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 MARCH 31, 2005
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________to_____________________
Commission File Number: 1-14659
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WILMINGTON TRUST CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0328154
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
RODNEY SQUARE NORTH, 1100 NORTH MARKET STREET,
WILMINGTON, DELAWARE 19890
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(Address of principal executive offices) (Zip Code)
(302) 651-1000
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(Registrant's telephone number, including area code)
NONE
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
Indicate 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 March 31, 2005
----- --------------------------------
COMMON STOCK - PAR VALUE $1.00 67,530,951
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
FIRST QUARTER 2005 FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Statements of Condition 1
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition
and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures About 41
Market Risk
Item 4 Controls and Procedures 45
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 45
Item 2 Unregistered Sales of Equity Securities and Use 46
of Proceeds
Item 3 Defaults upon Senior Securities 46
Item 4 Submission of Matters to a Vote of Security 46
Holders
Item 5 Other Information 46
Item 6 Exhibits 47
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------------
March 31, December 31,
(in millions) 2005 2004
--------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 158.0 $ 248.6
Federal funds sold and securities purchased ---------------------------
under agreements to resell 131.4 63.3
Investment securities available for sale: ---------------------------
U.S. Treasury and government agencies 452.8 441.3
Obligations of state and political
subdivisions 9.3 9.8
Other securities 1,366.1 1,359.1
--------------------------------------------------------------------------------
Total investment securities
available for sale 1,828.2 1,810.2
Investment securities held to maturity: ---------------------------
Obligations of state and political
subdivisions 2.5 2.6
(market values of $2.7 and $2.8,
respectively)
Other securities (market value of $0.5) 0.5 0.5
--------------------------------------------------------------------------------
Total investment securities held
to maturity 3.0 3.1
Loans: ---------------------------
Commercial, financial, and agricultural 2,519.0 2,505.2
Real estate - construction 821.9 735.4
Mortgage - commercial 1,240.2 1,246.8
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Total commercial loans 4,581.1 4,487.4
---------------------------
Mortgage - residential 428.3 431.3
Consumer 1,255.7 1,239.6
Secured with liquid collateral 594.5 604.7
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Total retail loans 2,278.5 2,275.6
---------------------------
Total loans net of unearned income 6,859.6 6,763.0
Reserve for loan losses (90.4) (89.7)
--------------------------------------------------------------------------------
Net loans 6,769.2 6,673.3
---------------------------
Premises and equipment, net 148.4 150.3
Goodwill, net of accumulated amortization
of $29.8 in 2005 and 2004 336.9 337.0
Other intangible assets, net of accumulated
amortization of $16.3 in 2005 and $15.0 in 2004 42.7 43.8
Accrued interest receivable 42.2 38.3
Other assets 115.4 142.3
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Total assets $9,575.4 $9,510.2
===========================
1
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
---------------------------
March 31, December 31,
(in millions) 2005 2004
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $1,012.4 $1,118.8
Interest-bearing:
Savings 356.5 355.5
Interest-bearing demand 2,366.9 2,442.5
Certificates under $100,000 782.6 765.4
Local CDs $100,000 and over 387.5 305.4
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Total core deposits 4,905.9 4,987.6
National CDs $100,000 and over 1,985.2 1,884.3
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Total deposits 6,891.1 6,871.9
---------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,215.5 1,120.2
U.S. Treasury demand 4.0 37.1
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Total short-term borrowings 1,219.5 1,157.3
---------------------------
Accrued interest payable 31.6 25.6
Other liabilities 121.5 141.4
Long-term debt 400.3 408.6
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Total liabilities 8,664.0 8,604.8
---------------------------
Minority interest 0.2 0.1
---------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 96.7 95.2
Retained earnings 1,036.1 1,015.3
Accumulated other comprehensive loss (39.9) (22.7)
--------------------------------------------------------------------------------
Total contributed capital and
retained earnings 1,171.4 1,166.3
Less: Treasury stock, at cost, 10,997,395
and 11,122,924 shares, respectively (260.2) (261.0)
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Total stockholders' equity 911.2 905.3
---------------------------
Total liabilities and stockholders'
equity $9,575.4 $9,510.2
===========================
See Notes to Consolidated Financial Statements
2
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
----------------------
For the three
months ended
March 31
----------------------
(in millions; except per share data) 2005 2004
--------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $ 94.2 $ 72.9
Interest and dividends on investment securities:
Taxable interest 17.0 16.2
Tax-exempt interest 0.1 0.1
Dividends 1.5 1.8
Interest on federal funds sold and securities
purchased under agreements to resell 0.1 --
--------------------------------------------------------------------------------
Total interest income 112.9 91.0
----------------------
Interest on deposits 23.3 13.2
Interest on short-term borrowings 7.6 3.1
Interest on long-term debt 4.4 2.9
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Total interest expense 35.3 19.2
----------------------
Net interest income 77.6 71.8
Provision for loan losses (3.1) (5.5)
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Net interest income after provision
for loan losses 74.5 66.3
NONINTEREST INCOME ----------------------
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory fees 29.6 26.9
Mutual fund fees 4.8 5.2
Planning and other services 9.1 7.6
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Total Wealth Advisory Services 43.5 39.7
----------------------
Corporate Client Services:
Capital markets services 7.6 7.8
Entity management services 5.9 5.5
Retirement services 3.2 2.8
Cash management services 1.3 1.8
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Total Corporate Client Services 18.0 17.9
----------------------
Cramer Rosenthal McGlynn 4.3 2.1
Roxbury Capital Management 0.3 0.2
--------------------------------------------------------------------------------
Advisory fees 66.1 59.9
Amortization of affiliate other intangibles (1.0) (0.4)
--------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate other intangibles 65.1 59.5
----------------------
Service charges on deposit accounts 6.7 8.2
Loan fees and late charges 1.6 1.6
Card fees 1.9 2.1
Other noninterest income 1.3 1.3
Securities gains 0.8 --
--------------------------------------------------------------------------------
Total noninterest income 77.4 72.7
----------------------
Net interest and noninterest income 151.9 139.0
----------------------
3
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
--------------------------
For the three
months ended
March 31
--------------------------
(in millions; except per share data) 2005 2004
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NONINTEREST EXPENSE
Salaries and wages 32.9 32.4
Incentives and bonuses 8.8 8.3
Employment benefits 12.5 10.9
Net occupancy 5.7 5.3
Furniture, equipment, and supplies 8.4 7.6
Advertising and contributions 2.1 1.6
Servicing and consulting fees 5.4 4.6
Travel, entertainment, and training 1.7 1.7
Originating and processing fees 2.2 2.1
Other noninterest expense 9.6 8.7
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Total noninterest expense 89.3 83.2
--------------------------
NET INCOME
Income before income taxes and minority
interest 62.6 55.8
Income tax expense 22.5 19.8
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Net income before minority interest 40.1 36.0
Minority interest -- 0.3
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Net income $ 40.1 $ 35.7
==========================
Net income per share:
Basic $ 0.59 $ 0.54
==========================
Diluted $ 0.59 $ 0.53
==========================
Weighted average shares outstanding:
Basic 67,480 66,160
Diluted 68,229 67,493
See Notes to Consolidated Financial Statements
4
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
-------------------
For the three
months ended
March 31
(in millions) 2005 2004
--------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 40.1 $ 35.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3.1 5.5
Provision for depreciation and other
amortization 4.9 4.6
Amortization of other intangible assets 1.3 0.7
Minority interest in net income ---- 0.3
Amortization of discounts and premiums on
investment securities available for sale 0.9 3.6
Deferred income taxes ---- 1.5
Originations of residential mortgages available
for sale (21.8) (16.9)
Gross proceeds from sales of residential
mortgages 22.3 17.3
Gains on sales of residential mortgages (0.5) (0.4)
Securities gains (0.8) ----
Income tax benefit realized on employee
exercise of stock options 0.4 0.6
Decrease in other assets 14.4 9.8
Decrease in other liabilities (4.2) (10.3)
--------------------------------------------------------------------------------
Net cash provided by operating activities 60.1 52.0
-------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 26.4 5.5
Proceeds from maturities of investment
securities available for sale 222.8 177.1
Proceeds from maturities of investment
securities held to maturity 0.2 0.1
Purchases of investment securities available for
sale (293.9) (238.3)
Purchases of investment securities held to
maturity (0.1) ----
Purchases of residential mortgages (3.9) ----
Net increase in loans (95.1) (149.9)
Purchases of premises and equipment (3.0) (8.2)
Dispositions of premises and equipment 0.1 4.6
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Net cash used for investing activities (146.5) (209.1)
-------------------
5
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
-------------------
For the three
months ended
March 31
(in millions) 2005 2004
--------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in demand, savings, and interest-bearing
demand deposits (181.0) (49.6)
Net increase in certificates of deposit 200.2 331.3
Net increase in federal funds purchased and securities
sold under agreements to repurchase 95.3 65.0
Net decrease in U.S. Treasury demand (33.1) (29.7)
Net decrease in line of credit ---- (8.0)
Cash dividends (19.3) (17.9)
Distributions to minority shareholders ---- (0.3)
Proceeds from common stock issued under employment benefit
plans, net of income taxes 3.0 4.6
Payments for common stock acquired through buybacks (1.1) (7.4)
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Net cash provided by financing activities 64.0 288.0
-------------------
Effect of foreign currency translation on cash (0.1) 0.1
-------------------
(Decrease)/increase in cash and cash equivalents (22.5) 131.0
Cash and cash equivalents at beginning of period 311.9 214.0
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Cash and cash equivalents at end of period $ 289.4 $ 345.0
===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 29.3 $ 17.9
Income taxes 0.8 7.3
See Notes to Consolidated Financial Statements
6
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 1 - STOCK-BASED COMPENSATION PLANS
At March 31, 2005, we had three types of stock-based compensation plans, which
are described in Note 18, "Stock-based compensation," which begins on page 80 of
our 2004 Annual Report to Shareholders.
We apply Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for these plans.
If compensation cost for our 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,"
our net income would have been as follows:
For the three months ended March 31
(in millions, except per share amounts) 2005 2004
--------------------------------------------------------------------------------
Net income:
As reported $ 40.1 $ 35.7
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects (1.0) (0.8)
--------------------------------------------------------------------------------
Pro forma net income $ 39.1 $ 34.9
Basic earnings per share:
As reported $ 0.59 $ 0.54
Pro forma 0.58 0.53
Diluted earnings per share:
As reported $ 0.59 $ 0.53
Pro forma 0.57 0.52
We made grants of restricted stock to certain employees. We amortize the value
of the award into compensation expense over the applicable vesting period, and
we record forfeitures as they are 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. We recognized expense in
connection with restricted stock awards for the three-month periods ended March
31, 2005, and March 31, 2004, of $0.1 million and $0.0 million, respectively.
NOTE 2 - ACCOUNTING AND REPORTING POLICIES
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) in the United
States, and with practices generally accepted within the banking industry. The
information for interim periods is unaudited. It includes all adjustments that
are of a normal recurring nature which we believe are necessary for fair
presentation.
The accompanying consolidated financial statements include, after elimination of
material intercompany balances and transactions, the accounts of Wilmington
Trust Corporation (Corporation), Wilmington Trust Company (WTC), Wilmington
Trust of Pennsylvania, Wilmington Trust FSB, WT Investments, Inc. (WTI), Rodney
Square Management Corporation, Wilmington Trust (UK) Limited, Balentine Delaware
Holding Company, LLC, GTBA Holdings, Inc., and WTC's subsidiaries. The
preparation of financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. We evaluate these estimates on an ongoing basis,
including those estimates related to the reserve for loan losses, stock-based
employee compensation, affiliate fee income, impairment of goodwill, recognition
of Corporate Client Services fees, loan origination fees, and mortgage servicing
assets. The consolidated financial
7
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
statements presented herein should be read in conjunction with the "Notes to
Consolidated Financial Statements" included in our 2004 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 March 31(in millions) 2005 2004
--------------------------------------------------------------------------------
Net income $ 40.1 $ 35.7
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities (16.6) 7.7
Reclassification adjustment for securities gains included
in net income (0.5) (0.1)
Net unrealized holding gains arising during the period
on derivatives used for cash flow hedge 0.1 0.1
Reclassification adjustment for derivative gains included
in net income (0.1) (0.1)
Foreign currency translation adjustments (0.1) (0.1)
------------------
Total comprehensive income 22.9 $ 43.2
==================
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings
per share:
For the three months ended March 31
(in millions, except per share data) 2005 2004
--------------------------------------------------------------------------------
Numerator:
Net income $ 40.1 $ 35.7
--------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 67.5 66.2
--------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 0.7 1.3
--------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 68.2 67.5
--------------------------------------------------------------------------------
Basic earnings per share $ 0.59 $ 0.54
================================================================================
Diluted earnings per share $ 0.59 $ 0.53
================================================================================
Cash dividends per share $ 0.285 $ 0.27
The number of antidilutive stock options excluded from the calculation of
earnings per share was 1.1 million for the three-month period ended March 31,
2005, compared with 1.0 million for the three-month period ended March 31, 2004.
8
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
NOTE 5 - SEGMENT REPORTING
For the purposes of segment reporting, we discuss our business in four segments.
There is a segment for each of our three businesses, which are Regional Banking,
Wealth Advisory Services, and Corporate Client Services, as well as a segment
for Affiliate Money Managers.
The segment reporting methodology employs activity-based costing principles to
assign corporate overhead expenses to each segment. Funds transfer pricing
concepts are used to credit and charge segments for funds provided and funds
used.
The Regional Banking segment includes lending, deposit-taking, and branch
banking in our primary banking markets of Delaware, southeastern Pennsylvania,
and Maryland. It also includes institutional deposit taking on a national basis.
Lending activities include commercial loans, commercial and residential
mortgages, and construction and consumer loans. Deposit products include demand
checking, certificates of deposit, negotiable order of withdrawal accounts, and
various savings and money market accounts.
The Wealth Advisory Services segment includes financial planning, asset
management, investment counseling, trust services, estate settlement, private
banking, tax preparation, mutual fund services, broker-dealer services,
insurance services, business management services, and family office services.
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.
The Affiliate Money Managers segment represents the contributions from Cramer
Rosenthal McGlynn (CRM) and Roxbury Capital Management (RCM), which are based on
our partial ownership interest in each firm. Services provided by these two
affiliates include fixed-income and equity investing services and investment
portfolio management services. Neither CRM's nor RCM's results are consolidated
in our financial statements.
The accounting policies of the segments are the same as those described in Note
1, "Summary of significant accounting policies," which begins on page 60 of our
2004 Annual Report to Shareholders. We evaluate performance based on profit or
loss from operations before income taxes and without including nonrecurring
gains and losses. We generally record intersegment sales and transfers as if the
sales or transfers were to third parties (e.g., at current market prices). We
report profit or loss from infrequent events, such as the sale of a business,
separately for each segment.
9
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
The following tables present financial data by segment for the quarters ended
March 31, 2005, and March 31, 2004.
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended March 31, 2005 (in millions) Banking Services Services Managers Totals
------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 71.4 $ 5.5 $ 2.8 $ (2.1) $ 77.6
Provision for loan losses (2.8) (0.3) -- -- (3.1)
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 68.6 5.2 2.8 (2.1) 74.5
Total advisory fees:
Wealth Advisory Services 0.4 40.9 2.2 -- 43.5
Corporate Client Services 0.2 -- 17.8 -- 18.0
Affiliate Money Managers -- -- -- 4.6 4.6
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Advisory fees 0.6 40.9 20.0 4.6 66.1
Amortization of other intangibles -- (0.8) (0.1) (0.1) (1.0)
------------------------------------------------------------------------------------------------------------------------------------
Advisory fees after
amortization of other intangibles 0.6 40.1 19.9 4.5 65.1
Other noninterest income 10.9 0.3 0.3 -- 11.5
Securities gains 0.8 -- -- -- 0.8
------------------------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 80.9 45.6 23.0 2.4 151.9
Noninterest expense (35.7) (36.3) (17.3) -- (89.3)
------------------------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes 45.2 9.3 5.7 2.4 62.6
Applicable income taxes and minority interest 16.1 3.2 2.1 1.1 22.5
------------------------------------------------------------------------------------------------------------------------------------
Segment net income $ 29.1 $ 6.1 $ 3.6 $ 1.3 $ 40.1
====================================================================================================================================
Depreciation and amortization $ 3.4 $ 2.3 $ 1.2 $ 0.2 $ 7.1
Investment in equity method investees -- -- -- 257.7 257.7
Segment average assets 7,720.6 1,290.5 196.1 262.2 9,469.4
10
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
Wealth Corporate Affiliate
Regional Advisory Client Money
Quarter ended March 31, 2004 (in millions) Banking Services Services Managers Totals
------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 63.9 $ 6.7 $ 2.6 $ (1.4) $ 71.8
Provision for loan losses (5.3) (0.2) -- -- (5.5)
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 58.6 6.5 2.6 (1.4) 66.3
Total advisory fees:
Wealth Advisory Services 0.5 36.7 2.5 -- 39.7
Corporate Client Services 0.3 -- 17.6 -- 17.9
Affiliate Money Managers -- -- -- 2.3 2.3
------------------------------------------------------------------------------------------------------------------------------------
Advisory fees 0.8 36.7 20.1 2.3 59.9
Amortization of other intangibles -- (0.2) (0.2) -- (0.4)
------------------------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of other intangibles 0.8 36.5 19.9 2.3 59.5
Other noninterest income 12.5 0.3 0.4 -- 13.2
------------------------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 71.9 43.3 22.9 0.9 139.0
Noninterest expense (34.4) (33.4) (15.4) -- (83.2)
------------------------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes 37.5 9.9 7.5 0.9 55.8
Applicable income taxes and minority interest 13.1 3.8 2.8 0.4 20.1
------------------------------------------------------------------------------------------------------------------------------------
Segment net income $ 24.4 $ 6.1 $ 4.7 $ 0.5 $ 35.7
====================================================================================================================================
Depreciation and amortization $ 5.5 $ 1.9 $ 1.4 $ 0.1 $ 8.9
Investment in equity method investees -- -- -- 242.2 242.2
Segment average assets 7,310.9 1,153.6 207.7 242.9 8,915.1
Segment data for prior periods may differ from previously published figures due
to changes in reporting methodology and/or organizational structure.
NOTE 6 - DERIVATIVE AND HEDGING ACTIVITIES
We enter into interest rate swap and interest rate floor contracts to manage
interest rate risk and to reduce the impact of fluctuations in interest rates of
identifiable asset categories, principally floating-rate commercial loans and
commercial mortgage loans. We also have used interest rate swaps in conjunction
with our subordinated long-term debt issues.
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts. Floors are contracts that generate interest payments to us
that are based on the difference between the floating-rate index and a
predetermined strike rate of the specific floor when the index is below the
strike rate. When the index is equal to or above the strike rate, we do not
receive or make any payments.
We employ interest rate swaps so that clients may convert floating-rate loan
payments to fixed-rate loan payments without exposing us to interest rate risk.
In these arrangements, we retain the credit risk associated with the potential
failure of counter-parties.
At March 31, 2005, we had entered into a total of $1,039.4 million notional
amount of interest rate swaps as follows:
- $332.2 million of swaps were associated with loan clients for whom we
exchanged floating rates for fixed rates.
- To offset the exposure from changes in the market value of those swaps,
$332.2 million of swaps were made with other financial institutions that
exchanged fixed rates for floating rates.
11
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
- $375.0 million of swaps associated with our long-term subordinated debt
issues were made with other financial institutions.
Changes in the fair value that are determined to be ineffective are 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 first quarter of 2005, approximately $77,100 of gains resulting from the
sale of floors in 2001 in "Accumulated other comprehensive income" was
reclassified to earnings. During the remainder of 2005 we expect to reclassify
approximately $103,864 of gains in "Accumulated other comprehensive income" to
earnings. This amortization period ends in August 2005.
We do 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:
March 31, 2005 December 31, 2004
----------------------------------------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount amortization amount amount amortization amount
------------------------------------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $366.7 $ 29.8 $336.9 $366.8 $ 29.8 $337.0
Other intangibles ===============================================================================
Amortizing:
Mortgage servicing rights $ 8.4 $ 5.2 $ 3.2 $ 8.0 $ 4.9 $ 3.1
Client lists 43.0 8.7 34.3 43.2 7.7 35.5
Acquisition costs 1.7 1.7 -- 1.7 1.7 --
Other intangibles 0.7 0.7 -- 0.7 0.7 --
Nonamortizing
Other intangible assets 5.2 -- 5.2 5.2 -- 5.2
------------------------------------------------------------------------------------------------------------------------------------
Total other intangibles $ 59.0 $ 16.3 $ 42.7 $ 58.8 $ 15.0 $ 43.8
===============================================================================
Amortization expense of other intangible assets for the three months ended March
31 is as follows:
For the three months ended March 31 (in millions) 2005 2004
--------------------------------------------------------------------------------
Amortization expense $ 1.3 $ 0.7
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, 2006 $ 4.9
For the year ended December 31, 2007 4.6
For the year ended December 31, 2008 3.4
For the year ended December 31, 2009 3.2
For the year ended December 31, 2010 2.8
12
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
The changes in the carrying amount of goodwill for the three months ended March
31 are as follows:
2005
---------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(in millions) Banking Services Services Managers Total
------------------------------------------------------------------------------------------------
Balance as of January 1, 2005 $ 3.8 $ 84.3 $ 10.3 $ 238.6 $337.0
Decrease in carrying value due to foreign
currency translation adjustments -- -- (0.1) -- (0.1)
------------------------------------------------------------------------------------------------
Balance as of March 31, 2005 $ 3.8 $ 84.3 $ 10.2 $ 238.6 $336.9
====================================================
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 -- 12.7 -- -- 12.7
Increase in carrying value due to foreign
currency translation adjustments -- -- 0.1 -- 0.1
------------------------------------------------------------------------------------------------
Balance as of March 31, 2004 $ 3.8 $ 17.1 $ 7.9 $ 227.2 $256.0
====================================================
The goodwill acquired in 2004 consists of $12.7 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.
The following table lists other intangible assets acquired during the three
months ended March 31.
2005 2004
-----------------------------------------------------------------------
Weighted Weighted
average average
amortization amortization
Amount Residual period Amount Residual period
(in millions) assigned value in years assigned value in years
------------------------------------------------------------------------------------------------------
Mortgage servicing rights $ 0.3 -- 8 $ 0.1 -- 8
Client list (decrease)/
increase in carrying value
due to foreign currency
translation adjustments (0.1) -- 0.1 --
------------------- -------------------
$ 0.2 -- $ 0.2 --
=================== ===================
13
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
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 months ended March 31, 2005, and 2004. Descriptions of these plans
are contained in Note 17, "Pension and other postretirement benefits," which
begins on page 77 of our Annual Report to Shareholders for 2004.
Pension benefits SERP benefits Postretirement benefits
--------------------------------------------------------------------------
For the three months ended
March 31, (in millions) 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 1.8 $ 1.6 $ 0.2 $ 0.1 $ 0.2 $ 0.3
Interest cost 2.6 2.1 0.3 0.3 0.6 0.6
Expected return on plan assets (3.1) (2.8) -- -- -- --
Amortization of transition
obligation/(asset) -- (0.2) -- -- -- --
Amortization of prior service cost 0.2 0.2 0.1 0.1 -- --
Recognized actuarial (gain)/loss 0.4 0.2 0.1 0.1 0.1 0.2
---------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1.9 $ 1.1 $ 0.7 $ 0.6 $ 0.9 $ 1.1
==========================================================================
Employer contributions $ -- $ -- $ 0.1 $ 0.1 $ 1.0 $ 1.0
Expected annual contribution $ -- $ 0.6 $ 4.1
We sponsor a postretirement health care plan that provides a prescription drug
benefit. The Medicare Prescription Drug Improvement and Modernization Act of
2003 provides a subsidy for such prescription drug benefits. In the fourth
quarter of 2004, these costs were reduced by $0.9 million to reflect the
adoption of these provisions.
NOTE 9 - TEMPORARILY IMPAIRED INVESTMENT SECURITIES
At March 31, 2005, we held positions in temporarily impaired securities with a
market value of $1,482.0 million and unrealized losses of $34.9 million. The
amount of unrealized losses reflects the rise in interest rates across all
sectors of investments. We continue to retain these securities in our portfolio
because they have known maturities and no credit delinquencies, and they
generate strong cashflows. 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 March 31, 2005
Other securities:
U.S. Treasury and
government agencies $ 422.7 $ (6.9) $ -- $ -- $ 422.7 $ (6.9)
Preferred stock 40.2 (0.6) 0.9 (0.1) 41.1 (0.7)
Mortgage--backed securities 643.0 (14.0) 279.6 (12.3) 922.6 (26.3)
Other debt securities 68.9 (0.6) 26.7 (0.4) 95.6 (1.0)
----------------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $ 1,174.8 $ (22.1) $ 307.2 $ (12.8) $ 1,482.0 $ (34.9)
==========================================================================
14
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
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,
whether it 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 us to review our degree
of involvement in an entity to determine if we should consolidate the entity or
make disclosures about our level of involvement in the entity. We must apply FIN
46R to entities considered to be special purpose entities for periods ending
after March 31, 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. 123 (revised): On December 17, 2004, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised), "Share-Based Payment,"
which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation."
The new pronouncement is similar in approach to Statement No. 123, but it
requires us to recognize the fair value of all share-based payments to employees
in our financial statements. Based on an April 14, 2005, pronouncement by the
Securities and Exchange Commission (SEC), this Statement will be effective for
us beginning in the first quarter of 2006, and will cause us to record
additional expense in our income statement. We expect the annual cost of SFAS
No. 123 (revised) to approximate the pro forma amounts shown in Note 1,
"Stock-based compensation plans." We currently use the "intrinsic value"
approach to accounting for stock-based compensation as permitted under APB
Opinion No. 25. We have adopted the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," and have
reported the pro forma impact of this Statement in Note 1 of these financial
statements.
SFAS No. 150: In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement established standards for how an issuer would treat financial
instruments with the characteristics of both liabilities and equity. This
Statement was effective for the first interim period ending after June 15, 2003.
The adoption of this Statement did not have an impact on our consolidated
earnings, financial condition, or equity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPANY OVERVIEW
Wilmington Trust Corporation (the Corporation) is (we are) a Delaware
corporation and a financial holding company under the Bank Holding Company Act.
We are a relationship management company that helps clients increase and
preserve their wealth. We do this by engaging in fiduciary, wealth management,
investment advisory, financial planning, insurance, broker-dealer services,
lending, and deposit-taking activities.
We manage our company through three businesses, each of which targets specific
types of clients, provides different kinds of services, and has a different
geographic scope:
- Regional Banking throughout the Delaware Valley region, which we define as
the state of Delaware; areas that are geographically adjacent to Delaware
along the I-95 corridor from Princeton, New Jersey, to Baltimore,
Maryland; and Maryland's Eastern Shore. We offer commercial banking
services throughout this region to family-owned or closely held businesses
with annual sales of up to $250 million. We target our retail banking
activities to clients in the state of Delaware.
Our lending services include commercial loans, commercial and residential
mortgages, and construction and consumer loans. Our deposit products
include demand checking, certificates of deposit, negotiable order of
withdrawal accounts, and various savings and money market accounts.
15
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
- Corporate Client Services, which serves national and multinational
institutions with a variety of trust, custody, and administrative services
that support capital markets transactions, entity management, and
retirement plans.
- Wealth Advisory Services, which serves high-net-worth clients in all 50
states. This business offers financial planning, asset management,
investment counseling, trust services, estate settlement, private banking,
tax preparation, mutual fund services, broker-dealer services, insurance
services, business management services, and family office services.
Because we actively seek to deepen our client relationships to the fullest
extent possible, many of our clients use services from two and, in some cases,
all three of these businesses.
We provide our services through various legal entities and subsidiaries that we
own wholly or in part. Our primary wholly owned subsidiary is Wilmington Trust
Company (WTC), a Delaware-chartered bank and trust company that was formed in
1903. At March 31, 2005, WTC had 44 branch offices in Delaware.
We own two other depository institutions through which we conduct business in
the United States outside of Delaware:
- Wilmington Trust of Pennsylvania (WTPA), a Pennsylvania-chartered bank and
trust company. WTPA has four offices: one each in center city
Philadelphia, Doylestown, Villanova, and West Chester, Pennsylvania.
- Wilmington Trust FSB (WTFSB), a federally chartered savings bank and
registered investment advisor, through which we conduct business from two
offices in California, four offices in Florida, two offices in Maryland,
and one office each in Georgia, Nevada, New Jersey, and New York.
We also own two other registered investment advisors:
- Rodney Square Management Corporation (RSMC), which oversees the Wilmington
family of mutual funds; and
- Wilmington Trust Investment Management, LLC (WTIM), which sets our
investment and asset allocation policies, and selects the independent
asset managers we use in our investment consulting services. WTIM was
known as Balentine & Company, LLC, prior to January 2005.
We also own three investment holding companies:
- WT Investments, Inc. (WTI), which holds interests in four asset management
firms, including our money manager affiliates, Cramer Rosenthal
McGlynn, LLC (CRM) and Roxbury Capital Management, LLC (RCM);
- Wilmington Trust (UK) Limited (WTL), through which we conduct business
outside the United States through SPV Management and its subsidiaries; and
- GTBA Holdings, Inc. (GTBAH), through which we offer business management
and family office services for high-net-worth clients through GTBAH's
subsidiary, Grant Tani Barash & Altman, LLC (GTBA).
In addition to the locations noted above, we and our affiliates have offices in
the Cayman Islands, the Channel Islands, Dublin, Ireland, and London, England,
and other affiliates in Milan, Italy.
We compete for deposits, loans, assets under management, and the opportunity to
provide trust, brokerage, and other services related to financial planning and
management. Our competitors include other trust companies, full-service banks,
deposit-taking institutions, mortgage lenders, credit card issuers, credit
acceptance corporations, securities dealers, asset managers, investment
advisors, mutual fund companies, insurance companies, and other financial
institutions.
We are subject to the regulations of, and undergo periodic examinations by, the
Federal Reserve Bank, Federal Deposit Insurance Corporation, Office of Thrift
Supervision, Delaware Department of Banking, Pennsylvania Department of Banking,
and other federal and state regulatory agencies.
16
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
When we discuss our businesses, we report income and assets from CRM and RCM
separately. For meeting the requirements of segment reporting, we combine
results from CRM and RCM into one segment. For more information about segment
reporting, please refer to Note 5, "Segment reporting," on page 9 of this
report.
SUMMARY OF RESULTS FOR THE 3 MONTHS ENDED MARCH 31, 2005
Net income for the first quarter of 2005 was $40.1 million. This was 12.3% more
than for the year-ago first quarter. Earnings per share, on a diluted basis,
were $0.59, which was 11.3% higher.
Factors in the results were:
- Continued loan growth, rising interest rates, a healthy Delaware Valley
economy, and superior credit quality;
- Double-digit growth in core Wealth Advisory investment management revenue;
- Record-high results from CRM; and
- A slower pace of growth in operating expenses.
Specific highlights of the 2005 first quarter included:
- Loan balances that were $6.77 billion, on average, which was 7.3% higher
than for the year-ago first quarter;
- A net interest margin of 3.64%, which was 11 basis points higher than for
the year-ago first quarter and 5 basis points higher than for the 2004
fourth quarter;
- Net charge-offs of 4 basis points and an internal rating of "pass" for
more than 96% of the loan portfolio;
- Net interest income of $77.6 million, which was 8.1% more than for the
year-ago first quarter;
- A 6.5% increase in noninterest income to $77.4 million;
- Advisory business revenue of $66.1 million, a 10.4% increase from the
year-ago first quarter;
- Operating expenses of $89.3 million, a 7.3% increase from the year-ago
first quarter, but a decrease of 2.4% from the 2004 fourth quarter; and
- Improvement in the returns on assets and equity.
On an annualized basis, first quarter 2005 results generated a return on average
assets of 1.72% and a return on average stockholders' equity of 17.80%. The
corresponding returns for the first quarter of 2004 were 1.61% and 17.69%,
respectively.
On April 21, 2005, the Board of Directors raised the quarterly cash dividend by
5.3%, from $0.285 to $0.30 per share. On an annualized basis, this increased the
dividend from $1.14 to $1.20.
This action marked the 24th consecutive year of increases in the cash dividend.
According to Mergent, Inc.'s Dividend Achievers, fewer than 3% of the
dividend-paying companies that trade on U.S. exchanges have increased their
dividend for 20 or more consecutive years.
STATEMENT OF CONDITION
This section discusses changes in the balance sheet for the period between
December 31, 2004, and March 31, 2005. All balances referenced in this section
are period-end balances unless otherwise noted.
ASSETS
Assets totaled $9.58 billion at March 31, 2005, a slight increase from the $9.51
billion recorded at the end of 2004. Earning assets were $8.82 billion, compared
with $8.64 billion at year-end 2004. Contributing to the increase were loan
growth, a slightly larger investment securities portfolio, and an increase in
the amount of federal funds sold and
17
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
securities purchased under agreements to resell (federal funds sold). The
increase in federal funds sold reflected our investment of cash inflows that
occurred toward the end of the quarter.
INVESTMENT SECURITIES
At March 31, 2005, the investment portfolio balance was $1.83 billion, slightly
more than the $1.81 billion recorded at December 31, 2004. On average, the
portfolio was $1.84 billion for the 2005 first quarter, which was slightly less
than the $1.85 billion average for the 2004 fourth quarter.
On a percentage basis, the composition of assets within the investment portfolio
remained relatively unchanged, as the following table shows.
--------------------------------------------------------------------------------
COMPOSITION AT PERIOD-END 2005 Q1 2004 Q4 2004 Q1
--------------------------------------------------------------------------------
Mortgage-backed securities 33% 34% 37%
--------------------------------------------------------------------------------
Collateralized mortgage obligations 19% 17% 16%
--------------------------------------------------------------------------------
U.S. treasuries 7% 8% 11%
--------------------------------------------------------------------------------
Corporate issues 15% 16% 14%
--------------------------------------------------------------------------------
U.S. government agencies 18% 17% 13%
--------------------------------------------------------------------------------
Money market preferred stocks 5% 5% 7%
--------------------------------------------------------------------------------
Municipal bonds 1% 1% 1%
--------------------------------------------------------------------------------
Other 2% 2% 1%
--------------------------------------------------------------------------------
Of the mortgage-backed securities held in the portfolio at March 31, 2005,
approximately 99% were invested in fixed-rate instruments with terms of 15 years
or less. We believe we can manage duration and risk more efficiently by
investing in mortgage-related instruments than by retaining individual
residential mortgage loans on our balance sheet.
At March 31, 2005, the average life of mortgage-backed instruments in the
investment portfolio was 4.22 years, and the duration was 4.02. The
corresponding life and duration at December 31, 2004, were 3.96 years and 3.72,
respectively.
For the portfolio in full, the average life was 6.42 years at March 31, 2005,
and the duration was 3.07. In comparison, at December 31, 2004, the average life
was 6.41 years and the duration was 2.66.
The changes in average life and duration reflected our assumption that, due to
rising interest rates, certain callable agency securities will be held to
maturity. Also, we sold certain amortizing mortgage-backed instruments that had
small remaining balances, and replaced them with higher-yielding securities.
This action contributed to the increase in duration.
LOAN BALANCES
The first quarter of 2005 marked the 16th consecutive quarter of loan growth.
Period-end loan balances rose 1.4%, totaled $6.86 billion, and accounted for
77.8% of earning assets.
On average, loan balances for the 2005 first quarter were $6.77 billion. This
was 2.2% more than loan balance averages for the 2004 fourth quarter. First
quarter 2005 loans, on average, accounted for 78.4% of first quarter 2005
earning assets, on average, which were $8.63 billion. We regard average balances
for a period, rather than period-end balances, as the more accurate indicator of
trends in our Regional Banking business.
The loan growth resulted mainly from business development with new and existing
clients throughout Delaware and southeastern Pennsylvania. Loans from the
Pennsylvania market were $1.44 billion, on average, and represented
18
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
approximately 21% of the total first quarter 2005 loan portfolio, on average. In
comparison, Pennsylvania market loans were $1.41 billion, on average, for 2004,
and accounted for approximately 22% of the total portfolio, on average.
The growth in loan balances was, in part, a reflection of the Delaware Valley
economy, which is well diversified. Economic indicators remained positive, as
the following statistics attest:
- The unemployment rate was 4.3% in Delaware and 4.7% for the Philadelphia
metropolitan area, compared with the national rate of 5.1%.
- The Federal Reserve Bank of Philadelphia released Economic Activity
Indexes for Delaware, New Jersey, and Pennsylvania that reported increases
in economic activity in all three states over the past 12 months (as of
February 2005, the most recent report available).
- The U.S. Bureau of Economic Analysis reported that Delaware had the 10th
highest rate of growth in personal income in the United States for the
fourth quarter of 2004.
- According to the U.S. Census Bureau, Delaware is the seventh
fastest-growing state in the nation, and fifth most popular for attracting
residents aged 65 and older.
COMMERCIAL LOANS
Commercial lending accounted for $93.7 million of the total first quarter loan
growth of $96.6 million, bringing commercial loan balances at March 31, 2005, to
$4.58 billion. This was 2.1% higher than at the end of 2004.
On average, commercial loans for the first quarter of 2005 were $4.51 billion, a
3.1% increase from the fourth quarter of 2004. The Pennsylvania market generated
approximately 29% of the total growth in commercial loans, on average.
Commercial real estate/construction lending accounted for more than 92% of the
first quarter growth in total commercial loans on a period-end basis, but only
8% of the growth on an average-balance basis. Almost all of the commercial real
estate/construction growth occurred in Delaware, where population growth in the
southern part of the state continued to drive demand for residential tract
housing and related retail development.
Commercial and industrial (C&I) lending (reported as commercial, financial, and
agricultural loans) comprised just under 15% of the total commercial loan growth
on a period-end basis, but nearly 78% of the growth on an average-balance basis.
Contributing to the growth in C&I balances were transportation companies and
suppliers of building and infrastructure materials, whose borrowings were for
working capital and new equipment.
RETAIL LOANS
Retail loan balances at March 31, 2005, were $2.28 billion. This increase showed
a $16.1 million improvement in consumer lending, opposite declines of $3.0
million in residential mortgage balances, and $10.2 million in loans secured
with liquid collateral.
On an average-balance basis, retail loans were $2.26 billion for the 2005 first
quarter, a slight increase from the 2004 fourth quarter. This change also
reflected growth in consumer loans opposite declines in the balances of
residential mortgages and loans secured with liquid collateral.
Residential mortgage balances declined because of prepayments and refinancings,
and our ongoing practice of selling all new fixed-rate residential mortgage
production into the secondary market. As noted earlier, we prefer to manage
mortgage-related risk in our investment portfolio, instead of by retaining
individual residential mortgage loans as assets.
Loans secured with liquid collateral are associated primarily with Wealth
Advisory Clients throughout the United States. Changes in these balances reflect
client demand.
19
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
CONSUMER LOANS
Consumer balances were $1.26 billion at March 31, 2005, compared with $1.24
billion at December 31, 2004. On average, consumer balances were $1.23 billion
for the 2005 first quarter, compared with $1.20 billion for the 2004 fourth
quarter.
--------------------------------------------------------------------------------
CONSUMER LOANS, ON AVERAGE (IN MILLIONS) 2005 Q1 2004 Q4 CHANGE
--------------------------------------------------------------------------------
Home equity $ 309.8 $ 294.8 5.1%
--------------------------------------------------------------------------------
Indirect $ 553.1 $ 544.4 1.6%
--------------------------------------------------------------------------------
Credit card $ 128.4 $ 120.6 6.5%
--------------------------------------------------------------------------------
Other consumer $ 243.3 $ 242.6 0.3%
--------------------------------------------------------------------------------
Total $1,234.6 $1,202.4 2.7%
--------------------------------------------------------------------------------
Within the consumer portfolio, most of the growth was in home equity and
indirect lending (loans made to clients through dealers). Most of the indirect
loans are for late-model used cars, and they typically have shorter terms, but
higher yields, than new car loans. The sales office we opened in October 2004 in
Bel Air, Maryland, which is midway between Wilmington and Baltimore, contributed
to the growth in indirect auto lending.
RESERVE FOR LOAN LOSSES
The reserve for loan losses increased from $89.7 million at December 31, 2004,
to $90.4 million at March 31, 2005. The reserve level was influenced by
continued growth in loan balances and strength in credit quality.
The loan loss reserve ratio at March 31, 2005, was 1.32%, which was 1 basis
point lower than at December 31, 2004. The reserve ratio reflected the low net
charge-off ratio, an internal risk rating of "pass" for more than 96% of the
loan portfolio, and the amount of the provision for loan losses, which declined
mainly because approximately $1.1 million was recovered during the 2005 first
quarter on a loan that previously had been charged-off.
For more information about credit quality, please refer to the "Asset Quality"
section of this report.
LIABILITIES
Total liabilities increased slightly from December 31, 2004, and reached $8.66
billion. Most of the increase resulted from short-term borrowings that we made
to fund loan growth.
DEPOSIT BALANCES AND SHORT-TERM BORROWINGS
As a general rule, changes in deposit balances suggest several things:
- Core deposits, including local CDs $100,000 and over, indicate trends in
commercial deposit gathering throughout the Delaware Valley region, and in
consumer deposit gathering, which is concentrated in Delaware. Core
deposits represent balances that are driven by our Regional Banking
clients.
- We consider core deposit balances on average, rather than period-end, as
the more accurate indicator of trends in our Regional Banking business.
- Differences between the period-end and average balances of
noninterest-bearing demand deposits typically reflect activity associated
with Corporate Client Services clients. It is not unusual for these
clients to deposit funds with us for a short duration, particularly over
period-ends.
- National certificates of deposit (national CDs) of $100,000 and over
represent funds we purchase. We manage these balances, and they are not
related to client activity. We use national CDs as well as short-term
borrowings to augment core deposit levels, if needed, to support growth in
earning assets.
20
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
At March 31, 2005, total deposits were $6.89 billion. On average, they were
$6.77 billion for the 2005 first quarter. These amounts were slight increases
from December 31, 2004, and the 2004 fourth quarter, respectively.
Core deposits accounted for more than 71% of total period-end first quarter
deposits, and amounted to $4.91 billion. On average, core deposits were $4.83
billion for the 2005 first quarter, and likewise constituted more than 71% of
total deposits, on average, for the first quarter. Almost all - approximately
94% - of core deposit balances, on average, for the 2005 first quarter were
associated with Regional Banking clients in Delaware.
Within core deposits, the balances of local CDs $100,000 and over increased
substantially, on both a period-end and average-balance basis. These deposits
were associated entirely with client activity. Of the $370.1 million, on
average, in these CD balances for the 2005 first quarter:
- Approximately 60% were consumer deposits from clients in Delaware;
- Approximately 20% came from commercial banking depositors throughout the
Delaware Valley region;
- Approximately 18% was associated with Wealth Advisory clients; and
- Approximately 2% was associated with Corporate Client Services clients.
National CDs and short-term borrowings augmented first quarter growth in earning
assets, and their balances were 5.4% higher than at December 31, 2004. On an
average-balance basis, the use of national CDs declined 3.8% while the use of
short-term borrowings rose 8.4%. Decisions on whether to use national CDs or
short-term borrowings typically are made based on the most favorable rate.
While the cost of purchased funding exceeded the rate paid on core
interest-bearing deposits, we use this funding strategy because it minimizes the
growth of annual operating expenses as well as the capital investments that
would be associated with a large-scale expansion of our branch office network.
For more information about our funding, please refer to the "Liquidity" section
of this report.
STOCKHOLDERS' EQUITY
At March 31, 2005, stockholders' equity was $911.2 million. This was $5.9
million more than at year-end 2004. On average, stockholders' equity for the
2005 first quarter was $913.6 million, which was 2.2% more than the $894.3
million recorded for the fourth quarter of 2004. For more information about the
changes in stockholders' equity, please refer to the "Capital Resources" section
of this report.
INCOME STATEMENT
This section compares our income and expenses for the first quarter of 2005 with
those of the first quarter of 2004.
Net income for the first quarter of 2005 rose 12.3% to $40.1 million. Earnings
per share (on a diluted basis) increased 11.3% to $0.59.
The main factors in the net income growth were:
- Higher amounts of net interest income, due to loan growth, rising interest
rates, and superior credit quality;
- An 11-basis-point improvement in the net interest margin;
- Double-digit growth in advisory income; and
- Well-managed expenses.
The percentage growth was higher for net income than for earnings per share
because the number of shares outstanding was 740,000 higher. The number of
shares outstanding increased mainly because we issued stock during the 2004
third quarter to accelerate the original terms of the acquisition of the firm
formerly known as Balentine &
21
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
Company. For more information about this transaction, please refer to the
section on "Wilmington Trust Investment Management" in Note 3, "Affiliates and
acquisitions," in our 2004 Annual Report to Shareholders.
SOURCES OF INCOME
We generate two types of revenue:
- Net interest income. This revenue is the difference between the interest
revenue we receive on earning assets, such as loans and investments, and
the interest expense we pay on liabilities, such as deposits and
short-term borrowings. Net interest income is generated primarily by
banking and funding activities.
- Noninterest income. This revenue consists primarily of income from the
advisory businesses, which comprise Wealth Advisory Services, Corporate
Client Services, and the two affiliate money managers, Cramer Rosenthal
McGlynn and Roxbury Capital Management. Noninterest income also includes
service charges on deposit accounts, loan fees and late charges, card
fees, securities gains (or losses), and other noninterest income.
These two sources of revenue generate a diversified stream of income that
enables us to deliver consistent profitability and growth, with low volatility,
in a variety of economic conditions.
The table below shows changes in the mix between net interest and noninterest
income. It demonstrates that:
- Our sources of income are diversified and balanced.
- Our advisory businesses generate most of our noninterest income.
PERCENTAGE CONTRIBUTION OF COMBINED NET INTEREST AND NONINTEREST INCOME
--------------------------------------------------------------------------------
INCOME (IN MILLIONS) FOR THE PERIOD ENDED 2005 Q1 2004 Q1
--------------------------------------------------------------------------------
Advisory income (after amortization) 42.9% 42.8%
--------------------------------------------------------------------------------
Total noninterest income 51.0% 52.3%
--------------------------------------------------------------------------------
Net interest income (after provision for loan losses) 49.0% 47.7%
--------------------------------------------------------------------------------
NET INTEREST INCOME AND THE NET INTEREST MARGIN
Net interest income, before the provision for loan losses, was $77.6 million, an
increase of 8.1% from the first quarter of 2004. After the provision for loan
losses, net interest income amounted to $74.5 million, which was a 12.4%
increase. Loan growth, credit quality, and rising interest rates were factors in
these increases.
Loan balances, on a period-end as well as average-balance basis, were more than
7% higher than their year-ago levels. The provision for loan losses was $2.4
million lower, as net charge-offs were 3 basis points lower, the percentage of
loans rated "pass" in our internal risk rating system exceeded 96% for the
fourth consecutive quarter, and we recovered approximately $1.1 million on a
loan that previously had been charged-off.
Yields on earning assets continued to improve, mainly because of the interest
rate environment. Market interest rates, as set by the Federal Open Market
Committee (FOMC), were 175 basis points higher at the end of the 2005 first
quarter than they were at the end of the year-ago first quarter.
As market interest rates rose, we were able to adjust the yields on our loans to
reflect the rising rates at a faster pace than we made corresponding changes to
our core deposit pricing. Compared with the year-ago first quarter, the average
yield on earnings assets was 82 basis points higher, while the average cost of
funds was 71 basis points higher. Assets continue to reprice at a faster pace
than liabilities, and we remain asset-sensitive.
These factors caused the net interest margin to reach 3.64%, which was 11 basis
points higher than for the year-ago first quarter, and the highest quarterly
margin since the first quarter of 2003.
22
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
To compute the net interest margin, we divide annualized net interest income on
a fully tax-equivalent (FTE) basis by average total earning assets.
On an FTE basis, net interest income for the 2005 first quarter was $78.5
million, and earning assets, on average, were $8.63 billion. For the year-ago
first quarter, FTE net interest income was $72.9 million and earning assets, on
average, were $8.22 billion.
The following tables present comparative net interest income data and
rate/volume analyses for the first 3 months of 2005 and 2004.
QUARTERLY ANALYSIS OF EARNINGS
2005 First Quarter 2004 First 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 $ 20.2 $ 0.1 2.16% $ 16.8 $ -- 1.01%
U.S. Treasury and government
agencies 440.9 3.9 3.53 465.3 3.9 3.44
State and municipal 11.9 0.3 8.76 14.7 0.3 8.55
Preferred stock 99.3 1.7 7.04 120.3 2.2 7.42
Mortgage-backed securities 960.5 9.8 4.09 1,008.8 10.6 4.12
Other 328.1 3.4 4.12 289.4 2.0 2.79
------------------------------------------------------ -------------------
Total investment securities 1,840.7 19.1 4.14 1,898.5 19.0 3.99
----------------------------------------------------------------
Commercial, financial, and
agricultural 2,512.9 34.2 5.46 2,325.2 24.4 4.16
Real estate - construction 760.2 11.5 6.06 725.0 8.1 4.42
Mortgage - commercial 1,233.6 18.0 5.82 1,103.1 13.4 4.82
------------------------------------------------------ -------------------
Total commercial loans 4,506.7 63.7 5.66 4,153.3 45.9 4.38
----------------------------------------------------------------
Mortgage - residential 427.5 6.3 5.87 481.7 7.3 6.08
Consumer 1,234.6 18.7 6.13 1,071.1 16.1 6.04
Secured with liquid collateral 600.7 5.9 3.90 602.6 3.8 2.51
------------------------------------------------------ -------------------
Total retail loans 2,262.8 30.9 5.49 2,155.4 27.2 5.06
----------------------------------------------------------------
Total loans net of
unearned income 6,769.5 94.6 5.60 6,308.7 73.1 4.61
----------------------------------------------------------------
Total earning assets $8,630.4 113.8 5.28 $8,224.0 92.1 4.46
================================================================
23
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
2005 First Quarter 2004 First Quarter
------------------------------ --------------------------------
(in millions; rates on Average Income/ Average Average Income/ Average
tax-equivalent basis) balance expense rate balance expense rate
-----------------------------------------------------------------------------------------------------
Funds supporting earning assets
Savings $ 354.5 0.2 0.25 $ 372.1 0.1 0.13
Interest-bearing demand 2,373.4 4.5 0.77 2,267.0 2.1 0.37
Certificates under $100,000 773.9 4.1 2.17 779.3 4.1 2.12
Local CDs $100,000 and over 370.1 2.3 2.47 134.8 0.5 1.44
------------------------------------------------------ -------------------
Total core interest-
bearing deposits 3,871.9 11.1 1.16 3,553.2 6.8 0.77
National CDs $100,000
and over 1,940.4 12.0 2.47 2,223.9 6.4 1.13
------------------------------------------------------ -------------------
Total interest-bearing
deposits 5,812.3 23.1 1.60 5,777.1 13.2 0.91
----------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,197.8 7.7 2.55 893.0 3.1 1.37
U.S. Treasury demand 8.5 -- 2.06 11.8 -- 0.77
------------------------------------------------------ -------------------
Total short-term
borrowings 1,206.3 7.7 2.55 904.8 3.1 1.37
----------------------------------------------------------------
Long-term debt 407.3 4.5 4.37 410.8 2.9 2.81
------------------------------------------------------ -------------------
Total interest-bearing
liabilities 7,425.9 35.3 1.91 7,092.7 19.2 1.08
----------------------------------------------------------------
Other noninterest funds 1,204.5 -- -- 1,131.3 -- --
------------------------------------------------------ -------------------
Total funds used to
support earning assets $8,630.4 35.3 1.64 $8,224.0 19.2 0.93
================================================================
Net interest income/yield 78.5 3.64 72.9 3.53
Tax-equivalent adjustment (0.9) (1.1)
-------- --------
Net interest income $ 77.6 $ 71.8
======== ========
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."
24
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
-------------------------------------
For the three months ended March 31, 2005/2004 Increase/(decrease) due to change in
-------------------------------------
(in millions) Volume (1) Rate (2) Total
--------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and securities purchased under agreements to resell $ -- $ 0.1 $ 0.1
U.S. Treasury and government agencies (0.1) 0.1 --
State and municipal * (0.1) 0.1 --
Preferred stock * (0.4) (0.1) (0.5)
Mortgage-backed securities (0.4) (0.4) (0.8)
Other * 0.3 1.1 1.4
--------------------------------------------------------------------------------------------------------------------
Total investment securities (0.7) 0.8 0.1
-------------------------------------
Commercial, financial, and agricultural * 1.9 7.9 9.8
Real estate - construction 0.4 3.0 3.4
Mortgage - commercial * 1.6 3.0 4.6
--------------------------------------------------------------------------------------------------------------------
Total commercial loans 3.9 13.9 17.8
-------------------------------------
Mortgage - residential (0.8) (0.2) (1.0)
Consumer 2.4 0.2 2.6
Secured with liquid collateral -- 2.1 2.1
--------------------------------------------------------------------------------------------------------------------
Total retail loans 1.6 2.1 3.7
Total loans net of unearned income 5.5 16.0 21.5
--------------------------------------------------------------------------------------------------------------------
Total interest income $ 4.8 $ 16.9 $21.7
-------------------------------------
Interest expense:
Savings $ -- $ 0.1 $ 0.1
Interest-bearing demand 0.1 2.3 2.4
Certificates under $100,000 -- -- --
Local CDs $100,000 and over 0.8 1.0 1.8
--------------------------------------------------------------------------------------------------------------------
Total core interest-bearing deposits 0.9 3.4 4.3
National CDs $100,000 and over (0.8) 6.4 5.6
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 0.1 9.8 9.9
-------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 1.0 3.6 4.6
Long-term debt -- 1.6 1.6
--------------------------------------------------------------------------------------------------------------------
Total interest expense $ 1.1 $ 15.0 $16.1
-------------------------------------
Changes in net interest income $ 3.7 $ 1.9 $ 5.6
=====================================
* Variances are calculated on a fully tax-equivalent basis, which includes
the effects of any disallowed interest expense.
(1) Changes attributable to volume are defined as 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.
25
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
NONINTEREST INCOME
Noninterest income for the 2005 first quarter was $77.4 million, a 6.5%
increase. Wealth Advisory growth and income from the investment in Cramer
Rosenthal McGlynn (CRM) accounted for almost all of this growth. Their results
helped offset weakness in the capital markets component of the Corporate Client
Services business and a decline in service charges on deposit accounts.
First quarter 2005 noninterest income included securities gains of $0.8 million,
which we took in the routine course of balance sheet management. Approximately
$0.2 million of that amount was associated with securities on which call
provisions were exercised. The remainder was associated primarily with
amortizing mortgage-backed instruments with small remaining balances, which we
sold and replaced with higher-yielding securities.
ASSETS UNDER MANAGEMENT AND ADMINISTRATION
A portion of our advisory business revenue is based on financial market
valuations and therefore tied to the levels of assets we manage or hold in
custody.
Within the Wealth Advisory business, all of the revenue reported as trust and
investment advisory income is based on the market valuations of assets we manage
or administer, and a significant portion of that revenue is tied to the equity
markets. The Wealth Advisory assets we manage include assets in personal trusts
that are structured around wealth planning, wealth preservation, and wealth
transition considerations. Changes in the levels of these assets reflect trust
distributions and terminations as well as business flows and financial market
movements.
Within the Corporate Client Services business, the majority of income reported
as retirement services revenue relates to the market valuations of retirement
plans for which we serve as trustee, rather than manager.
All of the recurring income from our investments in CRM and Roxbury Capital
Management (RCM) is tied to financial market valuations. The primary business of
these two firms is asset management. Changes in their levels of managed assets
reflect business flows as well as financial market movements.
The following table compares changes in assets under management.
CHANGES IN ASSETS UNDER MANAGEMENT (AUM)(1)
--------------------------------------------------------------------------------------
PERCENT CHANGE FROM
--------------------------------------------------------------------------------------
AUM AT PERIOD END (IN BILLIONS) 2005 Q1 2004 Q4 2004 Q1 2004 Q4 2004 Q1
--------------------------------------------------------------------------------------
Wilmington Trust $ 26.5 $ 26.5 $ 24.3 -- 9.1%
--------------------------------------------------------------------------------------
Cramer Rosenthal McGlynn $ 7.2 $ 6.9 $ 5.1 4.3% 41.2%
--------------------------------------------------------------------------------------
Roxbury Capital Management $ 2.8 $ 3.1 $ 3.4 (9.7)% (17.6)%
--------------------------------------------------------------------------------------
Total $ 36.5 $ 36.5 $ 32.8 -- 11.3%
--------------------------------------------------------------------------------------
(1) Assets under management include estimates for values associated with
certain assets that lack readily ascertainable values, such as limited
partnership interests.
26
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
The following table compares changes in the investment mix of managed assets at
Wilmington Trust (excluding the affiliate money managers).
INVESTMENT MIX OF MANAGED ASSETS AT WILMINGTON TRUST (EXCLUDING CRM AND RCM)
--------------------------------------------------------------------------------
INVESTMENT MIX AT PERIOD-END 2005 Q1 2004 Q4 2004 Q1
--------------------------------------------------------------------------------
Equities 57% 59% 54%
--------------------------------------------------------------------------------
Fixed income 24% 23% 26%
--------------------------------------------------------------------------------
Cash and equivalents 12% 12% 8%
--------------------------------------------------------------------------------
Mutual funds(1) -- -- 7%
--------------------------------------------------------------------------------
Other assets 7% 6% 5%
--------------------------------------------------------------------------------
(1) Beginning with the fourth quarter of 2004, we reclassified the percentage
of managed assets that previously were reported as mutual funds into the
relevant categories of equity, fixed income, or other assets.
The following table compares changes in assets under management and assets under
administration at Wilmington Trust (excluding the affiliate money managers).
Most of the assets under administration are associated with the Corporate Client
Services business.
CLIENT ASSETS AT WILMINGTON TRUST (EXCLUDING CRM AND RCM)
----------------------------------------------------------------------------------
PERCENT CHANGE FROM
----------------------------------------------------------------------------------
AT PERIOD END (IN BILLIONS) 2005 Q1 2004 Q4 2004 Q1 2004 Q4 2004 Q1
----------------------------------------------------------------------------------
Assets under management(1) $ 26.5 $ 26.5 $ 24.3 -- 9.1%
----------------------------------------------------------------------------------
Assets under administration $ 71.3 $ 72.5 $ 81.7 (1.7)% (12.7)%
----------------------------------------------------------------------------------
Total $ 97.8 $ 99.0 $ 106.0 (1.2)% (7.7)%
----------------------------------------------------------------------------------
(1) Assets under management include estimates for values associated with
certain assets that lack readily ascertainable values, such as limited
partnership interests.
WEALTH ADVISORY SERVICES
Wealth Advisory Services (WAS) revenue rose 9.6% to $43.5 million. This increase
indicated that the investments we have made in this business - we have added
private client advisors, expanded our physical presence in key markets, acquired
new capabilities, and strengthened our investment platform - are gaining
traction.
Business development with new as well as existing clients accounted for most of
the increase in WAS revenue, and generated approximately $5 million of
annualized fees for the 2005 first quarter. New business development was
particularly strong in the California, Florida, Maryland, and New York markets.
For the year-ago first quarter, new business results included fees for several
highly specialized financial plans. Excluding these nonrecurring fees, new
annualized fees were 6.6% higher than for the year-ago first quarter. Recurring
fees (as opposed to one-time fees) accounted for approximately 60% of new
business recorded during the 2005 first quarter, compared with approximately 45%
for the year-ago first quarter.
Of the three components of WAS revenue, most of this growth occurred in core
trust and investment advisory services. Revenue from these services rose 10.0%
to $29.6 million. New business development, particularly for investment
management services, was the primary cause of this growth. New fees associated
with asset management services were 63% higher than for the year-ago first
quarter.
27
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
Fees from planning and other services (which are not tied to financial market
valuations) were $9.1 million for the 2005 first quarter. Approximately $2
million of this amount was contributed by Grant Tani Barash & Altman (GTBA), the
Beverly Hills-based business management and family office firm acquired in
October 2004. The planning and other services component of WAS revenue also
reflected tax planning and wealth transfer planning activity.
Fees from mutual fund services were lower on a year-over-year as well as a
linked-quarter basis, as clients continued to redeem shares of low-yielding
money market funds. Approximately 95% of WAS mutual fund fees are tied to money
market funds.
CORPORATE CLIENT SERVICES
Corporate Client Services (CCS) revenue was $18.0 million for the 2005 first
quarter, which was slightly more than for the year-ago first quarter. Good
growth in the entity management and retirement services components of the CCS
business was not strong enough to offset continued weakness in the capital
markets sector.
Revenue from entity management (services that support structures and
transactions in preferred legal jurisdictions) was $5.9 million, which was 7.3%
more than for the year-ago first quarter. Income from services provided in
Europe rose 6.8%. Sales of entity management services rose 10.1%. Most of this
increase resulted from strong demand for Nevada-based services.
Revenue from corporate retirement services rose 14.3% to $3.2 million, and new
business volumes were 39.6% higher. Most of the growth was in fees for trust
services that support defined contribution plans (such as 401(k) plans) and
executive compensation plans. We work with leading third-party retirement plan
record keepers to market corporate retirement services. We established more of
these alliances during the past 12 months, which contributed to the increased
volume in this component of the CCS business.
Revenue from capital markets services (trust and administrative services that
support structured finance transactions) was $7.6 million, a decrease of 2.6%
from the year-ago first quarter. Factors in these declines included:
- Downward pricing pressures, as demand for structured finance transactions
remained weak, and as saturation in the market for trust-preferred issues
caused pricing on related services to shift to lower, commodity-driven
levels. Our capital markets transaction volumes were 8% higher than in the
year-ago first quarter, but new fees were 32% lower.
- Less market innovation, and fewer introductions of new structures, which
typically command higher fees than more established structures.
- Fewer issues of asset-backed securitizations, as well as shorter-duration
contracts. Today the typical maturity of asset-backed contracts is
approximately half as long as it was three years ago, which means these
accounts terminate (and cease to generate revenue) more quickly than in
the past.
CRAMER ROSENTHAL MCGLYNN
Assets under management at value-style affiliate money manager Cramer Rosenthal
McGlynn (CRM) totaled $7.23 billion at March 31, 2005. This was 40.4% higher
than the $5.15 billion recorded at March 31, 2004. A combination of new business
and market appreciation accounted for the increase. CRM's managed assets have
risen every quarter since the first quarter of 2003, and the current level is
the highest ever recorded by the firm.
Our income from CRM for the 2005 first quarter was $4.3 million. This was more
than double the amount recorded for the year-ago first quarter. Approximately
$1.4 million of the 2005 first quarter amount represented a nonrecurring gain on
the sale of a private equity investment.
The amount of income we record from CRM is based on our ownership interest in
the firm, which was 77.24% at March 31, 2005, the same percentage as at December
31, 2004. At March 31, 2004, our ownership interest in CRM was 69.14%.
28
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
CRM's results are not consolidated in our financial statements. Despite the high
percentage of our position, we do not hold a controlling interest in CRM. CRM
principals retain certain management controls, including veto powers over a
variety of matters.
ROXBURY CAPITAL MANAGEMENT
Roxbury Capital Management (RCM), the growth-style affiliate money manager,
continued its return to profitability. Our income from RCM was $0.3 million for
the 2005 first quarter, which was 50.0% higher than for the year-ago first
quarter. This increase reflected RCM's ongoing efforts to reduce expenses and
improve efficiency.
RCM's managed assets were $2.83 billion at March 31, 2005, compared with $3.36
billion at March 31, 2004. RCM continued to attract new funds to its small- and
mid-capitalization products, but not to an extent sufficient to offset the
outflows from its large-capitalization product.
The amount of income we record from RCM is based on our ownership interests in
the firm, which were the same at March 31, 2005, as they were at the end of 2004
and at the end of the 2004 first quarter: 41.23% of RCM's common shares, and 30%
of its gross revenues.
SERVICE CHARGES ON DEPOSIT ACCOUNTS
Income from service charges on deposit accounts was $6.7 million for the 2005
first quarter, which was 18.3% lower than for the year-ago first quarter.
Several factors contributed to the decline:
- Rising interest rates are generating higher earnings credits, which are
offsetting service charges on commercial deposit accounts. (Earnings
credits are amounts based on average deposit balances that commercial
depositors may use to offset account fees.)
- Clients are using more online and telephone banking services - which are
free. Online banking transactions were more than 7% higher than for the
corresponding period last year, while teller transactions were more than
7% lower.
- ATM transaction volumes fell more than 6%, and ATM fees declined nearly
14%, as consumers made larger, but fewer, ATM withdrawals. Year-to-date,
the average ATM withdrawal was $103.12, compared with the year-to-date
average of $98.92 for the corresponding period last year.
- Opposite the decline in ATM volumes, point-of-service (POS) transaction
volumes were nearly 5% higher than for the year-ago first quarter. Clients
incur no fees on POS transactions.
NONINTEREST EXPENSE
Noninterest, or operating, expense reflects the costs that we incur in the
course of normal operations, including expenses associated with employment,
occupancy, supplies, advertising, third-party providers, and other items.
For the first quarter of 2005, noninterest expense was $89.3 million. This was
7.3% higher than for the year-ago first quarter.
Nearly two-thirds of first-quarter 2005 operating expense, or $54.2 million, was
associated with staffing. Including salaries and wages, incentives and bonuses,
and employment benefits expense, staffing costs were 5.0% higher than for the
year-ago first quarter.
Staffing costs rose mainly because the number of staff members increased. At
March 31, 2005, there were 2,443 full-time equivalent staff members, which was
103 more than at March 31, 2004. Over the last 12 months, we added staff in
every department of our company and in every one of our markets. The acquisition
of GTBA, which we completed in October 2004, added 42 staff members. The number
of full-time equivalent staff members at March
29
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
31, 2005, published in this report differs from what we published on April 22,
2005, because we counted 19 staff members twice.
Salaries and wages amounted to $32.9 million for the 2005 first quarter, which
was 1.5% more than for the year-ago first quarter. Opposite the increase in the
number of staff members, this low rate of year-over-year growth in salaries and
wages was attributable to:
- A difference in the number of days of pay. The 2005 first quarter had one
less day of pay than the year-ago first quarter, and two fewer days of pay
than the 2004 fourth quarter. Each day of pay represents approximately
$0.5 million of salary and wage expense.
- A new pay structure for some staff that decreased the percentage of
compensation that is salary-based and increased the percentage that is
incentive-based.
- Lower temporary help expenses.
In employment benefit costs, the year-over-year increase reflected higher health
insurance and pension costs, as well as the higher number of staff members.
Of the year-over-year increases in other expense categories:
- Furniture, equipment, and supplies expense reflected higher depreciation
costs associated with the new desktop operating system installed
company-wide in 2004.
- Advertising and contributions expense reflected the payment of several
large charitable donations.
- Servicing and consulting fees included fees paid to third-party investment
advisors, and reflected increased demand for investment consulting
services.
- Other noninterest expense included higher telecommunications, insurance,
and audit costs.
Compared to the 2004 fourth quarter, total noninterest expense for the 2005
first quarter reflected a slowdown in the pace of expense growth. Noninterest
expense for the first quarter of 2005 was 2.4% lower than for the 2004 fourth
quarter. Except for staffing and net occupancy expense, the other categories of
noninterest expense all recorded linked-quarter declines.
FULL-TIME EQUIVALENT HEADCOUNT
--------------------------------------------------------------------------------
3/31/05 12/31/04 3/31/04
--------------------------------------------------------------------------------
Full-time equivalent headcount 2,443 2,428 2,340
--------------------------------------------------------------------------------
INCOME TAXES
While pretax income rose 12.2%, income taxes rose 13.6%, to $22.5 million. This
increase occurred mainly because state income taxes were higher, as we recorded
higher levels of revenue, especially from the affiliate money managers.
Our effective tax rate for the first three months of 2005 was 35.94%, compared
with 35.48% for the first three months of 2004.
30
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
CAPITAL RESOURCES
Our capital position remained strong during the first three months of 2005.
Stockholders' equity increased; the returns on assets and equity improved; and
our regulatory capital continued to exceed the minimum levels established by the
Federal Reserve Board for well-capitalized institutions. In a reflection of our
capital strength, on April 21, 2005, our Board of Directors approved an increase
in the cash dividend.
The quarterly dividend increased 5.3%, from $0.285 per share to $0.30 per share.
Annualized, the cash dividend rose from $1.14 per share to $1.20 per share. We
have paid cash dividends on our common stock every year since 1908; paid
quarterly cash dividends every year since 1916; and increased the cash dividend
every year since 1982, making this the 24th consecutive year that we have
increased our cash dividend.
The dividend payout ratio was 48.13%, compared with 52.85% for the full-year
2004.
The annualized capital generation rate for the first three months of 2005 was
9.4%, compared with an annualized rate of 8.9% for the first three months of
2004, and a rate of 8.4% for the full year 2004.
On an annualized basis, first quarter 2005 results generated a return on average
assets of 1.72% and a return on average stockholders' equity of 17.80%. The
corresponding returns for the first quarter of 2004 were 1.61% and 17.69%,
respectively. The return on equity improved because the disparity narrowed
between the pace of growth in our capital and the pace of growth in our net
income.
Between 2000 and 2004, our capital increased at a much higher rate than our net
income, which was muted by the low interest rate environment, volatile financial
markets, and expenses associated with the acquisitions we made, our expansion
into new markets, and the other investments we made in our company's future. The
pace of net income growth accelerated in the 2005 first quarter because:
- We are beginning to reap the benefits of those investments;
- Income from our affiliate money managers has increased; and
- Interest rates are rising, and the rate of growth in net interest income
is more in line with the rate of growth in loan balances.
At March 31, 2005, stockholders' equity was $911.2 million. This was an increase
of $5.9 million from the $905.3 million recorded at December 31, 2004.
During the first three months of 2005, additions to capital totaled $24.3
million and included:
- $20.8 million, which reflected earnings of $40.1 million net of $19.3
million in cash dividends;
- $0.1 million of net unrealized gains on derivatives used for cash flow
hedges; and
- $3.4 million from the issue of common stock under employment benefit
plans.
Offsetting these additions were $18.4 million in reductions, which consisted of:
- $17.1 million in unrealized losses on securities, net of taxes;
- $0.1 million in derivative losses included in net income, net of taxes;
- $0.1 million in foreign currency exchange adjustments; and
- $1.1 million for the repurchase of shares.
During the 2005 first quarter, we repurchased 32,812 of our shares at an average
per-share price of $34.91. This brought the total number of shares repurchased
under the current 8-million-share program, which commenced in April 2002, to
667,405 shares. Under the current program, 7,332,595 remain available for
repurchase.
31
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
Our 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 our ratios to the guidelines.
REGULATORY CAPITAL RATIOS
--------------------------------------------------------------------------------
ADEQUATELY WELL-
WILMINGTON TRUST CAPITAL CAPITALIZED CAPITALIZED
RATIOS 3/31/05 12/31/04 MINIMUM MINIMUM
--------------------------------------------------------------------------------
Total risk-based capital 12.05% 11.60% 8% 10%
--------------------------------------------------------------------------------
Tier 1 risk-based capital 7.24% 6.94% 4% 6%
--------------------------------------------------------------------------------
Tier 1 leverage capital 6.10% 5.92% 4% 5%
--------------------------------------------------------------------------------
We review our capital position and make adjustments as needed to assure that our
capital base is sufficient to satisfy existing and impending regulatory
requirements, meet appropriate standards of safety, and provide for future
growth.
LIQUIDITY AND FUNDING
We manage liquidity, which is affected by the proportion of funding that is
provided by core deposits and stockholders' equity, to ensure that our cash
flows are sufficient to support our operating, investing, and financing
activities. By managing liquidity, we are able to meet increases in demand for
loans and other assets, and decreases in deposits and other funding sources.
We use a mix of liquidity sources, including deposit balances; cash that is
generated by the investment and loan portfolios; short- and long-term
borrowings, which include national certificates of deposit in amounts of
$100,000 and more as well as term federal funds; internally generated capital;
and other credit facilities.
During the first three months of 2005, core deposits - demand deposits,
interest-bearing demand deposits, time deposits, and local CDs $100,000 and over
- continued to be our primary source of funding, but they accounted for a
smaller proportion, because the pace of growth in core deposits lagged the pace
of growth in earning assets.
Loan balances accounted for approximately 78% of total earning assets, both on a
period-end and average-balance basis. Between December 31, 2004, and March 31,
2005, loan balances increased 1.4%, but core deposit balances decreased 1.6%. On
average, loan balances were 2.2% higher for the 2005 first quarter than for the
2004 fourth quarter, while core deposit balances were 1.6% higher.
The following table shows changes, at period-end, in the proportion of funding
provided by various sources of liquidity.
CHANGES IN THE FUNDING MIX
--------------------------------------------------------------------------------
PROPORTION OF FUNDING AT PERIOD-END FROM: 3/31/05 12/31/04 3/31/04
--------------------------------------------------------------------------------
Core deposits 51.2% 52.4% 50.3%
--------------------------------------------------------------------------------
Core deposits and stockholders' equity 60.7% 62.0% 59.4%
--------------------------------------------------------------------------------
Purchased funds and short-term borrowings 33.5% 32.0% 34.3%
--------------------------------------------------------------------------------
We use purchased funds, which consist of national CDs $100,000 and over, and
short-term borrowings to augment growth in earning assets. We base the mix
between purchased funds and short-term borrowings on which offers the more
favorable rate.
32
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
Between December 31, 2004, and March 31, 2005, the combined balances of
purchased funds and short-term borrowings increased 5.4%. Most of the increase
was in national CD balances.
The average rate on core interest-bearing deposits was 1.16% for the 2005 first
quarter. The average rate for national CDs was 2.47%, and the average rate for
total short-term borrowings was 2.55%.
Although the cost of national CDs and short-term borrowings exceeded the rate we
pay on core interest-bearing deposits, we maintained this funding strategy
because:
- It lets us add deposits without making capital investments to support the
physical expansion of our branch network;
- It helps us curb growth in the annual operating expense associated with
staffing and maintaining additional branch offices;
- It does not add to our fixed costs; and
- We can predict the balances of purchased funds and short-term borrowings
with more certainty than we can predict changes in our clients' deposit
balances.
In general, the national CDs and term federal funds we purchase have maturities
of 90 days or fewer. Our short-term borrowings typically mature within 365 days
of the transaction date.
We expect the disparity between the pace of growth in our earning assets and
core deposits to continue, because our Regional Banking business makes loans
throughout the Delaware Valley region, but gathers core deposits mainly in the
state of Delaware, where our retail banking activities are concentrated. For
example, approximately 21% of our total first quarter loans, on average, were
made in southeastern Pennsylvania. In comparison, approximately 6% of core
deposits for the first quarter were generated outside of Delaware.
Other sources of liquidity that are available to us include:
- Cash flow generated by our investment portfolio, which we expect will
generate approximately $250 million of cash over the next 12 months from
maturities, calls, and income. At March 31, 2005, the balance of the
investment portfolio was $1.83 billion.
- The Federal Home Loan Bank of Pittsburgh, of which Wilmington Trust
Company is a member. As of March 31, 2005, we had $1.1 billion in
available borrowing capacity that was secured with collateral, compared
with $1.2 billion at December 31, 2004.
- Lines of credit with U.S. financial institutions totaling $75.0 million.
Our standing in the national markets, and our ability to obtain funding from
them, factor into our liquidity management strategies. In many cases, national
market investors use the findings of the major credit rating agencies - Standard
& Poor's, Moody's Investors Service, and Fitch - to guide their decisions. All
of our credit ratings are investment grade, and they substantiate our financial
stability and the consistency, over time, of our earnings. Our most recent
credit ratings are posted on wilmingtontrust.com in the "Investor Relations"
section.
Factors or conditions that could affect our liquidity management objectives
include changes in the mix of items on our balance sheet; our investment, loan,
and deposit balances; our reputation; and our credit ratings. A significant
change in our financial performance or credit ratings could reduce the
availability, or increase the cost, of funding from the national markets.
Among our liquidity risks is our partial guaranty of a line of credit obligation
for affiliate money manager Cramer Rosenthal McGlynn (CRM). At March 31, 2005,
the line of credit was $5.0 million, the balance was zero, and our guaranty was
for 77.24%, an amount equal to our ownership interest in CRM. This line of
credit is scheduled to expire on December 6, 2005.
33
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION
We manage credit risk mainly by applying our rigorous underwriting standards
consistently. As we expand our Regional Banking business, we have chosen to grow
loan balances through our own efforts, rather than by purchasing loans or
acquiring other banks. This prevents us from having to assume the credit risk
associated with loans that were extended under guidelines that may differ from
ours.
Economic and other external factors affect credit risk. Changes in these factors
could impair the ability of borrowers to repay their loans, and could result in
higher levels of nonperforming assets, credit losses, and provisions for loan
losses. To mitigate the impact of these factors, we:
- Make the vast majority of our loans within the Delaware Valley region, and
we rarely make commercial loans outside of our target client market of
family-owned or closely held businesses with annual sales of up to $250
million. This geographic and client focus enables us to remain cognizant
of economic and other external factors that may affect credit quality.
- Endeavor to maintain a loan portfolio that is diversified across
commercial and consumer lines and industry sectors.
- Perform an internal analysis that rates the risk in the portfolio.
- Monitor the portfolio continually to identify potential problems, and to
avoid disproportionately high concentrations of loans to any one borrower
or industry sector. Integral parts of this process include regular
analyses of past-due loans and the identification of loans that we doubt
will be repaid on a timely basis.
Measuring credit risk involves making subjective judgments that take into
account the levels of net charge-offs and nonperforming assets. We believe that
the primary indicator of credit quality is the net charge-off ratio.
During the first three months of 2005, all key measures of credit quality
improved:
- Net charge-offs, nonaccruing loans, and loans past due 90 days or more
decreased from the levels recorded at December 31, 2004.
- Also lower than their 2004 year-end levels were the loan loss reserve
ratio, the ratio of nonperforming assets, the ratio of loans past due 90
days, and the net charge-off ratio.
- The percentage of loans rated "pass" in the internal risk-rating analysis
remained higher than 96% for the fourth consecutive quarter.
The net charge-off ratio was 4 basis points for the 2005 first quarter. This was
4 basis points lower than for the 2004 fourth quarter. Annualized net
charge-offs were 16 basis points, compared with 32 basis points for the 2004
fourth quarter. Actual net charge-offs for the 2004 full year were 24 basis
points.
The following table provides 3- and 12-month comparisons of the changes in net
charge-offs.
NET CHARGE-OFFS
--------------------------------------------------------------------------------
FOR THE 3 MONTHS ENDED 3/31/05 12/31/04 3/31/04
--------------------------------------------------------------------------------
Net charge-off ratio 4 basis points 8 basis points 7 basis points
--------------------------------------------------------------------------------
Net charge-offs $2.4 million $5.6 million $4.2 million
--------------------------------------------------------------------------------
We continue to pursue repayment even after we charge off loans. During the 2005
first quarter, we recovered $1.1 million against loans that previously were
charged off.
Nonaccruing loans amounted to $39.5 million at the end of the first quarter,
which was $16.9 million less than at the end of 2004. This decline reflected the
receipt in January 2005 of the remaining payment on a $23 million loan that was
transferred to nonaccruing status during the 2004 third quarter.
This payment was the main factor in the decline from December 31, 2004, in total
nonperforming assets. Nonperforming assets for the first three months of 2005
included a $5.1 million loan that was renegotiated during the 2004 fourth
quarter.
34
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
The following table presents 3- and 12-month comparisons of these and other risk
elements of credit risk.
NONPERFORMING ASSETS
---------------------------------------------------------------------------------------
FOR THE 3 MONTHS ENDED (IN MILLIONS, EXCEPT PERCENTAGES) 3/31/05 12/31/04 3/31/04
---------------------------------------------------------------------------------------
Nonaccruing loans $ 39.5 $ 56.4 $ 40.6
---------------------------------------------------------------------------------------
Ratio of nonaccruing loans to total loans 0.58% 0.83% 0.64%
---------------------------------------------------------------------------------------
Other real estate owned (OREO) $ 0.2 $ 0.2 $ 1.1
---------------------------------------------------------------------------------------
Ratio of OREO to total loans -- -- 0.02%
---------------------------------------------------------------------------------------
Renegotiated loans (nonaccruing) $ 5.1 $ 5.2 --
---------------------------------------------------------------------------------------
Total nonperforming assets $ 44.8 $ 61.8 $ 41.7
---------------------------------------------------------------------------------------
Ratio of nonperforming assets to total loans 0.65% 0.91% 0.65%
---------------------------------------------------------------------------------------
At March 31, 2005, loans past due 90 days were lower than at December 31, 2004,
and March 31, 2004. This reflected loan payments received and the
reclassification of $1.7 million to nonaccruing status.
The following table presents 3- and 12-month comparisons of loans past due 90
days or more, and how they were dispersed throughout the loan portfolio on a
percentage basis.
LOANS PAST DUE 90 DAYS OR MORE
---------------------------------------------------------------------------------------
FOR THE 3 MONTHS ENDED 3/31/05 12/31/04 3/31/04
---------------------------------------------------------------------------------------
Loans past due 90 days or more (in millions) $ 3.2 $ 5.5 $ 6.2
---------------------------------------------------------------------------------------
Percentage in the commercial loan portfolio 52% 56% 57%
---------------------------------------------------------------------------------------
Percentage in the residential mortgage portfolio 25% 22% 27%
---------------------------------------------------------------------------------------
Percentage in the consumer loan portfolio 23% 22% 16%
---------------------------------------------------------------------------------------
At March 31, 2005, more than 96% of our loans received a rating of "pass" in our
internal risk-rating analysis. The percentage of loans with pass ratings has
been higher than 92% since 1998, and higher than 95% since 2000. The following
table presents 3- and 12-month comparisons of the internal risk-rating analysis.
INTERNAL RISK-RATING ANALYSIS
--------------------------------------------------------------------------------
FOR THE 3 MONTHS ENDED 3/31/05 12/31/04 3/31/04
--------------------------------------------------------------------------------
Pass 96.91% 96.58% 95.90%
--------------------------------------------------------------------------------
Watchlisted 1.95% 1.82% 2.64%
--------------------------------------------------------------------------------
Substandard 0.90% 1.35% 1.21%
--------------------------------------------------------------------------------
Doubtful 0.24% 0.25% 0.25%
--------------------------------------------------------------------------------
The percentage of loans rated "substandard" declined from year-end 2004 because
of the aforementioned loan repayment that reduced nonaccruing loans.
The definitions of the categories we use in the internal risk-rating analysis,
which we apply consistently, are as follows:
- "Pass" identifies loans with no current potential problems.
- "Watchlisted" identifies potential problem credits;
- "Substandard" identifies problem credits with some probability of loss; and
- "Doubtful" identifies problem credits with a higher probability of loss.
Our definitions of problem and potential problem credits are consistent with the
classifications used by regulatory agencies.
35
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
On a percentage basis, the composition of the loan portfolio remained well
diversified and relatively unchanged, as the following table shows.
LOAN PORTFOLIO COMPOSITION
--------------------------------------------------------------------------------
FOR THE 3 MONTHS ENDED 3/31/05 12/31/04 3/31/04
--------------------------------------------------------------------------------
Commercial/financial/agricultural 37% 37% 37%
--------------------------------------------------------------------------------
Commercial real estate construction 12% 11% 11%
--------------------------------------------------------------------------------
Commercial mortgage 18% 18% 18%
--------------------------------------------------------------------------------
Residential mortgage 6% 6% 7%
--------------------------------------------------------------------------------
Consumer 18% 19% 17%
--------------------------------------------------------------------------------
Secured by liquid collateral 9% 9% 10%
--------------------------------------------------------------------------------
Changes in the provision and reserve for loan losses reflected loan growth,
credit quality, and the aforementioned loan repayments and recoveries. The
following table compares 9- and 12-month changes in these measures of credit
quality.
PROVISION AND RESERVE FOR LOAN LOSSES
---------------------------------------------------------------------------------------
FOR THE 3 MONTHS ENDED (IN MILLIONS, EXCEPT PERCENTAGES) 3/31/05 12/31/04 3/31/04
---------------------------------------------------------------------------------------
Provision for loan losses $ 3.1 $ 4.0 $ 5.5
---------------------------------------------------------------------------------------
Reserve for loan losses $ 90.4 $ 89.7 $ 91.2
---------------------------------------------------------------------------------------
Loan loss reserve ratio 1.32% 1.33% 1.43%
---------------------------------------------------------------------------------------
The reserve for loan losses reflects our best estimate, based on subjective
judgments regarding how collectible loans within the portfolio are, of potential
losses. In calculating the reserve, we evaluate micro and macroeconomic factors,
historical net loss experience, delinquency trends, and movements within the
internal risk rating classifications, among other things. We reassess the
adequacy of the reserve on a quarterly basis as part of the regular application
of our reserve methodology.
At March 31, 2005, in light of the levels of past due, nonaccruing, and problem
loans, we believed that the amounts of our provision and reserve for loan losses
were adequate, and that they reflected a reasonable assessment of inherent loan
losses. The portion of the reserve that we allocated to new loans was relatively
unchanged from prior periods.
We allocate the majority of our reserve for loan losses to specific commercial
and retail loans. The portion of the reserve that we do not allocate
specifically reflects inherent losses that we have not accounted for otherwise.
As of March 31, 2005, the portion of the reserve that was unallocated was
somewhat higher, as the following table shows.
UNALLOCATED RESERVE FOR LOAN LOSSES
--------------------------------------------------------------------------------
FOR THE 3 MONTHS ENDED 3/31/05 12/31/04 3/31/04
--------------------------------------------------------------------------------
Amount of unallocated reserve (in millions) $ 6.9 $ 6.1 $ 6.1
--------------------------------------------------------------------------------
Percentage of reserve unallocated 7.6% 6.8% 6.7%
--------------------------------------------------------------------------------
At March 31, 2005, we identified approximately $18.9 million of loans that we
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.
The following table compares the changes in the amounts of such loans that we
identified.
LOANS WE DOUBT WILL BE REPAID ON A TIMELY BASIS
--------------------------------------------------------------------------------
FOR THE 3 MONTHS ENDED (IN MILLIONS) 3/31/05 12/31/04 3/31/04
--------------------------------------------------------------------------------
Loan amounts $ 18.9 $ 4.1 $ 23.1
--------------------------------------------------------------------------------
36
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
OFF-BALANCE-SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
In our day-to-day operations, we employ various financial instruments that
generally accepted accounting principles deem to be off-balance-sheet
arrangements. Under regulatory guidelines, these instruments are included in the
calculations of risk-based capital ratios. Some of these instruments, such as
stand-by and performance letters of credit, unfunded loan commitments,
unadvanced lines of credit, and interest rate swaps, do not appear on our
balance sheet. Other instruments, such as long-term debt, represent contractual
obligations and do appear on our balance sheet.
We employ interest rate swaps so that clients may convert floating-rate loan
payments to fixed-rate loan payments without exposing our company to interest
rate risk. In these arrangements, we retain the credit risk associated with the
potential failure of counter-parties. We also use interest rate swaps to manage
interest rate risk associated with our issues of long-term subordinated debt.
As of March 31, 2005, we had entered into a total of $1.0 billion of interest
rate swaps as follows:
- $332.2 million of swaps for loan clients for whom we exchanged floating
rates for fixed rates.
- $332.2 million of swaps with other financial institutions that exchanged
fixed rates for floating rates, in order to offset the exposure from
changes in the market value of the aforementioned swaps we made on behalf
of clients.
- $375.0 million of swaps with other financial institutions made in
connection with our issues of subordinated long-term debt.
As of March 31, 2005, our other contractual obligations consisted of:
- Two outstanding loans from the Federal Home Loan Bank of Pittsburgh that
total $35.5 million. We used these funds to construct Wilmington Trust
Plaza, our operations center in downtown Wilmington, Delaware, which was
completed in 1998.
- Lease commitments for offices, net of sublease arrangements, which total
$54.6 million. Many of our branch offices in Delaware, and all of our
offices outside Delaware, are leased.
- A 77.24% guaranty of a $5.0 million line-of-credit obligation of affiliate
money manager Cramer Rosenthal McGlynn (CRM). The guaranty amount
represents our current ownership interest in CRM. The balance of this line
of credit is zero and it is scheduled to expire on December 6, 2005.
- Letters of credit, unfunded loan commitments, and unadvanced lines of
credit amounting to $3.48 billion.
The following table summarizes the obligations referenced above and the periods
over which they extend.
CONTRACTUAL OBLIGATIONS
-------------------------------------------------------------------------------------------
LESS THAN 1 3 TO 5 MORE THAN 5
PAYMENTS DUE (IN MILLIONS) TOTAL YEAR 1 TO 3 YEARS YEARS YEARS
-------------------------------------------------------------------------------------------
Certificates of deposit $ 3,157.7 $ 2,823.0 $ 278.4 $ 50.1 $ 6.2
-------------------------------------------------------------------------------------------
Long-term debt obligations $ 555.2 $ 22.8 $ 196.2 $ 67.9 $ 268.3
-------------------------------------------------------------------------------------------
Operating lease obligations $ 54.6 $ 8.7 $ 23.2 $ 14.2 $ 8.5
-------------------------------------------------------------------------------------------
Guaranty obligations $ 3.9 $ 3.9 -- -- --
-------------------------------------------------------------------------------------------
Total $ 3,771.4 $ 2,858.4 $ 497.8 $132.2 $ 283.0
-------------------------------------------------------------------------------------------
The long-term debt obligations referenced above represent our two outstanding
subordinated debt issues and our Federal Home Loan Bank advances. The first debt
issue, for $125 million, was issued in 1998, is due in 2008, and was used to
support acquisitions and expansion. The second debt issue, for $250 million, was
issued in 2003, is due in 2013, and was used for general liquidity purposes.
Both of these debt issues are included in the "Long-term debt" line of our
balance sheet.
Our agreements with CRM, RCM, and GTBA permit principal members and designated
key employees of each firm, subject to certain restrictions, to put their
interests in their respective firms to our company. For more information
37
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
about these agreements, please refer to Note 3, "Affiliates and acquisitions,"
in our 2004 Annual Report to Shareholders.
INFLATION RISK
As a financial institution, our asset and liability structure is substantially
different from an industrial company's, since nearly all of our assets and
liabilities are monetary in nature. Our primary market risk is interest rate
risk. Interest rates do not necessarily move in the same direction, or at the
same magnitude, as the prices of goods and services. We are unable, therefore,
to determine the effect of inflation on our financial performance.
OTHER INFORMATION
ACCOUNTING PRONOUNCEMENTS
Please refer to Note 10, "Accounting pronouncements," on page 15 of this report
for a discussion of the impact of recent accounting pronouncements on our
financial condition and results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies arise in conjunction with revenue recognition,
the reserve for loan losses, stock-based compensation expense, and goodwill
valuations.
We maintain our accounting records and prepare our financial statements on the
accrual basis of accounting. This basis conforms to U.S. generally accepted
accounting principles (GAAP), and with reporting practices prescribed for the
banking industry. Using these principles, we make estimates and assumptions
about the reserve for loan losses; stock-based employee compensation; revenue
recognition for the Corporate Client Services business and the affiliate money
managers; goodwill impairments; loan origination fees; and mortgage servicing
assets.
The precision of the estimates and assumptions we make depend on a number of
underlying variables and a range of possible outcomes. Actual circumstances that
differ significantly from our judgments and estimates could have a material
impact on our financial results. Our financial results could be affected by,
among other things, changes in national or regional economic conditions; changes
in market interest rates; significant changes in banking laws or regulations;
the impact of accounting pronouncements; increased competition for business;
higher-than-expected credit losses; the effects of acquisitions; the effects of
integrating acquired entities; unanticipated changes in the regulatory,
judicial, or legislative tax treatment of business transactions; and uncertainly
created by unrest in other parts of the world.
Other than accounting for stock-based compensation, our critical accounting
policies do not involve the choice between alternative methods of accounting. We
have applied our critical accounting policies and estimation methods
consistently in all periods presented, and we have discussed these policies with
our Audit Committee.
Our consolidated financial statements include the accounts of Wilmington Trust
Corporation and WTC, WTPA, WTFSB, RSMC, WTIM, WTI, WTL, and GTBAH. We eliminate
intercompany balances and transactions in consolidation. We have reclassified
certain prior year amounts to conform to the current year's presentation. We
have adjusted all common stock and per-share amounts to reflect the 100% stock
dividend paid on June 17, 2002.
We believe the following critical accounting policies affect our more
significant judgments and the estimates we use to prepare the consolidated
financial statements.
38
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
Reserve for loan losses: We establish the reserve for loan losses by charging a
provision for loan losses against income. We reassess the adequacy of the
reserve quarterly, and we charge loans deemed uncollectible against the reserve
quarterly. We credit recoveries, if any, to the reserve.
Our policy is to maintain a reserve for loan losses that is our best estimate of
known and inherent estimated losses, based on subjective judgments regarding
loan collectibility. Staff members who are not responsible for lending evaluate
the reserve quarterly. In evaluating the reserve, we consider current micro and
macroeconomic factors, historical net loss experience, current delinquency
trends, and movement within our internal risk rating classifications, among
other matters. We have established the reserve in accordance with GAAP, and we
have applied our reserve methodology consistently for all periods presented.
For commercial loans, we maintain reserve allocations at various levels. We
typically establish impairment reserve allocations for nonperforming commercial
loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan." These impairment reserves are based on the present value of
anticipated cash flows discounted at the loan's effective interest rate at the
date the loan is determined to be impaired or, for collateral-dependent loans,
the fair value of the collateral. For collateral-dependent loans, we obtain
appraisals for all significant properties. Specific reserve allocations
represent subjective estimates of probable losses and consider estimated
collateral shortfalls.
For all commercial loans and letters of credit that are not subject to specific
impairment allocations, we assign a general reserve based on an eight-point
risk-rating classification system that we maintain internally. The definitions
and reserve allocation percentages for all adverse classifications are
consistent with current regulatory guidelines.
For retail loans, we use historical trend data to determine reserve allocations.
We establish specific allocations for problem credits we have identified, which
typically represent loans that are nearing our policy guidelines for charge-off
recognition. We establish general allocations for the remainder of the retail
portfolio by applying a ratio to the outstanding balances that considers the net
loss experience recognized over a historical period for the respective loan
product. We adjust the allocations as necessary.
A portion of the reserve is not allocated specifically to commercial or retail
loans. This portion represents potential or inherent losses that may be caused
by certain business conditions for which we have not accounted otherwise. These
conditions include current economic and market conditions, the complexity of the
loan portfolio, payment performance, migration within the internal risk rating
classification, the amount of loans we seriously doubt will be repaid, the
impact of litigation, and bankruptcy trends.
Various regulatory agencies, as an integral part of their examination processes,
periodically review the reserve of our banking affiliates. These agencies base
their judgments on information that is available to them when they conduct their
examinations, and they may require us to make adjustments to the reserve.
Determining the reserve is inherently subjective. Estimates we make, including
estimates of the amounts and timing of payments we expect to receive on impaired
loans, may be susceptible to significant change. If actual circumstances differ
substantially from the assumptions we used to determine the reserve, future
adjustments to the reserve may be necessary, which could have a material effect
on our financial performance.
39
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
Stock-based employee compensation: We account for our stock-based employee
compensation plans under the "intrinsic value" approach, in accordance with the
provisions of APB Opinion No. 25, rather than the "fair value" approach
prescribed in SFAS No. 123, "Accounting for Stock-based Compensation." The
"intrinsic value" approach limits the compensation expense to the excess of a
stock option's market price on the grant date over the option's exercise price.
Since our stock-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 when the grant is awarded.
Each year since the inception of SFAS No. 123, we have disclosed, in the notes
to the financial statements contained herein and in our Annual Report to
Shareholders, what the earnings impact would have been had we elected the "fair
value" approach under SFAS No. 123. If we had accounted for stock-based
compensation under SFAS No. 123 (revised), our net income would have been as
shown in Note 1, "Stock-based compensation plans," on page 7 of this report.
In December 2004, the FASB issued SFAS No. 123 (revised), which will disallow
use of the "intrinsic value" approach, and require us to recognize in our income
statement the expenses associated with the value of all stock options granted
but not yet fully vested. Based on an April 14, 2005, ruling by the SEC, this
pronouncement will be effective for us beginning in the first quarter of 2006,
and it will cause us to record additional expense in our income statement. We
expect the annual cost of SFAS No. 123 (revised) to approximate the pro forma
amounts shown in Note 1, "Stock-based compensation plans," on page 7 of this
report.
Goodwill and other intangible assets: Before 2002, goodwill was subject to
periodic amortization in accordance with the provisions of APB No. 17,
"Intangible Assets." This treatment provided for a gradual reduction in the book
value of assets over their useful lives, which for us was generally 10 to 15
years. This treatment allowed changes to amortization if later events and
circumstances warranted a revised estimate of the useful lives of the assets.
Additionally, under APB No. 17, estimations of value and future benefits may
require that the unamortized cost should be reduced, which would result in a
reduction in net income.
In 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which
eliminated the requirement to amortize goodwill, and substituted impairment
testing in its place. The purpose of impairment testing is to ensure that an
amount we record for goodwill does not exceed the asset's actual fair value. We
test for impairment annually, using a methodology that is consistent with how
the value of the associated asset was assigned originally. If this testing
indicates that the fair value of the asset is less than its book value, we are
required to record an impairment expense. Impairment testing may cause more
volatility in reported income than amortization of goodwill, because impairment
losses are likely to occur irregularly and in varying amounts.
All of the goodwill on our books is related to acquisitions we have made and
firms in which we have invested, such as affiliate money managers CRM and RCM. A
substantial loss of either client accounts and/or assets under management at
either of these firms would trigger impairment testing using a discounted cash
flow approach. A decline in the fair value of our investment in either of these
firms could cause us to record an impairment expense.
We amortize other intangible assets on the straight-line or
sum-of-the-years'-digits basis over the estimated useful life of the asset. We
currently amortize mortgage servicing rights over an estimated useful life of
approximately eight years, and client lists over an estimated useful life of 15
to 20 years.
Other accounting policies: For more information about our critical accounting
policies, please refer to Note 1, "Summary of significant accounting policies,"
which begins on page 60 of our 2004 Annual Report to Shareholders, and Note 10,
"Accounting pronouncements," on page 15 of this report.
40
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
CAUTIONARY STATEMENT
This report contains estimates, predictions, opinions, or other statements that
might be construed as "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
current expectations and assessments of potential developments.
Such statements include references to our financial goals; dividend policy;
financial and business trends; new business results and outlook; business
prospects and positioning with respect to market and pricing trends; strategic
initiatives; credit quality and the adequacy of the reserve for loans losses;
the effects of changes in market interest rates; the effects of changes in
securities valuations; the impact of accounting pronouncements; and other
internal and external factors that could affect our financial performance.
Our ability to achieve the results reflected in such statements could be
affected by, among other things, changes in national or regional economic
conditions, changes in market interest rates; significant changes in banking
laws or regulations; increased competition in our businesses;
higher-than-expected credit losses; the effects of acquisitions; the effects of
integrating acquired entities; unanticipated changes in regulatory, judicial, or
legislative tax treatment of business transactions; and economic uncertainty
created by unrest in other parts of the world.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY AND MARKET RISK
Our primary market risks are interest rate risk, which pertains to our banking
business, and financial market risk, which pertains to our advisory businesses.
This section discusses interest rate risk, which is the risk to our earnings
that arises from fluctuations, or volatility, in market interest rates.
Changes in market interest rates, whether they are increases or decreases, and
the pace at which the changes occur, affect our net interest income and our net
interest margin, which are important determinants of our earnings and ability to
produce consistent financial results. Changes in market interest rates can
trigger repricings, prepayments, and changes in the pace of payments, which
individually or in combination may affect our net interest income, positively or
negatively.
Most of the yields on our earning assets, including floating-rate loans and
investments, are related to market interest rates. So is our cost of funds,
which includes the rates we pay on interest-bearing deposits. Interest rate
sensitivity occurs when the interest income (yields) we earn on assets changes
at a pace that differs from the interest expense (rates) we pay on liabilities.
To assess interest rate risk, we consider a number of balance sheet risks and
market variables, which include:
- The mix of assets, liabilities, and off-balance-sheet instruments;
- Their respective repricing and maturity characteristics;
- The level of market interest rates; and
- Other external factors.
Our goal is to maximize the growth of net interest income on a consistent basis
by minimizing the effects of fluctuations associated with changing market
interest rates. In other words, we want changes in loans and deposits, rather
than changes in market interest rates, to be the primary drivers of growth in
net interest income.
The primary tool we use to assess our exposure to interest rate risk is a
computer modeling technique that simulates the effects of variations in interest
rates on net interest income. The simulations, which we conduct quarterly,
compare multiple hypothetical interest rate scenarios to a stable interest rate
environment. As a rule, our model employs scenarios in which rates gradually
move up or down 250 basis points over a period of 10 months.
41
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
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 March 31, 2005, and December 31, 2004.
INTEREST RATE RISK SIMULATION
--------------------------------------------------------------------------------
IMPACT OF INTEREST RATE CHANGES FOR THE 12 MONTHS FOR THE 12 MONTHS
ON NET INTEREST INCOME BEGINNING 3/31/05 BEGINNING 12/31/04
--------------------------------------------------------------------------------
Gradual increase of 250 basis points 2.00% 3.99%
--------------------------------------------------------------------------------
Gradual decrease of 250 basis points (6.36)% (8.11)%*
--------------------------------------------------------------------------------
* Because the targeted federal funds rate at December 31, 2004, was 2.25%, a
scenario that simulated a 250-basis-point decrease would have been
unreasonable, since that would have created negative interest rates within
the model. Accordingly, the declining-rate scenario for the 12 months
beginning December 31, 2004, modeled a gradual downward movement until the
federal funds rate equaled zero. The rising rate scenario had no
corresponding limit, as rates can increase without limit. As of March 31,
2005, the targeted federal funds rate was 2.75%, allowing for a full
250-basis-point decrease.
The table above shows that if, as of March 31, 2005, the targeted federal funds
rate were to increase gradually by a total of 250 basis points over a one-year
period, the model projects that net interest income would increase by 2.00% over
that same period. Similarly, if the targeted federal funds rate were to decrease
gradually over that same span of time, by a total of 250 basis points, the model
projects that net interest income would decline by 6.36% for that period.
Assumptions about retail deposits rates, residential mortgage prepayments,
asset-backed securities, and collateralized mortgage obligations play a
significant role in our interest rate simulations. Our rate and prepayment
assumptions differ for assets and liabilities in rising as well as declining
rate environments. These assumptions are inherently uncertain, and the
simulations cannot predict precisely what the actual impact of interest rate
changes might be on our net interest income.
One of the things we do to manage interest rate risk is to reduce our exposure
to fixed-rate residential mortgage loans. We continue to originate new
residential mortgages, but we sell most fixed-rate production into the secondary
market, which is one reason why our residential mortgage loan balances continue
to decline. In a dynamic interest rate environment, selling fixed-rate
residential mortgages eliminates the risk associated with instruments that
typically have a 15- to 30-year maturity, and it helps us obtain the best yield
opposite the corresponding risk.
Between 2001 and the end of June 2004, managing interest rate risk was
particularly challenging. During this time, the Federal Open Market Committee
(FOMC) instituted a series of downward moves in interest rates that ultimately
brought rates to their lowest levels since 1958. At the end of June 2004, the
FOMC instituted its first rate increase since May 2000. Since June 2004, the
FOMC has continued to move rates upward, as the following table shows.
FOMC ACTIONS SINCE JANUARY 1, 2004
--------------------------------------------------------------------------------
QUARTER FOMC ACTIONS FEDERAL FUNDS RATE AT PERIOD END
--------------------------------------------------------------------------------
2004 Q1 No change 1.00%
--------------------------------------------------------------------------------
2004 Q2 1 upward move of 25 bps 1.25%
--------------------------------------------------------------------------------
2004 Q3 2 upward moves totaling 50 bps 1.75%
--------------------------------------------------------------------------------
2004 Q4 2 upward moves totaling 50 bps 2.25%
--------------------------------------------------------------------------------
2005 Q1 2 upward moves totaling 50 bps 2.75%
--------------------------------------------------------------------------------
Between the beginning of 2001 and the end of June 2004, the magnitude of the
FOMC's rate decreases, and the rapid pace at which they occurred, caused the
yields on our earning assets to decline by amounts that were far larger than the
corresponding decreases in our cost of funds. In the second half of 2004, as
interest rates began to rise, this
42
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
situation reversed, and the increases in our yield on earning assets began to
outpace the increases in our cost of funds.
During the first three months of 2005, we continued to benefit from the rising
interest rate environment. As the table above shows, rates at the end of the
2005 first quarter were 175 basis points higher than they were at the end of the
year-ago first quarter, and 50 basis points higher than at the end of the 2004
fourth quarter.
As a result, our average yield on earning assets for the first quarter of 2005
was 82 basis points higher than for the year-ago first quarter, opposite an
increase of 71 basis points in the cost of funds. Compared with the 2004 fourth
quarter, the average yield on earning assets was 31 basis points higher, while
the cost of funds was 26 basis points higher. With increases on earning asset
yields continuing to outpace increases in the cost of funds, we remained asset
sensitive.
The following table presents a comparison of key yields and rates. For a more
detailed analysis of our yields and rates, please refer to the "Analysis of
earnings" that begins on page 23 of this report.
YIELDS AND RATES
--------------------------------------------------------------------------------
AVERAGE YIELDS AND RATES FOR THE 3 MONTHS ENDED 3/31/05 12/31/04 3/31/04
--------------------------------------------------------------------------------
On loan balances 5.60% 5.21% 4.61%
--------------------------------------------------------------------------------
On total earning assets 5.28% 4.97% 4.46%
--------------------------------------------------------------------------------
On core interest-bearing deposits 1.16% 1.05% 0.77%
--------------------------------------------------------------------------------
On total cost of funds 1.64% 1.38% 0.93%
--------------------------------------------------------------------------------
The following table presents a comparison of the percentages of fixed- and
floating-rate loans in our portfolio, and of our prime lending rate, which
serves as a point of reference for a substantial number of the floating-rate
loans in our commercial loan portfolio.
SELECTED LOAN YIELD INDICATORS
----------------------------------------------------------------------------------------
AT 3/31/05 AT 12/31/04 AT 3/31/04
----------------------------------------------------------------------------------------
Wilmington Trust prime lending rate (period end) 5.75% 5.25% 4.00%
----------------------------------------------------------------------------------------
Percentage of floating-rate loans 77.7% 77.0% 75.9%
----------------------------------------------------------------------------------------
Percentage of fixed-rate loans 22.3% 23.0% 24.1%
----------------------------------------------------------------------------------------
Changes in the yields on our floating-rate loans may not correlate directly with
market interest rate changes, because:
- Most of our floating-rate loans reprice within 30 to 45 days of a rate
change;
- Not all of our floating-rate loans are pegged to the targeted federal
funds rate; and
- We factor competitive considerations into our pricing decisions.
The preceding paragraphs contain forward-looking statements about the
anticipated effects on net interest income that may result from hypothetical
changes in market interest rates. We review our exposure to interest rate risk
regularly, and may employ a variety of strategies as needed to adjust its
sensitivity. This includes changing the relative proportions of fixed-rate and
floating-rate assets and liabilities; changing the number and maturity of
funding sources; securitizing assets; and utilizing such derivative contracts as
interest rate swaps and interest rate floors.
43
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
FINANCIAL MARKET RISK
Financial market risk is the risk that arises from fluctuations, or volatility,
in the equity markets, the fixed income markets, or both. Changes in the market
values of financial assets, the stability of particular securities markets, and
the level of volatility in financial markets could affect our noninterest income
and our overall results.
The majority of Wealth Advisory income, and a portion of Corporate Client
Services income, is derived from fees that we base on the financial market
valuations of assets we manage or hold in custody on behalf of clients. All of
the income from our affiliate money managers is based on financial market
valuations.
As the following table shows, 50% - or $38.7 million - of total noninterest
income for the 2005 first quarter was associated directly with financial market
valuations.
NONINTEREST INCOME TIED TO FINANCIAL MARKET VALUATIONS
--------------------------------------------------------------------------------
COMPONENTS OF NONINTEREST INCOME 2005 Q1 2004 Q4 2004 Q1
--------------------------------------------------------------------------------
Wealth Advisory trust and investment advisory fees 38% 39% 37%
--------------------------------------------------------------------------------
Corporate Client retirement services fees 4% 4% 4%
--------------------------------------------------------------------------------
Corporate Client cash management fees 2% 2% 2%
--------------------------------------------------------------------------------
Affiliate money manager income 6% 6% 3%
--------------------------------------------------------------------------------
Total noninterest income tied to market values 50% 51% 46%
--------------------------------------------------------------------------------
OPERATIONAL RISK AND FIDUCIARY RISK
Operational risk is the risk of unexpected losses attributable to human error,
systems failures, fraud, or inadequate internal controls and procedures. To
mitigate this risk, we employ a system of internal controls that is designed to
keep operating risk at levels we believe are acceptable, in view of the risks
inherent in the markets and businesses in which we engage. Our internal controls
include policies and procedures for authorizing, approving, documenting, and
monitoring transactions.
Fiduciary risk is the risk of loss that may occur if we were to breach a
fiduciary duty to a client. To limit this risk, we employ policies and
procedures to reduce the risk of failing to discharge our obligations to clients
faithfully and in compliance with applicable legal and regulatory requirements.
These policies and procedures pertain to creating, selling, and managing
investment products; trading securities; and selecting counterparties.
All of our staff members share responsibility for adhering to our policies,
procedures, and external regulations. Our internal auditors monitor the overall
effectiveness of our system of internal controls on an ongoing basis.
Section 404 of the Sarbanes-Oxley Act requires us to assess the design and
effectiveness of our internal controls over financial reporting. We evaluate the
documentation of our control processes and test our primary controls
continually, remediating them as needed. In addition, each quarter, designated
managers in each business unit certify to the chairman and chief executive
officer, as well as to the chief financial officer, as to the effectiveness of
the internal controls within their respective areas of responsibility.
As of December 31, 2004, neither we nor our independent registered public
accounting firm, KPMG LLP, identified any material weaknesses in our internal
controls over financial reporting. KPMG attested to this in a letter dated March
7, 2005, which appears on page 88 of our 2004 Annual Report to Shareholders.
44
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
REGULATORY RISK
Regulatory risk is the risk of sanctions that various state and federal
authorities may impose on us if we fail to comply adequately with regulatory
requirements, including those specified by the Bank Secrecy Act, the USA Patriot
Act, and the Sarbanes-Oxley Act, and other applicable legal and regulatory
requirements. To limit this risk, we employ policies and procedures to reduce
the risk of failing to comply with these requirements.
LEGAL RISK
We and our subsidiaries are subject to various legal proceedings that arise from
time to time in the ordinary course of business. Some of these proceedings seek
relief or damages in amounts that may be substantial. Because of the complex
nature of some of these proceedings, it may be a number of years before they
ultimately are resolved. While it is not feasible to predict the outcome of
these proceedings, we do not believe that the ultimate resolution of any of them
will have a materially adverse effect on our consolidated financial condition.
Furthermore, some of these proceedings involve claims that we believe may be
covered by insurance, and we have advised our insurance carriers accordingly.
OTHER RISK
We are exposed to a variety of risks in the normal course of our business. We
monitor these risks closely and take every step to safeguard the assets of our
clients and our company. From time to time, however, we may incur losses related
to these risks, and there can be no assurance that such losses will not occur in
the future.
ITEM 4. CONTROLS AND PROCEDURES.
Our chairman and chief executive officer, and our chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report, pursuant to Securities Exchange Act
Rule 13a-14. Based on that evaluation, they concluded that our disclosure
controls and procedures were effective in alerting them on a timely basis to
material information about the Corporation (including our consolidated
subsidiaries) that we are required to include in the periodic filings we make
with the Securities and Exchange Commission. There was no change in our internal
control over financial reporting during the first quarter of 2005 that
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We and our subsidiaries are subject to various legal proceedings that arise from
time to time in the ordinary course of their businesses and operations. Some of
these proceedings seek relief or damages in amounts that may be substantial.
Because of the complex nature of some of these proceedings, it may be a number
of years before they ultimately are resolved. While it is not feasible to
predict the outcome of these proceedings, management does not believe the
ultimate resolution of any of them will have a materially adverse effect on our
consolidated financial condition. Further, management believes that some of the
claims may be covered by insurance, and has advised its insurance carriers of
the proceedings.
45
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table shows our purchases of our equity securities during the
first quarter.
--------------------------------------------------------------------------------------------
(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
January 1, 2005 -
January 31, 2005 22,674 $34.71 22,674 7,342,733
--------------------------------------------------------------------------------------------
Month #2
February, 1, 2005 -
February 28, 2005 9,355 $35.49 9,355 7,333,378
--------------------------------------------------------------------------------------------
Month #3
March 1, 2005 -
March 31, 2005 783 $33.79 783 7,332,595
--------------------------------------------------------------------------------------------
Total 32,812 $34.91 32,812 7,332,595
--------------------------------------------------------------------------------------------
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.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
46
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
ITEM 6. EXHIBITS.
Exhibit
Number Exhibit
------ -------
3.1 Amended and Restated Certificate of Incorporation of the Corporation
(Commission File Number 1-14659)(1)
3.2 Amended Certificate of Designation of Series A Junior Participating
Preferred Stock of the Corporation (2)
3.3 Amended and Restated Bylaws of the Corporation (Commission File
Number 1-14659) (3)
31 Rule 13a-14(a)/15d-14(a) Certifications (2)
32 Section 1350 Certification (2)
----------
(1) Incorporated by reference to Exhibit 3(a) to the Report on Form S-8 of
Wilmington Trust Corporation filed on October 31, 1991.
(2) Filed herewith.
(3) Incorporated by reference to Exhibit 1 to the Current Report on Form 8-K
of Wilmington Trust Corporation filed on December 22, 2004.
47
Wilmington Trust Corporation
Form 10-Q for the quarterly period ended March 31, 2005
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILMINGTON TRUST CORPORATION
Date: May 10, 2005 /s/ Ted T. Cecala
----------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and Chief
Executive Officer
(Authorized Officer)
Date: May 10, 2005 /s/ David R. Gibson
----------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
47