UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-14659
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WILMINGTON TRUST CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0328154
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
RODNEY SQUARE NORTH, 1100 NORTH MARKET STREET, WILMINGTON, DELAWARE 19890
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(Address of principal executive offices) (Zip Code)
(302) 651-1000
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(Registrant's telephone number, including area code)
NONE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is 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 June 30, 2006
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COMMON STOCK -- PAR VALUE $1.00 68,660,548
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
SECOND 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 25
Item 3 Quantitative and Qualitative Disclosures About Market Risk 67
Item 4 Controls and Procedures 74
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 75
Item 1A Risk Factors 75
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 75
Item 3 Defaults upon Senior Securities 76
Item 4 Submission of Matters to a Vote of Security Holders 76
Item 5 Other Information 76
Item 6 Exhibits 76
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
-------------------------
June 30, December 31,
(In millions, except share amounts) 2006 2005
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ASSETS
Cash and due from banks $ 258.5 $ 264.0
-------------------------
Federal funds sold and securities purchased
under agreements to resell 66.7 14.3
-------------------------
Investment securities available for sale:
U.S. treasury 181.4 161.1
Government agencies 416.5 410.8
Obligations of state and political subdivisions 8.5 9.0
Other securities 1,228.6 1,345.4
------------------------------------------------------------------------------------------------
Total investment securities available for sale 1,835.0 1,926.3
-------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions 1.9 2.0
(market values of $2.0 and $2.1, respectively)
Other securities (market value of $0.3 and $0.5, respectively) 0.3 0.5
------------------------------------------------------------------------------------------------
Total investment securities held to maturity 2.2 2.5
-------------------------
Loans:
Commercial, financial, and agricultural 2,445.5 2,461.3
Real estate - construction 1,574.3 1,233.9
Mortgage - commercial 1,222.8 1,223.9
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Total commercial loans 5,242.6 4,919.1
-------------------------
Mortgage - residential 503.0 455.5
Consumer 1,452.4 1,438.3
Secured with liquid collateral 557.2 584.8
------------------------------------------------------------------------------------------------
Total retail loans 2,512.6 2,478.6
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Total loans net of unearned income 7,755.2 7,397.7
Reserve for loan losses (94.3) (91.4)
------------------------------------------------------------------------------------------------
Net loans 7,660.9 7,306.3
-------------------------
Premises and equipment, net 151.2 147.6
Goodwill, net of amortization 363.0 348.3
Other intangible assets, net of amortization 38.9 36.2
Accrued interest receivable 59.4 54.5
Other assets 154.9 132.8
------------------------------------------------------------------------------------------------
Total assets $10,590.7 $10,232.8
=========================
1
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
----------------------------
June 30, December 31,
(In millions, except share amounts) 2006 2005
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 813.8 $ 1,014.8
Interest-bearing:
Savings 313.1 326.3
Interest-bearing demand 2,355.9 2,360.0
Certificates under $100,000 991.1 923.0
Local CDs $100,000 and over 550.6 436.5
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Total core deposits 5,024.5 5,060.6
National CDs $100,000 and over 2,760.6 2,228.6
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Total deposits 7,785.1 7,289.2
----------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,145.0 1,355.6
U.S. Treasury demand 24.5 18.1
Line of credit 15.0 --
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Total short-term borrowings 1,184.5 1,373.7
----------------------------
Accrued interest payable 61.4 45.7
Other liabilities 99.1 105.9
Long-term debt 393.4 400.4
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Total liabilities 9,523.5 9,214.9
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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 159.6 145.0
Retained earnings 1,120.9 1,071.7
Accumulated other comprehensive loss (44.0) (21.8)
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Total contributed capital and retained earnings 1,315.0 1,273.4
Less: Treasury stock, at cost, 9,867,798 and
10,625,067 shares, respectively (248.1) (255.7)
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Total stockholders' equity 1,066.9 1,017.7
----------------------------
Total liabilities and stockholders' equity $ 10,590.7 $ 10,232.8
============================
See Notes to Consolidated Financial Statements
2
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
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For the three months ended For the six months ended
June 30, June 30,
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(In millions; except per share data) 2006 2005 2006 2005
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NET INTEREST INCOME
Interest and fees on loans $ 143.6 $ 103.3 $ 275.1 $ 197.5
Interest and dividends on investment securities:
Taxable interest 19.5 17.4 39.0 34.3
Tax-exempt interest 0.1 0.1 0.3 0.4
Dividends 1.6 1.6 3.1 3.0
Interest on federal funds sold and securities
purchased under agreements to resell 0.2 0.2 0.4 0.3
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Total interest income 165.0 122.6 317.9 235.5
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Interest on deposits 54.4 29.9 102.3 52.9
Interest on short-term borrowings 13.6 7.7 25.1 15.5
Interest on long-term debt 6.6 4.9 12.8 9.4
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Total interest expense 74.6 42.5 140.2 77.8
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Net interest income 90.4 80.1 177.7 157.7
Provision for loan losses (4.2) (3.8) (8.2) (6.9)
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Net interest income after provision
for loan losses 86.2 76.3 169.5 150.8
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NONINTEREST INCOME
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory fees 33.1 30.3 67.5 60.3
Mutual fund fees 5.0 4.3 9.7 8.8
Planning and other services 8.9 7.8 16.3 16.9
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Total Wealth Advisory Services 47.0 42.4 93.5 86.0
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Corporate Client Services:
Capital markets services 8.5 8.1 17.2 15.4
Entity management services 6.6 5.9 13.0 11.8
Retirement services 3.2 2.9 6.3 5.9
Investment/cash management services 2.5 1.8 4.6 3.6
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Total Corporate Client Services 20.8 18.7 41.1 36.7
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Cramer Rosenthal McGlynn 5.5 4.0 9.5 8.3
Roxbury Capital Management 0.3 0.2 1.1 0.5
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Advisory fees 73.6 65.3 145.2 131.5
Amortization of affiliate other intangibles (1.0) (1.0) (2.0) (2.1)
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Advisory fees after amortization
of affiliate other intangibles 72.6 64.3 143.2 129.4
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Service charges on deposit accounts 7.0 6.7 13.9 13.5
Loan fees and late charges 1.9 1.8 3.7 3.3
Card fees 2.3 2.2 4.4 4.0
Other noninterest income 2.6 1.4 3.9 2.9
Securities gains/(losses) (0.1) -- (0.1) 0.8
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Total noninterest income 86.3 76.4 169.0 153.9
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Net interest and noninterest income 172.5 152.7 338.5 304.7
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3
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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For the three months ended For the six months ended
June 30, June 30,
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(in millions; except per share data) 2006 2005 2006 2005
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NONINTEREST EXPENSE
Salaries and wages 37.8 35.0 74.6 67.9
Incentives and bonuses 10.3 10.1 20.6 19.9
Employment benefits 11.9 11.7 25.4 24.2
Net occupancy 6.3 5.1 12.2 10.8
Furniture, equipment, and supplies 9.9 9.0 19.1 17.5
Advertising and contributions 2.1 2.1 4.1 4.2
Servicing and consulting fees 2.4 2.3 4.7 5.0
Subadvisor expense 2.9 1.7 5.7 4.2
Travel, entertainment, and training 2.3 1.9 4.5 3.6
Originating and processing fees 2.4 2.7 5.2 4.9
Legal and auditing fees 1.7 2.2 3.1 3.7
Other noninterest expense 8.3 7.9 16.7 16.2
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Total noninterest expense 98.3 91.7 195.9 182.1
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NET INCOME
Income before income taxes and minority
interest 74.2 61.0 142.6 122.6
Income tax expense 27.2 22.4 51.4 44.8
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Net income before minority interest 47.0 38.6 91.2 77.8
Minority interest 0.1 0.1 0.1 0.1
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Net income $ 46.9 $ 38.5 $ 91.1 $ 77.7
==========================================================
Net income per share:
Basic $ 0.69 $ 0.57 $ 1.33 $ 1.15
==========================================================
Diluted $ 0.67 $ 0.56 $ 1.31 $ 1.14
==========================================================
Weighted average shares outstanding:
Basic (000's) 68,475 67,618 68,274 67,549
Diluted (000's) 69,776 68,387 69,606 68,309
See Notes to Consolidated Financial Statements
4
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------------------
For the six months ended June 30,
---------------------------------
(In millions) 2006 2005
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OPERATING ACTIVITIES
Net income $ 91.1 $ 77.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 8.2 6.9
Provision for depreciation and other amortization 9.7 9.6
Amortization of other intangible assets 2.6 2.6
Minority interest in net income 0.1 0.1
Amortization of investment securities available for sale
discounts and premiums 0.6 2.0
Deferred income taxes (12.0) (0.1)
Originations of residential mortgages available for sale (42.2) (43.2)
Gross proceeds from sales of residential mortgages 42.6 44.0
Gains on sales of residential mortgages (0.4) (0.8)
Securities losses/(gains) 0.1 (0.8)
Tax benefits realized from stock-based awards (3.4) (0.1)
(Increase)/decrease in other assets (28.7) 13.5
Increase in other liabilities 21.6 4.9
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Net cash provided by operating activities 89.9 116.3
---------------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 19.9 27.1
Proceeds from maturities of investment securities available for sale 247.0 326.1
Proceeds from maturities of investment securities held to maturity 0.3 0.2
Purchases of investment securities available for sale (203.0) (428.4)
Purchases of investment securities held to maturity -- (0.1)
Cash paid for purchase of subsidiary (2.6) --
Investment in affiliates (15.9) --
Purchases of residential mortgages (10.7) (7.6)
Net increase in loans (352.1) (286.7)
Purchases of premises and equipment (14.5) (8.4)
Dispositions of premises and equipment 1.4 0.9
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Net cash used for investing activities (330.2) (376.9)
---------------------------------
5
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
---------------------------------
For the six months ended June 30,
---------------------------------
(In millions) 2006 2005
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FINANCING ACTIVITIES
Net decrease in demand, savings, and interest-bearing
demand deposits (218.3) (327.9)
Net increase in certificates of deposit 714.2 527.7
Net (decrease)/increase in federal funds purchased and securities sold
under agreements to repurchase (210.6) 43.3
Net increase/(decrease) in U.S. Treasury demand 6.4 (11.7)
Net increase in Line of credit 15.0 --
Cash dividends (41.9) (39.6)
Proceeds from common stock issued under employment benefit plans 25.6 12.2
Tax benefits realized from stock-based awards 3.4 0.1
Payments for common stock acquired through buybacks (6.8) (1.4)
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Net cash provided by financing activities 287.0 202.7
---------------------------------
Effect of foreign currency translation on cash 0.2 (0.2)
---------------------------------
Increase/(decrease) in cash and cash equivalents 46.9 (58.1)
Cash and cash equivalents at beginning of period 278.3 311.9
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Cash and cash equivalents at end of period $ 325.2 $ 253.8
=================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 124.5 $ 72.6
Taxes 53.6 44.8
Liabilities were assumed in conjunction with the acquisition of PwC Corporate
Services (Cayman) Limited, Cramer Rosenthal McGlynn, LLC, and Wilmington Trust
SP Services (London) Limited as follows:
Book value of assets acquired 0.3 --
Goodwill and other intangible assets from acquisitions 18.4 7.3
---------------------------------
Fair value of assets acquired 18.7 7.3
Common stock issued -- --
Cash paid (18.5) --
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Liabilities assumed $ 0.2 $ 7.3
=================================
See Notes to Consolidated Financial Statements
6
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 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. We maintain our
accounting records and prepare our financial statements using the accrual basis
of accounting. We have applied our critical accounting policies and estimation
methods consistently in all periods presented, and we have discussed these
policies with our Audit Committee. Our critical accounting policies preclude us
from choosing among alternative methods of accounting.
The information for interim periods, such as the period covered by this report,
is unaudited, and includes all adjustments of a normal recurring nature that we
believe are necessary for fair presentation. We have reclassified certain
prior-year amounts to conform to the current-year presentation.
Our consolidated financial statements include 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.; Wilmington Trust CI Holdings
Limited; and WTC's subsidiaries. We eliminate intercompany balances and
transactions in consolidation.
In the course of applying our critical accounting policies, we make subjective
judgments, estimates, and assumptions about uncertainties and trends. These
estimates 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 make estimates concerning 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. We evaluate these estimates on an ongoing basis.
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; a substantial and
permanent loss of either client accounts and/or assets under management at
Wilmington Trust and/or our affiliate money managers, Cramer Rosenthal McGlynn
and Roxbury Capital Management; unanticipated changes in the regulatory,
judicial, legislative, or tax treatment of business transactions; and
uncertainty created by unrest in other parts of the world.
The consolidated financial statements presented in this report should be read in
conjunction with the "Consolidated Financial Statements" and 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 and the Select Committee of our Board of Directors administer these
plans.
7
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
- 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 or
Select 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.
When option recipients exercise their options, we issue shares 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. The expenses we record include estimates of
forfeitures. We record forfeitures of outstanding option grants when the
forfeitures occur.
At June 30, 2006, we held more than 9.8 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 June 30, 2006, there were 7,154,438 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 adjust our financial results back to 1995, the
effective date of SFAS No. 123.
The following tables present other information about stock-based compensation
awards.
8
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
------------------------------------------------------------------------
For the three months ended For the six months ended
------------------------------------------------------------------------
(In millions) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
--------------------------------------------------------------------------------------------------------------------
Compensation expense $1.4 $2.1 $3.4 $3.1
Tax benefit 0.5 0.2 1.2 0.3
--------------------------------------------------------------------------------------------------------------------
Net income effect $0.9 $1.9 $2.2 $2.8
STOCK OPTION AWARDS
------------------------------------------------------------------------
Weighted
average Aggregate
Weighted remaining intrinsic value
Stock option activity average contractual per option
for the three months ended June 30, 2006 Stock options exercise price term outstanding
--------------------------------------------------------------------------------------------------------------------
Outstanding at April 1, 2006 6,805,579 $32.36
Granted 22,061 43.64
Exercised 320,244 27.34
Expired 800 26.60
Forfeited 12,750 37.02
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Outstanding at June 30, 2006 6,493,846 $33.11 6.3 years $5.96
Exercisable at June 30, 2006 3,612,983 $29.23 4.7 years $5.43
------------------------------------------------------------------
Weighted
average Aggregate
Weighted remaining intrinsic
Stock option activity average contractual value per
for the three months ended June 30, 2005 Stock options exercise price term option
--------------------------------------------------------------------------------------------------------------------
Outstanding at April 1, 2005 6,610,562 $30.49
Granted 9,700 35.47
Exercised 93,206 30.09
Expired -- --
Forfeited 83,000 31.69
--------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2005 6,444,056 $30.47 6.9 years $5.46
Exercisable at June 30, 2005 3,113,964 $28.53 5.2 years $5.32
9
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
------------------------------------------------------------------
Weighted Aggregate
average intrinsic
Weighted remaining value per
Stock option activity average contractual option
for the six months ended June 30, 2006 Stock options exercise price term outstanding
--------------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 6,335,292 $30.56
Granted 956,466 43.21
Exercised 754,380 24.14
Expired 800 26.60
Forfeited 42,732 34.77
--------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2006 6,493,846 $33.11 6.3 years $5.96
Exercisable at June 30, 2006 3,612,893 $29.23 4.7 years $5.43
------------------------------------------------------------------
Weighted Aggregate
average intrinsic
Weighted remaining value per
Stock option activity average contractual option
for the six months ended June 30, 2005 Stock options exercise price term outstanding
--------------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2005 5,862,054 $29.70
Granted 950,221 33.93
Exercised 233,544 24.50
Expired -- --
Forfeited 134,675 31.07
----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2005 6,444,056 $30.47 6.9 years $5.46
Exercisable at June 30, 2005 3,113,964 $28.53 5.2 years $5.32
---------------------------------------------------------------
For the three months ended For the six months ended
Options exercised ---------------------------------------------------------------
(dollars in millions) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
--------------------------------------------------------------------------------------------------------------------
Number of options exercised 320,244 93,206 754,380 233,544
Total intrinsic value of options exercised $ 1.6 $ 0.5 $ 3.2 $ 1.0
Cash received from options exercised $ 14.1 $ 10.0 $ 25.6 $ 12.2
Tax deduction realized from options exercised $ 2.3 $ 0.1 $ 4.3 $ 0.5
At June 30, 2006, total unrecognized compensation cost related to nonvested
options was $9.9 million. We expect to record that expense over a weighted
average period of 1.4 years.
------------------------------------------
Weighted average
Nonvested stock options for the fair value
three months ended June 30, 2006 Stock options at grant date
--------------------------------------------------------------------------------------------------------
Nonvested at April 1, 2006 3,262,248 $6.21
Granted 22,061 6.28
Vested (392,096) 4.81
Exercised -- --
Expired -- --
Forfeited (11,350) 6.05
---------------------------------------------------------------------------------------------------
Nonvested at June 30, 2006 2,880,863 $6.63
10
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
------------------------------------------
Weighted average
Nonvested stock options for the fair value
three months ended June 30, 2005 Stock options at grant date
-------------------------------------------------------------------------------------------------------
Nonvested at April 1, 2005 3,415,268 $ 5.59
Granted 9,700 6.69
Vested (11,876) 6.00
Exercised -- --
Expired -- --
Forfeited (83,000) 5.59
-------------------------------------------------------------------------------------------------------
Nonvested at June 30, 2005 3,330,092 $ 5.59
------------------------------------------
Weighted average
Nonvested stock options for the fair value
six months ended June 30, 2006 Stock options at grant date
-------------------------------------------------------------------------------------------------------
Nonvested at January 1, 2006 3,287,608 $ 5.63
Granted 956,466 7.14
Vested (1,323,279) 4.94
Exercised -- --
Expired -- --
Forfeited (39,932) 5.85
-------------------------------------------------------------------------------------------------------
Nonvested at June 30, 2006 2,880,863 $ 6.63
------------------------------------------
Weighted average
Nonvested stock options for the fair value
six months ended June 30, 2005 Stock options at grant date
-------------------------------------------------------------------------------------------------------
Nonvested at January 1, 2005 2,811,022 $ 5.69
Granted 950,221 5.40
Vested (307,576) 5.93
Exercised (1,200) 4.81
Expired -- --
Forfeited (122,375) 5.56
-------------------------------------------------------------------------------------------------------
Nonvested at June 30, 2005 3,330,092 $ 5.59
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:
11
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
----------------------------------- ---------------------------------------
For the three months ended For the six months ended
----------------------------------------------------------------------------------------------------------------------
Black-Scholes valuation assumptions June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
Risk-free interest rate 4.62 - 4.94% 3.53 - 3.83% 4.51 - 4.94% 3.53 - 4.07%
Volatility of Corporation's stock 14.47 - 14.59% 20.85 - 20.88% 14.47 - 20.82% 20.85 - 21.57%
Expected dividend yield 2.72 - 2.84% 3.20 - 3.26% 2.72 - 2.86% 3.20 - 3.26%
Expected life of options 4.3 - 8.4 years 4.0 years 4.3 - 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.
- 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 June 30, 2006, total unrecognized
compensation cost related to restricted stock grants was $1.9 million. We
expect to record that expense over a weighted average period of 2.8 years.
-----------------------------------------------------
Restricted stock activity Weighted average fair
for the three months ended June 30, 2006 Restricted shares value at grant date
----------------------------------------------------------------------------------------------------------------------
Outstanding at April 1, 2006 43,719 $40.15
Granted 10,000 $43.38
Vested -- --
Forfeited -- --
----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2006 53,719 $40.75
-----------------------------------------------------
Restricted stock activity Weighted average fair
for the three months ended June 30, 2005 Restricted shares value at grant date
----------------------------------------------------------------------------------------------------------------------
Outstanding at April 1, 2005 25,730 $34.84
Granted -- --
Vested -- --
Forfeited -- --
----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2005 25,730 $34.84
-----------------------------------------------------
Restricted stock activity Weighted average fair
for the six months ended June 30, 2006 Restricted shares value at grant date
----------------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 25,730 $34.84
Granted 37,860 $43.30
Vested 9,871 $35.12
Forfeited -- --
----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2006 53,719 $40.75
12
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
--------------------------------------------------
Restricted stock activity Weighted average fair
for the six months ended June 30, 2005 Restricted shares value at grant date
----------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2005 12,638 $37.02
Granted 18,003 $33.90
Vested 4,911 $37.02
Forfeited -- --
----------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2005 25,730 $34.84
EMPLOYEE STOCK PURCHASE PLAN
For the employee stock purchase plan, we amortize the associated compensation
expense over the plan's fiscal year.
----------------------------------------------------------------
Shares reserved Subscriptions
for future subscriptions outstanding Price per share
----------------------------------------------------------------------------------------------------------------
Balance at January 1, 2005 693,011 106,989
Subscriptions entered into on June 1, 2005 (110,266) 110,266 $30.54
Forfeitures 7,545 (7,545) $30.54 - $31.06
Shares issued -- (102,874) $30.46
----------------------------------------------------------------------------------------------
Balance at December 31, 2005 590,290 106,836
Subscriptions entered into on June 1, 2006 (95,569) 95,569 $37.07
Forfeitures 4,488 (4,488) $30.54
Shares issued -- (102,348) $30.54
----------------------------------------------------------------------------------------------
Balance at June 30, 2006 499,209 95,569
For the six months ended June 30, 2006, total recognized compensation cost
related to the employee stock purchase plan was $0.3 million and total
unrecognized compensation cost related to this plan was $0.6 million.
NOTE 3 -- COMPREHENSIVE INCOME
-------------------------------------------------
For the 3 months ended For the 6 months ended
June 30, June 30,
Other comprehensive income (as required by SFAS No. 130) -------------------------------------------------
(in millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------------------
Net income $ 46.9 $ 38.5 $ 91.1 $ 77.7
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities (12.8) 11.9 (17.2) (4.7)
Reclassification adjustment for securities losses/(gains)
included in net income 0.1 -- 0.1 (0.5)
Net unrealized holding gains/(losses) arising during the
period on derivatives used for cash flow hedge (2.6) (0.1) (5.8) --
Reclassification adjustment for derivative gains
included in net income -- -- -- (0.1)
Foreign currency translation adjustments 0.6 (0.2) 0.7 (0.3)
-------------------------------------------------
Total comprehensive income $ 32.2 $ 50.1 $ 68.9 $ 72.1
=================================================
13
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
NOTE 4 -- EARNINGS PER SHARE
-------------------------------------------------
For the 3 months ended For the 6 months ended
June 30, June 30,
Computation of basic and diluted net earnings per share -------------------------------------------------
(in millions, except share amounts) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 46.9 $ 38.5 $ 91.1 $ 77.7
Denominator for basic earnings per share --
weighted-average shares 68.5 67.6 68.3 67.5
---------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 1.3 0.8 1.3 0.8
---------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -- adjusted 69.8 68.4 69.6 68.3
weighted-average shares and assumed conversions
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.69 $ 0.57 $ 1.33 $ 1.15
=====================================================================================================================
Diluted earnings per share $ 0.67 $ 0.56 $ 1.31 $ 1.14
=====================================================================================================================
Cash dividends per share $ 0.315 $ 0.30 $ 0.615 $ 0.585
The number of antidilutive stock options excluded was 0.9 million for the three-
and six-month periods ended June 30, 2006. The number of antidilutive stock
options excluded was 1.0 and 1.1 million, respectively, for the three- and
six-month periods ended June 30, 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.
14
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30,2006
The segment reporting methodology employs activity-based costing principles to
assign corporate overhead expenses to each segment. Funds transfer pricing
concepts are used to credit and charge segments for funds provided and funds
used.
The 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- and
six-month periods ended June 30, 2006 and 2005.
Wealth Corporate Affiliate
Regional Advisory Client Money
Three months ended June 30, 2006 (in millions) Banking Services Services Managers Totals
--------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 83.9 $ 6.3 $ 3.4 $ (3.2) $ 90.4
Provision for loan losses (3.7) (0.5) -- -- (4.2)
--------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 80.2 5.8 3.4 (3.2) 86.2
Advisory fees:
Wealth Advisory Services 0.3 44.0 2.7 -- 47.0
Corporate Client Services 0.2 -- 20.6 -- 20.8
Affiliate Money Managers -- -- -- 5.8 5.8
--------------------------------------------------------------------------------------------------------------------------------
Advisory fees 0.5 44.0 23.3 5.8 73.6
Amortization of other intangibles -- (0.6) (0.2) (0.2) (1.0)
--------------------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.5 43.4 23.1 5.6 72.6
Other noninterest income 12.5 0.9 0.4 -- 13.8
Securities losses (0.1) -- -- -- (0.1)
--------------------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 93.1 50.1 26.9 2.4 172.5
Noninterest expense (38.4) (40.5) (19.4) -- (98.3)
--------------------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes 54.7 9.6 7.5 2.4 74.2
Applicable income taxes and minority interest 19.6 3.6 2.8 1.3 27.3
--------------------------------------------------------------------------------------------------------------------------------
Segment net income $ 35.1 $ 6.0 $ 4.7 $ 1.1 $ 46.9
================================================================================================================================
Depreciation and amortization $ 2.9 $ 2.1 $ 1.3 $ 0.2 $ 6.5
15
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30,2006
Wealth Corporate Affiliate
Regional Advisory Client Money
Three months ended June 30, 2005 (in millions) Banking Services Services Managers Totals
--------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 74.6 $ 5.5 $ 2.3 $ (2.3) $ 80.1
Provision for loan losses (3.8) -- -- -- (3.8)
--------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 70.8 5.5 2.3 (2.3) 76.3
Total advisory fees:
Wealth Advisory Services 0.4 40.2 1.8 -- 42.4
Corporate Client Services 0.2 -- 18.5 -- 18.7
Affiliate Money Managers -- -- -- 4.2 4.2
--------------------------------------------------------------------------------------------------------------------------------
Advisory fees 0.6 40.2 20.3 4.2 65.3
Amortization of other intangibles -- (0.6) (0.2) (0.2) (1.0)
--------------------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.6 39.6 20.1 4.0 64.3
Other noninterest income 11.5 0.4 0.2 -- 12.1
--------------------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 82.9 45.5 22.6 1.7 152.7
Noninterest expense (36.9) (35.8) (19.0) -- (91.7)
--------------------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes 46.0 9.7 3.6 1.7 61.0
Applicable income taxes and minority interest 16.9 3.6 1.0 1.0 22.5
--------------------------------------------------------------------------------------------------------------------------------
Segment net income $ 29.1 $ 6.1 $ 2.6 $ 0.7 $ 38.5
================================================================================================================================
Depreciation and amortization $ 3.6 $ 2.1 $ 1.2 $ 0.2 $ 7.1
16
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30,2006
Wealth Corporate Affiliate
Regional Advisory Client Money
Six months ended June 30, 2006 (in millions) Banking Services Services Managers Totals
--------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 164.8 $ 12.9 $ 6.2 $ (6.2) $ 177.7
Provision for loan losses (7.5) (0.7) -- -- (8.2)
--------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 157.3 12.2 6.2 (6.2) 169.5
Total advisory fees:
Wealth Advisory Services 0.5 87.4 5.6 -- 93.5
Corporate Client Services 0.5 -- 40.6 -- 41.1
Affiliate Money Managers -- -- -- 10.6 10.6
--------------------------------------------------------------------------------------------------------------------------------
Advisory fees 1.0 87.4 46.2 10.6 145.2
Amortization of other intangibles -- (1.5) (0.2) (0.3) (2.0)
--------------------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 1.0 85.9 46.0 10.3 143.2
Other noninterest income 23.9 1.4 0.6 -- 25.9
Securities losses (0.1) -- -- -- (0.1)
--------------------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 182.1 99.5 52.8 4.1 338.5
Noninterest expense (77.3) (78.8) (39.8) -- (195.9)
--------------------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes 104.8 20.7 13.0 4.1 142.6
Applicable income taxes and minority interest 36.9 7.5 4.8 2.3 51.5
--------------------------------------------------------------------------------------------------------------------------------
Segment net income $ 67.9 $ 13.2 $ 8.2 $ 1.8 $ 91.1
================================================================================================================================
Depreciation and amortization $ 5.9 $ 4.1 $ 2.5 $ 0.4 $ 12.9
Investment in equity method investees -- -- -- 273.0 273.0
Segment average assets $ 8,434.0 $ 1,380.5 $ 192.8 $ 261.8 $ 10,269.1
17
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30,2006
Wealth Corporate Affiliate
Regional Advisory Client Money
Six months ended June 30, 2005 (in millions) Banking Services Services Managers Totals
--------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 145.9 $ 11.1 $ 5.1 $ (4.4) $ 157.7
Provision for loan losses (6.6) (0.3) -- -- (6.9)
--------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 139.3 10.8 5.1 (4.4) 150.8
Total advisory fees:
Wealth Advisory Services 0.8 81.2 4.0 -- 86.0
Corporate Client Services 0.4 -- 36.3 -- 36.7
Affiliate Money Managers -- -- -- 8.8 8.8
--------------------------------------------------------------------------------------------------------------------------------
Advisory fees 1.2 81.2 40.3 8.8 131.5
Amortization of other intangibles -- (1.4) (0.4) (0.3) (2.1)
--------------------------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 1.2 79.8 39.9 8.5 129.4
Other noninterest income 22.4 0.8 0.5 -- 23.7
Securities gains 0.8 -- -- -- 0.8
--------------------------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 163.7 91.4 45.5 4.1 304.7
Noninterest expense (73.0) (72.6) (36.5) -- (182.1)
--------------------------------------------------------------------------------------------------------------------------------
Segment profit before income taxes 90.7 18.8 9.0 4.1 122.6
Applicable income taxes and minority interest 32.7 6.8 3.3 2.1 44.9
--------------------------------------------------------------------------------------------------------------------------------
Segment net income $ 58.0 $ 12.0 $ 5.7 $ 2.0 $ 77.7
================================================================================================================================
Depreciation and amortization $ 6.9 $ 4.4 $ 2.5 $ 0.4 $ 14.2
Investment in equity method investees -- -- -- 260.8 260.8
Segment average assets $ 7,797.6 $ 1,306.0 $ 185.8 $ 260.1 $ 9,549.5
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.
18
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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. As of June 30, 2006, we had entered into a total of
$950.8 million notional amount of interest rate swaps as follows:
- $412.9 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,
$412.9 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 June 30, 2006, we had
purchased a total of $1.0 billion of interest rate floor contracts.
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
June 30, 2006 December 31, 2005
---------------------------------------------------------------------------------------------------
Goodwill and Gross Net Gross Net
other intangible assets carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount amortization amount amount amortization amount
------------------------------------------------------------------------------------------------------------------------------------
Goodwill (nonamortizing) $ 392.8 $ 29.8 $ 363.0 $ 378.1 $ 29.8 $ 348.3
===================================================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 9.2 $ 6.4 $ 2.8 $ 8.9 $ 5.9 $ 3.0
Client lists 48.0 14.1 33.9 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 $ 61.8 $ 22.9 $ 38.9 $ 56.5 $ 20.3 $ 36.2
===================================================================================================
For the 3 months ended For the 6 months ended
----------------------------------------------------------------------
June 30, June 30,
(In millions) 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------------------------------
Amortization expense of other intangible assets $ 1.3 $ 1.3 $ 2.6 $ 2.6
-----------------------------------------------------------------------------------------------------------------------------------
19
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Estimated annual amortization expense of other intangible assets (in millions)
-------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2007 $ 5.1
For the year ended December 31, 2008 4.8
For the year ended December 31, 2009 3.7
For the year ended December 31, 2010 3.2
For the year ended December 31, 2011 2.9
Changes in the carrying amount of goodwill by business segment for six months
ended June 30
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
Goodwill from acquisitions -- -- 1.1 12.4 13.5
Increase in carrying value due to foreign
currency translation adjustments -- -- 1.2 -- 1.2
-------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2006 $ 3.8 $ 86.7 $ 21.5 $ 251.0 $ 363.0
===================================================================
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
Goodwill from acquisitions -- -- 7.3 -- 7.3
Decrease in carrying value due to foreign
currency translation adjustments -- -- (0.7) -- (0.7)
-------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2005 $ 3.8 $ 84.3 $ 16.9 $ 238.6 $ 343.6
===================================================================
The goodwill from acquisitions recorded for 2006 consists of:
- $12.4 million recorded under Affiliate Money Managers in connection with
an increase in WTI's equity interest in Cramer Rosenthal McGlynn, LLC.
- $1.1 million associated with the acquisition of PwC Corporate Services
(Cayman) Limited recorded under Corporate Client Services.
The goodwill from acquisitions recorded for 2005 consisted of $7.3 million of
deferred payments associated with the acquisition of SPV Management recorded
under Corporate Client Services. In January 2006, we changed SPV Management's
name to Wilmington Trust SP Services (London) Limited.
20
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
----------------------------------------------------------------------------------------
2006 2005
----------------------------------------------------------------------------------------
Weighted Weighted
average average
Other intangible assets amortization amortization
acquired during the 6 months Amount Residual period Amount Residual period
ended June 30 (in millions) assigned value in years assigned value in years
----------------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights $ 0.3 -- 8 $ 0.5 -- 8
Client lists 4.9 -- 18 -- --
Client list increase/(decrease)
in carrying value
due to foreign currency
translation adjustments 0.1 -- (0.3) --
------------------------- --------------------
$ 5.3 -- $ 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- and six-month periods ended June 30, 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.
Postretirement
Pension benefits SERP benefits benefits
For the three months ended -----------------------------------------------------------
June 30 (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 $ 0.2 $ 1.2 $ 1.1
21
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Postretirement
Pension benefits SERP benefits benefits
For the six months ended -----------------------------------------------------------
June 30 (in millions) 2006 2005 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 4.2 $ 3.6 $ 0.4 $ 0.4 $ 0.6 $ 0.4
Interest cost 5.2 5.2 0.6 0.7 1.1 1.1
Expected return on plan assets (7.2) (6.2) -- -- -- --
Amortization of prior service cost 0.4 0.4 0.2 0.2 (0.2) --
Recognized actuarial (gain)/loss 1.0 0.8 0.2 0.2 0.4 0.3
------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 3.6 $ 3.8 $ 1.4 $ 1.5 $ 1.9 $ 1.8
===========================================================
Employer contributions $ -- $ -- $ 0.3 $ 0.3 $ 2.2 $ 2.1
Expected annual contribution $ -- $ 0.6 $ 4.4
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.
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
June 30, 2006.
22
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 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 June 30, 2006
Other securities:
U.S. Treasury $ 95.5 $ (0.4) $ 85.9 $ (2.3) $ 181.4 $ (2.7)
Government agencies 209.3 (5.6) 207.2 (5.6) 416.5 (11.2)
Preferred stock 56.2 (2.2) 3.5 (0.3) 59.7 (2.5)
Mortgage-backed securities 111.5 (4.5) 629.3 (39.5) 740.8 (44.0)
Other debt securities 69.0 (1.0) 61.2 (1.5) 130.2 (2.5)
---------------------------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $ 541.5 $ (13.7) $ 987.1 $ (49.2) $ 1,528.6 $ (62.9)
=================================================================================
NOTE 10 - ACCOUNTING PRONOUNCEMENTS
Following are recent accounting pronouncements that affect our financial
condition and results of operations.
SFAS No. 155. In February 2006, the Financial Accounting Standards Board (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.
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 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.
FIN 48. In June 2006, FASB issued Financial Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109 (FIN 48)." FIN 48 provides guidance on financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. According to the Interpretation, a tax position is recognized if it
is more likely than not that the tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. If the tax position
meets the more-likely-than-not recognition threshold, the position is measured
to determine the amount of benefit to recognize and should be measured at the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. We are not required to
23
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
adopt FIN 48 until fiscal year 2007, and therefore have not completed our
initial assessment of the impact, if any, that FIN 48 may have on our financial
statements.
24
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 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.
25
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 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 103 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 June 30, 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 five offices: one each in center city
Philadelphia, Bethlehem, 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 four 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 Holdings, 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.
- Wilmington Trust CI Holdings Limited (WTCIH), which owns Wilmington Trust
Corporate Services (Cayman) Limited and its subsidiaries.
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, London, England, and Frankfurt, Germany.
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
26
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Department of Banking, other U.S. federal and state regulatory agencies, and the
regulatory agencies of other countries in which we conduct business.
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 AND SIX MONTHS ENDED JUNE 30, 2006
EXECUTIVE SUMMARY
Net income for the three months ended June 30, 2006 (the second quarter of 2006)
was $46.9 million, which was 22% higher than for the year-ago second quarter.
Earnings per share (on a diluted basis) for the 2006 second quarter were $0.67,
which was 20% higher than for the year-ago second quarter. Revenue increased at
a double-digit pace in each of our businesses, loan balances rose 10%, credit
quality metrics remained high, and expenses were kept in check.
For the 2006 second quarter:
- Net interest income, at $90.4 million, was 13% higher than for the
year-ago second quarter.
- The Wealth Advisory Services and Corporate Client Services businesses each
recorded year-over-year revenue growth of 11%.
- The revenue contribution from the affiliate money managers was 38% higher
than for the year-ago second quarter.
- Total advisory revenue increased 13% year-over-year, to $73.6 million.
- Balance sheet assets totaled $10.59 billion at June 30, 2006. This was 8%
higher than at June 30, 2005, and 3% higher than at March 31, 2006.
- Loan balances were $7.76 billion at June 30, 2006. This was 10% higher
than at June 30, 2005, and 3% more than at March 31, 2006.
- The net interest margin rose to 3.80%, as we remained asset sensitive and
carefully managed our interest rate risk.
- The percentage of loans with pass ratings in the internal risk rating
analysis continued to exceed 97%.
- The net charge-off ratio was 5 basis points, well below its historic
level.
- Noninterest expenses increased 7% from their year-ago level to $98.3
million.
We continued to invest in our company's future during the 2006 second quarter:
- The Regional Banking business opened a new Pennsylvania market
headquarters office in Villanova and relocated the downtown Rehoboth
Beach, Delaware, branch into newly constructed offices.
- The Corporate Client Services business expanded its Cayman Island
capabilities by acquiring PwC Corporate Services (Cayman) from the
accounting firm PricewaterhouseCoopers. We also opened an office in
Frankfurt, Germany, to capitalize on market potential in Europe.
- The Wealth Advisory Services (WAS) business opened new offices in
Bethlehem, Pennsylvania (in the Lehigh Valley area); Princeton, New
Jersey; and Stamford, Connecticut. The WAS business also significantly
expanded its business management and family office services by adding
staff with highly specialized capabilities in Connecticut, Delaware, New
Jersey, and New York.
Our overall efficiency ratio improved during the 2006 second quarter to 55.29%,
mainly because pre-tax income from the Regional Banking and Corporate Client
Services businesses was higher. More information about the efficiency ratios and
profitability of each business is included in their respective sections of this
report.
27
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
EFFICIENCY RATIOS 2006 Q2 2006 Q1 2005 Q2
--------------------------------------------------------------------------------
Regional Banking 39.30% 41.47% 42.17%
Wealth Advisory Services 79.88% 77.22% 78.51%
Corporate Client Services 71.85% 78.38% 84.07%
Wilmington Trust consolidated 55.29% 57.02% 58.26%
The efficiency ratio is a measure of profitability that reflects how much it
costs a company to generate revenue. Low efficiency ratios are desirable because
they indicate high profitability. The table above shows that, for every dollar
of revenue recorded for the 2006 second quarter, Wilmington Trust spent slightly
more than 55 cents, and that this amount was lower than for prior periods.
Our results for the 2006 second quarter and first half of 2006 reflected the
expansion investments we have made in recent years to add people and
capabilities in markets and businesses where we see the greatest potential for
growth. For the first six months of 2006:
- Net income was $91.1 million, 17% higher than for the first half of 2005.
- Earnings per share (on a diluted basis) were $1.31, a 15% increase.
- Advisory revenue was 10% higher.
- Loan balances were $7.56 billion, on average, which was 10% higher than
average balances for the first half of 2005.
- The net charge-off ratio was 7 basis points, the same as for the first
half of 2005.
- The net interest margin was 3.79%, 14 basis points higher than for the
first half of 2005.
- Noninterest expenses totaled $195.9 million, an 8% increase.
On an annualized basis, second quarter 2006 results produced a return on average
assets of 1.81% and a return on average equity of 17.75%. The corresponding
returns for the second quarter of 2005 were 1.60% and 16.55%, respectively.
Our capital position remained strong, and on July 20, 2006, our Board of
Directors declared a regular quarterly cash dividend of $0.315 per share. This
quarterly dividend will be paid on August 15, 2006, to shareholders of record on
August 1, 2006. The amount of this quarterly dividend is 5% higher than the cash
dividend paid in August 2005, reflecting the Board's decision on April 20, 2006,
to raise the dividend, on an annualized basis, from $1.20 per share to $1.26 per
share. This action marked our 25th consecutive year of dividend increases.
According to Mergent's Dividend Achievers, Wilmington Trust is one of only 112
companies, among the 10,000 listed on North American exchanges, to raise cash
dividends for 25 or more consecutive years.
STATEMENT OF CONDITION
This section discusses the changes in our balance sheet between December 31,
2005, and June 30, 2006. We present amounts as of June 30, 2005, for historical
reference. All balances cited are period-end balances unless otherwise noted.
Year-to-date (YTD) references are as of June 30.
ASSETS
At June 30, 2006, balance sheet assets totaled $10.59 billion. This was $357.9
million more than at December 31, 2005. On a percentage basis, our mix of assets
remained relatively unchanged. Loans comprised 73% of assets at June 30, 2006,
compared with 72% at December 31, 2005.
28
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
ASSET BALANCES (in millions) AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------
Investment securities $ 1,837.2 $ 1,928.8 $ 1,879.1
Loans 7,755.2 7,397.7 7,053.1
Other assets 729.6 649.4 611.8
Reserve for loan losses (94.3) (91.4) (92.4)
Goodwill 363.0 348.3 343.6
---------------------------------------------------------------------------------------------------------------
Total assets $ 10,590.7 $ 10,232.8 $ 9,795.2
===============================================================================================================
We discuss the changes in investment securities, loans, and the reserve for loan
losses in the pages that follow. As for the other two balance sheet items listed
above, the rise in other assets during the first half of 2006 reflected
increased levels of short-term investments, derivative valuation adjustments,
and higher accruals for interest receivable and advisory fees receivable.
The higher amount of goodwill reflected our acquisition of PwC Corporate
Services (Cayman) and the increase of our ownership position in Cramer Rosenthal
McGlynn. Both of these events occurred in the 2006 second quarter, and we
discuss them more fully in the sections on the Corporate Client Services
business and the affiliate money managers.
Most of our assets generate interest. These assets are called earning assets.
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, and loan growth accounted for most of the $318.3 million increase in
earning assets during the first six months of 2006.
COMPOSITION OF EARNING ASSETS AT 6/30/06 AT 12/31/05 AT 6/30/05
----------------------------------------------------------------------------------------------------------------
Total earning assets (in millions) $ 9,659.1 $ 9,340.8 $ 8,943.9
% represented by loans 80.3% 79.2% 78.9%
% represented by investment securities 19.0% 20.6% 21.0%
% represented by other 0.7% 0.2% 0.1%
INVESTMENT SECURITIES PORTFOLIO
The investment securities portfolio was $1,837.2 million at June 30, 2006. This
was $91.6 million lower, or 5% less, than at December 31, 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 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations 16% 18% 18%
Corporate issues 19% 19% 17%
Money market preferred stocks 5% 5% 5%
Mortgage-backed securities 25% 26% 30%
Municipal bonds 1% 1% 1%
Other 2% 2% 2%
U.S. government agencies 22% 21% 21%
U.S. treasuries 10% 8% 6%
29
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Almost all of the mortgage-backed securities we held at June 30, 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 balance sheet. We are among the largest originators of
residential mortgages in Delaware, but we sell most newly originated fixed-rate
residential mortgages into the secondary market, as part of our interest rate
risk management strategy.
The following tables compare changes in the portfolio in average life and
duration.
AVERAGE LIFE IN THE INVESTMENT SECURITIES PORTFOLIO (in years) AT 6/30/06 AT 12/31/05 AT 6/30/05
-------------------------------------------------------------------------------------------------------------------
Mortgage-backed instruments 4.74 4.30 3.45
Total portfolio 6.00 6.14 5.69
DURATION IN THE INVESTMENT SECURITIES PORTFOLIO (in years) AT 6/30/06 AT 12/31/05 AT 6/30/05
-------------------------------------------------------------------------------------------------------------------
Mortgage-backed instruments 4.36 3.92 2.98
Total portfolio 2.78 2.63 2.39
Changes in the portfolio's average life and duration reflected the rising market
interest environment and the purchase of short-term securities used to
collateralize commercial banking client deposits. Our use of these short-term
instruments fluctuates according to deposit activity in client accounts.
LOANS
Loan balances rose for the 21st consecutive quarter, reaching $7.76 billion at
June 30, 2006. This was a 5% increase from December 31, 2005. Commercial loans
continued to account for more than two-thirds of total loan balances, and
accounted for almost all of the growth in total loan balances during the first
six months of 2006. Retail loan balances reflected the fact that, while we are a
leading residential mortgage originator in Delaware, we sell most newly
originated fixed rate residential mortgages into the secondary market.
PERIOD-END LOAN BALANCES (in millions) AT 6/30/06 AT 12/31/05 AT 6/30/05
-------------------------------------------------------------------------------------------------------------------
Commercial loans $ 5,242.6 $ 4,919.1 $ 4,665.7
Retail loans $ 2,512.6 $ 2,478.6 $ 2,387.4
-------------------------------------------------------------------------------------------------------------------
Total loans $ 7,755.2 $ 7,397.7 $ 7,053.1
===================================================================================================================
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 6 MONTHS ENDED 6 MONTHS ENDED
(dollars in millions, on average) 6/30/06 FULL YEAR 2005 6/30/05
-------------------------------------------------------------------------------------------------------------------
Commercial loans $ 5,097.3 $ 4,867.2 $ 4,559.2
Retail loans $ 2,463.9 $ 2,477.7 $ 2,295.3
-------------------------------------------------------------------------------------------------------------------
Total loans $ 7,561.2 $ 7,344.9 $ 6,854.5
===================================================================================================================
30
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
PENNSYLVANIA MARKET LOAN BALANCES 6 MONTHS ENDED 6 MONTHS ENDED
(dollars in millions, on average) 6/30/06 FULL YEAR 2005 6/30/05
--------------------------------------------------------------------------------------------------------------
Loans from the Pennsylvania market $ 1,679.0 $ 1,525.7 $ 1,474.4
Pennsylvania loans as a % of total loans outstanding 22% 21% 22%
While most of the year-to-date loan growth came from Delaware, the Pennsylvania
market also recorded higher loan balances. For the first half of 2006, loans
from the Pennsylvania market were 10% higher, on average, than for the full-year
2005, and 14% higher than for the first half of 2005. Commercial real
estate/construction (CRE) loans accounted for approximately three-quarters of
the year-to-date and year-over-year increases in Pennsylvania market loan
balances. Much of the remainder was associated with Wealth Advisory clients. The
Pennsylvania market continued to generate approximately 22% of the company's
total loans outstanding, on average.
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 Delaware Valley region rose over the past 12
months (as of May 2006, the most recent data available), and moderate economic
growth was projected through the end of 2006. The Federal Deposit Insurance
Corporation (FDIC) reported in its summer 2006 profile of Delaware that the
state's job growth is outpacing the nation's, and that Delaware's overall
economic growth is expected to continue at a moderate rate. Delaware's
unemployment rate remained below the national average. 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.
Commercial loan balances, which surpassed the $5 billion mark for the first time
in our history as of March 31, 2006, totaled $5.24 billion at June 30, 2006.
This was an increase of $323.5 million, or 7%, from December 31, 2005.
PERIOD-END COMMERCIAL LOANS (in millions) AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------
Commercial and industrial (C&I) $ 2,445.5 $ 2,461.3 $ 2,462.3
Commercial real estate/construction (CRE) 1,574.3 1,233.9 969.2
Commercial mortgage 1,222.8 1,223.9 1,234.2
---------------------------------------------------------------------------------------------------------------
Total commercial loans $ 5,242.6 $ 4,919.1 $ 4,665.7
===============================================================================================================
All of the loan growth during the first half of 2006 was in the commercial real
estate/construction (CRE) portfolio, which was 28% larger at June 30, 2006, than
at December 31, 2005. All of the states in our Regional Banking footprint
contributed to this growth.
31
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
MARKET SOURCES OF CRE LOAN GROWTH CONTRIBUTION TO CRE LOAN GROWTH IN THE FIRST HALF OF 2006
---------------------------------------------------------------------------------------------------------------
Delaware 59%
Maryland 11%
New Jersey 5%
Pennsylvania 22%
Other U.S. 3%
More than half of the CRE loans booked during the first half of 2006 were for
single family residential tract housing development and construction. Other CRE
loans booked during the first half of the year were for a variety of industrial,
retail, and other commercial and residential projects. Lending for office
buildings was minimal, with office projects accounting for approximately 7% of
the CRE loans booked in the first half of 2006.
Within the CRE portfolio, single family residential tract housing development
and construction loan balances were 22% higher at June 30, 2006, than at
December 31, 2005. Approximately 68% of this increase came from the Delaware
market, where demand continued to be driven by population growth.
In its summer 2006 profile of Delaware, the FDIC reported that Delaware's
population growth exceeds that of neighboring states, and that, unlike other
states in the region, Delaware's population growth is the result of domestic
in-migration (people relocating from other states). 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.
Delaware's tax environment and the availability of affordable housing, relative
to other states in the region, make it particularly attractive to retirees and
others on fixed incomes. A July 28, 2006, ranking by USA Today using U.S. Census
Bureau statistics listed Delaware as having the 8th lowest property taxes per
capita for 2004, the most recent data available.
For more information about population growth and housing demand in Delaware,
please refer to the discussion on economic risk in the "Quantitative and
qualitative disclosures about market risk" section of this report.
The following table shows how geographic dispersion has changed in the CRE
portfolio.
CRE PORTFOLIO BY MARKET AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------
Delaware 51% 57% 58%
Maryland 8% 10% 10%
New Jersey 10% 7% 7%
Pennsylvania 30% 24% 23%
Other U.S. 1% 2% 2%
In considering the risks associated with CRE lending, we take into account the
facts that: :
- Most of our CRE loans are for single-family, permanent (not vacation)
residences.
- The housing demand reflects population growth, not speculative activity.
- 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.
- We apply disciplined underwriting standards in our CRE lending:
32
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 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 from CRE loans have been minimal over the past five years, as
the following table shows. Negative numbers (numbers in parentheses) reflect
loan recoveries.
(In millions) 2001 2002 2003 2004 2005
---------------------------------------------------------------------------------------------------------------
CRE NET CHARGE-OFFS $0.1 $(1.4) $0.0 $(0.8) $0.1
For more details about net charge-offs and other credit quality metrics, please
refer to the "Asset quality" section of this report.
RETAIL LOANS
Our retail loan portfolio consists of three categories of loans: residential
mortgages, consumer loans, and loans secured with liquid collateral. Most of our
residential mortgages and consumer loans are associated with clients in
Delaware, which is where we focus our branch banking activities. Loans secured
with liquid collateral are associated mainly with Wealth Advisory Services (WAS)
clients throughout the United States.
Retail loan balances totaled $2,512.6 million at June 30, 2006, which was
slightly higher than at December 31, 2005. Increases in residential mortgages
and consumer loans during the first six months of 2006 were offset by a decline
in the balance of loans secured with liquid collateral, which change according
to WAS client demand.
PERIOD-END RETAIL LOANS (in millions) AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------
Residential mortgage $ 503.0 $ 455.5 $ 444.5
Consumer $ 1,452.4 $ 1,438.3 $ 1,332.4
Secured with liquid collateral $ 557.2 $ 584.8 $ 610.5
---------------------------------------------------------------------------------------------------------------
Total retail loans $ 2,512.6 $ 2,478.6 $ 2,387.4
===============================================================================================================
RESIDENTIAL MORTGAGE LOANS
Residential mortgage balances rose 10% during the first six months of 2006,
mainly because origination volumes increased. Origination volumes (dollar
amounts) were 32% higher for the first half of 2006 than for the corresponding
period in 2005, and the number of originated loans was 8% higher.
RESIDENTIAL MORTGAGE ACTIVITY 6 MONTHS ENDED 6 MONTHS ENDED
(dollar amounts in millions) 6/30/06 FULL YEAR 2005 6/30/05
---------------------------------------------------------------------------------------------------------------
Residential mortgage originations (number of loans) 489 1,077 451
Residential mortgage originations (dollar amount) $ 114.4 $ 221.0 $ 86.7
Residential mortgage balances (at period-end) $ 503.0 $ 455.5 $ 444.5
33
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Changes in our residential mortgage balances may not correspond with changes in
origination volumes. Although we are among the leading residential mortgage
originators in Delaware, we sell most newly originated fixed-rate production
into the secondary market instead of recording these loans on our balance sheet.
This ongoing practice is part of our interest rate risk management strategy. We
discuss this strategy more fully in the "Quantitative and qualitative
disclosures about market risk" section of this report.
CONSUMER LOANS
Consumer loan balances increased 1% during the first half of 2006. A 6% increase
in the category of consumer loans recorded as "other consumer" loans was offset
by 2% declines in home equity and credit card loan balances. "Other consumer"
loans consist of a variety of personal and installment loans. The majority of
our consumer loans continued to come from the Delaware market.
PERIOD-END CONSUMER LOANS (in millions) AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------
Home equity $ 318.3 $ 326.4 $ 331.8
Indirect 653.1 651.3 599.6
Credit card 73.2 74.5 70.3
Other consumer 407.8 386.1 330.7
---------------------------------------------------------------------------------------------------------------
Total consumer loans $ 1,452.4 $ 1,438.3 $ 1,332.4
===============================================================================================================
Percentage booked in Delaware 79% 81% 82%
Percentage booked in Pennsylvania 7% 6% 6%
Percentage booked in Maryland 14% 13% 12%
The decline in home equity loan balances reflected market conditions, as rising
market interest rates lessened client demand. Fixed rate home equity loan
balances increased during the first half of 2006, but not at a pace strong
enough to offset lower demand for adjustable rate loans.
The majority of our indirect loans are auto loans made through auto dealers,
mainly for late-model used cars. The flatness in indirect loan balances for the
first half of 2006 reflected the seasonality of auto sales, which typically are
slower during winter months, and the effects of low-rate financing promotions
offered by auto manufacturers.
RESERVE FOR LOAN LOSSES
The reserve for loan losses at June 30, 2006, was $94.3 million, which was $2.9
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 increase
in the reserve. At June 30, 2006, the loan loss reserve ratio was 1.22%,
compared with 1.24% at December 31, 2005. For information about other metrics of
our credit quality, please refer to the "Asset Quality" section of this report.
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities increased $308.6 million, or 3%, during the first six months
of 2006. The mix of liabilities remained relatively unchanged. Deposits
accounted for 82% of total liabilities as of June 30, 2006.
34
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Stockholders' equity rose $49.2 million, or 5%, during the first six months of
2006. The portion of year-to-date earnings added to capital, and the proceeds of
stock option exercises, were the main factors in the increase. 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 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------
Total deposits $ 7,785.1 $ 7,289.2 $ 7,071.7
Short-term borrowings 1,184.5 1,373.7 1,188.9
Other liabilities 553.9 552.0 581.1
---------------------------------------------------------------------------------------------------------------
Total liabilities $ 9,523.5 $ 9,214.9 $ 8,841.7
---------------------------------------------------------------------------------------------------------------
Minority interest 0.3 0.2 0.2
Stockholders' equity 1,066.9 1,017.7 953.3
---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 10,590.7 $ 10,232.8 $ 9,795.2
===============================================================================================================
DEPOSITS
During the first half of 2006, total deposit balances rose $495.9 million, or
7%. All of this growth was in national CD balances, as core deposit balances
were relatively unchanged. According to SNL Securities' deposit rankings as of
June 30, 2006, we had the highest market share of deposits among full-service
banks in Delaware, with more than three times the amount of the nearest
full-service competitor.
DEPOSITS (IN MILLIONS) AT 6/30/06 AT 12/31/05 AT 6/30/05
-------------------------------------------------------------------------------------------------------------
Total deposits $ 7,785.1 $ 7,289.2 $ 7,071.7
Our total deposits consist of two types of deposits:
- Core deposits, which are deposits from our clients. Core deposits include
noninterest-bearing demand, interest-bearing demand, and savings deposits,
and certificates of deposit (CDs). We record two categories of CDs in core
deposits: CDs under $100,000 and local CDs $100,000 and over.
- National CDs $100,000 and over. These are wholesale CDs we purchase,
primarily from money center banks. These deposits are not associated with
client activity.
To evaluate deposit trends fully, it is important to understand our business
model and our funding strategies. We make loans primarily in four states:
Delaware, Pennsylvania, Maryland, and New Jersey. In comparison, we gather core
deposits mainly in Delaware, which is where we focus our retail banking
activities, and which is the smallest of these four states by far. In our
business model, therefore, loan growth outpaces core deposit growth.
To fund loan growth, we augment core deposits with national CDs and short-term
borrowings, which consist of U.S. Treasury demand deposits and federal funds
purchased and securities sold under agreements to repurchase. The mix of
national CDs and short-term borrowings depends on which instruments offer a more
favorable rate. Changes in the balances of national CDs, therefore, should be
viewed in the context of changes in short-term borrowings.
35
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
LOAN AND DEPOSIT GROWTH COMPARISON (in millions) AT 6/30/06 AT 12/31/05 CHANGE
---------------------------------------------------------------------------------------------------------------
Total loans $ 7,755.2 $ 7,397.7 5%
Core deposits $ 5,024.5 $ 5,060.6 (1)%
National CDs $100,000 and over $ 2,760.6 $ 2,228.6 24%
Short-term borrowings 1,184.5 1,373.7 (14)%
---------------------------------------------------------------------------------------------------------------
Total wholesale funding $ 3,945.1 $ 3,602.3 10%
---------------------------------------------------------------------------------------------------------------
Total core deposits and wholesale funding $ 8,969.6 $ 8,662.9 4%
===============================================================================================================
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 with those of our
floating rate loans. The efficiency of this funding model is evident in the
efficiency ratio of the Regional Banking business.
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. For more
information about rates and yields, please refer to our discussion of interest
rate risk management in this report.
CORE DEPOSITS
Total core deposit balances decreased 1% during the first half of 2006. Within
core deposits, CD balances rose, but these increases were offset by declines in
noninterest-bearing demand deposits, savings deposits, and interest-bearing
deposits. The vast majority of core deposits continued to come from consumer and
commercial banking clients in Delaware.
PERIOD-END CORE DEPOSITS (in millions) AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 813.8 $ 1,014.8 $ 999.5
Savings 313.1 326.3 347.7
Interest-bearing demand 2,355.9 2,360.0 2,241.7
CDs under $100,000 999.1 923.0 804.7
Local CDs $100,000 and more 550.6 436.5 367.4
---------------------------------------------------------------------------------------------------------------
Total core deposits $ 5,024.5 $ 5,060.6 $ 4,761.0
===============================================================================================================
% of core deposits from Delaware clients 94% 94% 94%
Balance changes in the categories of core deposits appeared to reflect the
rising market interest rate environment, as clients opted to deposit funds in
higher-yielding instruments. In addition, the year-to-date decline in
noninterest-bearing demand deposits reflected a practice we instituted in
December 2005 of sweeping commercial noninterest-bearing demand account balances
into money market deposits. By sweeping these commercial accounts daily, we
lower the deposit reserve requirements mandated by the Federal Reserve, and
ultimately reduce our borrowing costs and uninvested cash balances. These
account sweeps accounted for approximately $185 million of the year-to-date
decline in noninterest-bearing demand balances.
36
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
We record 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 AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------
Consumer clients in Delaware 74% 65% 68%
DE commercial banking clients 12% 12% 15%
PA commercial banking clients 7% 9% 7%
Wealth Advisory clients 7% 14% 8%
Corporate Client Services clients -- -- 2%
Although this section discusses core deposits on a period-end basis, we believe
average balances are a better indicator of trends in the Regional Banking
business. Frequently there are disparities between period-end and average
balances due to Corporate Client Services (CCS) client activity. CCS clients who
use our cash management services often deposit funds for very short spans of
time, typically 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.
On an average-balance basis, core deposits increased 1% during the first half of
2006. While noninterest-bearing demand and savings balances declined,
interest-bearing demand deposits increased 2%; CDs under $100,000 rose 16%, and
local CD balances were 25% higher.
CORE DEPOSITS (ON AVERAGE, IN MILLIONS) 6 MONTHS ENDED 6/30/06 FULL YEAR 2005 6 MONTHS ENDED 6/30/05
----------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 752.7 $ 992.0 $ 966.6
Savings 323.6 344.9 354.5
Interest-bearing demand 2,355.6 2,303.8 2,318.7
CDs under $100,000 959.9 824.4 785.0
Local CDs $100,000 and more 501.9 401.5 374.5
Total core deposits $ 4,893.7 $ 4,866.6 $ 4,799.3
REGIONAL BANKING PROFITABILITY
Second quarter 2006 profitability of the Regional Banking business increased
from prior periods, as demonstrated by the improvements in the efficiency ratio.
EFFICIENCY RATIOS 2006 Q2 2006 Q1 2005 Q2
---------------------------------------------------------------------------------------------------------------
Regional Banking 39.30% 41.47% 42.17%
Wilmington Trust consolidated 55.29% 57.02% 58.26%
Regional Banking's efficiency improved largely because its income growth far
outpaced its noninterest expense growth. Net interest income from Regional
Banking for the 2006 second quarter was $9.3 million higher than for the
year-ago second quarter, opposite a corresponding increase in expenses of $1.5
million. On a linked-quarter basis, net interest income rose $2.9 million, while
expenses were $0.5 million lower.
Opposite loan growth, on average, of 11% year-over-year and 3% on a
linked-quarter basis, the effect of the funding strategy on Regional Banking
expenses was a major factor in the efficiency improvements. Using national CDs
to augment core deposits minimized expense growth, as the business achieved
these levels of loan growth without
37
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
significantly increasing branch office network operating expenses. Regional
Banking has 47 branch offices in Delaware, 5 loan offices in Pennsylvania, 2 in
New Jersey, and 2 in Maryland.
INCOME STATEMENT
This section compares our income and expenses for the second quarter and first
six months of 2006 with the corresponding periods in 2005. Year-to-date (YTD)
references are as of June 30.
Net income for the second quarter of 2006 was $46.9 million. This was 22% higher
than for the year-ago second quarter. Earnings per share (on a diluted basis)
for the 2006 second quarter were $0.67. This was 20% higher than for the
year-ago second quarter. The growth rates were different for net income and
earnings per share because the number of shares outstanding increased.
For the first six months of 2006, net income totaled $91.1 million. This was 17%
more than for the first half of 2005.
NET INCOME 2006 Q2 2005 Q2 2006 YTD 2005 YTD
-------------------------------------------------------------------------------------------------------------
Net income (in millions) $ 46.9 $ 38.5 $ 91.1 $ 77.7
Earnings per share (diluted) $ 0.67 $ 0.56 $ 1.31 $ 1.14
Average shares outstanding (diluted, in thousands) 69,776 68,387 69,606 68,309
The main factors in the second quarter and year-to-date growth in net income
were:
- Higher amounts of net interest income due to loan growth, modest deposit
pricing pressure, and the combination of our asset sensitivity and the
rising market interest rate environment;
- A 10% increase in advisory business revenue;
- Carefully managed expense growth; and
- Leverage from the expansion investments we have made in recent years to
add people and capabilities in markets and businesses where we see the
greatest potential for 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. During the first six months of
2006, our sources of income remained diversified and balanced between net
interest and noninterest income, and our advisory businesses generated the
majority of our noninterest income.
38
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
NET INTEREST AND NONINTEREST INCOME (1) 2006 Q2 2005 Q2 2006 YTD 2005 YTD
---------------------------------------------------------------------------------------------------------------
Total net interest and noninterest income (in millions) $ 172.5 $ 152.7 $ 338.5 $ 304.7
Portion from net interest income 50% 50% 50% 50%
Portion from advisory business income 42% 42% 42% 43%
Portion from total noninterest income 50% 50% 50% 50%
----------
(1) After amortization and the provision for loan losses.
NET INTEREST INCOME
Net interest income for the 2006 second quarter, after the provision for loan
losses, was $86.2 million. This was 13% higher than for the year-ago second
quarter. For the first half of 2006, net interest income was $169.5 million, 12%
higher than for the corresponding period in 2005.
NET INTEREST INCOME (in millions) 2006 Q2 2005 Q2 2006 YTD 2005 YTD
---------------------------------------------------------------------------------------------------------------
Interest income $ 165.0 $ 122.6 $ 317.9 $ 235.5
Interest expense 74.6 42.5 140.2 77.8
Net interest income $ 90.4 $ 80.1 $ 177.7 $ 157.7
Provision for loan losses (4.2) (3.8) (8.2) (6.9)
Net interest income (after provision) $ 86.2 $ 76.3 $ 169.5 $ 150.8
The primary reasons for the second quarter and year-to-date increases in net
interest income were:
- Loan growth. Loan balances were 10% higher at June 30, 2006, than at June
terest margin.
- Improvement in the net interest margin. As market interest rates
increased, we remained asset sensitive, and assets continued to reprice
faster than liabilities. For the second quarter and first six months of
2006, our net interest margin was 14 basis points higher than for the
corresponding periods in 2005.
- Credit quality. The growth in net interest income far exceeded the
increases in the provision for loan losses.
CREDIT QUALITY EFFECT ON NET INTEREST INCOME Q2 2006 VS. 2005 YTD 2006 VS. 2005
---------------------------------------------------------------------------------------------------------------------
Increase in net interest income before the provision (in millions) $ 10.3 $ 20.0
Increase in the provision (in millions) $ 0.4 $ 1.3
Approximately 93% of net interest income for the 2006 second quarter came from
the Regional Banking business. We attribute portions of net interest income to
the Wealth Advisory Services and Corporate Client Services businesses, as these
businesses have some clients who use our banking services. For more information
about this, please refer to Note 5, "Segment reporting," in this report.
NET INTEREST MARGIN
The net interest margin for the 2006 second quarter was 3.80%. This was 14 basis
points higher than for the year-ago second quarter. The year-to-date net
interest margin was 3.79%, also 14 basis points higher than for the first half
of 2005.
NET INTEREST MARGIN 2006 Q2 2006 Q1 2005 Q4 2005 Q3 2005 Q2
---------------------------------------------------------------------------------------------------------------
Net interest margin 3.80% 3.77% 3.74% 3.66% 3.66%
39
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
We remained asset sensitive throughout the first six months of 2006. Deposit
pricing pressure was relatively modest, and our asset yields continued to rise
at a faster pace than deposit costs. For example:
- Comparing the second quarter of 2006 with the second quarter of 2005, loan
yields rose 152 basis points, while core interest-bearing deposit rates
increased 69 basis points.
- Comparing the first six months of 2006 with the corresponding period in
2005, loan yields rose 151 basis points, while core interest-bearing
deposit rates increased 67 basis points.
BASIS POINT (bps) CHANGES IN YIELDS/RATES 6/30/06 VS. 3/31/06 6/30/06 VS. 12/31/05 6/30/06 VS. 6/30/05
----------------------------------------------------------------------------------------------------------------
Commercial loans 38 bps 85 bps 178 bps
Total loans 34 bps 75 bps 151 bps
Total earning assets 32 bps 68 bps 132 bps
Core interest-bearing deposits 17 bps 34 bps 67 bps
National CDs 51 bps 97 bps 195 bps
Total interest-bearing deposits 29 bps 60 bps 121 bps
Funds to support earning assets 29 bps 62 bps 118 bps
Changes in loan yields and deposit rates reflected the increases in short-term
interest rates made by the Federal Open Market Committee, which raised rates
eight times in the 12 months ended June 30, 2006. At June 30, 2006, short-term
rates were:
- 100 basis points higher than at December 31, 2005.
- 200 basis points higher than at June 30, 2005.
Our net interest margin also benefited from our funding and interest rate risk
management strategies. For more information on these strategies, please refer to
the respective discussions on those subjects in this report.
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 Q2 2005 Q2 2006 YTD 2005 YTD
-----------------------------------------------------------------------------------------------------------------
FTE (1) net interest income $ 91.5 $ 81.0 $ 179.8 $ 159.5
Earning assets (on average) $ 9,512.6 $ 8,786.9 $ 9,427.6 $ 8,709.1
Net interest margin 3.80% 3.66% 3.79% 3.65%
----------
(1) Fully tax-equivalent
ANALYSIS OF EARNINGS
On the following pages, we present the consolidated comparative rate/volume and
net interest income data for the second quarters and first six months of 2006
and 2005.
40
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
QUARTERLY ANALYSIS OF EARNINGS
-------------------------------------------------------------------
2006 Second Quarter 2005 Second Quarter
-------------------------------------------------------------------
(Dollars in millions; Average Income/ Average Average Income/ Average
rates on tax-equivalent basis) balance expense rate balance expense rate
--------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased
under agreements to resell $ 18.8 $ 0.2 4.93% $ 21.0 $ 0.2 2.88%
U.S. Treasury 146.7 1.3 3.53 113.4 0.9 3.10
Government agencies 394.1 4.0 3.93 331.9 3.2 3.78
State and municipal 10.5 0.2 8.79 11.8 0.2 8.71
Preferred stock 89.2 1.7 7.60 94.4 1.7 7.82
Mortgage-backed securities 780.1 8.5 4.16 929.8 9.7 4.07
Other 397.3 6.1 6.14 346.0 3.9 4.55
-------------------------------------------------------- -------------------
Total investment securities 1,817.9 21.8 4.67 1,827.3 19.6 4.27
------------------------------------------------------------------
Commercial, financial, and
agricultural 2,463.5 47.3 7.61 2,462.1 36.4 5.86
Real estate - construction 1,517.5 31.7 8.26 917.3 14.9 6.42
Mortgage - commercial 1,212.8 23.7 7.71 1,231.8 19.0 6.13
-------------------------------------------------------- -------------------
Total commercial loans 5,193.8 102.7 7.82 4,611.2 70.3 6.04
------------------------------------------------------------------
Mortgage - residential 484.2 7.0 5.77 432.1 6.4 5.90
Consumer loans 1,441.6 25.5 7.09 1,297.8 20.3 6.28
Secured with liquid collateral 556.3 8.9 6.36 597.5 6.7 4.40
-------------------------------------------------------- -------------------
Total retail loans 2,482.1 41.4 6.67 2,327.4 33.4 5.73
------------------------------------------------------------------
Total loans net of
unearned income 7,675.9 144.1 7.45 6,938.6 103.7 5.93
Total earning assets $ 9,512.6 $ 166.1 6.90% $8,786.9 $ 123.5 5.58%
==================================================================
41
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
---------------------------------------------------------------------------------------
2006 Second Quarter 2005 Second Quarter
---------------------------------------------------------------------------------------
(Dollars in millions; Average Income/ Average Average Income/ Average
rates on tax-equivalent basis) balance expense rate balance expense rate
----------------------------------------------------------------------------------------------------------------------------------
Funds supporting earning assets
Savings $ 321.2 $ 0.3 0.39% $ 354.5 $ 0.2 0.25%
Interest-bearing demand 2,364.4 6.1 1.04 2,264.4 4.7 0.82
Certificates under $100,000 980.9 8.6 3.51 795.9 4.7 2.39
Local CDs $100,000 and over 540.0 5.9 4.29 379.0 2.6 2.70
------------------------------------------------------------------ ----------------------------
Total core interest-
bearing deposits 4,206.5 20.9 1.98 3,793.8 12.2 1.29
National CDs $100,000
and over 2,656.1 33.5 4.98 2,302.0 17.7 3.03
------------------------------------------------------------------ ----------------------------
Total interest-bearing
deposits 6,862.6 54.4 3.15 6,095.8 29.9 1.94
--------------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,146.0 13.4 4.67 1,034.1 7.6 2.93
U.S. Treasury demand 16.0 0.2 4.74 17.7 0.1 2.62
------------------------------------------------------------------ ----------------------------
Total short-term
borrowings 1,162.0 13.6 4.67 1,051.8 7.7 2.92
--------------------------------------------------------------------------------------
Long-term debt 393.3 6.6 6.69 405.9 4.9 4.85
------------------------------------------------------------------ ----------------------------
Total interest-bearing
liabilities 8,417.9 74.6 3.52 7,553.5 42.5 2.24
--------------------------------------------------------------------------------------
Other noninterest funds 1,094.7 -- -- 1,233.4 -- --
------------------------------------------------------------------ ----------------------------
Total funds used to
support earning assets $ 9,512.6 $ 74.6 3.10 $ 8,786.9 $ 42.5 1.92%
======================================================================================
Net interest income/yield 91.5 3.80% 81.0 3.66%
Tax-equivalent adjustment (1.1) (0.9)
-------- ----------
Net interest income $ 90.4 $ 80.1
======== ==========
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."
42
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
YEAR-TO-DATE ANALYSIS OF EARNINGS
---------------------------------------------------------------------------------------
Year-to-date 2006 Year-to-date 2005
---------------------------------------------------------------------------------------
(Dollars in millions; Average Income/ Average Average Income/ Average
rates on tax-equivalent basis) balance expense rate balance expense rate
----------------------------------------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 18.2 $ 0.4 4.54% $ 20.6 $ 0.3 2.53%
U.S. Treasury 145.7 2.6 3.46 114.6 1.7 2.86
Government agencies 397.4 8.0 3.94 328.5 6.3 3.82
State and municipal 10.5 0.5 8.78 11.8 0.5 8.74
Preferred stock 90.3 3.4 7.60 96.9 3.5 7.43
Mortgage-backed securities 804.1 17.4 4.17 945.1 19.5 4.08
Other 400.2 11.7 5.83 337.1 7.3 4.34
------------------------------------------------------------------ ----------------------------
Total investment securities 1,848.2 43.6 4.60 1,834.0 38.8 4.21
--------------------------------------------------------------------------------------
Commercial, financial, and
agricultural 2,455.8 91.5 7.43 2,466.8 70.1 5.66
Real estate-construction 1,420.2 57.8 8.08 870.6 27.4 6.24
Mortgage-commercial 1,221.3 46.2 7.53 1,221.8 36.6 5.98
------------------------------------------------------------------ ----------------------------
Total commercial loans 5,097.3 195.5 7.63 4,559.2 134.1 5.85
--------------------------------------------------------------------------------------
Mortgage-residential 473.8 13.7 5.81 429.8 12.6 5.89
Consumer loans 1,432.8 49.6 6.97 1,266.4 39.0 6.21
Secured with liquid collateral 557.3 17.2 6.12 599.1 12.5 4.15
------------------------------------------------------------------ ----------------------------
Total retail loans 2,463.9 80.5 6.55 2,295.3 64.1 5.61
--------------------------------------------------------------------------------------
Total loans net of
unearned income 7,561.2 276.0 7.28 6,854.5 198.2 5.77
Total earning assets $ 9,427.6 $ 320.0 6.74 $ 8,709.1 $ 237.3 5.43%
======================================================================================
43
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
--------------------------------------------------------------------------------------
Year-to-date 2006 Year-to-date 2005
--------------------------------------------------------------------------------------
(Dollars in millions; Average Income/ Average Average Income/ Average
rates on tax-equivalent basis) balance expense rate balance expense rate
---------------------------------------------------------------------------------------------------------------------------------
Funds supporting earning assets
Savings $ 323.6 $ 0.6 0.35% $ 354.5 $ 0.4 0.25%
Interest-bearing demand 2,355.6 12.0 1.03 2,318.7 9.2 0.80
Certificates under $100,000 959.9 16.1 3.39 785.0 8.9 2.28
Local CDs $100,000 and over 501.9 10.4 4.11 374.5 4.9 2.59
----------------------------------------------------------------- ----------------------------
Total core interest-
bearing deposits 4,141.0 39.1 1.90 3,832.7 23.4 1.23
National CDs $100,000
and over 2,651.9 63.2 4.73 2,122.2 29.5 2.78
----------------------------------------------------------------- ----------------------------
Total interest-bearing
deposits 6,792.9 102.3 3.00 5,954.9 52.9 1.78
-------------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,114.1 24.8 4.44 1,115.6 15.3 2.73
U.S. Treasury demand 13.9 0.3 4.52 13.1 0.2 2.44
----------------------------------------------------------------- ----------------------------
Total short-term
borrowings 1,128.0 25.1 4.44 1,128.7 15.5 2.72
Long-term debt 396.2 12.8 6.47 406.6 9.4 4.61
----------------------------------------------------------------- ----------------------------
Total interest-bearing
liabilities 8,317.1 140.2 3.36 7,490.2 77.8 2.07
-------------------------------------------------------------------------------------
Other noninterest funds 1,110.5 -- -- 1,218.9 -- --
----------------------------------------------------------------- ----------------------------
Total funds used to
support earning assets $ 9,427.6 $ 140.2 2.95% $ 8,709.1 $ 77.8 1.78%
=====================================================================================
Net interest income/yield 179.8 3.79% 159.5 3.65%
Tax-equivalent adjustment (2.1) (1.8)
Net interest income $ 177.7 $ 157.7
======== ============
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."
44
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
------------------------------------ ------------------------------------
For the three months ended June 30, For the six months ended June 30,
2006/2005 2006/2005
------------------------------------ ------------------------------------
Increase/(decrease) due to change in Increase/(decrease) due to change in
------------------------------------ ------------------------------------
(In millions) Volume (1) Rate (2) Total Volume (1) Rate (2) Total
----------------------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and securities
purchased under agreements to resell $ -- $ -- $ -- $ -- $ 0.1 $ 0.1
U.S. Treasury 0.3 0.1 0.4 0.5 0.4 0.9
Government agencies 0.6 0.2 0.8 1.4 0.3 1.7
State and municipal * -- -- -- (0.1) 0.1 --
Preferred stock * (0.1) 0.1 -- (0.2) 0.1 (0.1)
Mortgage-backed securities (1.4) 0.2 (1.2) (2.5) 0.4 (2.1)
Other * 0.6 1.6 2.2 1.4 3.0 4.4
---------------------------------------------------------------------------------------------------------------------------------
Total investment securities -- 2.2 2.2 0.5 4.3 4.8
---------------------------------------------------------------------------
Commercial, financial, and agricultural * -- 10.9 10.9 (0.3) 21.7 21.4
Real estate - construction 9.6 7.2 16.8 17.0 13.4 30.4
Mortgage - commercial * (0.3) 5.0 4.7 -- 9.6 9.6
---------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 9.3 23.1 32.4 16.7 44.7 61.4
---------------------------------------------------------------------------
Mortgage - residential 0.8 (0.2) 0.6 1.3 (0.2) 1.1
Installment loans to individuals 2.3 2.9 5.2 5.1 5.5 10.6
Secured with liquid collateral (0.5) 2.7 2.2 (0.9) 5.6 4.7
---------------------------------------------------------------------------------------------------------------------------------
Total retail loans 2.6 5.4 8.0 5.5 10.9 16.4
---------------------------------------------------------------------------
Total loans net of unearned income 11.9 28.5 40.4 22.2 55.6 77.8
---------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 11.9 $ 30.7 $ 42.6 $ 22.7 $ 60.0 $ 82.7
---------------------------------------------------------------------------
Interest expense:
Savings $ -- $ 0.1 $ 0.1 $ -- $ 0.2 $ 0.2
Interest-bearing demand 0.2 1.2 1.4 0.1 2.7 2.8
Certificates under $100,000 1.1 2.8 3.9 2.0 5.2 7.2
Local CDs $100,000 and over 1.1 2.2 3.3 1.7 3.8 5.5
---------------------------------------------------------------------------------------------------------------------------------
Total core interest-bearing deposits 2.4 6.3 8.7 3.8 11.9 15.7
National CDs $100,000 and over 2.7 13.1 15.8 7.4 26.3 33.7
---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5.1 19.4 24.5 11.2 38.2 49.4
---------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 0.8 5.0 5.8 -- 9.5 9.5
U.S. Treasury demand -- 0.1 0.1 -- 0.1 0.1
---------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 0.8 5.1 5.9 -- 9.6 9.6
Long-term debt (0.2) 1.9 1.7 (0.2) 3.6 3.4
---------------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 5.7 $ 26.4 $ 32.1 $ 11.0 $ 51.4 $ 62.4
Changes in net interest income $ 6.2 $ 4.3 $ 10.5 $ 11.7 $ 8.6 $ 20.3
===========================================================================
--------
* 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.
45
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
NONINTEREST INCOME
Noninterest income (after amortization) for the 2006 second quarter was $86.3
million. This was 13% more than for the year-ago second quarter. For the first
six months of 2006, noninterest income (after amortization) was $169.0 million.
This was 10% higher than for the first six months of 2005.
NONINTEREST INCOME (in millions) 2006 Q2 2005 Q2 2006 YTD 2005 YTD
-------------------------------------------------------------------------------------------------------------------------
Advisory business revenue (1) $72.6 $64.3 $143.2 $129.4
Service charges on deposit accounts 7.0 6.7 13.9 13.5
Other noninterest income 6.8 5.4 12.0 10.2
Securities gains/(losses) (0.1) -- (0.1) 0.8
------------------------------------------------------------------------------------------------------------------------
Total noninterest income $86.3 $76.4 $169.0 $153.9
========================================================================================================================
------------
(1) Includes revenue from Wealth Advisory Services, Corporate Client Services,
Cramer Rosenthal McGlynn, and Roxbury Capital Management, after
amortization.
Revenue from the Wealth Advisory Services and Corporate Client Services
businesses accounted for most of these increases in noninterest income.
THE WEALTH ADVISORY SERVICES BUSINESS
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 11% higher for the second quarter of 2006, and 9% higher for the
first six months of 2006, than for the corresponding periods in 2005. The
revenue increases resulted from a combination of new business development with
new clients as well as existing clients, especially in the areas of investment
management and financial planning services. The deterioration of financial
markets during the 2006 second quarter masked the overall growth of the WAS
business year-to-date.
WEALTH ADVISORY SERVICES REVENUE (in millions) 2006 Q2 2005 Q2 2006 YTD 2005 YTD
--------------------------------------------------------------------------------------------------------------------------
Trust and investment advisory fees $33.1 $30.3 $67.5 $60.3
Planning and other services fees 8.9 7.8 16.3 16.9
Mutual fund fees 5.0 4.3 9.7 8.8
-------------------------------------------------------------------------------------------------------------------------
Total Wealth Advisory Services revenue $47.0 $42.4 $93.5 $86.0
=========================================================================================================================
46
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Most of the second quarter increase, and almost all of the year-to-date
increase, in total WAS revenue came from trust and investment advisory revenue,
which is where we record fees from our asset allocation and investment
management services. New business development was more of a factor in the trust
and investment advisory revenue growth than market appreciation, as comparisons
with the S&P 500 Index illustrate.
REVENUE FROM NEW BUSINESS VS. MARKET APPRECIATION 6/30/06 VS. 6/30/05 6/30/06 VS. 12/31/05
-------------------------------------------------------------------------------------------------------------------------
Change in WAS trust and investment advisory revenue 9% 6%
Change in the S&P 500 7% 2%
We believe the S&P 500 is a good proxy for the equity investments in client
accounts.
For the planning component of WAS revenue, the main contributors to the
quarterly growth were business management services provided through Beverly
Hills-based Grant Tani Barash & Altman (GTBA), and a variety of fiduciary and
financial planning services. For the first six months of 2006, WAS planning
revenue was $0.6 million less than for the corresponding period in 2005, because
client demand for highly complex financial plans was lower. Planning revenue for
the first quarter of 2005 included several very large fees associated with these
types of plans.
Increases in the mutual fund component of WAS revenue reflected the rising
market interest rate environment, which increased the attractiveness of money
market mutual funds as an investment alternative.
The strength of business development activities was evident in WAS sales. WAS
sales were 9% higher for the second quarter of 2006 and 13% higher for the first
half of the year than for the corresponding periods in 2005. Sales of asset
allocation and investment management services accounted for most of these
increases. The New York market contributed the majority of the second quarter
2006 versus 2005 sales growth, while the California and Pennsylvania markets
also recorded increases. For the first six months of 2006, the largest sales
increases were recorded by the Pennsylvania, New York, and Delaware markets.
A large portion of the sales attributed to Delaware actually comes from clients
throughout the United States who choose to locate accounts in Delaware in order
to benefit from Delaware's trust, tax, and legal advantages, many of which are
not available for trusts governed by the laws of other states. We attribute
these sales to Delaware because we serve these client accounts from our Delaware
headquarters.
PERCENTAGE CONTRIBUTION TO TOTAL WAS SALES 2006 Q2 2005 Q2 2006 YTD 2005 YTD
----------------------------------------------------------------------------------------------------------------------
California 3% 3% 4% 6%
Delaware (1) 59% 64% 56% 61%
Florida 5% 6% 7% 6%
Georgia 5% 4% 4% 5%
Maryland 1% 5% 2% 3%
New York 14% 5% 12% 9%
Pennsylvania 13% 13% 15% 10%
--------------
(1) Delaware's contribution includes business development with clients in
other states who seek Delaware's trust advantages. Because we serve these
clients from our headquarters, we attribute these sales to Delaware.
WEALTH ADVISORY SERVICES PROFITABILITY
WAS profitability measures for the 2006 second quarter reflected significant
expansion expenses incurred during the 2006 second quarter, which included:
- Establishing WAS offices in the Lehigh Valley area of Eastern Pennsylvania
and in Princeton, New Jersey, and hiring staff for those offices; and
47
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
- Launching the Wilmington Family Office (WFO) practice on the East Coast;
adding WFO staff in Delaware, New Jersey, and New York; and opening a
small WFO office in Stamford, Connecticut.
The associated growth in noninterest expense reduced pre-tax income on a
year-over-year and linked-quarter basis, and diminished the WAS efficiency
ratio.
EFFICIENCY RATIOS 2006 Q2 2006 Q1 2005 Q2
-----------------------------------------------------------------------------------------
Wealth Advisory Services 79.88% 77.22% 78.51%
Wilmington Trust consolidated 55.29% 57.02% 58.26%
THE CORPORATE CLIENT SERVICES BUSINESS
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 clients who have
residual cash management needs, and for 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.
CCS revenue was 11% higher for the second quarter of 2006, and 12% higher for
the first six months of 2006, than for the corresponding periods in 2005.
Quarterly and year-to-date results were strong in the capital markets, entity
management, and investment/cash management components of the CCS business.
CORPORATE CLIENT SERVICES REVENUE (in millions) 2006 Q2 2005 Q2 2006 YTD 2005 YTD
----------------------------------------------------------------------------------------------------------------------
Capital markets services $ 8.5 $ 8.1 $17.2 $15.4
Entity management services 6.6 5.9 13.0 11.8
Retirement services 3.2 2.9 6.3 5.9
Investment/cash management services 2.5 1.8 4.6 3.6
----------------------------------------------------------------------------------------------------------------------
Total Corporate Client Services revenue $20.8 $18.7 $41.1 $36.7
======================================================================================================================
The main contributor to CCS revenue growth for the second quarter and first six
months of 2006 was the investment/cash management component. This was the result
of more proactive efforts to promote our money market mutual funds and fixed
income investment management capabilities with new as well as existing clients.
Most of the CCS investment/cash management revenue is tied to money market
mutual funds. The remainder is based on the valuations of fixed income
instruments, primarily asset-backed, U.S. Treasury, corporate, and other types
of investment-grade securities.
In the capital markets component of the CCS business, demand was very strong in
the second quarter and first six months of 2006 for specialty trust services,
particularly collateral trustee and successor trustee services. We also saw
48
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
increased demand for our commercial mortgage-backed defeasance services. In
defeasance, one type of collateral is substituted for another. In these types of
transactions, we act as a securities intermediary, a function that is analogous
to escrow agent services.
This activity was offset somewhat by less revenue from services that support
asset-backed securitizations (ABS). The decline in these fees reflected market
conditions in the United States that are affecting ABS issuance:
- As these types of securitizations have gained popularity, they have become
more common - and the fees they command are significantly lower than when
this type of structure was new.
- The dollar volume of ABS issues has risen, but the actual number of issues
has fallen. Competition for fewer issues has eroded pricing.
- Rising market interest rates have reduced demand for mortgage-backed
securitizations.
- New Securities and Exchange Commission registration and reporting
requirements (Regulation AB) have caused some issuers to delay or cancel
transactions.
The ABS services we provide in Europe differ somewhat from those we provide in
the United States. Most of the ABS transactions we support are structured in
special purpose entities for which we provide independent directors and other
administrative services. We record fees from ABS services we provide in Europe,
therefore, as entity management revenue, rather than capital markets revenue.
In Europe, demand for asset-backed securitizations continued to rise,
particularly for securitizations of residential and commercial mortgages. ABS
activity and higher volumes of business development in Ireland, England, and
Greece were the main causes of the growth in entity management revenue for the
second quarter and first half of 2006. In Greece, ABS services are in demand
because the expanding housing market has created more opportunities to
securitize mortgages. In addition, Greece has one of the highest credit card
utilization rates in Europe, which has led to more securitizations of credit
card receivables.
Entity management revenue for the 2006 second quarter also reflected increased
business development in the Cayman Islands, resulting from our acquisition of
PwC Corporate Services (Cayman) from the accounting firm PricewaterhouseCoopers.
This transaction was completed in May 2006.
Increases in revenue from retirement services resulted from higher asset
valuations, which rose as clients added funds to their retirement plans.
Approximately 50% of retirement services revenue is based on the value of
retirement plan assets for which we serve as custodian.
CORPORATE CLIENT SERVICES PROFITABILITY
CCS pre-tax income for the 2006 second quarter was twice the amount for the
year-ago second quarter, and 34% higher on a linked-quarter basis. In
comparison, noninterest expense was only 2% higher year-over-year and 4% lower
on a linked-quarter basis. The CCS efficiency ratio improved as a result.
EFFICIENCY RATIOS 2006 Q2 2006 Q1 2005 Q2
---------------------------------------------------------------------------------------------------------------
Corporate Client Services 71.85% 78.38% 84.07%
Wilmington Trust consolidated 55.29% 57.02% 58.26%
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
49
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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.
ASSETS UNDER MANAGEMENT (in billions) AT 6/30/06 AT 3/31/06 AT 12/31/05 AT 6/30/05
-----------------------------------------------------------------------------------------------------------------------------------
Wilmington Trust (1) $26.4 $27.2 $26.0 $26.0
Cramer Rosenthal McGlynn 9.4 9.7 8.9 7.8
Roxbury Capital Management 3.3 3.5 3.3 3.0
-----------------------------------------------------------------------------------------------------------------------------------
Total assets under management $39.1 $40.4 $38.2 $36.8
===================================================================================================================================
----------
(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.
CLIENT ASSETS AT WILMINGTON TRUST (in billions) AT 6/30/06 AT 3/31/06 AT 12/31/05 AT 6/30/05
-----------------------------------------------------------------------------------------------------------------------------------
Assets under management (1) $ 26.4 $ 27.2 $ 26.0 $ 26.0
Assets under administration 74.3 74.9 74.9 71.9
-----------------------------------------------------------------------------------------------------------------------------------
Total client assets $100.7 $102.1 $100.9 $97.9
===================================================================================================================================
--------------
(1) Assets under management include estimates for values associated with
certain assets that lack readily ascertainable values, such as limited
partnership interests.
50
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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 6/30/06 AT 3/31/06 AT 12/31/05 AT 6/30/05
--------------------------------------------------------------------------------------------------------------------------
Equities 51% 53% 56% 55%
Fixed income 26% 24% 23% 25%
Cash and equivalents 13% 14% 12% 11%
Other assets 10% 9% 9% 9%
-------------
(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.
AFFILIATE MANAGER REVENUE (in millions) 2006 Q2 2005 Q2 2006 YTD 2005 YTD
--------------------------------------------------------------------------------------------------------------------------
Revenue from Cramer Rosenthal McGlynn $5.5 $4.0 $9.5 $8.3
Revenue from Roxbury Capital Management $0.3 $0.2 $1.1 $0.5
AFFILIATE MANAGER MANAGED ASSETS (in millions) AT 6/30/06 AT 3/31/06 AT 12/31/05 AT 6/30/05
--------------------------------------------------------------------------------------------------------------------------
Managed assets at Cramer Rosenthal McGlynn $9,392.0 $9,733.9 $8,899.0 $7,801.8
Managed assets at Roxbury Capital Management $3,253.3 $3,515.7 $3,287.3 $2,965.3
CRAMER ROSENTHAL MCGLYNN (CRM)
CRM's assets under management rose $1.59 billion, or 20%, during the 12 months
ended June 30, 2006. Between December 31, 2005, and June 30, 2006, CRM added
$493.0 million in managed assets. Asset inflows into the firm's small- and
mid-cap products were the main reasons for these increases. Until the 2006
second quarter, market appreciation also contributed to the increases.
Deterioration in the equity markets during the 2006 second quarter caused CRM's
managed assets to decline from their 2006 first quarter level, ending a
13-quarter trend of increases in assets under management.
The higher levels of managed assets, plus hedge fund performance fees, caused
2006 second quarter revenue from CRM to increase 38% from the year-ago second
quarter. On a year-to-date basis, revenue from CRM was 14% higher. Revenue from
CRM for the first half of 2005 included a gain of approximately $1.4 million on
the sale of an equity investment. Absent this gain, revenue from CRM for the
first half of 2005 would have been $6.9 million and the year-to-date increase
would have been 38%.
51
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Our ownership position in CRM increased slightly during the 2006 second quarter,
from 77.24% to 80.61%, as permitted by the put (relinquishment of interests)
provisions in our acquisition agreement with CRM. The impact of this increase on
CRM's revenue contribution to us was marginal. Despite the high percentage of
our ownership position, CRM principals retain certain management controls,
including veto powers, over a variety of matters. As a result, revenue we report
from CRM is net of CRM's expenses. We do not consolidate CRM's financial results
with ours.
ROXBURY CAPITAL MANAGEMENT (RCM)
At June 30, 2006, RCM's assets under management were 10% higher than at June 30,
2005, and slightly less than the amount recorded at December 31, 2005. Asset
inflows into the firm's small- and mid-cap products accounted for the
year-over-year increase in managed assets, and helped offset the effects of
equity market declines during the 2006 second quarter.
Second quarter 2006 revenue from RCM was 50% higher than for the year-ago second
quarter, mainly because of the corresponding increase in managed assets. On a
year-to-date basis, revenue from RCM more than doubled. RCM continued to attract
new assets to its products, and the firm launched several new small- and mid-cap
growth funds during the 2006 second quarter.
At June 30, 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 Q2 2005 Q2 2006 YTD 2005 YTD
---------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 7.0 $6.7 $13.9 $13.5
Other noninterest income $ 6.8 $5.4 $12.0 $10.2
Securities gains/(losses) $ (0.1) -- $(0.1) $ 0.8
Income from service charges on deposit accounts was higher for the second
quarter and first six months of 2006 than for the corresponding periods in 2005,
mainly because:
- The volume of returned items increased;
- Revenue from ATMs was higher; and
ATMs AT 6/30/06 AT 3/31/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------
Number of ATMs 226 233 230 232
Other noninterest income was higher for the second quarter and first six months
of 2006 than for the corresponding periods in 2005, mainly because:
- Revenue from loan fees increased, due to higher volumes of letters of
credit extended on unfunded loan commitments.
- During the 2006 second quarter, we recorded nonrecurring income of
approximately $1.0 million from a gain on the sale of real property.
52
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
NONINTEREST EXPENSE
Noninterest expenses were $98.3 million and $195.9 million, respectively, for
the second quarter and first half of 2006. These were increases of 7% and 8%,
respectively, from the corresponding periods in 2005. These increases mirrored
the expansion investments we have made over the past 12 months to add staff and
capabilities that help us strengthen relationships with clients.
NONINTEREST EXPENSES (dollar amounts in millions) 2006 Q2 2005 Q2 2006 YTD 2005 YTD
------------------------------------------------------------------------------------------------------------------------
Salaries and wages $37.8 $35.0 $ 74.6 $ 67.9
Incentives and bonuses 10.3 10.1 20.6 19.9
Employment benefits 11.9 11.7 25.4 24.2
Total staffing-related expense (1) $60.0 $56.8 $120.6 $112.0
Total noninterest expense $98.3 $91.7 $195.9 $182.1
Staffing expense as a % of total noninterest expense 61% 62% 62% 62%
------------
(1) Salaries and wages, incentives and bonuses, and employment benefits.
Staffing-related expenses (salaries, incentives, and benefits) continued to
represent the majority of noninterest expenses. At June 30, 2006, there were 46
more full-time-equivalent staff members than at December 31, 2005, and 90 more
than at June 30, 2005.
STAFFING AT 6/30/06 AT 12/31/05 AT 6/30/05
------------------------------------------------------------------------------------------------------------------------
Full-time equivalent staff members 2,515 2,469 2,425
The increases in staffing reflected expansion that occurred during the 12 months
ended June 30, 2006, including:
- New office openings in the Lehigh Valley area of eastern Pennsylvania; in
Princeton, New Jersey; and in Stamford, Connecticut.
- The launch of the Wilmington Family Office practice on the East Coast.
- The addition of captive insurance management services, in July 2005, to
our Corporate Client Services capabilities.
- The Corporate Client Services acquisition, in May 2006, of PwC Corporate
Services (Cayman).
- Expansion of existing Regional Banking offices in Delaware, Pennsylvania,
and Maryland.
- Expansion of existing Wealth Advisory offices in Delaware, Pennsylvania,
and New York.
Effective January 1, 2006, we adopted the retrospective method of accounting for
stock-based compensation expense, in accordance with Statement of Financial
Accounting Standards No. 123 (revised), and we adjusted prior period amounts
accordingly. We record these costs in the incentives and bonus expense line.
INCENTIVES AND BONUSES (in millions) 2006 Q2 2006 Q1 2005 Q4 2005 Q3 2005 Q2
---------------------------------------------------------------------------------------------------------------------------
Stock-based compensation expense $ 1.4 $ 2.0 $1.8 $1.7 $ 2.1
Total incentives and bonuses $10.3 $10.3 $8.8 $9.3 $10.1
The adjusted 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.
In most other expense categories, the second quarter and year-to-date increases
also were related to our expansion activities.
53
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
In the subadvisor category of expenses, the 2006 second quarter and year-to-date
increases reflected a credit of approximately $1 million that was recorded for
the 2005 second quarter. This credit resulted from account reconciliations made
when subadvisor expenses were consolidated under Wilmington Trust Investment
Management. Absent this credit, the increase in subadvisor expense for the 2006
second quarter would have been $0.2 million, not $1.2 million. The year-to-date
increase would have been $0.5 million, not $1.5 million. Subadvisor expense
consists of payments to third-party investment advisors used in the Wealth
Advisory business.
INCOME TAXES
Income tax expense for the second quarter and first half of 2006 was higher than
for the corresponding periods in 2005 mainly because our pretax income was
higher. Our 2006 second quarter and year-to-date effective tax rates were lower
than for the corresponding year-ago periods because the volumes of stock options
exercised were higher in 2006, which increased the tax-deductible portion of our
stock-based compensation expense.
INCOME TAXES AND TAX RATE 2006 Q2 2005 Q2 2006 YTD 2005 YTD
------------------------------------------------------------------------------------------------------------
Pretax income (in millions) $ 74.2 $ 61.0 $ 142.6 $122.6
Income tax expense (in millions) $ 27.2 $ 22.4 $ 51.4 $ 44.8
Effective tax rate 36.66% 36.72% 36.04% 36.54%
CAPITAL RESOURCES
Our capital position remained strong during the first half of 2006.
Stockholders' equity rose 5%; 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. On July 20, 2006, the Board declared a
regular quarterly dividend of $0.315 per share, to be paid on August 15, 2006,
to shareholders of record as of August 1, 2006.
6 MOS. ENDED YEAR ENDED 6 MOS. ENDED
CAPITAL STRENGTH 6/30/06 12/31/05 6/30/05
------------------------------------------------------------------------------------------------------------
Stockholders' equity (period-end, in millions) $1,066.9 $1,017.7 $ 953.3
Return on average stockholders' equity (annualized) 17.61% 18.77% 16.93%
Return on average assets (annualized) 1.79% 1.82% 1.64%
Capital generation rate (annualized) 9.8% 10.3% 9.1%
Dividend payout ratio 46.0% 48.0% 51.0%
During the first half of 2006, we added $78.9 million to capital, including:
- $49.2 million, which reflected earnings of $91.1 million net of $41.9
million in cash dividends;
- $25.6 million from the issue of common stock under employment benefit
plans;
- $3.4 million in tax benefits from stock-based compensation costs; and
- $0.7 million in foreign currency exchange adjustments.
54
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Offsetting these additions were $29.7 million of reductions in capital, which
consisted of:
- $17.1 million in unrealized losses on securities, net of taxes;
- $6.8 million for the repurchase of shares; and
- $5.8 million in derivative losses included in other comprehensive income,
net of taxes.
Our share repurchase activity remained modest, as we opted to retain capital.
During the first half of 2006, we repurchased 157,317 of our shares at an
average per-share price of $43.46 and a total cost of $6.8 million. This brought
the total number of shares repurchased under the current 8-million-share
program, which commenced in April 2002, to 845,562, leaving 7,154,438 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 6/30/06 12/31/05 ADEQUATELY CAPITALIZED WELL CAPITALIZED
----------------------------------------------------------------------------------------------------------------------------------
Total risk-based capital 12.66% 12.36% 8% 10%
Tier 1 risk-based capital 7.74% 7.54% 4% 6%
Tier 1 leverage capital 6.98% 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.
For banks, liquidity is defined as the ability to accommodate, efficiently and
economically, decreases in deposits and increases in assets. Bank liquidity also
includes managing the cash flows associated with amortization, prepayments, and
maturities of loans and investment securities. A bank has liquidity when it has
the ability to obtain sufficient funds in a timely manner at a reasonable cost.
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;
- Provide for decreases in deposits and other funding sources; and
- Minimize funding and liquidity risk.
We manage our liquidity according to a policy established by our Asset/Liability
Committee and approved by our Board of Directors. This policy:
- Requires us to maintain liquidity within regulatory guidelines;
- Authorizes the use of such wholesale (non-core-deposit) funding
alternatives as federal funds purchased, brokered CDs, Federal Reserve
Bank discount window borrowings, advances from Federal Home Loan Banks,
and repurchase agreements.
55
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
- Establishes procedures for measuring liquidity needs on three-month,
six-month, and one-year time horizons; and
- Prescribes numeric parameters for measuring liquidity risk on three-month,
six-month, and one-year time horizons.
Our liquidity policy categorizes liquidity risk into three levels: Level I,
Level II, and Level III, each of which places liquidity risk in the context of
various internal and external scenarios.
Level I is the most favorable level. It indicates a normal banking operations
scenario, with no indications of any funding pressures. At this level, the
sources of funds available to us are diverse, and we are able to access them
immediately at a reasonable cost and at the maturities we desire. As of June 30,
2006, we were operating within Level I parameters.
Level II indicates a state of warning that we might be encountering funding
difficulties due to a combination of internal and external factors. These
factors include real or perceived weakness in our earnings, deterioration in our
asset quality, the potential for credit ratings downgrades, damage to our
reputation, or changes in the economic or business environment. Were a Level II
scenario to occur, we would implement an action plan that would include, but not
be limited to:
- Using Federal Home Loan Bank borrowings to fill in funding gaps;
- Selling liquid securities;
- Implementing a communications plan to clarify market perceptions; and
- Expanding retail deposit strategies.
Level III indicates that the current composition of the balance sheet has
created excessive liquidity risk. At this level, we would implement a
contingency plan that would include, but not be limited to:
- The steps outlined for a Level II scenario;
- Restricting the acquisition of additional assets;
- Restricting additional lending activities;
- Restricting off-balance-sheet commitments; and
- Selling liquid assets.
We have developed numeric parameters that correspond with each level of
liquidity risk. To measure our liquidity needs and risk against these
parameters, we use a funds-at-risk (FAR) ratio. The FAR ratio, which we
calculate monthly, expresses on- and off-balance-sheet liquid assets as a
percentage of wholesale liabilities. The FAR ratio considers these items on
three-month, six-month, and one-year time horizons:
As of June 30, 2006, our FAR ratio calculations indicated that our liquidity
position was within the parameters described in Level I of our liquidity risk
policy.
We believe our liquidity management practices give us the flexibility to react
to any potential changes that might adversely affect our liquidity risk. 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.
56
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
We have undergone no credit rating changes since August 2004. In June 2006,
Fitch Ratings affirmed its credit ratings of Wilmington Trust Corporation and
Wilmington Trust Company. In August 2005, Standard & Poor's reaffirmed its
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.
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 funding comes from
core deposits and wholesale borrowings (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 this 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.
LIQUIDITY AND FUNDING IN THE FIRST SIX MONTHS OF 2006
During the first half 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
57
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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 June 30, 2006, loan balances rose 5%, but core
deposit balances declined 1%.
PROPORTION OF FUNDING PROVIDED BY: AT 6/30/06 AT 12/31/05 AT 6/30/05
-----------------------------------------------------------------------------------------------------------------
Core deposits 47.4% 49.5% 48.6%
Core deposits and stockholders' equity 57.5% 59.4% 58.3%
National CDs and short-term borrowings 37.3% 35.2% 35.7%
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 June
30, 2006, included:
- Cash flow generated by our investment portfolio, which we expect will
generate approximately $339 million of cash over the next 12 months from
maturities, calls, and income. At June 30, 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 June 30, 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 June
30, 2006, this line of credit was $3.0 million, the balance was zero, and our
guaranty was for 80.61%, 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
June 30, 2006, loans represented 73% of our assets; investment securities
represented 17%; goodwill represented 3%, premises and equipment represented 1%,
and a combination of other assets accounted for the remainder. We discuss our
investment securities portfolio in the narrative about our Statement of
Condition in this report. For the purposes of this section, our discussion of
asset quality centers on loan (credit) quality.
58
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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:
- 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
59
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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.
CREDIT QUALITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006
The 2006 second quarter marked the 21st consecutive quarter of loan growth:
- Period-end loan balances were up 10% from their year-ago levels and up 5%
from the end of 2005.
- On average, second quarter 2006 loan balances were 11% higher than for the
year-ago second quarter.
- For the first six months of 2006, loan balances, on average, were 10%
higher than for the same period in 2005.
Opposite this loan growth, credit quality trends remained positive:
- At 5 basis points for the 2006 second quarter and 7 basis points
year-to-date, the net charge-off ratio remained below historic levels.
(Between 1995 and 2005, the full-year net charge-off ratio ranged from 24
to 44 basis points.)
- More than 97% of loans outstanding continued to receive pass ratings in
the internal risk rating analysis.
- Nonaccruing loans declined from their year-end 2005 and year-ago second
quarter amounts.
- Total nonperforming assets at June 30, 2006, were the same amount as at
December 31, 2005, and 25% less than at the end of the year-ago second
quarter.
- The composition of the loan portfolio remained well diversified.
KEY MEASURES OF CREDIT QUALITY 3 MONTHS ENDED 3 MONTHS ENDED 6 MONTHS ENDED 6 MONTHS ENDED
(dollars in millions) 6/30/06 6/30/05 6/30/06 6/30/05
----------------------------------------------------------------------------------------------------------
Total loan balances (period end) $ 7,755.2 $ 7,053.1 $ 7,755.2 $ 7,053.1
Total loan balances (on average) $ 7,675.9 $ 6,938.6 $ 7,561.2 $ 6,854.5
Gross charge-offs $ 5.7 $ 2.8 $ 8.9 $ 6.3
Recoveries $ (2.2) $ (1.0) $ (3.6) $ (2.1)
Net charge-offs $ 3.5 $ 1.8 $ 5.3 $ 4.2
Net charge-off ratio (1) 5 basis points 3 basis points 7 basis points 6 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.
60
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
NONPERFORMING ASSETS: While credit quality remained relatively unchanged
overall, there were some shifts among several categories during the 2006 second
quarter.
- At $29.5 million, nonaccruing loans were $24.7 million less than at the
end of the year-ago second quarter, and $9.8 million less than at the end
of 2005. Proceeds from a settlement we recorded in October 2005 accounted
for approximately one-third of the year-over-year decline. During the 2006
second quarter, one loan was transferred from nonaccruing status to other
real estate owned (OREO). This transfer accounted for almost half of the
decline in nonaccruing loans since year-end 2005.
- The nonaccruing loan transferred to OREO during the 2006 second quarter
accounted for the increases in this category of nonperforming assets. This
asset consists of an agricultural parcel in New Jersey.
- One Delaware-based loan accounted for the increases in renegotiated loans.
This loan, which represented approximately 50% of the total renegotiated
loan amount as of June 30, 2006, was repaid in July 2006. Had this payment
been received prior to June 30, 2006, the amount of renegotiated loans as
of that date would have been $4.7 million, the same as at December 31,
2005.
NONPERFORMING ASSETS (dollars in millions) AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------------
Nonaccruing loans $29.5 $ 39.3 $ 54.2
Ratio of nonaccruing loans to total loans 0.38% 0.53% 0.77%
Other real estate owned (OREO) (1) $ 4.8 $ 0.2 $ 0.2
Ratio of OREO to total loans 0.06% --% --%
Renegotiated loans (nonaccruing) $ 9.9 $ 4.7 $ 4.9
Total nonperforming assets $44.2 $ 44.2 $ 59.3
Ratio of nonperforming assets to total loans 0.57% 0.60% 0.84%
---------------
(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: On a dollar-amount basis, total loans past due
90 days or more were higher at June 30, 2006, than at December 31, 2005, but on
a percentage basis, they continued to account for less than 1% of total loans
outstanding.
LOANS PAST DUE 90 DAYS OR MORE (dollars in millions) AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more $ 4.7 $ 4.1 $ 2.9
Amount in the commercial portfolio $ 2.3 $ 1.5 $ 0.5
Amount in the retail portfolio $ 2.4 $ 2.6 $ 2.4
Ratio of total past-due loans to total loans outstanding 0.06% 0.06% 0.04%
61
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
SERIOUS-DOUBT LOANS: Loans recorded as serious-doubt loans are loans that we
seriously doubt will be repaid, even though they are performing in accordance
with their terms or are less than 90 days past due.
SERIOUS-DOUBT LOANS AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------------
Serious-doubt loans (in millions) $20.7 $6.9 $3.0
Ratio of serious doubt loans to total loan balances 0.3% 0.1% --%
One commercial loan that we moved to serious-doubt status during the 2006 second
quarter accounted for approximately 40% of the amount of serious-doubt loans at
June 30, 2006. Two Wealth Advisory Services loans accounted for approximately
22% of the amount. Other commercial loans accounted for the remainder.
INTERNAL RISK RATING ANALYSIS: 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.
INTERNAL RISK RATING ANALYSIS AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------------
Pass 97.28% 97.24% 96.96%
Watchlisted 1.89% 1.96% 2.00%
Substandard 0.76% 0.73% 0.82%
Doubtful 0.07% 0.07% 0.22%
PROVISION AND RESERVE FOR LOAN LOSSES: 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. In light of the levels of past due, nonaccruing, and
problem loans, we believed that the June 30, 2006, amounts of our provision and
reserve for loan losses reflected a reasonable assessment of inherent loan
losses.
PROVISION FOR LOAN LOSSES 3 MONTHS ENDED 3 MONTHS ENDED 6 MONTHS ENDED 6 MONTHS ENDED
(In millions) 6/30/06 6/30/05 6/30/06 6/30/05
---------------------------------------------------------------------------------------------------------------------
Provision for loan losses $4.2 $3.8 $8.2 $6.9
RESERVE FOR LOAN LOSSES (dollars in millions) AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------------
Reserve for loan losses $ 94.3 $ 91.4 $ 92.4
Loan loss reserve ratio 1.22% 1.24% 1.31%
Unallocated reserve amount $ 6.1 $ 6.1 $ 7.7
% of total reserve that is unallocated 6.5% 6.7% 8.3%
62
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
LOAN PORTFOLIO COMPOSITION: On a percentage basis, the composition of the loan
portfolio remained well diversified and relatively unchanged.
COMPOSITION OF THE LOAN PORTFOLIO AT 6/30/06 AT 12/31/05 AT 6/30/05
-----------------------------------------------------------------------------------------------------
Commercial/financial/agricultural 32% 33% 36%
Commercial real estate/construction 20% 17% 13%
Commercial mortgage 16% 17% 18%
Residential mortgage 6% 6% 6%
Home equity 4% 4% 4%
Indirect auto 8% 9% 9%
Credit card 1% 1% 1%
Other consumer 6% 5% 5%
Secured with liquid collateral 7% 8% 8%
For more information about how we manage commercial real estate/construction
credit risk, please refer to the section on commercial lending in our discussion
in this report of our Statement of Condition.
DERIVATIVES, HEDGING INSTRUMENTS, OTHER OFF-BALANCE-SHEET ARRANGEMENTS, AND
OTHER CONTRACTUAL OBLIGATIONS
We use a variety of financial instruments and contracts to help us manage
capital, liquidity, interest rate risk, credit risk, and other aspects of our
day-to-day operations. As permissible under regulatory guidelines, we include
these instruments in our calculations of regulatory risk-based capital ratios.
These instruments include:
- Derivative instruments, such as interest rate swaps and interest rate
floors.
- Instruments that generally accepted accounting principles deem to be
off-balance-sheet arrangements, which means they do not appear on our
balance sheet. These instruments include stand-by letters of credit,
unfunded loan commitments, and unadvanced lines of credit.
- Contractual obligations that do appear on our balance sheet. These
instruments include certificates of deposit, long-term debt, operating
lease obligations, and other guaranties.
Among our derivative instruments are:
- Interest rate swaps, which we employ:
- So that clients may convert floating rate loan payments to fixed
rate loan payments without exposing our company to interest rate
risk. In these transactions, we retain the credit risk associated
with the potential failure of counter-parties.
- To manage the interest rate risk associated with our subordinated
long-term debt.
- Interest rate floors, which we employ to hedge the interest revenue from
our floating rate loans against declines in market interest rates.
As of June 30, 2006, our derivative instruments included:
63
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
- A total of $950.8 million of interest rate swaps, as follows:
- $412.9 million of swaps for loan clients for whom we exchanged
floating rates for fixed rates.
- $412.9 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 are accreting the discount-to-market value currently associated
with this debt issue back to par over the remaining life of the
debt.
- $1.0 billion of interest rate floors associated with floating rate
commercial loans.
Our other contractual obligations as of June 30, 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.
- Lease commitments for offices, net of sublease arrangements, which total
$51.6 million. In Delaware, we lease many of our branch offices. We lease
all of our branch offices outside of Delaware.
- An 80.61% 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 $4.30 billion.
- Letters of credit, unfunded loan commitments, and unadvanced lines of
credit amounting to $3.58 billion.
The following table summarizes our current contractual obligations and the
periods over which they extend.
PAYMENTS DUE (in millions) TOTAL LESS THAN 1 YEAR 1 TO 3 YEARS 3 TO 5 YEARS MORE THAN 5 YEARS
--------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit $ $4,302.3 $ 4,067.9 $ 169.8 $ 44.5 $ 20.1
Long-term debt obligations (1) 516.8 26.3 161.3 54.8 274.4
Operating lease obligations 51.6 9.3 22.2 13.9 6.2
Guaranty obligations 2.4 2.4 -- -- --
Total $ 4,873.1 $ 4,105.9 $ 353.3 $ 113.2 $ 300.7
================================================================================================================================
-----------
(1) Contractual obligations associated with long-term debt obligations include
future interest payments.
The long-term debt obligations referenced in the table 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
64
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies conform with U.S. generally accepted accounting
principles (GAAP), and with reporting practices prescribed for the banking
industry. We maintain our accounting records and prepare our financial
statements using the accrual basis of accounting. In applying our critical
accounting policies, 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.
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;
- Note 1, "Accounting and reporting policies," in this report; and
- Note 10, "Accounting pronouncements," in this report.
65
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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; a substantial and permanent loss of either client
accounts and/or assets under management at Wilmington Trust and/or our affiliate
money managers, Cramer Rosenthal McGlynn and Roxbury Capital Management;
unanticipated changes in regulatory, judicial, or legislative tax treatment of
business transactions; and economic uncertainty created by unrest in other parts
of the world.
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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.
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.
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Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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 June 30, 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
5.41% over the 12 months beginning June 30, 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 5.04%
over the 12 months beginning June 30, 2006.
IMPACT OF INTEREST RATE CHANGES FOR THE 12 MONTHS FOR THE 12 MONTHS
ON NET INTEREST INCOME BEGINNING 6/30/06 BEGINNING 12/31/05
---------------------------------------------------------------------------------------------------
Gradual increase of 250 basis points 5.41% 0.56%
Gradual decrease of 250 basis points (5.04)% (3.97)%
As of March 31, 2006, we adjusted the simulation to reflect two changes:
- On March 31, 2006, we terminated $250 million of interest rate 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 environment. 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 second quarter and first half 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.
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- The repricing characteristics of our loan portfolio closely matched those
of our wholesale funding sources.
- 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 June 30,
2006, were 100 basis points higher than at December 31, 2005, and 200
basis points higher than at the end of the year-ago second quarter.
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 6 MONTHS 12 MONTHS 3 MONTHS 6 MONTHS
ENDED ENDED ENDED ENDED ENDED
AVERAGE YIELDS AND RATES 6/30/06 6/30/06 12/31/05 6/30/05 6/30/05
--------------------------------------------------------------------------------------------------------------------
Investment securities portfolio 4.67% 4.60% 4.28% 4.27% 4.21%
Commercial loans 7.82% 7.63% 6.40% 6.04% 5.85%
Total loans 7.45% 7.28% 6.22% 5.93% 5.77%
Total earning assets 6.90% 6.74% 5.80% 5.58% 5.43%
Core interest-bearing deposits 1.98% 1.90% 1.39% 1.29% 1.23%
National CDs 4.98% 4.73% 3.36% 3.03% 2.78%
Total interest-bearing deposits 3.15% 3.00% 2.13% 1.94% 1.78%
Short-term borrowings 4.67% 4.44% 3.20% 2.92% 2.72%
Total cost of funds 3.10% 2.95% 2.09% 1.92% 1.78%
Net interest margin 3.80% 3.79% 3.71% 3.66% 3.65%
On a year-to-date basis, the net interest margin at June 30, 2006, was 3.79%,
which was 14 basis points higher than the 3.65% recorded for the first six
months of 2005.
The tables above and below demonstrate how asset repricing is outpacing
liability repricing. Comparing the three months ended June 30, 2006, with the 12
months ended December 31, 2005, the yield on total earning assets increased 110
basis points, while the total cost of funds increased 101 basis points.
Comparing the three months ended June 30, 2006 and 2005, the yield on total
earning assets rose 132 basis points, while the corresponding increase in the
total cost of funds was 118 basis points.
3 MOS. ENDED 6/30/06 VS. 3 MOS. ENDED JUNE 30,
BASIS POINT (BPS) INCREASES 12 MONTHS ENDED 12/31/05 2006 VS. 2005
----------------------------------------------------------------------------------------------------------------
Investment securities portfolio 39 bps 40 bps
Commercial loans 142 bps 178 bps
Total loans 123 bps 152 bps
Total earning assets 110 bps 132 bps
Core interest-bearing deposits 59 bps 69 bps
National CDs 162 bps 195 bps
Total interest-bearing deposits 102 bps 121 bps
Short-term borrowings 147 bps 175 bps
Total cost of funds 101 bps 118 bps
Net interest margin 9 bps 14 bps
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Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 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.
FLOATING- VS. FIXED-RATE LOANS OUTSTANDING AT 6/30/06 AT 12/31/05 AT 6/30/05
---------------------------------------------------------------------------------------------------------------------
Percentage of loans with floating rates 76% 77% 79%
Percentage of loans with fixed rates 24% 23% 21%
Wilmington Trust prime lending rate (period end) 8.25% 7.25% 6.25%
Wilmington Trust prime lending rate (YTD average) 7.43% 6.19% 5.44%
As of June 30, 2006:
- Of our total floating-rate loans, approximately 81% were commercial loans.
- The pricing on approximately 63% of commercial floating-rate loans was tied
to a prime lending rate of 8.25%.
- The pricing on approximately 31% of commercial floating-rate loans was tied
to the 30-day London Interbank Offered Rate (Libor) of 5.33%.
The pricing characteristics of our commercial loan portfolio closely matched
those of our wholesale funding sources:
COMMERCIAL
FLOATING RATE LOANS NATIONAL CDS SHORT-TERM BORROWINGS
AS OF REPRICING IN = OR LESS THAN 30 DAYS MATURING = OR LESS THAN 90 DAYS MATURING = OR LESS THAN 90 DAYS
---------------------------------------------------------------------------------------------------------------------------
6/30/06 92% 59% 94%
3/31/06 92% 76% 87%
12/31/05 92% 87% 90%
6/30/05 92% 90% 84%
The percentage of national CDs maturing within 90 days fell during the 2006
second quarter because of flatness in the yield curve. In a period of rising
interest rates, when there is no rate difference between 90-day and 120-day
instruments, we prefer to take the longer maturity.
Changes in the yields on our floating-rate loans may not correlate directly with
market interest rate changes, because:
- 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.
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Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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 or 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 second quarter and first six months of 2006, approximately 52% and 53%,
respectively, of our total noninterest income (after amortization) was subject
to financial market risk, as the following table shows. Approximately 26% of our
total net interest and noninterest income (after amortization and the provision
for loan losses) for the second quarter and first half of 2006 was subject to
financial market risk.
NONINTEREST INCOME BASED ON MARKET VALUATIONS 2006 2005 2006 2005
(dollars in millions) Q2 Q2 YTD YTD
---------------------------------------------------------------------------------------------------------------------
WAS trust and investment advisory fees $ 33.1 $ 30.3 $ 67.5 $ 60.3
CCS retirement services revenue 3.2 2.9 6.3 5.9
CCS investment and cash management revenue 2.5 1.8 4.6 3.6
Affiliate manager revenue 5.8 4.2 10.6 8.8
Total revenue based on market valuations $ 44.6 $ 39.2 $ 89.0 $ 78.6
Total noninterest income (after amortization) $ 86.3 $ 76.4 $169.0 $153.9
% of total noninterest income tied to market values 52% 51% 53% 51%
Total net interest and noninterest income
(after the provision and amortization) $172.5 $152.7 $338.5 $304.7
% of total net interest and noninterest income tied to market values 26% 26% 26% 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.
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Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Economic indicators for the Delaware Valley region remained positive in the
second quarter and first half of 2006:
- According to the U.S. Bureau of Labor Statistics, as of June 2006, the U.S.
unemployment rate was 4.6%. In comparison, Delaware's unemployment rate was
3.7%, down from 4.2% at the end of the year-ago second quarter.
- 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.
- In its State Profiles for summer 2006, the Federal Deposit Insurance
Corporation reported that:
- Delaware's rate of job growth is outpacing the nation's, due to strength
in the retail, government, and health care sectors.
- Pennsylvania's economy continues to strengthen, with improved job growth
and lower unemployment.
- Employment in eastern Pennsylvania has been helped by strong population
in-migration (people relocating from other states) in the Lehigh Valley
area.
- In New Jersey, during the first quarter of 2006, job growth reached its
highest quarterly rate since the fourth quarter of 2000.
- According to data published by the Federal Reserve Bank of Philadelphia for
June 2006, economic activity indices for the region rose over the previous 12
months and modest economic growth was projected through the first quarter of
2007.
- Delaware's population continued to increase due to the state's convenient
mid-Atlantic location, favorable tax climate, affordable housing relative to
other states in the region, 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 Maryland, a study conducted by Towson University for the state's
Department of Business and Economic Development predicted that the Pentagon's
military base realignment will add 28,000 households to Maryland's population
over the next decade. In November 2005, the department said that the
Pentagon'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. The Aberdeen
Proving Ground is located in Harford County, Maryland, not far from our
lending office in Bel Air.
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. According to news reports
published on July 26, 2006, Bank of America had eliminated 4,000 jobs in the
United States, approximately 800 of which were Delaware jobs. In a speech to the
Wilmington (Delaware) Rotary Club on July 27, 2006, Bank of America's senior
executive in Delaware said he "believes the worst of the cuts are behind us" and
that the bank is achieving many reductions through attrition, rather than
layoffs. It is impossible to predict how potential job losses at Bank of America
might affect Delaware's economy or our financial condition.
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Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
Delaware is among the East Coast's leading poultry producers. It is impossible
to predict how an outbreak of avian influenza might affect the state's economy,
our credit quality, or our financial condition. As of June 30, 2006, we had
approximately $62 million in credit exposure to the poultry industry.
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.
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
73
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
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
June 30, 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.
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-15(e). 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 second quarter or first six months
of 2006 that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
74
Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 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 Dollar Value) of
(a) Total (b) of Shares (or Shares (or Units)
Number of Average Units) Purchased that May Yet Be
Shares (or Price Paid as Part of Publicly Purchased Under
Units) per Share (or Announced Plans the Plans or
Period Purchased Unit) or Programs Programs
-----------------------------------------------------------------------------------------------------
Month #1 -- -- -- 7,156,831
April 1 -
April 30, 2006
Month #2
May 1, 2006 -
May 31, 2006 2,393 $41.79 2,393 7,154,438
Month #3
June 1, 2006 -
June 30, 2006 -- -- -- 7,154,438
--------------------------------------------------------------------------------------------------
Total 2,393 $41.79 2,393 7,154,438
==================================================================================================
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 second quarter of 2006
was consistent with the Federal Reserve Board's policy.
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Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 2006
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Shareholders' Meeting on April 20, 2006 (Annual Meeting), the
nominees for directors of the Corporation proposed were elected. Shareholders
cast votes for those nominees as follows:
NOMINEE FOR WITHHELD
-------------------------------------------------------------------------------------------------------
Ted T. Cecala 56,001,538.689 822,710.802
David P. Roselle 55,928,146.691 896,102.800
The terms of Carolyn S. Burger, Charles S. Crompton Jr., R. Keith Elliott,
Robert V.A. Harra Jr., Gailen Krug, Rex L. Mears, Stacey J. Mobley, H. Rodney
Sharp III, Robert W. Tunnell Jr., and Susan D. Whiting continued after the
Annual Meeting.
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.
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Wilmington Trust Corporation
Form 10-Q for the three and six months ended June 30, 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: August 9, 2006 /s/ Ted T. Cecala
---------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and
Chief Executive Officer
(Authorized Officer)
Date: August 9, 2006 /s/ David R. Gibson
---------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
77