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, 2006
-------------------------------------------------
or
[X] 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
--------------------------------------------------------------------------------
(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
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
--------------------------------------------------------------------------------
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b-2 of the Exchange Act.
[X] Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of March 31, 2006
----- --------------------------------
COMMON STOCK - PAR VALUE $1.00 68,210,351
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
FIRST QUARTER 2006 FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Statements of Condition 1
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 53
Item 4 Controls and Procedures 60
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 61
Item 1A Risk Factors 61
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 61
Item 3 Defaults upon Senior Securities 62
Item 4 Submission of Matters to a Vote of Security Holders 62
Item 5 Other Information 62
Item 6 Exhibits 62
2006 Q1 FORM 10-Q Wilmington Trust Corporation
DRAFT #9 Form 10-Q for the three months ended March 31, 2006
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
------------------------
March 31, December 31,
(In millions, except share amounts) 2006 2005
-------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 219.2 $ 264.0
------------------------
Federal funds sold and securities purchased under agreements to
resell 44.9 14.3
------------------------
Investment securities available for sale:
U.S. treasury 157.3 181.6
Government agencies 374.0 390.3
Obligations of state and political subdivisions 8.5 9.0
Other securities 1,298.2 1,345.4
-------------------------------------------------------------------------------------------------------------
Total investment securities available for sale 1,838.0 1,926.3
------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions
(market values of $2.1 and $2.1 respectively) 2.0 2.0
Other securities (market value of $0.3 and $0.5 respectively) 0.3 0.5
-------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity 2.3 2.5
------------------------
Loans:
Commercial, financial, and agricultural 2,445.9 2,461.3
Real estate - construction 1,411.9 1,233.9
Mortgage - commercial 1,245.4 1,223.9
-------------------------------------------------------------------------------------------------------------
Total commercial loans 5,103.2 4,919.1
------------------------
Mortgage - residential 473.4 455.5
Consumer 1,408.5 1,438.3
Secured with liquid collateral 553.9 584.8
-------------------------------------------------------------------------------------------------------------
Total retail loans 2,435.8 2,478.6
------------------------
Total loans net of unearned income 7,539.0 7,397.7
Reserve for loan losses (93.6) (91.4)
-------------------------------------------------------------------------------------------------------------
Net loans 7,445.4 7,306.3
------------------------
Premises and equipment, net 148.7 147.6
Goodwill, net of amortization 348.5 348.3
Other intangible assets, net of amortization 35.0 36.2
Accrued interest receivable 57.9 54.5
Other assets 124.7 132.8
-------------------------------------------------------------------------------------------------------------
Total assets $10,264.6 $10,232.8
========================
1
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
------------------------
March 31, December 31,
(In millions, except share amounts) 2006 2005
----------------------------------- --------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 830.2 $ 1,014.8
Interest-bearing:
Savings 328.0 326.3
Interest-bearing demand 2,352.1 2,360.0
Certificates under $100,000 960.4 923.0
Local CDs $100,000 and over 513.3 436.5
-------------------------------------------------------------------------------------------------------------
Total core deposits 4,984.0 5,060.6
National CDs $100,000 and over 2,707.2 2,228.6
-------------------------------------------------------------------------------------------------------------
Total deposits 7,691.2 7,289.2
------------------------
Short-term borrowings:
Federal funds purchased and securities sold under agreements
to repurchase 984.2 1,355.6
U.S. Treasury demand 0.6 18.1
-------------------------------------------------------------------------------------------------------------
Total short-term borrowings 984.8 1,373.7
------------------------
Accrued interest payable 59.6 45.7
Other liabilities 92.2 105.9
Long-term debt 393.2 400.4
-------------------------------------------------------------------------------------------------------------
Total liabilities 9,221.0 9,214.9
------------------------
Minority interest 0.3 0.2
------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized 150,000,000 shares;
issued 78,528,346 78.5 78.5
Capital surplus 153.9 145.0
Retained earnings 1,095.4 1,071.7
Accumulated other comprehensive loss (29.3) (21.8)
-------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 1,298.5 1,273.4
Less: Treasury stock, at cost, 10,317,995 and 10,625,067
shares, respectively (255.2) (255.7)
-------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,043.3 1,017.7
------------------------
Total liabilities and stockholders' equity $10,264.6 $10,232.8
========================
See Notes to Consolidated Financial Statements
2
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------
For the three
months ended
March 31,
---------------
(In millions, except share amounts) 2006 2005
-------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $131.5 $ 94.2
Interest and dividends on investment securities:
Taxable interest 19.5 17.0
Tax-exempt interest 0.1 0.1
Dividends 1.5 1.5
Interest on federal funds sold and securities
purchased under agreements to resell 0.2 0.1
-------------------------------------------------------------------------------------------------------------
Total interest income 152.8 112.9
---------------
Interest on deposits 47.8 23.3
Interest on short-term borrowings 11.5 7.6
Interest on long-term debt 6.2 4.4
-------------------------------------------------------------------------------------------------------------
Total interest expense 65.5 35.3
---------------
Net interest income 87.3 77.6
Provision for loan losses (4.0) (3.1)
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 83.3 74.5
---------------
NONINTEREST INCOME
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory fees 34.3 29.9
Mutual fund fees 4.7 4.5
Planning and other services 7.3 9.1
-------------------------------------------------------------------------------------------------------------
Total Wealth Advisory Services 46.3 43.5
---------------
Corporate Client Services:
Capital markets services 8.7 7.3
Entity management services 6.5 5.9
Retirement services 3.1 3.0
Investment/cash management services 2.1 1.8
-------------------------------------------------------------------------------------------------------------
Total Corporate Client Services 20.4 18.0
---------------
Cramer Rosenthal McGlynn 4.0 4.3
Roxbury Capital Management 0.9 0.3
-------------------------------------------------------------------------------------------------------------
Advisory fees 71.6 66.1
Amortization of affiliate other intangibles (1.0) (1.0)
-------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of affiliate
other intangibles 70.6 65.1
---------------
Service charges on deposit accounts 6.9 6.7
Loan fees and late charges 1.9 1.6
Card fees 2.0 1.9
Other noninterest income 1.3 1.3
Securities gains -- 0.8
-------------------------------------------------------------------------------------------------------------
Total noninterest income 82.7 77.4
---------------
Net interest and noninterest income 166.0 151.9
---------------
3
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
-----------------
For the three
months ended
March 31,
-----------------
(In millions, except share amounts) 2006 2005
-------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and wages 36.9 32.9
Incentives and bonuses 10.3 9.8
Employment benefits 13.5 12.5
Net occupancy 5.9 5.7
Furniture, equipment, and supplies 9.0 8.4
Advertising and contributions 1.9 2.1
Servicing and consulting fees 2.3 2.8
Subadvisor expense 2.8 2.6
Travel, entertainment, and training 2.2 1.7
Originating and processing fees 2.8 2.2
Legal and auditing fees 1.5 1.5
Other noninterest expense 8.4 8.1
-------------------------------------------------------------------------------------------------------------
Total noninterest expense 97.5 90.3
-----------------
NET INCOME
Income before income taxes and minority interest 68.5 61.6
Income tax expense 24.3 22.4
-------------------------------------------------------------------------------------------------------------
Net income before minority interest 44.2 39.2
Minority interest 0.1 --
-------------------------------------------------------------------------------------------------------------
Net income $ 44.1 $ 39.2
=================
Net income per share:
Basic $ 0.65 $ 0.58
=================
Diluted $ 0.64 $ 0.57
=================
Weighted average shares outstanding:
Basic (000s) 68,070 67,480
Diluted (000s) 69,434 68,327
See Notes to Consolidated Financial Statements
4
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------
For the three
months
ended March 31,
(In millions) 2006 2005
-------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 44.1 $ 39.2
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 4.0 3.1
Provision for depreciation and other amortization 4.8 4.9
Amortization of other intangible assets 1.3 1.3
Minority interest in net income 0.1 --
Amortization of investment securities available for sale
discounts and premiums 0.4 0.9
Deferred income taxes (12.2) --
Originations of residential mortgages available for sale (20.2) (21.8)
Gross proceeds from sales of residential mortgages 20.4 22.3
Gains on sales of residential mortgages (0.2) (0.5)
Securities gains -- (0.8)
Tax benefits realized from stock-based compensation cost (2.6) (1.8)
Decrease in other assets 9.1 16.5
Increase/(decrease) in other liabilities 4.4 (4.2)
-------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 53.4 59.1
---------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 7.9 26.4
Proceeds from maturities of investment securities available for sale 93.7 222.8
Proceeds from maturities of investment securities held to maturity 0.2 0.2
Purchases of investment securities available for sale (20.6) (293.9)
Purchases of investment securities held to maturity -- (0.1)
Purchases of residential mortgages (7.1) (3.9)
Net increase in loans (136.0) (95.1)
Purchases of premises and equipment (5.8) (3.0)
Dispositions of premises and equipment -- 0.1
-------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (67.7) (146.5)
---------------
5
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
-----------------
For the three
months ended
March 31,
(in millions) 2006 2005
-------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in demand, savings, and interest-bearing demand deposits (190.8) (181.0)
Net increase in certificates of deposit 592.8 200.2
Net (decrease)/increase in federal funds purchased and securities sold
under agreements to repurchase (371.4) 95.3
Net decrease in U.S. Treasury demand (17.5) (33.1)
Cash dividends (20.4) (19.3)
Proceeds from common stock issued under employment benefit plans 11.5 2.2
Tax benefits realized from stock-based compensation cost 2.6 1.8
Payments for common stock acquired through buybacks (6.7) (1.1)
-------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 0.1 65.0
-----------------
Effect of foreign currency translation on cash -- (0.1)
-----------------
Decrease in cash and cash equivalents (14.2) (22.5)
Cash and cash equivalents at beginning of period 278.3 311.9
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 264.1 $ 289.4
=================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $51.6 $29.3
Taxes 2.2 0.8
See Notes to Consolidated Financial Statements
6
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ACCOUNTING AND REPORTING POLICIES
We have prepared the accompanying consolidated financial statements in
accordance with U.S. generally accepted accounting principles (GAAP), and with
practices generally accepted within the banking industry. The information for
interim periods is unaudited, and includes all adjustments of a normal recurring
nature which we believe are necessary for fair presentation. We have
reclassified certain prior-year amounts to conform to the current-year
presentation.
The accompanying consolidated financial statements include, after elimination of
material intercompany balances and transactions, the accounts of Wilmington
Trust Corporation (Corporation); Wilmington Trust Company (WTC); Wilmington
Trust of Pennsylvania; Wilmington Trust FSB; WT Investments, Inc. (WTI); Rodney
Square Management Corporation; Wilmington Trust (UK) Limited; Wilmington Trust
Investment Management, LLC; GTBA Holdings, Inc.; and WTC's subsidiaries.
Preparing financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities; the disclosure of contingent assets and liabilities at the date of
the financial statements; and the reported amounts of revenues and expenses
during the reporting period. We evaluate these estimates on an ongoing basis,
including those estimates related to the reserve for loan losses, stock-based
employee compensation, affiliate fee income, impairment of goodwill, recognition
of Corporate Client Services fees, loan origination fees, and mortgage servicing
assets. The consolidated financial statements presented in this report should be
read in conjunction with the "Notes to Consolidated Financial Statements" in our
2005 Annual Report to Shareholders.
NOTE 2 - STOCK-BASED COMPENSATION PLANS
We offer a long-term stock-based incentive plan, an executive incentive plan,
and an employee stock purchase plan, as described below. The Compensation
Committee of our Board of Directors administers these plans.
- Long-term stock-based incentive plans. Under our 2005 long-term incentive
plan, we may grant incentive stock options, nonstatutory stock options,
restricted stock, and other stock-based awards to officers, other key staff
members, directors, and advisory board members for up to 4 million shares
of common stock. Under this plan and its predecessors, the exercise price
of each option equals the last sale price of our common stock on the date
of the grant. Options are subject to a vesting period, which is normally 3
years (or such other term as our Compensation Committee may determine).
Options have a maximum term of 10 years.
- Executive incentive plan. Our 2004 executive incentive plan, which was
approved by shareholders on April 15, 2004, authorizes cash bonuses and the
issue of up to 300,000 shares of our common stock with a par value of $1.00
per share. The stock awards we have granted under this plan are for
restricted stock and are subject to vesting at the sole discretion of the
Compensation Committee.
- Employee stock purchase plan. Under our employee stock purchase plan,
substantially all staff members may purchase our common stock at the
beginning of the stock purchase plan year through payroll deductions of up
to 10% of their annual base pay, or $21,250, whichever is less. Plan
participants may terminate their participation at any time. The price per
share is 85% (or such greater percentage as our Compensation Committee may
determine) of the stock's fair market value at the beginning of the plan
year. We include the discounted value of the shares issued each June (at
the end of the plan year) in the stock-based compensation pro rata over the
plan's fiscal year.
7
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
When option recipients exercise their options, we issue shares from those held
in our treasury and record the proceeds as additions to capital. When restricted
stock grants are forfeited before they vest, we reacquire the shares, hold them
in our treasury, and use them to grant new awards. We record forfeitures when
they occur.
At March 31, 2006, we held more than 10 million shares of our stock in our
treasury. This is more than adequate to meet the share requirements of our
current stock-based compensation plans. We may repurchase additional shares
under our current 8-million-share repurchase program, which commenced in April
2002. As of March 31, 2006, there were 7,156,831 shares available for repurchase
under this program.
Prior to January 1, 2006, we accounted for stock-based compensation expense
under the intrinsic value method permitted by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The intrinsic value method limited the compensation expense to
the excess of a stock option's market price on its grant date over the option's
exercise price. Since the stock options we award have exercise prices equal to
market values on the grant date, there was no excess, and we recognized no
stock-based compensation expense in our income statement.
Prior to January 1, 2006, in accordance with the fair value provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," we provided pro forma disclosures of our stock-based
compensation expense as if we had followed the fair value approach.
Effective January 1, 2006, we adopted SFAS No. 123 (revised), "Share-Based
Payment," using the modified retrospective method. SFAS No. 123 (revised)
requires us to recognize the expense, or fair value, in our income statement of
stock-based compensation and stock option awards over their vesting periods. The
vesting period is the amount of time after the grant of stock-based compensation
and/or stock option awards that recipients must remain employed by us before
they may exercise their options and/or realize such compensation.
Our decision to use the modified retrospective method of adopting SFAS No. 123
(revised) required us to restate our financial results back to 1995, the
effective date of SFAS No. 123.
The following tables present other information about stock-based compensation
awards.
-----------
For the three months ended March 31 (in millions) 2006 2005
-------------------------------------------------------------------------------------------------------------
Stock compensation expense recognized in income $2.0 $1.0
Tax benefit recognized in income 0.7 0.1
-----------
Net income effect recognized in Consolidated Statements of Income $1.3 $0.9
STOCK OPTION AWARDS
----------------------------------------------
Weighted
Weighted average
Stock option activity average remaining Aggregate
for the three months Stock exercise contractual intrinsic
ended March 31, 2006 options price term value
-------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 6,189,292 $30.57
Granted 934,405 43.20
Exercised 434,136 21.78
Forfeited 29,982 33.82
------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 2006 6,659,579 $32.90 6.6 years $5.81
Exercisable at March 31, 2006 3,397,331 $29.26 4.8 years $5.43
8
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
Options exercised for the three months -------------------
ended March 31 (dollars in millions) 2006 2005
-------------------------------------------------------------------------------------------------------------
Number of options exercised 434,136 140,338
Total intrinsic value of options exercised $ 1.7 $ 0.5
Cash received from options exercised $ 11.5 $ 2.2
Tax deduction realized from options exercised $ 2.0 $ 0.4
At March 31, 2006, total unrecognized compensation cost related to nonvested
options was $11.5 million. We expect to record that expense over a weighted
average period of 1.3 years.
--------------------------------
Weighted average
Nonvested stock options for the fair value
three months ended March 31, 2006 Stock options at grant date
-------------------------------------------------------------------------------------------------------------
Nonvested at January 1, 2006 3,287,608
Granted 934,405 $43.20
Vested (931,183) 28.07
Exercised -- --
Forfeited (28,582) 34.06
--------------------------------------------------------------------------------------------------------
Nonvested at March 31, 2006 3,262,248 $36.68
The weighted average fair value as of the grant date for nonvested stock options
awarded in the first quarter of 2005 was $33.91.
VALUATION OF STOCK OPTIONS
--------------------------
Since adopting SFAS No. 123 (revised), we made no modifications to stock options
already outstanding as of January 1, 2006. For stock options granted after
January 1, 2006, we modified our valuation methodology by segregating the awards
into two groups: one for designated senior managers and one for all other staff
members. This enabled us to employ valuation methodologies for each group based
on the amount of time that typically lapses between option grant dates and
option exercise dates. It also enabled us to apply different forfeiture rates
for each group.
Senior managers tend to hold their options for longer periods of time than other
staff members do. Compared to options held for short periods of time, options
held for longer periods of time are likely to incur a greater degree of
volatility in share price and, therefore, a greater degree of volatility in
valuation.
To estimate the fair value of stock option awards, we use the Black-Scholes
valuation method. This method is dependent upon certain assumptions, as
summarized below:
Options granted in quarter ending
----------------------------------
Black-Scholes valuation assumptions March 31, 2006 March 31, 2005
-------------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.51% - 4.85% 4.00% - 4.07%
Expected volatility of the Corporation's stock 14.59% - 20.82% 20.85% - 21.57%
Expected divided yield 2.72% - 2.86% 3.21% - 3.25%
Expected life of options 4.3 to 8.4 years 4.0 years
In the table above:
- The risk-free interest rate is the U.S. Treasury rate commensurate with the
expected life of options on the date of their grant.
- We based the volatility of our stock on historical volatility over a span
of time equal to the expected life of options.
9
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
- We based the expected life of stock option awards on historical experience.
Expected life is the period of time we estimate that stock options granted
will remain outstanding.
RESTRICTED STOCK GRANTS
-----------------------
We amortize the value of restricted stock grants into compensation expense over
the applicable vesting periods. At March 31, 2006, total unrecognized
compensation cost related to restricted stock options was $1.7 million. We
expect to record that expense over a weighted average period of 2.5 years.
-----------------------------
Weighted average
Restricted stock activity Restricted fair value
for the three months ended March 31, 2006 shares at grant date
-------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 25,730 $34.84
Granted 27,860 $43.27
Vested 9,871 $35.12
Forfeited -- --
-------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 2006 43,719 $40.15
The weighted average fair value at the grant date for restricted shares granted
in the first quarter of 2005 was $33.90.
EMPLOYEE STOCK PURCHASE PLAN
----------------------------
For the employee stock purchase plan, we amortize the associated compensation
expense over the plan's fiscal year. The plan's expense is equal to the
difference between the fair market value and the discounted value of our stock.
-------------------
Employee stock purchase plan for the three months ended 2006 2005
-------------------------------------------------------------------------------------------------------------
Share subscriptions 106,836 106,989
Subscriptions cancelled 1,695 2,263
Purchase price (85% of market value) $ 30.55 $ 31.06
Compensation expense recognized (in millions) $ 0.1 --
NOTE 3 - COMPREHENSIVE INCOME
--------------
For the three months ended March 31 (in millions) 2006 2005
------------------------------------------------------------------------------------------------------------
Net income $44.1 $ 39.2
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities (4.4) (16.6)
Reclassification adjustment for securities gains included in net income -- (0.5)
Net unrealized holding gains/(losses) arising during the period
on derivatives used for cash flow hedge (3.2) 0.1
Reclassification adjustment for derivative gains included in net income -- (0.1)
Foreign currency translation adjustments 0.1 (0.1)
----- ------
Total comprehensive income $36.6 $ 22.0
===== ======
10
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
NOTE 4 - EARNINGS PER SHARE
For the three months ended March 31 --------------
(in millions, except share amounts) 2006 2005
-------------------------------------------------------------------------------------------------------------
Numerator:
Net income $44.1 $ 39.2
-------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted-average shares 68.1 67.5
-------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 1.3 0.8
-------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed conversions 69.4 68.3
-------------------------------------------------------------------------------------------------------------
Basic earnings per share $0.65 $ 0.58
=============================================================================================================
Diluted earnings per share $0.64 $ 0.57
=============================================================================================================
Cash dividends per share $0.30 $0.285
The number of antidilutive stock options excluded was 0.9 million for the
three-month period ended March 31, 2006. The number of antidilutive stock
options excluded was 1.1 million for the three-month 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. The fourth segment
combines the results from our affiliate money managers, Cramer Rosenthal McGlynn
(CRM) and Roxbury Capital Management (RCM).
The Regional Banking segment includes lending, deposit taking, and branch
banking in our primary banking markets of Delaware, southeastern Pennsylvania,
and Maryland. It also includes institutional deposit taking on a national basis.
Lending activities include commercial loans, commercial and residential
mortgages, and construction and consumer loans. Deposit products include demand
checking, certificates of deposit, negotiable order of withdrawal accounts, and
various savings and money market accounts.
The Wealth Advisory Services (WAS) segment includes financial planning, asset
management, investment counseling, trust services, estate settlement, private
banking, tax preparation, mutual fund services, broker-dealer services,
insurance services, business management services, and family office services. We
provide WAS services to clients throughout the United States and around the
world.
The Corporate Client Services (CCS) segment includes a variety of trust,
custody, and administrative services that support capital markets transactions,
entity management, and retirement plan assets. We provide CCS services to
clients around the world.
The Affiliate Money Managers segment represents the combined contributions from
CRM and RCM. These contributions are based on our partial ownership interest in
each firm. Services provided by these two affiliates include fixed-income and
equity investing services and investment portfolio management services. Neither
CRM's nor RCM's results are consolidated in our financial statements.
The segment reporting methodology employs activity-based costing principles to
assign corporate overhead expenses to each segment. Funds transfer pricing
concepts are used to credit and charge segments for funds provided and funds
used.
11
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
The accounting policies of the segments are the same as those described in Note
1, "Summary of significant accounting policies," which begins on page 62 of our
2005 Annual Report to Shareholders. We evaluate performance based on profit or
loss from operations before income taxes and without including nonrecurring
gains and losses. We generally record intersegment sales and transfers as if the
sales or transfers were to third parties (e.g., at current market prices). We
report profit or loss from infrequent events, such as the sale of a business,
separately for each segment.
The following tables present financial data by segment for the three months
ended March 31, 2006 and 2005.
-------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Three months ended March 31, 2006 (in millions) Banking Services Services Managers Totals
-------------------------------------------------------------------------------------------------------------
Net interest income $ 81.0 $ 6.4 $ 2.9 $ (3.0) $ 87.3
Provision for loan losses (3.8) (0.2) -- -- (4.0)
-------------------------------------------------------------------------------------------------------------
Net interest income after provision 77.2 6.2 2.9 (3.0) 83.3
Advisory fees:
Wealth Advisory Services 0.3 43.2 2.8 -- 46.3
Corporate Client Services 0.2 -- 20.2 -- 20.4
Affiliate Money Managers -- -- -- 4.9 4.9
-------------------------------------------------------------------------------------------------------------
Advisory fees 0.5 43.2 23.0 4.9 71.6
Amortization of other intangibles -- (0.7) (0.1) (0.2) (1.0)
-------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.5 42.5 22.9 4.7 70.6
Other noninterest income 11.4 0.5 0.2 -- 12.1
-------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 89.1 49.2 26.0 1.7 166.0
Noninterest expense (38.9) (38.3) (20.3) -- (97.5)
-------------------------------------------------------------------------------------------------------------
Segment profit before income taxes 50.2 10.9 5.7 1.7 68.5
Applicable income taxes and minority interest 17.5 3.9 2.1 0.9 24.4
-------------------------------------------------------------------------------------------------------------
Segment net income $ 32.7 $ 7.0 $ 3.6 $ 0.8 $ 44.1
=============================================================================================================
Depreciation and amortization $ 3.1 $ 2.0 $ 1.2 $ 0.2 $ 6.5
Investment in equity method investees -- -- -- 253.9 253.9
Segment average assets 8,356.3 1,374.1 183.8 257.8 10,172.0
12
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Three months ended March 31, 2005 (in millions) Banking Services Services Managers Totals
-------------------------------------------------------------------------------------------------------------
Net interest income $ 71.3 $ 5.5 $ 2.9 $ (2.1) $ 77.6
Provision for loan losses (2.8) (0.3) -- -- (3.1)
-------------------------------------------------------------------------------------------------------------
Net interest income after provision 68.5 5.2 2.9 (2.1) 74.5
Total advisory fees:
Wealth Advisory Services 0.4 41.0 2.1 -- 43.5
Corporate Client Services 0.2 -- 17.8 -- 18.0
Affiliate Money Managers -- -- -- 4.6 4.6
-------------------------------------------------------------------------------------------------------------
Advisory fees 0.6 41.0 19.9 4.6 66.1
Amortization of other intangibles -- (0.7) (0.2) (0.1) (1.0)
-------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.6 40.3 19.7 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 80.8 45.8 22.9 2.4 151.9
Noninterest expense (36.1) (36.8) (17.4) -- (90.3)
-------------------------------------------------------------------------------------------------------------
Segment profit before income taxes 44.7 9.0 5.5 2.4 61.6
Applicable income taxes and minority interest 15.7 3.2 2.1 1.4 22.4
-------------------------------------------------------------------------------------------------------------
Segment net income $ 29.0 $ 5.8 $ 3.4 $ 1.0 $ 39.2
=============================================================================================================
Depreciation and amortization $ 3.3 $ 2.3 $ 1.3 $ 0.2 $ 7.1
Investment in equity method investees -- -- -- 257.7 257.7
Segment average assets 7,712.1 1,299.8 199.5 262.2 9,473.6
Segment data for prior periods may differ from previously published figures due
to changes in reporting methodology and/or organizational structure.
NOTE 6 - DERIVATIVE AND HEDGING ACTIVITIES
We enter into interest rate swap and interest rate floor contracts to manage
interest rate risk, and to reduce the impact of fluctuations in interest rates
of identifiable asset categories, principally floating-rate commercial loans and
commercial mortgage loans. We also have used interest rate swaps in conjunction
with our issues of subordinated long-term debt.
We do not hold or issue derivative financial instruments for trading purposes.
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts. Floors are contracts that generate interest payments to us
that are based on the difference between the floating-rate index and a
predetermined strike rate of the specific floor when the index is below the
strike rate. When the index is equal to or above the strike rate, we do not
receive or make any payments. We amortize the premiums paid for interest rate
floors over the life of each floor.
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, 2006, we had entered into a total of
$953.2 million notional amount of interest rate swaps as follows:
13
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
- $414.1 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,
$414.1 million of swaps were made with other financial institutions that
exchanged fixed rates for floating rates.
- $125.0 million of swaps associated with our long-term subordinated debt
issues were made with other financial institutions.
On March 31, 2006, we sold $250.0 million of interest rate swap contracts
associated with the $250.0 million of subordinated long-term debt we issued on
April 4, 2003. We realized a loss of $12.7 million in this transaction. We will
recognize the amount of the loss over the remaining life of the debt, which
matures in 2013.
We employ interest rate floors to hedge the interest revenue of floating rate
loans against declines in market interest rates. At March 31, 2006, we had
purchased a total of $575.0 million of interest rate floors.
We record changes in fair value that are determined to be ineffective in "Other
noninterest income" in the Consolidated Statements of Income. We record the
effective portion of the change in fair value in "Other comprehensive income" in
the Consolidated Statements of Condition.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
March 31, 2006 December 31, 2005
---------------------------------- ----------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(In millions) amount amortization amount amount amortization amount
-------------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $378.3 $29.8 $348.5 $ 378.1 $29.8 $348.3
===========================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 9.1 $ 6.2 $ 2.9 $ 8.9 $ 5.9 $ 3.0
Client lists 42.9 13.0 29.9 43.0 12.0 31.0
Acquisition costs 1.7 1.7 -- 1.7 1.7 --
Other intangibles 0.7 0.7 -- 0.7 0.7 --
Nonamortizing
Other intangible assets 2.2 -- 2.2 2.2 -- 2.2
------------------------------------------------------------------------------------------------------------
Total other intangibles $ 56.6 $21.6 $ 35.0 $ 56.5 $20.3 $ 36.2
===========================================================================
The amortization expense of other intangible assets for the three months ended
March 31 was as follows:
For the three months ended March 31 (in millions) 2006 2005
-------------------------------------------------------------------------------------------------------------
Amortization expense $1.3 $1.3
14
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
The estimated amortization expense of other intangible assets for each of the
next five fiscal years is as follows:
Estimated annual amortization expense (in millions)
-------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2007 $4.6
For the year ended December 31, 2008 $4.2
For the year ended December 31, 2009 $3.2
For the year ended December 31, 2010 $2.8
For the year ended December 31, 2011 $2.5
Changes in the carrying amount of goodwill by business segment for the three
months ended March 31 were as follows:
2006
----------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
(In millions) Banking Services Services Managers Total
-------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2006 $3.8 $86.7 $19.2 $238.6 $348.3
Increase in carrying value due to foreign
currency translation adjustments -- -- 0.2 -- 0.2
-------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2006 $3.8 $86.7 $19.4 $238.6 $348.5
==================================================
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
==================================================
No goodwill was acquired during the first three months of 2006 or 2005.
15
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
The following table lists other intangible assets acquired during the three
months ended March 31
2006 2005
-----------------------------------------------------------------------
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 $0.2 -- 8 $0.3 -- 8
Client list decrease
in carrying value
due to foreign currency
translation adjustments (0.1) -- (0.1) --
-------------------- ---------------
$0.1 -- $0.2 --
==================== ===============
NOTE 8 - COMPONENTS OF NET PERIODIC BENEFIT COST
The following table presents 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, 2006 and 2005. Descriptions of these plans
are contained in Note 17, "Pension and other postretirement benefits," which
begins on page 78 of our 2005 Annual Report to Shareholders.
Pension SERP Postretirement
benefits benefits benefits
For the three months ended ---------------------------------------------
March 31 (in millions) 2006 2005 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 2.1 $ 1.8 $0.2 $0.2 $ 0.3 $0.2
Interest cost 2.6 2.6 0.3 0.3 0.5 0.6
Expected return on plan assets (3.6) (3.1) -- -- -- --
Amortization of prior service cost 0.2 0.2 0.1 0.1 (0.1) --
Recognized actuarial (gain)/loss 0.5 0.4 0.1 0.1 0.2 0.1
------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1.8 $ 1.9 $0.7 $0.7 $ 0.9 $0.9
============================================
Employer contributions $ -- $ -- $0.1 $0.1 $ 1.0 $1.0
Expected annual contribution $ -- $0.5 $ 4.1
NOTE 9 - TEMPORARILY IMPAIRED INVESTMENT SECURITIES
We periodically review the securities in our investment portfolio in order to
determine if their market value is equal to, less than, or exceeds their book
value. When the market value of securities falls below their book value, we
classify them as temporarily impaired, and report an unrealized loss. The
unrealized loss is the difference between the book value and the market value of
the securities.
16
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
Long-term market interest rates and the yield curve are key determinants of the
market value of temporarily impaired debt securities. A rise in long-term rates
typically causes the market value of these securities to decline. When their
market value declines, the unrealized loss increases. Conversely, a decline in
long-term rates typically causes the market value of these debt securities to
increase. As their market value rises, the unrealized loss diminishes or
disappears.
We consider these impairments temporary because we hold the debt securities
until maturity, at which point their market value equals par value. Par value is
the amount that is assigned to a security at the time of initial investment.
We retain temporarily impaired debt securities because, in addition to their
known maturities, they have no credit delinquencies and they generate strong
cash flows.
The primary risk associated with temporarily impaired debt securities is
interest rate risk. An extended period of increases in long-term rates could
further reduce the market value of fixed income securities, and create
additional unrealized losses.
The following table shows the estimated market value and gross unrealized loss
of debt and marketable equity securities that were temporarily impaired as of
March 31, 2006.
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, 2006
Other securities:
U.S. Treasury $ 50.6 $(0.2) $ 86.2 $ (2.1) $ 136.8 $ (2.3)
Government agencies 178.5 (3.4) 216.1 (4.8) 394.6 (8.2)
Preferred stock 33.3 (0.5) 3.6 (0.2) 36.9 (0.7)
Mortgage-backed securities 113.4 (2.5) 678.8 (27.4) 792.2 (29.9)
Other debt securities 97.7 (2.2) 53.6 (0.8) 151.3 (3.0)
-----------------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $473.5 $(8.8) $1,038.3 $(35.3) $1,511.8 $(44.1)
====================================================================
NOTE 10 - ACCOUNTING PRONOUNCEMENTS
Following are recent accounting pronouncements that affect our financial
condition and results of operations.
SFAS No. 155. In February 2006, FASB issued SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments." SFAS No. 155 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to permit fair
value remeasurement of any hybrid financial instrument with an embedded
derivative that otherwise would require bifurcation, provided that the entire
instrument is accounted for on the fair value basis. Also, SFAS No. 155 amends
SFAS No. 140, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
by eliminating the prohibition on a qualified special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
in other than another derivative financial instrument. SFAS No. 155 will be
effective for all financial instruments acquired or issued in our fiscal year
beginning January 1, 2007. We do not expect the adoption of SFAS No. 155 to have
a material impact on our financial statements.
17
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
SFAS No. 156. In March 2006, FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets - an amendment of FASB Statement No. 140." Along with
addressing the recognition and measurement of separately recognized servicing
assets and servicing liabilities, SFAS No. 156 provides for fair value
measurement of servicing assets and liabilities at each reporting period, with
changes in fair value reported in earnings in the period in which changes occur.
The fair value measurement method provides an approach to simplify efforts to
obtain hedge-like accounting for servicing assets and servicing liabilities.
SFAS No. 156 will be effective for us with the fiscal year that begins on
January 1, 2007. Because this Statement was issued so recently, and because we
are not required to adopt it until fiscal year 2007, we have not completed our
initial assessment of the impact, if any, that SFAS No. 156 may have on our
financial statements.
18
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPANY OVERVIEW
Wilmington Trust Corporation (the Corporation) is (we are) a Delaware
corporation and a financial holding company under the Bank Holding Company Act.
We are a relationship management company that helps clients increase and
preserve their wealth. We do this by engaging in fiduciary, wealth management,
investment advisory, financial planning, insurance, and broker-dealer services,
and in lending and deposit-taking activities.
Our mission is to help our clients succeed. Our driving force is sustainable
earnings growth and consistent profitability with low volatility. Our strategy
is to deliver consistent results by investing in businesses that have the most
potential for long-term growth or high operating profit margins; being the
market leader in each of our businesses; and increasing profitability without
compromising our overall risk profile.
We manage our company through three businesses: Regional Banking, Corporate
Client Services, and Wealth Advisory Services.
Regional Banking
We offer Regional Banking services throughout the Delaware Valley region, which
we define as the state of Delaware; areas that are geographically adjacent to
Delaware along the I-95 corridor from Princeton, New Jersey, to Baltimore,
Maryland; and Maryland's Eastern Shore. We offer commercial banking services
throughout this region, and target family-owned or closely held businesses with
annual sales of up to $250 million. We target our retail banking activities to
clients in the state of Delaware.
Our lending services include commercial loans, commercial and residential
mortgages, and construction and consumer loans. Our deposit products include
demand checking, certificates of deposit, negotiable order of withdrawal
accounts, and various savings and money market accounts.
Corporate Client Services
This business serves national and multinational institutions in 85 countries
with a variety of trust, custody, administrative, and investment and cash
management services that support capital markets transactions, entity
management, and retirement plans.
The capital markets component of this business provides services that support
structured finance transactions like securitizations and leveraged leases.
The entity management component helps clients establish "nexus," or legal
presence, in jurisdictions in the United States, Caribbean, and Europe with
favorable legal and tax considerations, and provides captive insurance
management services.
The retirement services component provides trust and custodian services for
retirement plans.
Wealth Advisory Services
This business serves high-net-worth clients in all 50 states and 21 other
countries. It offers financial planning, asset management, investment
counseling, trust services, estate settlement, private banking, tax preparation,
mutual fund services, broker-dealer services, insurance services, business
management services, and family office services.
The investment services we offer feature a combination of proprietary and
independent advisors; forward-looking asset allocation; a blend of active and
index funds; and tactical rebalancing.
Our planning services help high-net-worth individuals and families preserve and
protect their wealth; minimize taxes; transfer wealth to future generations;
support charitable endeavors; and manage their business affairs.
19
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
Each of these businesses targets specific types of clients, provides different
kinds of services, and has a different geographic scope. Because we actively
seek to deepen our client relationships to the fullest extent possible, each of
these businesses uses services from the other two. Collectively, they generate a
balanced and diversified revenue stream that has helped us produce consistent
growth and profitability, with low volatility, throughout 102 years of economic
cycles.
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, 2006, WTC had 47 branch offices in Delaware - more than any
other bank in the state.
We own two other depository institutions through which we conduct business in
the United States outside of Delaware:
- Wilmington Trust of Pennsylvania (WTPA), a Pennsylvania-chartered bank
and trust company. WTPA has four offices: one each in center city
Philadelphia, Doylestown, Villanova, and West Chester, Pennsylvania.
- Wilmington Trust FSB (WTFSB), a federally chartered savings bank and
registered investment advisor, through which we conduct business from
two offices in California, four offices in Florida, two offices in
Maryland, and one office each in Georgia, Nevada, New Jersey, and New
York.
We also own other registered investment advisors:
- Rodney Square Management Corporation (RSMC), which oversees the
Wilmington family of mutual funds.
- 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. Prior to
January 2005, WTIM was known as Balentine & Company, LLC.
- Grant Tani Barash & Altman, LLC (GTBA) and Grant, Tani, Barash &
Altman Management, Inc. GTBA is the Beverly Hills-based firm through
which we offer business management and family office services.
We also own three investment holding companies:
- WT Investments, Inc. (WTI), which holds interests in five asset
management firms: our two money manager affiliates, Cramer Rosenthal
McGlynn, LLC (CRM) and Roxbury Capital Management, LLC (RCM); Clemente
Capital, Inc.; Camden Partners Holding, LLC; and Camden Partners
Private Equity Advisors, LLC.
- Wilmington Trust (UK) Limited (WTL), through which we conduct business
outside the United States through Wilmington Trust SP Services
(London) Limited and its subsidiaries. Prior to January 2006,
Wilmington Trust SP Services (London) Limited was known as SPV
Management Limited.
- GTBA Holdings, Inc. (GTBAH), through which we conduct the business of
GTBA, Grant, Tani, Barash & Altman Management, Inc., and Wilmington
Family Office, Inc.
In addition to the locations noted above, we and our affiliates have offices in
South Carolina, Vermont, the Cayman Islands, the Channel Islands, Dublin,
Ireland, and London, England.
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,
other U.S. federal and state regulatory agencies, and the regulatory agencies of
other countries in which we conduct business.
20
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
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 named "Affiliate Money Managers." For
more information about segment reporting, please refer to Note 5, "Segment
reporting," in this report.
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2006
Net income for the first quarter of 2006 was $44.1 million, which was 13% higher
than for the year-ago first quarter. Earnings per share (on a diluted basis) for
the 2006 first quarter were $0.64, which was 12% higher than for the year-ago
first quarter.
EXECUTIVE SUMMARY
Factors in the 2006 first quarter performance were growth in each of our
businesses, continued loan growth, a favorable market interest rate environment,
and the high quality of our loan portfolio. These results illustrated the
continuing return from the investments we have made over the past several years
to hire the best people, add the capabilities our clients need most, and enter
markets that have the greatest potential for growth.
For the 2006 first quarter:
- Loan balances totaled $7.54 billion at March 31, 2006. This was 10% higher
than at March 31, 2005, and 2% more than at December 31, 2005.
- At $1.8 million and 2 basis points, net charge-offs and the net charge-off
ratio, respectively were lower than for any quarter in 2005 or 2004.
- More than 97% of loans outstanding continued to receive pass ratings in the
internal risk rating analysis.
- Net interest income was 13% higher than for the year-ago first quarter.
- The net interest margin rose to 3.77%.
- Revenue from trust and investment advisory services in the Wealth Advisory
Services (WAS) business was 15% higher than for the year-ago first quarter.
- Corporate Client Services (CCS) revenue was 13% higher than for the
year-ago first quarter.
- Managed assets at value-style affiliate money manager Cramer Rosenthal
McGlynn continued to reach new highs.
- Expense growth was managed.
In other 2006 first quarter business activity, we opened two new branch offices
in Delaware, one in Middletown and one in Millville, both of which are located
in fast-growing parts of Delaware south of the Chesapeake and Delaware Canal. We
also added investment management and other wealth advisory professionals in our
Florida, Georgia, and New York offices.
On an annualized basis, our first quarter 2006 results produced a return on
average assets of 1.76% and a return on average equity of 17.42%. The
corresponding returns for the first quarter of 2005 were 1.68% and 17.32%,
respectively.
On April 20, 2006, the Board of Directors raised the quarterly cash dividend 5%,
from $0.30 per share to $0.315 per share. On an annualized basis, this increased
the dividend from $1.20 per share to $1.26 per share. This marked the 25th
consecutive year of increases in the cash dividend. According to Mergent, Inc.'s
Dividend Achievers, only 112 of the 10,000 companies trading on North American
exchanges have raised their dividends for 25 or more consecutive years.
21
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
We made several changes to our financial statements beginning with the 2006
first quarter.
- We adopted the retrospective method of accounting for compensation costs
associated with stock option awards, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123 (revised). We restated all
affected prior-period amounts accordingly, including incentive and bonus
expense (which includes stock option expense), total noninterest expense,
taxes, net income, net income per share, total assets, stockholders'
equity, the returns on average assets and average equity, period-end
primary capital, risk-based capital, and book value per share. The restated
amounts for the full years 1995 through 2005 are available at
wilmingtontrust.com, by e-mail request to IR@wilmingtontrust.com, or by
telephone request to (302) 651-8107.
- In the investment securities section of our balance sheet, we commenced
recording U.S. Treasury securities and government agency securities
separately. Previously these two types of securities were reported as a
single category. We adjusted prior period amounts to reflect this change,
which had no effect on period-end or average balance amounts.
- During a routine review of the commercial loan portfolio, we reclassified
some loans. The reclassifications affected all three categories of
commercial loans, but did not affect total commercial loan balances. We
adjusted period-end and average commercial loan balances to reflect these
reclassifications.
- In our income statement, we reclassified portions of WAS and CCS revenue.
- We reclassified some of the WAS revenue previously reported as mutual
fund revenue to trust and investment advisory revenue. The portion of
mutual fund revenue we reclassified was revenue that is associated
with equity mutual funds. We did this to combine into one category the
WAS revenue that is derived from core investment strategies and tied
to financial market valuations. We adjusted prior period amounts to
reflect this change, which had no effect on total amounts of WAS
revenue.
- We reclassified portions of CCS capital markets and retirement
services revenue into a new category of revenue called investment and
cash management services. This change enabled us to report revenue
from money management services separately from trust and
administrative revenue, which typically is based on service
complexity, not asset value. We adjusted prior period amounts to
reflect this change, which had no effect on total amounts of CCS
revenue.
- We restated the amount of assets under management at Wilmington Trust as of
December 31, 2005. During a review of assets under management, we
discovered that approximately $1.5 billion of assets had been
double-counted. This reduced managed assets as of December 31, 2005, which
had been reported as $27.5 billion, to $26.0 billion. Since assets under
management are a subset of assets under administration, this restatement
reduced assets under administration as of December 31, 2005, by an equal
amount. Amounts as of December 31, 2005, were the only amounts affected.
STATEMENT OF CONDITION
This section discusses the changes in our balance sheet between December 31,
2005, and March 31, 2006. We present amounts as of March 31, 2005, for
historical reference. All balances cited are period-end balances unless
otherwise noted.
22
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
ASSETS
At March 31, 2006, balance sheet assets totaled $10.26 billion. This was $31.8
million more than at December 31, 2005. On a percentage basis, our mix of assets
remained relatively unchanged. Loans comprised 73% of assets at March 31, 2006,
compared with 72% at December 31, 2005.
ASSET BALANCES (in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Investment securities $ 1,840.3 $ 1,928.8 $1,831.2
Loans 7,539.0 7,397.7 6,859.6
Other 630.4 649.4 642.3
Reserve for loan losses (93.6) (91.4) (90.4)
Goodwill 348.5 348.3 336.9
------------------------------------------------------------------------------------------------------------
Total assets $10,264.6 $10,232.8 $9,579.6
============================================================================================================
Earning assets are assets on which we earn interest. They comprise loans before
subtracting the reserve for loan losses; investment securities; and federal
funds sold and securities purchased under agreements to resell.
Loans continued to account for more than three-fourths of our total earning
assets. Growth in loan balances accounted for most of the $83.4 million increase
in earning assets during the first three months of 2006.
COMPOSITION OF EARNING ASSETS AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Total earning assets (in millions) $9,424.2 $9,340.8 $8,822.2
% represented by loans 80.0% 79.2% 77.8%
% represented by investment securities 19.5% 20.6% 20.8%
% represented by other 0.5% 0.2% 1.4%
INVESTMENT SECURITIES PORTFOLIO
Investment securities balances were $1.84 billion at March 31, 2006, which was
5% lower than at the end of 2005.
On a percentage basis, the composition of the portfolio remained relatively
unchanged, with mortgage-backed instruments continuing to comprise the largest
concentration of securities in the portfolio. We invest only in securities with
an investment grade of "A" or better, as assigned by Standard & Poor's or
Moody's Investors Service.
COMPOSITION OF INVESTMENT SECURITIES PORTFOLIO AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations 18% 18% 19%
Corporate issues 20% 19% 15%
Money market preferred stocks 5% 5% 5%
Mortgage-backed securities 26% 26% 33%
Municipal bonds 1% 1% 1%
Other 2% 2% 2%
U.S. government agencies 21% 21% 18%
U.S. treasuries 7% 8% 7%
Almost all of the mortgage-backed securities we held at March 31, 2006, were
invested in fixed-rate instruments with terms of 15 years or less. We believe we
can manage duration and interest rate risk more efficiently by investing in
mortgage-related instruments, rather than by retaining individual residential
mortgage loans on our
23
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
balance sheet.
We sell most newly originated fixed-rate residential mortgage loans into the
secondary market to help manage interest rate risk.
The following tables compare changes in the portfolio in average life and
duration.
AVERAGE LIFE IN THE INVESTMENT
SECURITIES PORTFOLIO (in years) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Mortgage-backed instruments 4.48 4.30 4.22
Total portfolio 6.27 6.14 6.42
DURATION IN THE INVESTMENT
SECURITIES PORTFOLIO (in years) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Mortgage-backed instruments 4.14 3.92 4.02
Total portfolio 2.71 2.63 3.07
The changes in average life and duration during the first three months of 2006
reflected the rising market interest rate environment, which caused prepayments
of mortgage-backed instruments to slow. With these instruments, a slowdown in
prepayment extends, or increases, their average life.
Because a large portion of our securities portfolio is invested in
mortgage-backed instruments - 44% as of March 31, 2006 - the extension in the
average life of mortgage-backed instruments caused the increase in the average
life of the portfolio overall. The same dynamics caused the changes in duration.
LOANS
Loan balances rose for the 20th consecutive quarter, reaching $7.54 billion at
March 31, 2006. This was $141.3 million higher than at December 31, 2005.
Commercial loans continued to account for more than two-thirds of total loan
balances, and accounted for all of the growth in total loan balances during the
first three months of 2006.
PERIOD-END LOAN BALANCES (in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Commercial loans $5,103.2 $4,919.1 $4,581.1
Retail loans $2,435.8 $2,478.6 $2,278.5
------------------------------------------------------------------------------------------------------------
Total loans $7,539.0 $7,397.7 $6,859.6
============================================================================================================
Most of the loans in the portfolio continued to be Delaware-originated loans.
The Pennsylvania market accounted for approximately 22% of total loan balances.
Although this section discusses balances on a period-end basis, we present
average balances in the table below as a point of comparison. We believe that
average balances, rather than period-end balances, offer a better measure of
trends in our Regional Banking business. The factors that caused average
balances to change were also the main factors that caused period-end balances to
change. For more detail on average balances, please refer to the "Quarterly
Analysis of Earnings" section of this report.
LOAN BALANCES FOR THE 3 MONTHS ENDED
(on average, in millions) 3/31/06 12/31/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Commercial loans $4,999.9 $4,867.2 $4,506.7
Retail loans $2,445.4 $2,477.7 $2,262.8
-------------------------------------------------------------------------------------------------------------
Total loans $7,445.3 $7,344.9 $6,769.5
=============================================================================================================
Loans from the Pennsylvania market $1,630.0 $1,610.0 $1,440.0
24
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
A primary factor in our ability to generate loan growth is the stable and
diversified economy in the Delaware Valley region, where economic indicators
remained positive. According to the Federal Reserve Bank of Philadelphia,
economic activity indices for the region rose over the past 12 months, and
moderate to strong economic growth was projected through the third quarter of
2006. According to the Federal Deposit Insurance Corporation, Delaware's rate of
job growth in the fourth quarter of 2005 (the most recent data available) was
among the highest in the United States. Delaware's unemployment rate remained
below the national unemployment rate. For more information about the regional
economy, please refer to the discussion on economic risk in the "Quantitative
and qualitative disclosures about market risk" section of this report.
COMMERCIAL LOANS
We offer commercial banking services in Delaware and surrounding areas,
including eastern Pennsylvania, central and southern New Jersey, northeastern
Maryland, and the Baltimore-Washington, D.C. area. We target our commercial
banking services to middle-market businesses (family-owned or closely held
businesses with annual sales of up to $250 million) in these areas.
During the first three months of 2006, commercial loan balances exceeded $5
billion for the first time in our history, reaching $5.10 billion at March 31,
2006. This was an increase of $184.1 million, or nearly 4%, from December 31,
2005. Commercial real estate/construction (CRE) and commercial mortgage lending
accounted for all of the year-to-date growth in commercial loan balances.
PERIOD-END COMMERCIAL LOANS (in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Commercial and industrial (C&I) $2,445.9 $2,461.3 $2,476.6
Commercial real estate/construction (CRE) 1,411.9 1,233.9 886.4
Commercial mortgage 1,245.4 1,223.9 1,218.1
------------------------------------------------------------------------------------------------------------
Total commercial loans $5,103.2 $4,919.1 $4,581.1
============================================================================================================
Population growth, particularly in Delaware, continued to spur demand for
housing and drive the increase in CRE lending. Almost all of the CRE loans
booked during the 2006 first quarter were for primary residences in
single-family residential tract development projects, including the projects we
fund in the beach resort areas in our region.
Approximately 43% of the CRE loans booked during the 2006 first quarter were for
projects in Delaware. Almost all of these loans were for single-family
residential development projects in the fast-growing parts of the state south of
the Chesapeake and Delaware Canal. According to the U.S. Census Bureau, Delaware
was the ninth fastest-growing state in the United States for the 12 months ended
July 1, 2005 (the most recent data available) and the seventh most popular for
attracting permanent residents aged 65 and older.
Approximately 42% of CRE loans booked during the 2006 first quarter were for
projects in southeastern Pennsylvania. These loans were mainly for land
acquisition, single-family residential development, and other types of
residential projects in Chester, Montgomery, Philadelphia, and Lehigh Counties.
Other CRE loans booked during the 2006 first quarter included a retail project
in Ocean City, Maryland, and a residential project in Cape May, New Jersey.
We do not believe we have undue concentration or credit risk in the CRE
portfolio, because:
- Population growth is spurring the housing demand;
- We apply disciplined underwriting standards in our CRE lending; and
- We prefer to work with local developers who are based in the Delaware
Valley region, whose projects are in the Delaware Valley region, and with
whom we have long-standing relationships. These developers own their
businesses and have solid reputations, diverse cash flow streams, personal
liquidity, and experience in a variety of market cycles.
25
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
We place maximum terms of two years on unimproved land and three years on
development loans, which means that approximately 33% of our total residential
project loans outstanding are repaid in any given year. The relatively short
terms of our construction loans provide us the ability to adjust our loan mix,
if necessary, to mitigate the effects of a downturn in any single market
segment.
Our target size for CRE loans is $1 million to $10 million. Net charge-offs of
CRE loans have been zero in six of the past 10 years. For more details about our
credit quality, please refer to the "Asset quality" section of this report.
RETAIL LOANS
In our retail lending activities, we make most of our residential mortgage and
consumer loans to clients in the state of Delaware. The other category of retail
loans, loans secured with liquid collateral, are loans we extend mainly to
Wealth Advisory clients throughout the United States. Changes in the balances of
loans secured with liquid collateral reflect Wealth Advisory client demand.
During the first three months of 2006, retail loan balances decreased because
growth in residential mortgage balances was offset by lower client demand for
loans secured with liquid collateral and by declines in consumer loans, which we
discuss in more detail below.
PERIOD-END RETAIL LOANS (in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Residential mortgage $ 473.4 $ 455.5 $ 428.3
Consumer $1,408.5 $1,438.3 $1,255.7
Secured with liquid collateral $ 553.9 $ 584.8 $ 594.5
------------------------------------------------------------------------------------------------------------
Total retail loans $2,435.8 $2,478.6 $2,278.5
============================================================================================================
RESIDENTIAL MORTGAGE LOANS
Residential mortgage balances were higher at March 31, 2006, than at December
31, 2005, because adjustable rate originations increased and the rising market
interest rate environment caused the pace of prepayments to slow. Origination
volumes declined because of the seasonal slowness that typically occurs during
winter months, and because demand slowed somewhat due to rising market interest
rates.
RESIDENTIAL MORTGAGE ACTIVITY AS OF THE 3 MONTHS ENDED 3/31/06 12/31/05 9/30/05 6/30/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Residential mortgage originations (number of loans) 201 305 321 269 182
Residential mortgage originations (volume in millions) $ 46.8 $ 64.1 $ 70.1 $ 54.9 $ 31.9
Residential mortgage balances (in millions, at period-end) $473.4 $455.5 $450.9 $444.5 $428.3
We are a leading residential mortgage originator in Delaware, but we sell most
new fixed-rate production into the secondary market to help manage interest rate
risk. We discuss this strategy more fully in the "Quantitative and qualitative
disclosures about market risk" section of this report.
26
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
CONSUMER LOANS
Consumer loan balances fell $29.8 million between December 31, 2005, and March
31, 2006, mainly because of declines in home equity and indirect auto lending.
PERIOD-END CONSUMER LOANS
(in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Home equity $ 320.7 $ 326.4 $ 310.6
Indirect 642.4 651.3 576.0
Credit card 71.6 74.5 72.6
Other consumer 373.8 386.1 296.5
------------------------------------------------------------------------------------------------------------
Total consumer loans $1,408.5 $1,438.3 $1,255.7
============================================================================================================
Percentage booked in Delaware 80% 81% 83%
Percentage booked in Pennsylvania 6% 6% 7%
Percentage booked in Maryland 14% 13% 10%
During the first three months of 2006, balances of fixed rate home equity loans
increased, but not at a pace strong enough to offset lower demand for adjustable
rate loans in the rising market interest rate environment. The decline in
indirect auto loans reflected the seasonality of automobile sales, which
typically are slower during winter months.
RESERVE FOR LOAN LOSSES
The reserve for loan losses at March 31, 2006, was $93.6 million, which was $2.2
million more than at December 31, 2005. Loan growth and the high percentage of
loans rated "pass" in our internal risk rating analysis influenced the changes
in the reserve. At March 31, 2006, the loan loss reserve ratio was 1.24%,
unchanged from December 31, 2005. For more information about our credit quality,
please refer to the "Asset Quality" section of this report.
LIABILITIES AND STOCKHOLDERS' EQUITY
During the first three months of 2006, total liabilities increased $6.1 million.
Our mix of liabilities remained relatively unchanged. Total deposits continued
to account for 80% or more of total liabilities.
The portion of 2006 first quarter earnings we added to capital and the proceeds
of stock option exercises were the main factors in the $25.6 million increase in
stockholders' equity during the first three months of 2006. For more details on
the changes in stockholders' equity, please refer to the "Capital Resources"
section of this report.
LIABILITIES AND STOCKHOLDERS'
EQUITY (in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Total deposits $ 7,691.2 $ 7,289.2 $6,891.1
Short-term borrowings 984.8 1,373.7 1,219.5
Other liabilities 545.0 552.0 553.4
------------------------------------------------------------------------------------------------------------
Total liabilities 9,221.0 9,214.9 8,664.0
------------------------------------------------------------------------------------------------------------
Minority interest 0.3 0.2 0.2
Stockholders' equity 1,043.3 1,017.7 915.4
------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $10,264.6 $10,232.8 $9,579.6
============================================================================================================
27
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
DEPOSITS
Deposit balances rose $402.0 million between December 31, 2005, and March 31,
2006. All of this growth was in national CDs $100,000 and over (national CDs).
DEPOSITS (in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Core deposits $4,984.0 $5,060.6 $4,905.9
National CDs $100,000 and over 2,707.2 2,228.6 1,985.2
------------------------------------------------------------------------------------------------------------
Total deposits $7,691.2 $7,289.2 $6,891.1
============================================================================================================
To evaluate deposit trends fully, it is important to understand our business
model and our funding model. We make loans primarily in four states - Delaware,
Pennsylvania, Maryland, and New Jersey - but we gather core deposits mainly in
Delaware, the smallest of these markets by far.
To fund loan growth, we augment core deposits with a combination of national CDs
and short-term borrowings. The mix of national CDs and short-term borrowings
depends on which of these instruments offers a more favorable rate. Changes in
the balances of national CDs, therefore, should be viewed in the context of
changes in short-term borrowings.
LOAN AND DEPOSIT GROWTH COMPARISON
(in millions) AT 3/31/06 AT 12/31/05 CHANGE
---------------------------------------------------------------------------------------------------------------
Total loans $7,539.0 $7,397.7 1.9%
Core deposits $4,984.0 $5,060.6 (1.5)%
National CDs $100,000 and over $2,707.2 $2,228.6 21.5%
Short-term borrowings 984.8 1,373.7 (28.3)%
--------------------------------------------------------------------------------------------------------------
Total wholesale funding $3,692.0 $3,602.3 2.5%
--------------------------------------------------------------------------------------------------------------
Total core deposits and wholesale funding $8,676.0 $8,662.9 0.2%
==============================================================================================================
Although the rates on wholesale funds are somewhat higher than those of core
deposits, we believe using wholesale funding is more cost-effective and
efficient than other sources of funding. To acquire significantly higher levels
of core deposits, we would need to undertake a large-scale expansion of our
branch office network beyond Delaware - an approach that would require us to
invest capital and increase our annual operating costs. Our use of wholesale
funding also helps us manage interest rate risk, because we are able to match
closely the repricing characteristics of wholesale funds and floating rate
loans. For more details on our funding strategy, please refer to the "Liquidity
and Funding" section and the discussion of interest rate risk in the
"Quantitative and Qualitative Disclosures about Market Risk" section of this
report.
CORE DEPOSITS
Among core deposits, CD balances rose substantially during the first three
months of 2006 and savings balances rose slightly. Other core deposit categories
reflected the seasonal declines that typically occur during the first three
months of each year. The vast majority of core deposits continued to come from
consumer and commercial banking clients in Delaware.
28
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
PERIOD-END CORE DEPOSITS (in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 830.2 $1,014.8 $1,012.4
Savings 328.0 326.3 356.5
Interest-bearing demand 2,352.1 2,360.0 2,366.9
CDs under $100,000 960.4 923.0 782.6
Local CDs $100,000 and more 513.3 436.5 387.5
------------------------------------------------------------------------------------------------------------
Total core deposits $4,984.0 $5,060.6 $4,905.9
============================================================================================================
% of core deposits from Delaware clients 94% 94% 94%
In noninterest-bearing demand deposits, approximately $150 million of the
decline resulted from account sweeps we began in December 2005. These sweeps
shifted portions of commercial deposits from noninterest-bearing demand deposits
into money market deposits (and kept the affected amounts on-balance-sheet). By
sweeping these amounts into money market deposits, we were able to reduce our
Federal Reserve-mandated deposit reserve requirements, which in turn lowered our
borrowing costs and uninvested cash balances.
While we do not record national CDs as core deposits, we do record local CDs of
$100,000 and more (local CDs) as core deposits because they are client deposits,
not brokered or wholesale deposits. The majority of local CDs are associated
with clients in the Delaware Valley region, including commercial banking clients
and municipalities, which frequently use these CDs to generate returns on their
excess cash.
LOCAL CDS > OR = $100,000 BY CLIENT CATEGORY 3/31/06 12/31/05 9/30/05 6/30/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Consumer clients in Delaware 70% 65% 66% 68% 60%
Commercial clients in the Delaware Valley 14% 21% 17% 22% 20%
Wealth Advisory clients 16% 14% 16% 8% 18%
Corporate Client Services clients 0% 0% 1% 2% 2%
Corporate Client Services client activity frequently causes disparities between
period-end and average deposit balances, because CCS clients typically deposit
funds for very short spans of time, often over the ends of financial reporting
periods. This is why we believe average balances, rather than period-end
balances, are the better indicator of trends in our Regional Banking business.
The first quarter 2006 decrease in core deposits, on average, reflected the
seasonal decline that is typical for the first three months of each year.
CORE DEPOSITS, ON AVERAGE, FOR
THE 3 MONTHS ENDED 3/31/06 12/31/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Core deposits (on average, in millions) $4,838.2 $5,012.6 $4,831.2
INCOME STATEMENT
This section compares our income and expenses for the first quarter of 2006 with
the first quarter of 2005. We present other amounts for historical reference.
Net income for the first quarter of 2006 was $44.1 million. This was 13% higher
than for the year-ago first quarter. Earnings per share (on a diluted basis) for
the 2006 first quarter were $0.64. This was 12% higher than for the year-ago
first quarter. The percentage increase amounts for net income and earnings per
share were different because the average number of shares outstanding (diluted)
was higher at March 31, 2006, than at March 31, 2005.
29
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
NET INCOME 2006 Q1 2005 Q1 % CHANGE
-------------------------------------------------------------------------------------------------------------
Net income (in millions) $ 44.1 $ 39.2 13%
Earnings per share (diluted) $ 0.64 $ 0.57 12%
Average shares outstanding (diluted, in thousands) 69,434 68,327 2%
The main factors in the net income growth were:
- A 13% increase in net interest income, due to loan growth, modest deposit
pricing pressure, and the combination of our slight asset sensitivity and
the rising market interest rate environment;
- An 8% increase in advisory business revenue; and
- Carefully managed expense growth.
SOURCES OF INCOME
We generate two types of revenue:
1. Net interest income. This revenue is the difference between the interest
revenue we receive on earning assets, such as loans and investments, and
the interest expense we pay on liabilities, such as deposits and short-term
borrowings. We generate net interest income mainly through banking and
funding activities.
2. Noninterest income. This revenue consists primarily of income from the
advisory businesses, which comprise Wealth Advisory Services, Corporate
Client Services, and the two affiliate money managers, Cramer Rosenthal
McGlynn and Roxbury Capital Management. Noninterest income also includes
service charges on deposit accounts, loan fees and late charges, card fees,
securities gains (or losses), and other noninterest income.
These two sources of revenue generate a diversified stream of income that we
believe enables us to deliver consistent profitability and growth, with low
volatility, in a variety of economic conditions. As the following table shows,
for the first quarter of 2006:
- Our sources of income remained diversified and balanced between net
interest and noninterest income; and
- The advisory businesses generated the majority of our noninterest income.
NET INTEREST AND NONINTEREST INCOME (1) 2006 Q1 2005 Q1
-------------------------------------------------------------------------------------------------------------
Total net interest and noninterest income
(in millions) $166.0 $151.9
Portion from advisory business income 43% 43%
Portion from total noninterest income 50% 51%
Portion from net interest income 50% 49%
(1) After amortization and the provision for loan losses.
NET INTEREST INCOME
Net interest income, after the provision for loan losses, was $83.3 million for
the 2006 first quarter. This was 12% more than for the 2005 first quarter.
30
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
NET INTEREST INCOME (in millions) 2006 Q1 2005 Q1 % CHANGE
-------------------------------------------------------------------------------------------------------------
Interest income $152.8 $112.9 35%
Interest expense 65.5 35.3 86%
Net interest income 87.3 77.6 13%
Provision for loan losses (4.0) (3.1) 29%
Net interest income (after provision) $ 83.3 $ 74.5 12%
The primary reasons for the increases in net interest income were:
- Loan growth. Loan balances were 10% higher for the 2006 first quarter than
for the year-ago first quarter.
- Improvement in the net interest margin. As market interest rates increased,
we remained asset sensitive, and assets continued to reprice faster than
liabilities. Our net interest margin rose as a result.
- Credit quality. Compared to the year-ago first quarter, net interest income
before the provision for loan losses was $9.7 million higher, while the
provision for loan losses was only $0.9 million higher.
The Regional Banking business generated approximately 93% of our 2006 first
quarter net interest income.
NET INTEREST MARGIN
The net interest margin for the 2006 first quarter was 3.77%. This was 13 basis
points higher than for the year-ago first quarter.
NET INTEREST MARGIN 2006 Q1 2005 Q4 2005 Q1
-------------------------------------------------------------------------------------------------------------
Net interest margin 3.77% 3.74% 3.64%
Factors in the margin increase included the short-term interest rate
environment, our slight asset sensitivity, modest deposit pricing pressure, and
the closely matched repricing characteristics of floating rate loans and
purchased funding.
Short-term market interest rates, as set by the Federal Open Market Committee,
were 200 basis points higher at the end of March 2006 than at the end of March
2005. They were 50 basis points higher than at the end of December 2005. In this
environment, we experienced modest deposit pricing pressure, but our loan yields
continued to rise at a faster pace than our deposit rates.
YIELD/RATE CHANGES (basis points) 3/31/06 VS. 12/31/05 3/31/06 VS. 3/31/05
-------------------------------------------------------------------------------------------------------------
Commercial loans 47 bps 178 bps
Total loans 41 bps 151 bps
Total earning assets 36 bps 130 bps
Core interest-bearing deposits 17 bps 65 bps
Total interest-bearing deposits 31 bps 126 bps
Funds to support earning assets 33 bps 117 bps
31
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
To compute the net interest margin, we divide annualized net interest income on
a fully tax-equivalent (FTE) basis by average total earning assets.
IN MILLIONS (except margin) 2006 Q1 2005 Q1 CHANGE
-------------------------------------------------------------------------------------------------------------
FTE (1) net interest income $ 88.3 $ 78.5 13%
Earning assets (on average) $9,341.7 $8,630.4 8%
Net interest margin 3.77% 3.64% 4%
(1) Fully tax-equivalent
ANALYSIS OF EARNINGS
The following tables present comparative rate/volume and net interest income
data for the first quarters of 2006 and 2005. In order to ensure the
comparability of yields and rates and their impact on net interest income, we
use average balances at historical cost to calculate average rates. Average
rates do not reflect the market valuation adjustment required by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
32
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
QUARTERLY ANALYSIS OF EARNINGS
2006 First Quarter 2005 First Quarter
---------------------------- ----------------------------
(Dollar amounts in millions; Average Income/ Average Average Income/ Average
rates on a tax-equivalent basis) balance expense rate balance expense rate
-------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 17.5 $ 0.2 4.11% $ 20.2 $ 0.1 2.16%
U.S. Treasury 165.1 1.4 3.33 136.5 0.9 2.67
Government agencies 380.3 3.9 4.00 304.4 3.0 3.92
State and municipal 10.5 0.2 8.77 11.9 0.3 8.76
Preferred stock 91.4 1.7 7.60 99.3 1.7 7.04
Mortgage-backed securities 828.4 8.9 4.17 960.5 9.8 4.09
Other 403.2 5.6 5.52 328.1 3.4 4.12
-----------------------------------------------------------------------------------------------------------
Total investment securities 1,878.9 21.7 4.53 1,840.7 19.1 4.14
---------------------------------------------------------
Commercial, financial, and
agricultural 2,448.1 44.2 7.24 2,471.6 33.7 5.46
Real estate - construction 1,322.0 26.1 7.90 823.3 12.5 6.06
Mortgage - commercial 1,229.8 22.6 7.34 1,211.8 17.5 5.82
-----------------------------------------------------------------------------------------------------------
Total commercial loans 4,999.9 92.9 7.44 4,506.7 63.7 5.66
---------------------------------------------------------
Mortgage - residential 463.3 6.7 5.84 427.5 6.3 5.87
Consumer loans 1,423.9 24.1 6.85 1,234.6 18.7 6.13
Secured with liquid collateral 558.2 8.2 5.89 600.7 5.9 3.90
-----------------------------------------------------------------------------------------------------------
Total retail loans 2,445.4 39.0 6.44 2,262.8 30.9 5.49
---------------------------------------------------------
Total loans net of
unearned income 7,445.3 131.9 7.11 6,769.5 94.6 5.60
Total earning assets $9,341.7 153.8 6.58 $8,630.4 113.8 5.28
=========================================================
33
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
2006 First Quarter 2005 First Quarter
---------------------------- ----------------------------
(Dollar amounts in millions; Average Income/ Average Average Income/ Average
rates on a tax-equivalent basis) balance expense rate balance expense rate
-------------------------------------------------------------------------------------------------------------
Funds supporting earning assets
Savings $ 326.0 0.2 0.32 $ 354.5 0.2 0.25%
Interest-bearing demand 2,346.8 5.9 1.02 2,373.4 4.5 0.77
Certificates under $100,000 938.6 7.6 3.27 773.9 4.1 2.17
Local CDs $100,000 and over 463.3 4.5 3.89 370.1 2.3 2.47
------------------------------------------------------------------- -----------------
Total core interest-
bearing deposits 4,074.7 18.2 1.81 3,871.9 11.1 1.16
National CDs $100,000 and over 2,647.7 29.6 4.47 1,940.4 12.0 2.47
------------------------------------------------------------------- -----------------
Total interest-bearing deposits 6,722.4 47.8 2.86 5,812.3 23.1 1.60
---------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,082.0 11.4 4.19 1,197.9 7.7 2.55
U.S. Treasury demand 11.7 0.1 4.21 8.5 -- 2.06
------------------------------------------------------------------- -----------------
Total short-term borrowings 1,093.7 11.5 4.20 1,206.4 7.7 2.55
---------------------------------------------------------
Long-term debt 399.0 6.2 6.26 407.3 4.5 4.37
------------------------------------------------------------------- -----------------
Total interest-bearing
liabilities 8,215.1 65.5 3.20 7,426.0 35.3 1.91
---------------------------------------------------------
Other noninterest funds 1,126.6 -- -- 1,204.4 -- --
------------------------------------------------------------------- -----------------
Total funds used to support
earning assets $9,341.7 65.5 2.81 $8,630.4 35.3 1.64
=========================================================
Net interest income/yield 88.3 3.77 78.5 3.64
Tax-equivalent adjustment (1.0) (0.9)
----- -----
Net interest income $87.3 $77.6
===== =====
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."
34
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
Increase/(decrease)
due to change in
For the three months ended March 31, 2006/2005 -----------------------------
(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 0.2 0.3 0.5
Government agencies 0.8 0.1 0.9
State and municipal * 0.0 (0.1) (0.1)
Preferred stock * (0.1) 0.1 --
Mortgage-backed securities (1.2) 0.3 (0.9)
Other * 0.8 1.4 2.2
-----------------------------------------------------------------------------------------------------------
Total investment securities 0.5 2.1 2.6
---------------------------
Commercial, financial, and agricultural * (0.3) 10.8 10.5
Real estate - construction 7.5 6.1 13.6
Mortgage - commercial * 0.3 4.8 5.1
-----------------------------------------------------------------------------------------------------------
Total commercial loans 7.5 21.7 29.2
---------------------------
Mortgage - residential 0.5 (0.1) 0.4
Consumer loans 2.9 2.5 5.4
Secured with liquid collateral (0.4) 2.7 2.3
-----------------------------------------------------------------------------------------------------------
Total retail loans 3.0 5.1 8.1
---------------------------
Total loans net of unearned income 10.5 26.8 37.3
---------------------------
Total interest income 11.0 29.0 40.0
---------------------------
Interest expense:
Savings $ -- $ -- $ --
Interest-bearing demand (0.1) 1.5 1.4
Certificates under $100,000 0.9 2.6 3.5
Local CDs $100,000 and over 0.6 1.6 2.2
-----------------------------------------------------------------------------------------------------------
Total core interest-bearing deposits 1.4 5.7 7.1
National CDs $100,000 and over 4.4 13.2 17.6
-----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5.8 18.9 24.7
---------------------------
Federal funds purchased and securities sold
under agreements to repurchase (0.7) 4.4 3.7
U.S. Treasury demand -- 0.1 0.1
-----------------------------------------------------------------------------------------------------------
Total short-term borrowings (0.7) 4.5 3.8
Long-term debt (0.1) 1.8 1.7
-----------------------------------------------------------------------------------------------------------
Total interest expense $ 5.0 $25.2 $30.2
Changes in net interest income $ 6.0 $ 3.8 $ 9.8
===========================
* 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.
35
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
NONINTEREST INCOME
Noninterest income (after amortization) for the 2006 first quarter was $82.7
million. This was $5.3 million more than for the year-ago first quarter. Revenue
from the Wealth Advisory Services and Corporate Client Services businesses
accounted for most of the growth.
NONINTEREST INCOME (in millions) 2006 Q1 2005 Q1 % CHANGE
-------------------------------------------------------------------------------------------------------------
Advisory business revenue (1) $70.6 $65.1 8%
Service charges on deposit accounts 6.9 6.7 3%
Other noninterest income 5.2 4.8 8%
Securities gains/(losses) -- 0.8 (100)%
------------------------------------------------------------------------------------------------------------
Total noninterest income $82.7 $77.4 7%
============================================================================================================
(1) Includes revenue from Wealth Advisory Services, Corporate Client Services,
Cramer Rosenthal McGlynn, and Roxbury Capital Management, after
amortization.
WEALTH ADVISORY SERVICES
We report Wealth Advisory Services (WAS) revenue in three categories:
1. Trust and investment advisory fees, which represent the revenue generated
by our core asset management, asset allocation, and trust management
services. These fees are based on the market valuations of client assets we
manage, direct, or hold in custody, and they are tied to movements in the
financial markets. Most of these fees are based on equity market
valuations.
2. Planning and other services fees. These fees are from financial planning,
estate settlement, family office management, tax, and other services. These
fees are based on the level and complexity of the services we provide. They
are not associated with asset valuations. These fees can vary widely in
amount, and portions of them may be nonrecurring. Because these fees
reflect client demand at any given point in time, it is not unusual for
them to fluctuate up or down from period to period.
3. Mutual fund fees. These fees are tied to money market mutual fund and cash
valuations, and do not reflect equity market movements.
WAS revenue was $2.8 million higher for the first quarter of 2006 than for the
first quarter of 2005. Business development with existing as well as new clients
accounted for much of the growth.
WEALTH ADVISORY SERVICES REVENUE (in millions) 2006 Q1 2005 Q1 % CHANGE
-------------------------------------------------------------------------------------------------------------
Trust and investment advisory fees $34.3 $29.9 15%
Planning and other services fees 7.3 9.1 (20)%
Mutual fund fees 4.7 4.5 4%
-------------------------------------------------------------------------------------------------------------
Total Wealth Advisory Services revenue $46.3 $43.5 6%
=============================================================================================================
WAS sales reflected the momentum in this business and client demand for a broad
array of services. Sales were 18% higher on a year-over-year basis, and 8%
higher on a linked-quarter basis. First quarter 2006 sales were especially
strong in Pennsylvania, Florida, and Delaware, which included business from
clients in other states who seek Delaware's trust advantages.
36
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
PERCENTAGE CONTRIBUTION TO TOTAL WAS SALES 2006 Q1 2005 Q4 2005 Q1
-------------------------------------------------------------------------------------------------------------
California 5% 4% 8%
Delaware (1) 54% 37% 59%
Florida 9% 8% 7%
Georgia 3% 6% 5%
Maryland 2% 2% 1%
New York 11% 20% 13%
Pennsylvania 16% 23% 7%
(1) Delaware's contribution includes business development with clients in other
states who seek Delaware's trust advantages. We serve these clients from
our headquarters in Wilmington.
The increase in trust and investment advisory revenue reflected client demand
for our asset allocation strategies and investment management services, which
use third-party advisors to achieve objective investment management. Business
development was more of a factor in the increase than market appreciation, as
trust and investment advisory revenue growth for the 12 months ended March 31,
2006, outpaced financial market increases during the same span of time.
Revenue from planning and other services was lower because the amount recorded
for the year-ago first quarter included several very large fees associated with
highly complex financial plans.
CORPORATE CLIENT SERVICES
We report Corporate Client Services (CCS) revenue in four categories:
1. Capital markets. These fees are based on the complexity of trust and
administrative services we provide that support the structured finance
industry. We perform most of these services under multiyear contracts.
2. Entity management. These fees are based on the complexity of administrative
services we provide for special purpose entities in preferred
jurisdictions.
3. Retirement services. Approximately 50% of these fees are based on equity
market valuations of retirement plan assets for which we serve as
custodian.
4. Investment/cash management. These fees reflect investment and cash
management services we perform for capital markets and retirement services
clients. The majority of these fees are based on money market fund
valuations. The remainder is based on the valuations of investment-grade
fixed income instruments.
For the 2006 first quarter, CCS revenue was $2.4 million higher than for the
year-ago first quarter. All components of the CCS business contributed to the
increase.
CORPORATE CLIENT SERVICES REVENUE (in millions) 2006 Q1 2005 Q1 % CHANGE
-------------------------------------------------------------------------------------------------------------
Capital markets services $ 8.7 $ 7.3 19%
Entity management services 6.5 5.9 10%
Retirement services 3.1 3.0 3%
Cash and investment management services 2.1 1.8 17%
Total Corporate Client Services revenue $20.4 $18.0 13%
The capital markets component contributed the largest percentage of the revenue
increase, reflecting the rebound in this sector that began during the second
half of 2005. Sales volumes of capital markets services were 46% higher for the
2006 first quarter than for the year-ago first quarter. Demand was especially
strong from insurance industry
37
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
clients, for trust and administrative services that support collateral
mortgage-backed securities, for auction agent services, and for escrow services.
The revenue increase in the entity management component reflected continued
momentum for asset securitization services in European jurisdictions, especially
in Ireland. Sales of services in U.S. and Caribbean jurisdictions also
contributed to the year-over-year increase. Approximately $0.3 million of 2006
first quarter entity management revenue was a one-time fee associated with a
large transaction.
The increase in revenue from the retirement services component reflected a
combination of higher sales of services that support defined contribution plans,
market appreciation, and increased plan contributions. Approximately 50% of
retirement services revenue is based on the value of retirement plan assets for
which we serve as custodian.
The increase in investment and cash management services revenue reflected higher
demand for these services, which were used by clients with taxable as well as
tax-exempt entities. Of the $2.1 million recorded for the 2006 first quarter,
approximately 73% was based on money market mutual fund values. The remainder
was based on the valuations of domestic fixed income instruments, most of which
held asset-backed, U.S. Treasury, corporate and other types of investment-grade
securities.
ASSETS UNDER MANAGEMENT AND ADMINISTRATION
At Wilmington Trust, changes in WAS and CCS revenue are better indicators of
business trends than assets under management or assets under administration.
Since most of the assets we manage for clients are held in trusts, the amount of
assets we manage is affected by trust distributions in addition to business
flows and financial market movements. Funds from trusts are distributed for tax
payments, philanthropic obligations, discretionary spending, trust terminations,
and other purposes. Trust distributions reduce asset levels in trust accounts
and do not necessarily reflect lost business.
In addition:
- We specialize in providing holistic wealth management, of which asset
management is just one element.
- Only the portion of WAS revenue recorded as trust and investment advisory
fees is tied to asset valuations.
- Investment strategies for WAS clients consider a number of factors,
including wealth planning, wealth preservation, wealth transition, and tax
minimization.
- Assets held in direction trusts generate WAS trust and investment advisory
fees, but assets held in direction trusts are recorded as assets under
administration, not assets under management.
- The vast majority of CCS revenue is generated on a fee-for-service basis
and is not related to asset valuations.
- Assets associated with CCS clients can fluctuate by hundreds of millions of
dollars from one period to the next, depending on cash management decisions
clients make.
In contrast, managed asset levels are indicative of business trends at our two
affiliate money managers, Cramer Rosenthal McGlynn (CRM) and Roxbury Capital
Management (RCM). Changes in managed assets at these two firms reflect business
flows as well as financial market movements.
The following table compares changes in assets under management.
38
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
% CHANGE FROM
ASSETS UNDER MANAGEMENT ------------------
(Dollar amounts in billions) AT 3/31/06 AT 12/31/05 AT 3/31/05 12/31/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Wilmington Trust (1) $27.2 $26.0 $26.5 5% 3%
Cramer Rosenthal McGlynn 9.7 8.9 7.2 9% 35%
Roxbury Capital Management 3.5 3.3 2.8 6% 25%
Total assets under management $40.4 $38.2 $36.5 6% 11%
(1) Includes estimates for values associated with certain assets that lack
readily ascertainable values, such as limited partnership interests.
The following table compares changes in assets under management and assets under
administration at Wilmington Trust (excluding CRM and RCM). Most of the assets
under administration are associated with the Corporate Client Services business.
% CHANGE FROM
CLIENT ASSETS AT WILMINGTON TRUST (excluding CRM and RCM) ------------------
(Dollar amounts in billions) AT 3/31/06 AT 12/31/05 AT 3/31/05 12/31/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Assets under management (1) $ 27.2 $ 26.0 $26.5 5% 3%
Assets under administration 74.9 74.9 71.3 -- 5%
Total client assets $102.1 $100.9 $97.8 1% 4%
(1) Assets under management include estimates for values associated with
certain assets that lack readily ascertainable values, such as limited
partnership interests.
On a percentage basis, the investment mix of managed assets at Wilmington Trust
(excluding CRM and RCM) remained relatively unchanged.
INVESTMENT MIX OF WILMINGTON TRUST MANAGED ASSETS (1) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Equities 53% 56% 57%
Fixed income 24% 23% 24%
Cash and equivalents 14% 12% 12%
Other assets 9% 9% 7%
(1) Excluding CRM and RCM.
AFFILIATE MONEY MANAGERS
Our two affiliate money managers are:
- Cramer Rosenthal McGlynn (CRM), a value-style manager based in New York;
and
- Roxbury Capital Management (RCM), a growth-style manager based in Santa
Monica, California.
The revenue we record from these two firms is based on our ownership interest in
each. We do not consolidate their results in our financial statements.
Managed assets rose from their year-ago and prior quarter levels at both CRM and
RCM.
39
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
AFFILIATE MANAGER RESULTS (dollars in millions) 2006 Q1 2005 Q4 2005 Q1
-------------------------------------------------------------------------------------------------------------
Revenue from Cramer Rosenthal McGlynn $ 4.0 $ 4.3 $ 4.3
Managed assets at Cramer Rosenthal McGlynn $9,733.9 $8,899.0 $7,233.4
Revenue from Roxbury Capital Management $ 0.9 $ 0.6 $ 0.3
Managed assets at Roxbury Capital Management $3,515.7 $3,287.3 $2,828.4
At CRM, assets under management have risen every quarter since the first quarter
of 2003, and have set new records every quarter since the second quarter of
2004. For the first quarter of 2006, market appreciation and asset inflows into
CRM's small- and mid-cap products were the main reasons for the increase in the
firm's managed assets. Revenue from CRM was lower year-over-year because revenue
for the year-ago first quarter included a gain of approximately $1.4 million on
the sale of an equity investment. Absent this gain, first quarter 2006 revenue
from CRM was 38% higher year-over-year. On a linked-quarter basis, revenue from
CRM declined because hedge fund performance fees were lower.
At March 31, 2006, our ownership interest in CRM was 77.24%, unchanged from the
second quarter of 2004. Despite the high percentage of our ownership position,
we do not hold a controlling interest in CRM. CRM principals retain certain
management controls, including veto powers over a variety of matters.
At RCM, the growth in assets under management reflected the firm's ability to
attract new assets into its small- and mid-cap products. This growth led to the
year-over-year and linked-quarter increases in revenue from RCM.
At March 31, 2006, our ownership interest in RCM consisted of 41.23% of RCM's
common shares and 30% of its gross revenues, unchanged from the fourth quarter
of 2003.
OTHER NONINTEREST INCOME
OTHER NONINTEREST INCOME (in millions) 2006 Q1 2005 Q1 % CHANGE
-------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $6.9 $6.7 3%
Other noninterest income $5.2 $4.8 8%
Securities gains/(losses) -- $0.8 (100)%
Income from service charges on deposit accounts rose year-over-year because ATM
fees were 15% higher, mainly because we had more ATMs at the end of the 2006
first quarter than at the end of the year-ago first quarter. Most of the new
ATMs were added during the second and third quarters of 2005 and were located in
Delaware and New Jersey.
ATMS 2006 Q1 2005 Q1 CHANGE
-------------------------------------------------------------------------------------------------------------
Number of ATMs 233 172 61
The increase in ATM fees was offset somewhat by higher levels of earnings
credits on commercial deposit accounts that occur in a rising market interest
rate environment. Commercial banking clients may earn credits in lieu of paying
fees on their deposit accounts.
Other noninterest income rose year-over-year mainly because revenue from loan
fees increased. This reflected higher volumes of letters of credit extended on
unfunded loan commitments.
40
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
For the first quarter of 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.
NONINTEREST EXPENSE
Noninterest expenses for the 2006 first quarter totaled $97.5 million. This was
8% higher than for the year-ago first quarter and 3% higher than for the 2005
fourth quarter. Staffing-related expenses (salaries, incentives, and benefits)
represented approximately 62% of 2006 first quarter expenses, and accounted for
nearly all of the increases in total noninterest expenses.
NONINTEREST EXPENSES (dollar amounts in millions) 2006 Q1 2005 Q4 2005 Q1
-------------------------------------------------------------------------------------------------------------
Full-time equivalent staff members 2,475 2,469 2,443
Salaries and wages $ 36.9 $ 36.4 $ 32.9
Incentives and bonuses 10.3 8.8 9.8
Employment benefits 13.5 11.5 12.5
Total staffing-related expense (1) $ 60.7 $ 56.7 $ 55.2
Total noninterest expense $ 97.5 $ 94.5 $ 90.3
(1) Salaries and wages, incentives and bonuses, and employment benefits.
Most of the year-over-year increase in staffing expense was in salaries and
wages, due to the addition of staff members in all three businesses. There were
32 more full-time equivalent staff members at March 31, 2006, than at March 31,
2005.
On a linked-quarter basis, most of the increase in staffing expense was in
employment benefits. This reflected the seasonal effects of payroll taxes and
401(k) plan matches, which reset at the start of each year. As the year
progresses, limits are reached on payroll taxes and 401(k) plan matches, which
is why these expenses are typically lowest during the fourth quarter of each
year.
The large linked-quarter increase in incentive and bonus expense reflected
higher sales levels in each of the three businesses.
Beginning with the first quarter of 2006, we adopted the retrospective method of
accounting for the cost of stock-based compensation. We restated prior period
amounts accordingly, in accordance with Statement of Financial Accounting
Standards No. 123 (revised). We record these costs in the incentives and bonus
expense line. The restated amounts for incentives and bonus expense, as well as
for all other affected amounts, for the full years 1995 through 2005 are
available at wilmingtontrust.com, by e-mail request to IR@wilmingtontrust.com,
or by telephone request to (302) 651-8107.
INCENTIVES AND BONUSES
(in millions) 2006 Q1 2005 Q4 2005 Q3 2005 Q2 2005 Q1
-------------------------------------------------------------------------------------------------------------
Stock-based compensation expense $ 2.0 $1.8 $1.7 $ 2.1 $1.0
Total incentives and bonuses $10.3 $8.8 $9.3 $10.1 $9.8
41
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
The year-over-year increase in stock-based compensation expense reflected a
difference in timing, which made first quarter 2006 expense more on par with
second quarter 2005 expense.
In other categories of noninterest expenses:
- Increases in occupancy-related expenses (net occupancy and furniture,
equipment, and supplies) reflected expansion activities, primarily in
Regional Banking and Corporate Client Services. Between March 31, 2005 and
2006, Regional Banking added three new branch offices in Delaware and
expanded offices in Pennsylvania and Maryland. During that same 12-month
span, the Corporate Client Services business opened captive insurance
management offices in South Carolina and Vermont.
- Increases in subadvisor expense reflected higher demand for investment
advisory services.
- Increases in originating and processing fees were due to higher loan
origination, filing, and check processing costs.
- Most other categories of expenses declined.
INCOME TAXES
Income tax expense for the first quarter of 2006 was higher than for the first
quarter of 2005 mainly because our pretax income was higher. In addition, as we
have expanded into additional states, our state income tax expense has risen.
INCOME TAXES AND TAX RATE 2006 Q1 2005 Q4 2005 Q1
-------------------------------------------------------------------------------------------------------------
Pretax income (in millions) $ 68.5 $ 70.8 $ 61.6
Income tax expense (in millions) $ 24.3 $ 24.3 $ 22.4
Effective tax rate 35.47% 34.32% 36.36%
On a linked-quarter basis, pretax income was lower but income tax expense was
the same because income tax expense for the 2005 fourth quarter reflected a tax
benefit of approximately $1.7 million for deferred taxes associated with
acquisition accounting. Absent this benefit, income tax expense for the 2005
fourth quarter would have been approximately $26.0 million and the effective tax
rate would have been 35.86%.
CAPITAL RESOURCES
Our capital position remained strong during the first quarter of 2006.
Stockholders' equity rose 14%; the returns on equity and assets improved; the
capital generation rate improved; and our regulatory capital continued to exceed
the minimum levels established by the Federal Reserve Board for well-capitalized
institutions.
In a reflection of our capital strength, our Board of Directors raised the
quarterly cash dividend 5% on April 20, 2006. This increased the quarterly
dividend from $0.30 per share to $0.315 per share, or from $1.20 per share to
$1.26 per share on an annualized basis.
We have paid cash dividends on our common stock every year since 1908; paid
quarterly cash dividends every year since 1916; and increased our cash dividend
every year since 1982. According to Mergent, Inc.'s Dividend Achievers, only 112
of the 10,000 companies trading on North American exchanges have raised their
dividends for 25 or more consecutive years.
42
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
3 MOS. ENDED YEAR ENDED 3 MOS. ENDED
CAPITAL STRENGTH 3/31/06 12/31/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Stockholders' equity (period-end, in millions) $1,043.3 $1,017.7 $915.4
Return on average stockholders' equity (annualized) 17.42% 18.77% 17.32%
Return on average assets (annualized) 1.76% 1.82% 1.68%
Capital generation rate (annualized) 9.4% 10.3% 9.4%
Dividend payout ratio 46.3% 48.0% 49.2%
During the first quarter of 2006, we added $25.6 million to capital, including:
- $23.7 million, which reflected earnings of $44.1 million net of $20.4
million in cash dividends;
- $16.1 million from the issue of common stock under employment benefit
plans; and
- $0.1 million in foreign currency exchange adjustments.
Offsetting these additions were $14.3 million of reductions in capital, which
consisted of:
- $4.4 million in unrealized losses on securities, net of taxes;
- $3.2 million in derivative losses included in other comprehensive income,
net of taxes; and
- $6.7 million for the repurchase of shares.
Our share repurchase activity remained modest, as we opted to retain capital.
During the 2006 first quarter, we repurchased 154,924 of our shares at an
average per-share price of $43.48 and a total cost of $6.7 million. This brought
the total number of shares repurchased under the current 8-million-share
program, which commenced in April 2002, to 843,169, leaving 7,156,831 shares
available for repurchase.
Our capital ratios continued to exceed the Federal Reserve Board's minimum
guidelines for both well-capitalized and adequately capitalized institutions, as
the following table shows. The Federal Reserve's guidelines are intended to
reflect the varying degrees of risk associated with different on- and
off-balance sheet items.
AT AT MINIMUM TO BE MINIMUM TO BE
REGULATORY CAPITAL RATIOS 3/31/06 12/31/05 ADEQUATELY CAPITALIZED WELL CAPITALIZED
-------------------------------------------------------------------------------------------------------------
Total risk-based capital 12.72% 12.36% 8% 10%
Tier 1 risk-based capital 7.77% 7.54% 4% 6%
Tier 1 leverage capital 6.94% 6.74% 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
Liquidity refers to the ability to obtain cash, or to convert assets into cash
or cash equivalents quickly without substantially affecting the asset's price.
Liquidity is affected by the proportion of our funding that is provided by core
deposits and stockholders' equity. We manage liquidity to ensure that we have
sufficient cash (funding) to:
- Support our operating and investing activities;
- Meet increases in demand for loans and other assets; and
- Provide for decreases in deposits and other funding sources.
43
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
FUNDING STRATEGY
We use a mix of liquidity - or funding - 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 (national CDs) as well as term federal funds; internally
generated capital; and other credit facilities. Most of our liquidity comes from
core deposits and wholesale funding (national CDs and short-term borrowings).
Our funding strategies and the mix of funding sources we use reflect our
business model. We offer commercial banking services throughout the Delaware
Valley region, which means that we make loans primarily in four states:
Delaware, Pennsylvania, Maryland, and New Jersey. In contrast, we gather core
deposits mainly in Delaware, where we focus our retail banking activities. As a
result, loan growth has been outpacing core deposit growth. As we continue to
expand our commercial banking business throughout the region, we expect the
disparity between loan growth and core deposit growth to continue.
To compensate for the disparity, we augment core deposits with wholesale funding
(national CDs and short-term borrowings). We adjust the mix between national CDs
and short-term borrowings according to which of these two funding sources offers
more favorable terms. We use wholesale funding because:
- It lets us add deposits without making capital investments to support the
physical expansion of our branch network beyond Delaware;
- It helps us curb growth in the annual operating expense associated with
staffing and maintaining additional branch offices outside of Delaware;
- It does not add to our fixed costs;
- 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; and
- It helps us manage interest rate risk, because we are able to match closely
the repricing characteristics of wholesale funds and floating rate loans.
For more information on how we manage interest rate risk, please refer to
the discussion in the "Quantitative and Qualitative Disclosures about
Market Risk" section of this report.
Our standing in the national markets, and our ability to obtain funding from
them, factor into our liquidity management strategies. In many cases, national
market investors use the findings of the major credit rating agencies - Standard
& Poor's, Moody's Investors Service, and Fitch - to guide their decisions. All
of our credit ratings are investment grade, and they substantiate our financial
stability and the consistency, over time, of our earnings. We have undergone no
credit rating changes since August 2004. In August 2005, Standard & Poor's
reaffirmed their credit ratings of Wilmington Trust Corporation and Wilmington
Trust Company. Our most recent credit ratings are posted on wilmingtontrust.com
in the "Investor Relations" section.
Factors or conditions that could affect our liquidity management objectives
include changes in the mix of items on our balance sheet; our investment, loan,
and deposit balances; our reputation; and our credit ratings. A significant
change in our financial performance or credit ratings could reduce the
availability, or increase the cost, of funding from the national markets.
LIQUIDITY AND FUNDING IN THE FIRST THREE MONTHS OF 2006
During the first quarter of 2006, core deposits - demand deposits,
interest-bearing demand deposits, time deposits, and local CDs $100,000 and over
- continued to be our primary source of funding, but they accounted for a
smaller proportion of our funding. This reflected our business strategy of
expanding the commercial banking business throughout the Delaware Valley region
while focusing our retail banking (and core deposit gathering) activities in the
state of Delaware. Between December 31, 2005, and March 31, 2006, loan balances
rose 10%, but core deposit balances remained essentially unchanged.
44
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
PROPORTION OF FUNDING PROVIDED BY: AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Core deposits 48.6% 49.5% 51.2%
Core deposits and stockholders' equity 58.7% 59.4% 60.8%
National CDs and short-term borrowings 36.0% 35.2% 33.5%
The rates we pay for wholesale funding tend to be higher than the rates we pay
on core deposits. Using rates alone to compare funding costs can be misleading,
however. This is because core deposit rates express the absolute cost of the
funds, but they do not reflect the staffing and other operating expenses we
incur in their acquisition. For a comparison of core deposit and wholesale
funding rates, please refer to the interest rate risk discussion in the
"Quantitative and Qualitative Disclosures about Market Risk" section of this
report.
In addition to deposits, other sources of liquidity available to us as of March
31, 2006, included:
- Cash flow generated by our investment portfolio, which we expect will
generate approximately $260 million of cash over the next 12 months from
maturities, calls, and income. At March 31, 2006, the balance of the
investment portfolio was $1.84 billion.
- The Federal Home Loan Bank of Pittsburgh, of which Wilmington Trust Company
is a member. As of March 31, 2006, we had $0.8 billion in available
borrowing capacity that was secured with collateral, compared with $0.9
billion at December 31, 2005.
- Lines of credit with U.S. financial institutions that totaled $100.0
million.
Among the risks to our liquidity is a partial guaranty of a line of credit
obligation for affiliate money manager Cramer Rosenthal McGlynn (CRM). At March
31, 2006, this line of credit was $3.0 million, the balance was zero, and our
guaranty was for 77.24%, an amount equal to our ownership interest in CRM. This
line of credit is scheduled to expire on December 4, 2006.
ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION
Asset quality is one of the risks we encounter in the ordinary course of
business. We discuss other types of risk elsewhere in this report.
Our two main categories of assets are investment securities and loans. As of
March 31, 2006, 73% of our assets were loans. Our discussion of asset quality,
therefore, centers on loan (credit) quality.
OVERVIEW
Credit quality is a term that describes how loans perform relative to their
repayment terms. In general, when loan defaults are low, credit quality is high.
Credit risk is the risk associated with the potential inability of some
borrowers to repay loans according to their contractual terms. The inability of
some borrowers to repay their loans could result in higher levels of
nonperforming assets, credit losses, and provisions for loan losses - and
potentially could reduce our earnings.
Lending money is inherently risky. No matter how financially sound a client or
lending decision may seem, a borrower's ability to repay can be affected
adversely by economic changes and other factors. In the process of making loans,
we make subjective judgments about a borrower's ability to repay.
We take a number of steps to mitigate the risks associated with lending money:
45
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
- We base our lending decisions on rigorous loan underwriting criteria, which
we apply consistently. For commercial loans, we generally require personal
guarantees from our clients, and we test our clients' ability to withstand
rising interest rates and economic slowdowns. We have a chief credit
officer who implements and monitors our loan underwriting standards.
- We make the vast majority of our loans within the Delaware Valley region.
We target our commercial lending services to family-owned and closely held
businesses with annual sales of up to $250 million. This geographic and
client focus helps us stay cognizant of economic and other external factors
that may affect credit quality.
- We endeavor to keep the composition of our loan portfolio diversified among
commercial loans, consumer loans, and industry sectors.
- We monitor the loan portfolio continually to identify potential problems
and to avoid disproportionately high concentrations of loans to any one
borrower or industry sector.
- We regularly review all past-due loans, those not performing according to
contractual terms, and those we doubt will be repaid on a timely basis.
- We conduct an internal risk-rating analysis that classifies all loans
outstanding in one of four categories:
- "Pass" identifies loans with no current potential problems;
- "Watchlisted" identifies potential problem credits;
- "Substandard" identifies problem credits with some probability of
loss; and
- "Doubtful" identifies problem credits with a higher probability of
loss.
These classifications, which we apply consistently, mirror the
classifications that regulatory agencies use to define problem and
potential problem credits.
- 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.
More details about our commercial real estate/construction loan underwriting and
credit quality are in the discussion of commercial loans in this report.
We reserve an amount for loan losses that represents our best estimate of known
and inherent estimated losses, based on subjective judgments we make regarding
loan collectibility. In calculating the reserve for loan losses, we evaluate
micro- and macro-economic factors, historical net loss experience, delinquency
trends, and movements within the internal risk rating classifications, among
other things. We reassess the reserve quarterly and we charge loans deemed
uncollectible against the reserve quarterly. We credit recoveries, if any, to
the reserve. The process we use to calculate the reserve has provided an
appropriate reserve over an extended period of time, and we believe that our
reserve methodology is sound.
We allocate the majority of our reserve for loan losses to specific commercial
and retail loans. The portion of the reserve that we do not allocate
specifically reflects the inherent losses that we have not accounted for
otherwise.
Loan growth does not automatically result in increases in the provision and
reserve for loan losses, because the reserve reflects the credit quality of the
loan portfolio overall. New loans do not automatically carry higher levels of
risk than loans already in the portfolio.
To us, the primary indicator of credit quality is the net charge-off ratio. The
net charge-off ratio measures loan losses as a percentage of total loans
outstanding. We continue to pursue repayment even after we charge off loans.
46
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
CREDIT QUALITY FOR THE FIRST THREE MONTHS OF 2006
Opposite 10% year-over-year growth in loan balances, credit quality trends
remained positive:
- Net charge-offs and the net charge-off ratio were lower than for any
quarter of 2005 or 2004.
- The internal risk rating analysis awarded pass ratings to more than 97% of
loans outstanding.
- The amount of nonperforming assets declined.
- The composition of the loan portfolio remained well diversified.
KEY MEASURES OF CREDIT QUALITY 3 MOS. ENDED 3 MOS. ENDED 3 MOS. ENDED
(dollars in millions) 3/31/06 12/31/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Total loan balances (on average) $7,445.3 $7,344.9 $6,769.5
Gross charge-offs $ 3.2 $ 7.8 $ 3.5
Recoveries $ (1.4) $ (3.8) $ (1.1)
Net charge-offs $ 1.8 $ 4.0 $ 2.4
Net charge-off ratio (1) 2 basis points 5 basis points 4 basis points
(1) We calculate the net charge-off ratio by dividing the year-to-date dollar
amount of net charge-offs by total loans, on average, for the period.
Changes in the provision and reserve for loan losses reflected loan growth, the
results of the internal risk rating analysis, the level of loan repayments and
recoveries, and the Delaware Valley economic environment.
PROVISION AND RESERVE FOR LOAN LOSSES
(as of the 3 months ended) 3/31/06 12/31/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Provision for loan losses (in millions) $ 4.0 $ 2.0 $ 3.1
Reserve for loan losses (period end, in millions) $93.6 $91.4 $90.4
Loan loss reserve ratio 1.24% 1.24% 1.32%
Unallocated reserve amount (in millions) $ 6.1 $ 6.1 $ 6.9
% of total reserve that is unallocated 6.5% 6.7% 7.6%
At $4 million, the 2006 first quarter provision for loan losses was in line with
historic provisioning levels. On a year-over-year basis, the increase in the
provision reflected the corresponding 10% growth in loan balances. The
linked-quarter increase reflected the fact that the 2005 fourth quarter
provision was unusually low due to a $2.5 million recovery we recorded in
October 2005.
The dollar amount of the reserve for loan losses was higher at March 31, 2006,
than at December 31 and March 31, 2005, but the loan loss reserve ratio was
unchanged from the 2005 fourth quarter and 8 basis points lower than for the
year-ago first quarter.
At March 31, 2006, 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
reflected a reasonable assessment of inherent loan losses.
In our internal risk rating analysis, the percentage of loans rated pass
continued to exceed 97%. The percentage of pass-rated loans has been higher than
92% since 1998, higher than 95% since 2000, and higher than 96% since the second
quarter of 2004.
47
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
INTERNAL RISK RATING ANALYSIS AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Pass 97.20% 97.24% 96.91%
Watchlisted 1.97% 1.96% 1.95%
Substandard 0.76% 0.73% 0.90%
Doubtful 0.07% 0.07% 0.24%
Total nonperforming assets were lower year-over-year and on a linked-quarter
basis, mainly because paydowns reduced nonaccruing loans.
NONPERFORMING ASSETS (dollars in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Nonaccruing loans $35.5 $39.3 $39.5
Ratio of nonaccruing loans to total loans 0.47% 0.53% 0.58%
Other real estate owned (OREO) (1) $ 0.2 $ 0.2 $ 0.2
Ratio of OREO to total loans -- -- --
Renegotiated loans (nonaccruing) $ 4.9 $ 4.7 $ 5.1
Total nonperforming assets $40.6 $44.2 $44.8
Ratio of nonperforming assets to total loans 0.54% 0.60% 0.65%
(1) OREO consists of assets that we have acquired through foreclosure, by
accepting a deed in lieu of foreclosure, or by taking possession of assets
that were used as loan collateral. We record OREO assets in "other assets"
on our balance sheet at the lower of the asset's cost or estimated fair
value less cost to sell, adjusted periodically based on current appraisals.
Loans past due 90 days or more were higher mainly because of one loan we
transferred from loans secured with liquid collateral to past-due status in the
2006 first quarter. This loan is a well-secured, fully collateralized loan
associated with a Wealth Advisory Services client.
LOANS PAST DUE 90 DAYS OR MORE (dollars in millions) AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more $10.1 $ 4.1 $ 3.2
Amount in the commercial portfolio $ 2.6 $ 1.5 $ 1.7
Amount in the retail portfolio $ 7.5 $ 2.6 $ 1.5
Ratio of total past-due loans to total loans outstanding 0.13% 0.06% 0.05%
At March 31, 2006, we had serious doubt that $10.2 million of loans would be
repaid on a timely basis, even though those loans were performing in accordance
with their terms or were less than 90 days past due. Almost all of these loans
were commercial loans.
SERIOUS-DOUBT LOANS AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Serious-doubt loans (in millions) $10.2 $6.9 $18.9
Ratio of serious doubt loans to total loan balances 0.1% 0.1% 0.3%
On a percentage basis, the composition of the loan portfolio remained well
diversified and relatively unchanged.
48
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
COMPOSITION OF THE LOAN PORTFOLIO AT 3/31/06 AT 12/31/05 AT 3/31/05
-------------------------------------------------------------------------------------------------------------
Commercial/financial/agricultural 32% 33% 36%
Commercial real estate/construction 19% 17% 13%
Commercial mortgage 17% 17% 18%
Residential mortgage 6% 6% 6%
Home equity 4% 4% 5%
Indirect auto 9% 9% 8%
Credit card 1% 1% 1%
Other consumer 5% 5% 4%
Secured with liquid collateral 7% 8% 9%
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 letters of credit, unfunded loan commitments, unadvanced lines of
credit, interest rate swaps, and interest rate floors, 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.
We employ interest rate floors to hedge the interest revenue from our floating
rate loans against declines in market interest rates.
Our off-balance-sheet arrangements as of March 31, 2006, included:
- A total of $953.2 million of interest rate swaps, as follows:
- $414.1 million of swaps for loan clients for whom we exchanged
floating rates for fixed rates.
- $414.1 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 values of the aforementioned swaps
we made on behalf of clients.
- $125.0 million of swaps with other financial institutions made in
connection with our issues of subordinated long-term debt. This amount
was $250 million lower than at December 31, 2005, because we
terminated $250 million of interest rate swaps on March 31, 2006, as
part of our interest rate risk management program. The terminated
swaps were associated with the $250 million of subordinated long-term
debt we issued on April 4, 2003. This debt was issued at a fixed rate
of 4.875% and swapped immediately for a floating rate tied to the
three-month Libor, which was 4.53% at December 31, 2005. We will
accelerate the discount-to-market value currently associated with this
debt issue back to par over the remaining life of the debt.
- $575.0 million of interest rate floors associated with floating rate
commercial loans.
Other contractual obligations as of March 31, 2006, 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.
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Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
- Lease commitments for offices, net of sublease arrangements, which total
$44.7 million. Many of our branch offices in Delaware are leased. All of
our offices outside Delaware are leased.
- A 77.24% guaranty of a $3.0 million line-of-credit obligation of affiliate
money manager Cramer Rosenthal McGlynn (CRM). The guaranty amount
represents our current ownership interest in CRM. The balance of this line
of credit is zero and it is scheduled to expire on December 4, 2006.
- Certificates of deposit amounting to $4.18 billion.
- Letters of credit, unfunded loan commitments, and unadvanced lines of
credit amounting to $3.63 billion.
The following table summarizes our current contractual obligations and the
periods over which they extend.
LESS THAN 1 TO 3 3 TO 5 MORE THAN
PAYMENTS DUE (in millions) TOTAL 1 YEAR YEARS YEARS 5 YEARS
-------------------------------------------------------------------------------------------------------------
Certificates of deposit $4,180.9 $3,983.9 $124.7 $ 50.5 $ 21.8
Long-term debt obligations 536.6 28.3 163.4 67.5 277.4
Operating lease obligations 44.7 8.7 14.8 10.2 11.0
Guaranty obligations 2.3 2.3 -- -- --
------------------------------------------------------------------------------------------------------------
Total $4,764.5 $4,023.2 $302.9 $128.2 $310.2
============================================================================================================
The long-term debt obligations referenced above consist of two outstanding
subordinated debt issues and Federal Home Loan Bank advances. The first debt
issue, for $125 million, was issued in 1998, was used to support acquisitions
and expansion, and is due in 2008. The second debt issue, for $250 million, was
issued in 2003, was used for general liquidity purposes, and is due in 2013.
Both of these debt issues are included in the "Long-term debt" line of our
balance sheet.
Our agreements with CRM, RCM, and GTBA permit principal members and designated
key employees of each firm, subject to certain restrictions, to put their
interests in their respective firms to our company. For more information about
these agreements, please refer to Note 3, "Affiliates and acquisitions," which
begins on page 67 of our 2005 Annual Report to Shareholders.
INFLATION RISK
Since nearly all of our assets and liabilities are monetary in nature, our
primary market risk is interest rate risk, not inflation risk. Interest rates do
not necessarily move in the same direction, or at the same magnitude, as the
prices of goods and services. As a result, we are unable to determine the
effects of inflation on our financial performance.
For more information about our interest rate risk and other kinds of risk,
please refer to Item 3 of this report, "Quantitative and Qualitative Disclosures
about Market Risk."
OTHER INFORMATION
ACCOUNTING PRONOUNCEMENTS
Please refer to Note 10, "Accounting pronouncements," of this report for a
discussion of the impact of recent accounting pronouncements on our financial
condition and results of operations.
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Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We maintain our accounting records and prepare our financial statements using
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.
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 critical accounting policies preclude us from choosing
among alternative methods of accounting.
Our critical accounting policies require us to make difficult and subjective
judgments regarding uncertainties and trends. The precision of these estimates
and the likelihood of future changes depend on a number of underlying variables
and range of possible outcomes. Actual circumstances that differ significantly
from our judgments and estimates could have a material impact on our financial
results.
Our financial results could be affected by, among other things, changes in
national or regional economic conditions; changes in market interest rates;
significant changes in banking laws or regulations; the impact of accounting
pronouncements; increased competition for business; higher-than-expected credit
losses; the effects of acquisitions; the effects of integrating acquired
entities; unanticipated changes in the regulatory, judicial, legislative, or tax
treatment of business transactions; and uncertainty created by unrest in other
parts of the world.
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 presentation.
We believe the following critical accounting policies affect our more
significant judgments and the estimates we use to prepare the consolidated
financial statements.
RESERVE FOR LOAN LOSSES: We establish the reserve for loan losses by charging a
provision for loan losses against income. We reassess the 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. The process we use to calculate the reserve has provided an
appropriate reserve over an extended period of time, and we believe that our
methodology is sound.
Staff members who do not have lending authority evaluate the reserve quarterly.
In evaluating the reserve, we consider current micro- and macro-economic
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.
51
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
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. These
problem credits 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 remains unallocated. This portion represents probable
or inherent losses caused by certain business conditions for which we have not
accounted otherwise. These conditions include current economic and market
conditions, the complexity of the loan portfolio, payment performance, migration
within the internal risk rating classification, the amount of loans we seriously
doubt will be repaid, the impact of litigation, and bankruptcy trends.
Various regulatory agencies, as an integral part of their examination processes,
periodically review the reserve of our banking affiliates. These agencies base
their judgments on information that is available to them when they conduct their
examinations, and they may require us to make adjustments to the reserve.
Determining the reserve is inherently subjective. Estimates we make, including
estimates of the amounts and timing of payments we expect to receive on impaired
loans, may be susceptible to significant change. If actual circumstances differ
substantially from the assumptions we used to determine the reserve, future
adjustments to the reserve may be necessary, which could have a material effect
on our financial performance.
STOCK-BASED EMPLOYEE COMPENSATION: Effective January 1, 2006, we adopted SFAS
No. 123 (revised), "Share-Based Payment," which requires us to recognize in our
income statement the expenses associated with the value, over their vesting
periods, of all stock options we grant. We used the retrospective method of
adopting SFAS No. 123 (revised), and we have restated all affected prior-period
amounts accordingly. The restated amounts for the full years 1995 through 2005
are available at wilmingtontrust.com, by e-mail request to
IR@wilmingtontrust.com, or by telephone request to (302) 651-8107.
GOODWILL AND OTHER INTANGIBLE ASSETS: We account for goodwill and other
intangible assets in accordance with 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 and permanent loss of client accounts and/or assets under management
at 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.
52
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
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 62 of our 2005 Annual Report to Shareholders, and Note 10,
"Accounting pronouncements," in this report.
CAUTIONARY STATEMENT
This report contains estimates, predictions, opinions, or other statements that
might be construed as "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
current expectations and assessments of potential developments.
Such statements include references to our financial goals; dividend policy;
financial and business trends; new business results and outlook; business
prospects and positioning with respect to market and pricing trends; strategic
initiatives; credit quality and the adequacy of the reserve for loans losses;
the effects of changes in market interest rates; the effects of changes in
securities valuations; the impact of accounting pronouncements; and other
internal and external factors that could affect our financial performance.
Our ability to achieve the results reflected in such statements could be
affected by, among other things, changes in national or regional economic
conditions, changes in market interest rates; significant changes in banking
laws or regulations; increased competition in our businesses;
higher-than-expected credit losses; the effects of acquisitions; the effects of
integrating acquired entities; unanticipated changes in regulatory, judicial, or
legislative tax treatment of business transactions; and economic uncertainty
created by unrest in other parts of the world.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
INTEREST RATE RISK
Interest rate risk is the risk that arises from fluctuations, or volatility, in
market interest rates. Market interest rates are key determinants of the yields
we generate on earning assets (assets that produce income, such as loans and
investments) and the rates we pay on liabilities (such as deposits and other
sources of funding). Changes in market interest rates, and the pace at which
they occur, can:
- Trigger repricings of investment securities, loans, deposits, and other
sources of funds.
- Alter the pace of payments.
- Positively or negatively affect our net interest income and net interest
margin.
- Ultimately affect our financial performance and ability to produce
consistent results.
To minimize our exposure to interest rate risk, we regularly review and change,
when we deem necessary, the:
- Mix of assets and liabilities on our balance sheet.
- Pricing and maturity characteristics of assets and liabilities.
- Relative proportion of fixed- and floating-rate assets and liabilities.
- Numbers and types of funding sources.
- Use of derivative and off-balance-sheet instruments, such as interest rate
swaps and floors. For more information on our derivative and hedging
activities, please refer to Note 6, "Derivative and hedging activities,"
and the section on "Off-balance-sheet arrangements and contractual
obligations" in this report.
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Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
The main way we manage interest rate risk is to match, as closely as possible,
the pricing and maturity characteristics of our assets with those of our
liabilities. We do this by:
- Using a blend of funding sources, including core deposits, national
(brokered) CDs in amounts of $100,000 and more, and other short-term
borrowings.
- Selling most of our new fixed-rate residential mortgage production into the
secondary market. By limiting the fixed-rate residential mortgages we hold
in our loan portfolio, we eliminate much of the long-term risk inherent in
instruments that typically have 15- to 30-year maturities.
- Managing the size of our investment securities portfolio and the mix of
instruments in it.
Our interest rate risk management objectives are to:
- Prevent market interest rate changes from reducing net interest income by
10% or more within any 12-month period.
- Maximize net interest income growth consistently by minimizing the effects
of market interest rate fluctuations.
The primary tool we use to assess our exposure to interest rate risk is a
computer modeling technique that simulates the effects on our net interest
income of gradual and sustained changes in market interest rates. We perform
simulations quarterly that 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.
As of March 31, 2006, our model projected that:
- If short-term rates were to increase gradually by a total of 250 basis
points over a 10-month period, our net interest income would increase 5.75%
over the 12 months beginning March 31, 2006.
- If short-term rates were to decrease gradually over a 10-month period by a
total of 250 basis points, our net interest income would decline by 7.17%
over the 12 months beginning March 31, 2006.
IMPACT OF INTEREST RATE CHANGES FOR THE 12 MONTHS FOR THE 12 MONTHS
ON NET INTEREST INCOME BEGINNING 3/31/06 BEGINNING 12/31/05
-------------------------------------------------------------------------------------------------------------
Gradual increase of 250 basis points 5.75% 0.56%
Gradual decrease of 250 basis points (7.17)% (3.97)%
We adjusted the March 31, 2006, stimulation to reflect two changes:
- On March 31, 2006, we terminated $250 million of interest rates swaps that
were associated with $250 million of subordinated long-term debt. We
issued this debt at a fixed rate, which we immediately swapped for a
floating rate. We terminated these swaps because a floating rate is more
beneficial in a rising market interest rate enviorment. For more
information about these swaps, please refer to Note 6, "Derivative and
hedging activities," and the "Off-balance-sheet arrangements and
contractual obligations" section of this report.
- We changed some of the assets in the model from fixed rates to floating
rates.
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. Assumptions about retail deposits rates,
residential mortgage prepayments, asset-backed securities, and collateralized
mortgage obligations play a significant role in our interest rate simulations.
Our assumptions about rates and the pace of changes in payments differ for
assets and liabilities in rising as well as declining rate environments. These
assumptions are inherently uncertain, and the simulations cannot predict
precisely what the actual impact of interest rate changes might be on our net
interest income.
During the first three months of 2006:
- Our interest rate risk position remained asset sensitive, which means that
our loan yields continued to rise at a faster pace than our deposit rates.
- The repricing characteristics of our loan portfolio closely matched those
of our wholesale funding sources.
54
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
- We added interest rate floor contracts to hedge a portion of the interest
revenue from commercial floating rate loans against potential future
declines in market interest rates.
- Deposit pricing pressure was modest, even though short-term market interest
rates (as set by the Federal Open Market Committee) at March 31, 2006, were
50 basis points higher than at December 31, 2005, and 200 basis points
higher than at the end of March 2005.
The following tables compare our key yields and rates. For a more detailed
analysis of our yields and rates, please refer to the "Analysis of earnings"
section of this report.
3 MONTHS 3 MONTHS 3 MONTHS
AVERAGE YIELDS AND RATES ENDED 3/31/06 ENDED 12/31/05 ENDED 3/31/05
-------------------------------------------------------------------------------------------------------------
Investment securities portfolio 4.53% 4.44% 4.14%
Commercial loans 7.44% 6.97% 5.66%
Total loans 7.11% 6.70% 5.60%
Total earning assets 6.58% 6.22% 5.28%
Core interest-bearing deposits 1.81% 1.64% 1.16%
National CDs 4.47% 4.01% 2.47%
Total interest-bearing deposits 2.86% 2.55% 1.60%
Short-term borrowings 4.20% 3.80% 2.55%
Total cost of funds 2.81% 2.48% 1.64%
Net interest margin 3.77% 3.74% 3.64%
BASIS POINT (BPS) CHANGES 3/31/06 VS. 12/31/05 3/31/06 VS. 3/31/05
-------------------------------------------------------------------------------------------------------------
Investment securities portfolio 9 bps 39 bps
Commercial loans 47 bps 178 bps
Total loans 41 bps 151 bps
Total earning assets 36 bps 130 bps
Core interest-bearing deposits 17 bps 65 bps
National CDs 46 bps 200 bps
Total interest-bearing deposits 31 bps 126 bps
Short-term borrowings 40 bps 165 bps
Total cost of funds 33 bps 117 bps
Net interest margin 3 bps 13 bps
As of March 31, 2006, the repricing characteristics of our loan portfolio
closely matched those of our wholesale funding sources:
- Approximately 77% of our total loans were floating rate loans.
- Approximately 81% of our floating rate loans were commercial loans.
- The pricing on approximately 58% of commercial floating-rate loans was tied
to a prime lending rate of 7.75%.
- The pricing on approximately 34% of commercial floating-rate loans was tied
to the 1-month London Interbank Offered Rate (Libor) of 4.83%.
- Approximately 77% of our brokered CDs had maturities of 90 days or less.
- Approximately 87% of our interest-bearing short-term borrowings (federal
funds purchased and securities sold under agreements to repurchase) had
maturities of 90 days or less.
55
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
The following table compares the percentages of fixed and floating rate loans in
our portfolio, and 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.
3 MONTHS ENDED 3 MONTHS ENDED 3 MONTHS ENDED
SELECTED LOAN YIELD INDICATORS 3/31/06 12/31/05 3/31/05
-------------------------------------------------------------------------------------------------------------
Wilmington Trust prime lending rate (period-end) 7.75% 7.25% 5.75%
Wilmington Trust prime lending rate (period average) 7.43% 6.97% 5.44%
Percentage of floating-rate loans 77% 77% 79%
Percentage of fixed-rate loans 23% 23% 21%
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.
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. Financial market
volatility could change the market value of assets we manage, hold in custody,
or own for our own account. Changes in asset valuations could affect our revenue
and overall results.
Most of our financial market risk exposure is in noninterest income, where some
categories of advisory revenue are based on the market values of assets we
manage or hold in custody for clients.
In Wealth Advisory Services, all of the revenue recorded in the category of
trust and investment advisory fees is based on the market values of equity,
fixed income, and other classes of assets.
In Corporate Client Services, approximately 50% of revenue recorded as
retirement services revenue is based on the market values of retirement plans
for which we are custodian. All of the revenue recorded as Corporate Client
investment/cash management revenue reflects service charges that are based on
the value of cash assets in money market mutual funds and fixed income
investments.
All of the income we receive from our ownership positions in the two affiliate
money managers, Cramer Rosenthal McGlynn and Roxbury Capital Management, is
based on equity market valuations.
For the first quarter of 2006, approximately 54% of our total noninterest income
was subject to financial market risk, as shown in the following table.
56
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
NONINTEREST INCOME BASED ON MARKET VALUATIONS
(dollars in millions) 2006 Q1 2005 Q4 2005 Q1
-------------------------------------------------------------------------------------------------------------
WAS trust and investment advisory fees $ 34.3 $ 31.1 $ 29.9
CCS retirement services revenue $ 3.1 $ 3.3 $ 3.0
CCS investment and cash management revenue $ 2.1 $ 2.3 $ 1.8
Affiliate manager revenue $ 4.9 $ 4.9 $ 4.6
Total revenue based on market valuations $ 44.4 $ 41.6 $ 39.3
Total noninterest income (after amortization) $ 82.7 $ 79.8 $ 77.4
% of total noninterest income tied to market values 54% 52% 51%
Total net interest and noninterest income (after
the provision and amortization) $166.0 $165.3 $151.9
% of total net interest and noninterest income tied
to market values 27% 25% 26%
Financial market volatility also could change the market values of securities in
our investment portfolio and affect the amount of interest income the portfolio
generates. For more information about income from the investment securities
portfolio, please refer to the "Analysis of earnings" section of this report.
ECONOMIC RISK
Economic risk is the risk to our financial results from conditions that alter
the pace and direction of key economic indicators, such as employment levels and
the consumption of goods and services. Most of our exposure to economic risk is
in the Regional Banking business and in the Delaware Valley region.
The Delaware Valley's economy is well diversified among industry sectors,
including life sciences, financial services, pharmaceuticals, health care,
education, construction, manufacturing, retail, agriculture, and tourism. This
diversification provides a degree of economic stability and helps the region
withstand the effects of downturns in any single sector.
Economic indicators for the Delaware Valley region remained positive in the
first quarter of 2006:
- According to the U.S. Bureau of Labor Statistics, as of March 2006, the
U.S. unemployment rate was 4.7%. In comparison, Delaware's unemployment
rate was 3.6%.
- On April 21, 2006, the Delaware Department of Labor reported it expects
Delaware to gain approximately 7,000 jobs in 2006 and that job growth will
outpace the 2005 level. Gains in insurance, real estate, retail banking,
health care, retail, and construction jobs are expected to offset declines
in manufacturing and credit card jobs.
- According to data published by the Federal Reserve Bank of Philadelphia for
February 2006 (the most recent data available):
- Economic activity indices for the region rose over the previous 12
months. Delaware's index rose 3%; New Jersey's index rose 3%; and
Pennsylvania's index rose 4%.
- Leading economic indices projected moderate growth for Pennsylvania
and New Jersey, and strong growth for Delaware, through the third
quarter of 2006.
- According to the Federal Reserve Bank of Philadelphia's March 2006 Business
Outlook Survey, growth in the region's manufacturing sector was expected to
continue over the next six months.
57
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
- According to the Federal Deposit Insurance Corporation's Regional Profile
for spring 2006:
- In a ranking of job growth that grouped states into nine regions,
Delaware was in the region with the second-highest rate of job growth
in the 2005 fourth quarter.
- Loan growth in 2005 for Delaware's insured institutions was 490 basis
points higher than the national average.
- Past-due loans for Delaware's insured institutions were less than 1%
of all loans, compared with the national level of 1.3%.
- Delaware's population continued to increase due to the state's convenient
mid-Atlantic location, favorable tax climate, and desirability as a
retirement destination. According to the U.S. Census Bureau, Delaware was
the ninth fastest-growing state in the United States for the 12 months
ended July 1, 2005 (the most recent data available) and the seventh most
popular for attracting permanent residents aged 65 and older.
- According to the Delaware Population Consortium, approximately two-thirds
of Delaware's population growth is coming from migration into the state,
with the remainder occurring naturally (births minus deaths). Approximately
80% of the people moving to Delaware are coming from other parts of the
United States. The rest are migrating from other countries.
- In November 2005, the Maryland Department of Business and Economic
Development said that the U.S. military's Base Realignment and Closing
initiative could add 40,000 to 45,000 jobs in the Baltimore and northeast
Maryland area, as contractors and service providers cluster near Ft. Meade
and Aberdeen Proving Ground.
On January 1, 2006, Bank of America Corporation completed its acquisition of
Delaware-based MBNA Corporation. According to published reports, Bank of America
employs approximately 202,300 people worldwide, approximately 11,700 of whom
work in Delaware. Bank of America has said it plans to eliminate as many as
6,000 jobs as a result of the MBNA acquisition. As of April 21, 2006, Bank of
America had announced plans to eliminate approximately 760 jobs in Delaware,
mostly in Dover. The company has not said if, when, or where it might eliminate
other jobs. It is impossible, therefore, to predict how potential job losses at
Bank of America might affect Delaware's economy or our financial condition.
Beyond the Delaware Valley region, changes in economic conditions at the
national and international level that eliminate or slow demand for services
could affect all of our businesses, loan and deposit balances, revenue, net
income, and overall results.
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.
Fiduciary risk is the risk of loss that may occur if we were to breach a
fiduciary duty to a client.
All of our staff members share responsibility for adhering to our policies,
procedures, and external regulations. We have a number of policies, procedures,
and internal controls designed to reduce the risk of failing to comply with
applicable legal and regulatory requirements, and of failing to discharge our
obligations to clients faithfully. Our internal auditors monitor the overall
effectiveness of our system of internal controls on an ongoing basis.
In view of the operational risks inherent in the markets and businesses in which
we engage, we aim to keep operating risk at levels we believe are acceptable,
through policies and procedures for authorizing, approving, documenting, and
monitoring transactions.
58
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
To help mitigate fiduciary risk, we have established policies and procedures for
creating, selling, and managing investment products; trading securities; and
selecting counterparties.
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, every quarter, designated
managers in each business unit certify to the chairman and chief executive
officer, and to the chief financial officer, as to the effectiveness of the
internal controls within their respective areas of responsibility.
REGULATORY RISK
Regulatory risk is the risk of sanctions that various state, federal, and other
authorities may impose on us if we fail to comply adequately with regulatory
requirements. These requirements include those specified by the Bank Secrecy
Act, the USA Patriot Act, the Sarbanes-Oxley Act, New York Stock Exchange
policies, 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. For more information about the regulatory requirements
that affect us, please refer to the section on "Regulatory matters" which begins
on page 18 of our 2005 Annual Report on Form 10-K.
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.
We do not expect the ultimate resolution of any legal matters outstanding as of
March 31, 2006, to have a materially adverse effect on our consolidated
financial condition.
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.
59
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
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 2006 that
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
60
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We and our subsidiaries are subject to various legal proceedings that arise from
time to time in the ordinary course of their businesses and operations. Some of
these proceedings seek relief or damages in amounts that may be substantial.
Because of the complex nature of some of these proceedings, it may be a number
of years before they ultimately are resolved. While it is not feasible to
predict the outcome of these proceedings, management does not believe the
ultimate resolution of any of them will have a materially adverse effect on our
consolidated financial condition. Further, management believes that some of the
claims may be covered by insurance, and has advised its insurance carriers of
the proceedings.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table shows our repurchases of Wilmington Trust stock during the
first quarter of 2006.
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
(b) Shares (or Units) Shares (or Units)
(a) Total Number of Average Price Purchased as Part of that May Yet Be
Shares (or Units) Paid per Share Publicly Announced Purchased Under the
Period Purchased (or Unit) Plans or Programs Plans or Programs
-------------------------------------------------------------------------------------------------------------
Month #1 11,968 $42.86 11,968 7,299,787
January 1 -
January 31, 2006
Month #2
February 1, 2006 -
February 28, 2006 99,800 $43.11 99,800 7,199,987
Month #3
March 1, 2006 -
March 31, 2006 43,156 $44.53 43,156 7,156,831
--------------------------------------------------------------------------------------------------------
Total 154,924 $43.48 154,924 7,156,831
========================================================================================================
In April 2002, we announced a plan to repurchase up to 8 million shares of our
stock.
The Federal Reserve Board's policy is that bank holding companies should not pay
dividends unless the institution's prospective earnings retention rate is
consistent with its capital needs, asset quality, and overall financial
condition. We believe our payment of dividends during the first quarter of 2006
was consistent with the Federal Reserve Board's policy.
61
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
Exhibit
Number Exhibit
------- -------
3.1 Amended and Restated Certificate of Incorporation of the Corporation
(Commission File Number 1-14659)(1)
3.2 Amended Certificate of Designation of Series A Junior Participating
Preferred Stock of the Corporation (Commission File Number 1-14659)
(2)
3.3 Amended and Restated Bylaws of the Corporation (Commission File Number
1-14659) (3)
31 Rule 13a 14(a)/15d-14(a) Certifications (4)
32 Section 1350 Certification (4)
(1) Incorporated by reference to Exhibit 3(a) to the Report on Form S-8 of
Wilmington Trust Corporation filed on October 31, 1991.
(2) Incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form
10-Q of Wilmington Trust Corporation filed on May 9, 2005.
(3) Incorporated by reference to Exhibit 1 to the Current Report on Form 8-K of
Wilmington Trust Corporation filed on December 22, 2004.
(4) Filed herewith.
62
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2006
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, 2006 /s/ Ted T. Cecala
----------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and
Chief Executive Officer
(Authorized Officer)
Date: May 10, 2006 /s/ David R. Gibson
----------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
63