to the section on "Noninterest income"
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report.
OPERATIONAL RISK
----------------
Operational risk is the risk of unexpected losses attributable to human error,
systems failures, fraud, or inadequate internal controls and procedures. This
risk is mitigated through a system of internal controls that are designed to
keep operating risk at a level appropriate to the Corporation's standards, in
view of the risks inherent in the markets and businesses in which the
Corporation is engaged.
44
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
The system of internal controls includes policies and procedures that require
the proper authorization, approval, documentation, and monitoring of
transactions. Each business unit is responsible for complying with the
Corporation's policies and applicable regulations, and is responsible for
establishing specific procedures to do so. Each business unit as well as the
Corporation's internal auditors monitors the overall effectiveness of the system
of internal controls on an ongoing basis.
FIDUCIARY RISK
--------------
Fiduciary risk is the risk of loss that may occur if the Corporation were to
breach a fiduciary duty to a client. To limit this risk, the Corporation has
established policies and procedures to reduce the risk that obligations to
clients would not be discharged faithfully or in compliance with applicable
legal and regulatory requirements.
These policies and procedures provide guidance and establish standards related
to the creation, sale, and management of investment products, trade execution,
and counterparty selection. Business units have the primary responsibility for
adhering to the policies and procedures applicable to their businesses.
ITEM 4. CONTROLS AND PROCEDURES
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. The Corporation implemented a new trust accounting system
during the second quarter of 2004. There were no other significant changes in
the Corporation's internal controls during the second quarter of 2004 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 proceedings seek relief or damages in amounts that may
be substantial. Because of the complex nature of some of these proceedings, it
may be a number of years before they ultimately are resolved. While it is not
feasible to predict the outcome of these proceedings, management does not
believe the ultimate resolution of any of them will have a materially adverse
effect on the Corporation's consolidated financial condition. Further,
management believes that some of the claims may be covered by insurance, and has
advised its insurance carriers of the proceedings.
In the second quarter of 2004, the Securities and Exchange Commission reached
settlements with Wilmington Trust Company on two separate matters that took the
form of cease-and-desist orders. In one settlement, which was associated with
the Corporate Client Services business, the Corporation incurred a $125,000
penalty. That order related to certain recordkeeping and reporting requirements
in the registered transfer agent business. The second settlement, which was
associated with the Wealth Advisory Services business, pertained to account
statements provided to a third-party investment adviser for a custody account.
No penalty was assessed for the second settlement.
45
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table shows changes in issuer purchases of equity securities.
(d) Maximum
Number (or
Approximate
(c) Total Number Dollar Value) of
(a) Total (b) of Shares (or Shares (or Units)
Number of Average Units) Purchased that May Yet Be
Shares (or Price Paid as Part of Publicly Purchased Under
Units) per Share (or Announced Plans the Plans or
Period Purchased Unit) or Programs Programs
Month #1
April 1, 2004 -
April 30, 2004 219,518 $ 35.44 219,518 7,495,210
Month #2
May, 1, 2004 -
May 31, 2004 -- -- -- 7,495,210
Month #3
June 1, 2004 -
June 30, 2004 -- -- -- 7,495,210
Total 219,518 $ 35.44 219,518 7,495,210
In April 2002, the Corporation announced a plan to repurchase 8 million shares
of its stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Corporation's Annual Shareholders' Meeting held on April 15, 2004 (the
Annual Meeting), the nominees for directors of the Corporation proposed were
elected. The votes cast for those nominees were as follows:
FOR WITHHELD
Charles S. Crompton Jr. 54,492,566.372 499,214.253
R. Keith Elliott 52,900,819.660 2,090,960.965
Stacey J. Mobley 54,522,873.117 468,907.508
H. Rodney Sharp III 54,512,570.330 479,210.295
46
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
The terms of Carolyn S. Burger, Ted T. Cecala, Richard R. Collins, Robert V.A.
Harra Jr., Rex L. Mears, Hugh E. Miller, David P. Roselle, Thomas P. Sweeney,
and Robert W. Tunnell Jr. continued after the Annual Meeting.
In addition, at the Annual Meeting, the Corporation's shareholders approved the
Corporation's 2004 Employee Stock Purchase Plan. That plan, designed to assist
the Corporation's staff members in becoming shareholders of the Corporation, is
for a term of four years and authorizes the issuance of up to 800,000 shares of
the Corporation's common stock. The vote in favor of that plan was as follows:
FOR AGAINST ABSTAIN
40,128,898.486 1,397,691.199 403,033.940
At the Annual Meeting, the Corporation's shareholders also approved the 2004
Executive Incentive Plan. The plan offers added incentive for the Corporation's
senior executives to achieve targeted performance goals. The vote in favor of
that plan was as follows:
FOR AGAINST ABSTAIN
37,094,508.557 4,147,202.362 687,912.706
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)
10.60 2004 Employee Stock Purchase Plan (3)
10.61 2004 Executive Incentive Plan (3)
10.62 Purchase Agreement dated as of June 30, 2004, among Balentine Holdings,
Inc., Robert M. Balentine, B. Clayton Rolader, Jeffrey P. Adams, Robert
E. Reiser, Jr., Gary B. Martin, Wesley A. French, Michael E. Wolf, The
1999 Balentine Family Trust, The Robert M. Balentine Insurance Trust,
Marcia M. Murray, S. Brittain Ellis Prigge, Dorsey D. Farr, Wilmington
Trust Company as Trustee of the Griffin Trust, Southern Highlands
Reserve, Inc., WT Investments, Inc., and Wilmington Trust Corporation(3)
99.1 Section 302 Certifications(3)
99.2 Section 906 Certification(3)
------------------------------
(1) Incorporated by reference to the corresponding exhibit to the Annual
Report on Form 10-K of Wilmington Trust Corporation filed on March 30,
1996.
(2) Incorporated by reference to the corresponding exhibit to the Annual
Report on Form 10-K of Wilmington Trust Corporation filed on March 27,
2003.
(3) Filed herewith.
The Corporation filed current reports on Form 8-K on April 15, 2004, and April
23, 2004, reporting certain developments under Item 5, and a current report on
Form 8-K on April 16, 2004, under Item 12 reporting its financial condition and
results of operations for the first quarter of 2004.
47
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended June 30, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILMINGTON TRUST CORPORATION
Date: August 9, 2004 /s/ Ted T. Cecala
-----------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and
Chief Executive Officer
(Authorized Officer)
Date: August 9, 2004 /s/ David R. Gibson
-----------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
48