2006 Q3 10-Q #5
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 September 30, 2006
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission File Number: 1-14659
--------------------------------------------------------
WILMINGTON TRUST CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0328154
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
RODNEY SQUARE NORTH, 1100 NORTH
MARKET STREET, WILMINGTON, DELAWARE 19890
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(302) 651-1000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b-2 of the Exchange Act.
[X] Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of September 30, 2006
----- ------------------------------------
COMMON STOCK - PAR VALUE $1.00 68,431,543
2006 Q3 10-Q #5
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
THIRD 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 70
Item 4 Controls and Procedures 76
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 77
Item 1A Risk Factors 77
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 77
Item 3 Defaults upon Senior Securities 78
Item 4 Submission of Matters to a Vote of Security Holders 78
Item 5 Other Information 78
Item 6 Exhibits 78
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and Subsidiaries
----------------------------
September 30, December 31,
(In millions, except share amounts) 2006 2005
-------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 268.4 $ 264.0
----------------------------
Federal funds sold and securities purchased
under agreements to resell 38.4 14.3
----------------------------
Investment securities available for sale:
U.S. Treasury 230.8 161.1
Government agencies 533.0 410.8
Obligations of state and political subdivisions 7.8 9.0
Other securities 1,208.8 1,345.4
-------------------------------------------------------------------------------------------------
Total investment securities available for sale 1,980.4 1,926.3
----------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions 1.6 2.0
(market values of $1.7 and $2.1, respectively)
Other securities (market values of $0.3 and $0.5, respectively) 0.3 0.5
-------------------------------------------------------------------------------------------------
Total investment securities held to maturity 1.9 2.5
----------------------------
Loans:
Commercial, financial, and agricultural 2,378.1 2,461.3
Real estate - construction 1,610.9 1,233.9
Mortgage - commercial 1,254.5 1,223.9
-------------------------------------------------------------------------------------------------
Total commercial loans 5,243.5 4,919.1
----------------------------
Mortgage - residential 518.7 455.5
Consumer 1,489.7 1,438.3
Secured with liquid collateral 528.3 584.8
-------------------------------------------------------------------------------------------------
Total retail loans 2,536.7 2,478.6
----------------------------
Total loans net of unearned income 7,780.2 7,397.7
Reserve for loan losses (93.6) (91.4)
-------------------------------------------------------------------------------------------------
Net loans 7,686.6 7,306.3
----------------------------
Premises and equipment, net 151.6 147.6
Goodwill, net of amortization 291.1 348.3
Other intangible assets, net of amortization 38.8 36.2
Accrued interest receivable 63.9 54.5
Other assets 176.1 132.8
-------------------------------------------------------------------------------------------------
Total assets $10,697.2 $10,232.8
============================
1
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
----------------------------
September 30, December 31,
(In millions, except share amounts) 2006 2005
------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 861.3 $ 1,014.8
Interest-bearing:
Savings 292.5 326.3
Interest-bearing demand 2,417.5 2,360.0
Certificates under $100,000 995.5 923.0
Local CDs $100,000 and over 574.7 436.5
------------------------------------------------------------------------------------
Total core deposits 5,141.5 5,060.6
National CDs $100,000 and over 2,742.7 2,228.6
------------------------------------------------------------------------------------
Total deposits 7,884.2 7,289.2
----------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,146.7 1,355.6
U.S. Treasury demand 7.0 18.1
Line of credit 15.0 --
------------------------------------------------------------------------------------
Total short-term borrowings 1,168.7 1,373.7
----------------------------
Accrued interest payable 77.1 45.7
Other liabilities 107.4 105.9
Long-term debt 395.2 400.4
------------------------------------------------------------------------------------
Total liabilities 9,632.6 9,214.9
----------------------------
Minority interest 0.3 0.2
----------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 165.8 145.0
Retained earnings 1,104.5 1,071.7
Accumulated other comprehensive loss (18.6) (21.8)
------------------------------------------------------------------------------------
Total contributed capital and retained earnings 1,330.2 1,273.4
Less: Treasury stock, at cost, 10,096,803 and
10,625,067 shares, respectively (265.9) (255.7)
------------------------------------------------------------------------------------
Total stockholders' equity 1,064.3 1,017.7
----------------------------
Total liabilities and stockholders' equity $10,697.2 $10,232.8
============================
See Notes to Consolidated Financial Statements
2
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and Subsidiaries
---------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
---------------------------------
(In millions, except share amounts) 2006 2005 2006 2005
------------------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $152.6 $114.3 $427.6 $311.8
Interest and dividends on investment securities:
Taxable interest 20.5 18.6 59.7 52.9
Tax-exempt interest 0.1 0.1 0.4 0.5
Dividends 1.5 1.4 4.5 4.5
Interest on federal funds sold and securities
purchased under agreements to resell 0.3 0.5 0.7 0.7
------------------------------------------------------------------------------------------
Total interest income 175.0 134.9 492.9 370.4
---------------------------------
Interest on deposits 61.8 36.5 164.0 89.4
Interest on short-term borrowings 13.5 9.2 38.6 24.7
Interest on long-term debt 6.7 5.5 19.6 14.9
------------------------------------------------------------------------------------------
Total interest expense 82.0 51.2 222.2 129.0
---------------------------------
Net interest income 93.0 83.7 270.7 241.4
Provision for loan losses (6.6) (2.9) (14.8) (9.8)
------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 86.4 80.8 255.9 231.6
---------------------------------
NONINTEREST INCOME
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory fees 33.0 32.7 100.4 92.9
Mutual fund fees 5.3 4.4 15.0 13.2
Planning and other services 8.8 6.4 25.1 23.3
------------------------------------------------------------------------------------------
Total Wealth Advisory Services 47.1 43.5 140.5 129.4
---------------------------------
Corporate Client Services:
Capital markets services 8.2 8.3 25.4 23.7
Entity management services 6.8 5.7 19.8 17.5
Retirement services 3.4 3.2 9.8 9.1
Investment/cash management services 2.7 1.9 7.3 5.4
------------------------------------------------------------------------------------------
Total Corporate Client Services 21.1 19.1 62.3 55.7
---------------------------------
Cramer Rosenthal McGlynn 4.6 3.4 14.1 11.8
Roxbury Capital Management -- 0.3 1.1 0.8
------------------------------------------------------------------------------------------
Advisory fees 72.8 66.3 218.0 197.7
Amortization of affiliate other intangibles (1.1) (1.0) (3.1) (3.1)
------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate other intangibles 71.7 65.3 214.9 194.6
---------------------------------
Service charges on deposit accounts 7.3 7.4 21.1 20.9
Loan fees and late charges 2.1 2.0 5.9 5.3
Card fees 2.4 2.0 6.7 6.0
Other noninterest income 1.0 3.0 5.0 5.9
Securities gains 0.1 -- -- 0.8
------------------------------------------------------------------------------------------
Total noninterest income 84.6 79.7 253.6 233.5
---------------------------------
Net interest and noninterest income 171.0 160.5 509.5 465.1
---------------------------------
3
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
-------------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
-------------------------------------
(in millions, except share amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and wages 39.5 35.4 114.1 103.3
Incentives and bonuses 8.9 9.3 29.5 29.1
Employment benefits 11.4 11.6 36.8 35.8
Net occupancy 6.7 5.5 19.0 16.3
Furniture, equipment, and supplies 9.2 8.7 28.2 26.3
Advertising and contributions 2.2 2.4 6.2 6.6
Servicing and consulting fees 2.8 2.3 7.5 7.3
Subadvisor expense 2.7 2.7 8.4 6.9
Travel, entertainment, and training 2.5 2.6 7.0 6.2
Originating and processing fees 2.8 2.8 8.0 7.7
Legal and auditing fees 1.7 1.6 4.9 5.2
Impairment write-down 72.3 -- 72.3 --
Other noninterest expense 8.2 8.6 24.9 24.9
-------------------------------------------------------------------------------------------
Total noninterest expense 170.9 93.5 366.8 275.6
-------------------------------------
NET INCOME
Income before income taxes and minority interest 0.1 67.0 142.7 189.5
Income tax (benefit)/expense (5.0) 24.1 46.3 68.8
-------------------------------------------------------------------------------------------
Net income before minority interest 5.1 42.9 96.4 120.7
Minority interest (0.1) 0.1 0.1 0.2
-------------------------------------------------------------------------------------------
Net income $ 5.2 $ 42.8 $ 96.3 $ 120.5
=====================================
Net income per share:
Basic $ 0.08 $ 0.63 $ 1.41 $ 1.78
=====================================
Diluted $ 0.07 $ 0.62 $ 1.38 $ 1.76
=====================================
Weighted average shares outstanding:
Basic (000s) 68,647 67,788 68,399 67,630
Diluted (000s) 69,933 68,699 69,716 68,440
See Notes to Consolidated Financial Statements
4
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
-----------------
For the nine
months ended
September 30,
-----------------
(In millions) 2006 2005
-------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 96.3 $ 120.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 14.8 9.8
Provision for depreciation and other amortization 15.0 14.5
Impairment write-down 72.3 --
Amortization of other intangible assets 4.0 4.0
Minority interest in net income 0.1 0.2
Amortization of investment securities available for sale
discounts and premiums 0.9 3.1
Deferred income taxes (11.8) (0.1)
Employer pension contribution (15.0) (25.0)
Originations of residential mortgages available for sale (62.4) (79.1)
Gross proceeds from sales of residential mortgages 63.0 80.3
Gains on sales of residential mortgages (0.6) (1.2)
Securities gains -- (0.8)
Tax benefits realized from stock-based awards (4.3) (0.2)
Increase in interest rate floor contracts (19.9) --
Increase in other assets (25.0) (17.0)
Increase in other liabilities 46.5 21.7
-------------------------------------------------------------------------------------------
Net cash provided by operating activities 173.9 130.7
-----------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 21.2 27.2
Proceeds from maturities of investment securities available for sale 660.7 397.8
Proceeds from maturities of investment securities held to maturity 0.6 0.5
Purchases of investment securities available for sale (732.4) (561.8)
Purchases of investment securities held to maturity -- (0.1)
Cash paid for purchase of subsidiary (2.6) (0.6)
Investment in affiliate (15.9) --
Purchase of client list (0.6) --
Purchases of residential mortgages (10.7) (7.6)
Net increase in loans (384.4) (528.3)
Purchases of premises and equipment (20.3) (11.9)
Dispositions of premises and equipment 1.6 0.8
-------------------------------------------------------------------------------------------
Net cash used for investing activities (482.8) (684.0)
-----------------
5
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
-----------------
For the nine
months ended
September 30,
-----------------
(In millions) 2006 2005
---------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in demand, savings, and interest-bearing
demand deposits (129.8) (205.8)
Net increase in certificates of deposit 724.8 882.8
Net decrease in federal funds purchased and securities sold
under agreements to repurchase (208.9) (15.8)
Net decrease in U.S. Treasury demand (11.1) (24.2)
Net increase in Line of credit 15.0 --
Cash dividends (63.5) (59.9)
Distributions to minority shareholders -- (0.1)
Proceeds from common stock issued under employment benefit plans 35.4 16.9
Tax benefits realized from stock-based awards 4.3 0.2
Payments for common stock acquired through buybacks (29.1) (1.7)
---------------------------------------------------------------------------------------
Net cash provided by financing activities 337.1 592.4
-----------------
Effect of foreign currency translation on cash 0.3 (0.2)
-----------------
Increase in cash and cash equivalents 28.5 38.9
Cash and cash equivalents at beginning of period 278.3 311.9
---------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 306.8 $ 350.8
=================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 190.7 $ 112.7
Taxes 79.9 54.4
Liabilities were assumed in conjunction with the acquisition of PwC Corporate
Services (Cayman) Limited; Cramer Rosenthal McGlynn, LLC; GTBA Holdings, Inc.;
and Wilmington Trust SP Services (London) Limited as follows:
Book value of assets acquired $ 0.3 $ 0.1
Goodwill and other intangible assets from acquisitions 19.7 8.2
-----------------
Fair value of assets acquired 20.0 8.3
Cash paid (19.1) (0.6)
---------------------------------------------------------------------------------------
Liabilities assumed $ 0.9 $ 7.7
=================
See Notes to Consolidated Financial Statements
6
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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 revenue recognition, the reserve for loan losses,
stock-based employee compensation, affiliate fee income, impairment of goodwill,
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.
7
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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.
- 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
three 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.
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 stock-based compensation expense we record
includes estimates of forfeitures. When stock option or restricted stock awards
vest, we adjust both retained earnings and stock-based compensation expense to
reflect actual forfeitures that occurred prior to the vesting date.
For the employee stock purchase plan, we record stock-based compensation expense
that represent the fair value of plan participants' options to purchase shares,
amortized over the plan's fiscal year.
At September 30, 2006, we held approximately 10.1 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 September 30, 2006, there were 6,649,923 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 (APB)
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
8
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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.
---------------------------------------------------------------------------------
For the three months ended For the nine months ended
---------------------------------------------------------------------------------
(In millions) September 30, 2006 September 30, 2005 September 30, 2006 September 30, 2005
--------------------------------------------------------------------------------------------------------
Compensation expense $1.7 $1.7 $5.1 $4.9
Tax benefit 0.6 0.1 1.8 0.4
--------------------------------------------------------------------------------------------------------
Net income effect $1.1 $1.6 $3.3 $4.5
STOCK OPTION AWARDS
----------------------------------------------------
Weighted Aggregate
Weighted average intrinsic
average remaining value per
Stock option activity exercise contractual option
for the three months ended September 30, 2006 Stock options price term outstanding
----------------------------------------------------------------------------------------------------
Outstanding at July 1, 2006 6,493,846 $33.11
Granted 41,736 42.72
Exercised (272,510) 35.73
Expired (1,300) 27.86
Forfeited (44,415) 36.93
----------------------------------------------------------------------------------------------------
Outstanding at September 30, 2006 6,217,357 $33.35 6.4 years $5.89
Exercisable at September 30, 2006 3,339,608 $29.28 4.6 years $5.44
--------------------------------------------------
----------------------------------------------------
Weighted Aggregate
Weighted average intrinsic
average remaining value per
Stock option activity exercise contractual option
for the three months ended September 30, 2005 Stock options price term outstanding
----------------------------------------------------------------------------------------------------
Outstanding at July 1, 2005 6,444,056 $30.47
Granted 19,100 36.62
Exercised (97,391) 27.86
Expired -- --
Forfeited (52,450) 30.82
----------------------------------------------------------------------------------------------------
Outstanding at September 30, 2005 6,313,315 $30.53 6.8 years $5.47
Exercisable at September 30, 2005 2,999,073 $28.54 4.9 years $5.32
9
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
----------------------------------------------------
Weighted Aggregate
Weighted average intrinsic
average remaining value per
Stock option activity exercise contractual option
for the nine months ended September 30, 2006 Stock options price term outstanding
---------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 6,335,292 $30.56
Granted 998,202 43.19
Exercised (1,026,890) 27.21
Expired (2,100) 27.38
Forfeited (87,147) 35.87
---------------------------------------------------------------------------------------------------
Outstanding at September 30, 2006 6,217,357 $33.35 6.4 years $5.89
Exercisable at September 30, 2006 3,339,608 $29.28 4.6 years $5.44
----------------------------------------------------
Weighted Aggregate
Weighted average intrinsic
average remaining value per
Stock option activity exercise contractual option
for the nine months ended September 30, 2005 Stock options price term outstanding
----------------------------------------------------------------------------------------------------
Outstanding at January 1, 2005 5,862,054 $29.70
Granted 969,321 33.98
Exercised (330,935) 25.49
Expired -- --
Forfeited (187,125) 31.00
----------------------------------------------------------------------------------------------------
Outstanding at September 30, 2005 6,313,315 $30.53 6.8 years $5.47
Exercisable at September 30, 2005 2,999,073 $28.54 4.9 years $5.32
-------------------------------------------------------------
For the three months ended For the nine months ended
-------------------------------------------------------------
Options exercised September 30, September 30, September 30, September 30,
(dollars in millions) 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------
Number of options exercised 272,510 97,391 1,026,890 330,935
Total intrinsic value of options exercised $ 1.4 $ 0.5 $ 4.7 $ 1.6
Cash received from options exercised $ 9.8 $ 4.7 $ 35.4 $ 16.9
Tax deduction realized from options exercised $ 1.4 $ 0.3 $ 5.7 $ 0.8
At September 30, 2006, total unrecognized compensation cost related to nonvested
options was $8.6 million. We expect to record that expense over a weighted
average period of 1.4 years.
10
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
---------------------------------------------------------
Nonvested stock options
for the three months ended September 30, 2006 Stock options Weighted average fair value at grant date
---------------------------------------------------------------------------------------------------------
Nonvested at July 1, 2006 2,880,863 $6.63
Granted 41,736 6.03
Vested (6,035) 5.93
Exercised -- --
Expired -- --
Forfeited (38,815) 5.78
---------------------------------------------------------------------------------------------------------
Nonvested at September 30, 2006 2,877,749 $6.41
---------------------------------------------------------
Nonvested stock options
for the three months ended September 30, 2005 Stock options Weighted average fair value at grant date
---------------------------------------------------------------------------------------------------------
Nonvested at July 1, 2005 3,330,092 $5.59
Granted 19,100 5.71
Vested (3,000) 5.43
Exercised (1,800) 4.81
Expired -- --
Forfeited (30,150) 5.46
---------------------------------------------------------------------------------------------------------
Nonvested at September 30, 2005 3,314,242 $5.59
---------------------------------------------------------
Nonvested stock options
for the nine months ended September 30, 2006 Stock options Weighted average fair value at grant date
---------------------------------------------------------------------------------------------------------
Nonvested at January 1, 2006 3,287,608 $5.63
Granted 998,202 7.10
Vested (1,329,314) 4.95
Exercised -- --
Expired -- --
Forfeited (78,747) 5.81
---------------------------------------------------------------------------------------------------------
Nonvested at September 30, 2006 2,877,749 $6.41
---------------------------------------------------------
Nonvested stock options
for the nine months ended September 30, 2005 Stock options Weighted average fair value at grant date
---------------------------------------------------------------------------------------------------------
Nonvested at January 1, 2005 2,811,022 $5.69
Granted 969,321 5.40
Vested (310,576) 5.92
Exercised (3,000) 4.81
Expired -- --
Forfeited (152,525) 5.54
---------------------------------------------------------------------------------------------------------
Nonvested at September 30, 2005 3,314,242 $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
11
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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:
-------------------------------------------------------------------
For the three months ended For the nine months ended
-------------------------------------------------------------------
Black-Scholes valuation assumptions Sept. 30, 2006 Sept. 30, 2005 Sept. 30, 2006 Sept. 30, 2005
---------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.53 - 4.85% 3.84 - 4.26% 4.51 - 4.94% 3.53 - 4.26%
Volatility of Corporation's stock 14.39 - 14.82% 19.38 - 20.85% 14.39 - 20.82% 19.38 - 21.57%
Expected dividend yield 2.79 - 2.83% 3.12 - 3.22% 2.72 - 2.86% 3.12 - 3.26%
Expected life of options 4.3 - 8.4 years 4 years 4.3 - 8.4 years 4 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 stock-based compensation
expense on a straight-line basis over the requisite service period for the
entire award. At September 30, 2006, total unrecognized compensation cost
related to restricted stock grants was $1.8 million. We expect to record that
expense over a weighted average period of 2.5 years.
-------------------------------------------------------------
Restricted stock activity
for the three months ended September 30, 2006 Restricted shares Weighted average fair value at grant date
-------------------------------------------------------------------------------------------------------------
Outstanding at July 1, 2006 53,719 $40.75
Granted 3,000 42.31
Vested -- --
Forfeited (984) 40.60
-------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 2006 55,735 $40.84
-------------------------------------------------------------
Restricted stock activity
for the three months ended September 30, 2005 Restricted shares Weighted average fair value at grant date
-------------------------------------------------------------------------------------------------------------
Outstanding at July 1, 2005 25,730 $34.84
Granted -- --
Vested -- --
Forfeited -- --
-------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 2005 25,730 $34.84
12
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
--------------------------------------------------------------
Restricted stock activity
for the nine months ended September 30, 2006 Restricted shares Weighted average fair value at grant date
-------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 25,730 $34.84
Granted 40,860 43.23
Vested (9,871) 35.12
Forfeited (984) 40.60
-------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 2006 55,735 $40.84
--------------------------------------------------------------
Restricted stock activity
for the nine months ended September 30, 2005 Restricted shares Weighted average fair 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 September 30, 2005 25,730 $34.84
EMPLOYEE STOCK PURCHASE PLAN
For the employee stock purchase plan, we record stock-based compensation expense
that represent the fair value of plan participants' options to purchase shares,
amortized 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
Forfeitures 677 (677) $37.07
-------------------------------------------------------------------- --------------- ------------------
Balance at September 30, 2006 499,886 94,892
For the nine months ended September 30, 2006, total recognized compensation cost
related to the employee stock purchase plan was $0.5 million and total
unrecognized compensation cost related to this plan was $0.5 million.
13
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
NOTE 3 - COMPREHENSIVE INCOME
------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
Other comprehensive income (as required by SFAS No. 130) ------------------------------------------
(in millions) 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------
Net income $ 5.2 $42.8 $96.3 $120.5
Other comprehensive income, net of income taxes:
Net unrealized holding gains/(losses) on securities 20.1 (7.8) 2.9 (12.5)
Reclassification adjustment for securities gains
included in net income (0.1) -- -- (0.5)
Net unrealized holding gains/(losses) arising during the
period on derivatives used for cash flow hedge 5.3 -- (0.5) --
Reclassification adjustment for derivative gains
included in net income -- -- -- (0.1)
Foreign currency translation adjustments 0.1 (0.1) 0.8 (0.4)
---------------------------------------
Total comprehensive income $30.6 $34.9 $99.5 $107.0
=======================================
NOTE 4 - EARNINGS PER SHARE
------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
Computation of basic and diluted net earnings per share ------------------------------------------
(in millions, except share amounts) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------
Numerator:
Net income $ 5.2 $42.8 $96.3 $120.5
Denominator for basic earnings per share -
weighted-average shares 68.6 67.8 68.4 67.6
----------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 1.3 0.9 1.3 0.8
----------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted 69.9 68.7 69.7 68.4
weighted-average shares and assumed conversions
----------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.08 $0.63 $1.41 $ 1.78
====================================================================================================
Diluted earnings per share $ 0.07 $0.62 $1.38 $ 1.76
====================================================================================================
Cash dividends per share $0.315 $0.30 $0.93 $0.885
The number of anti-dilutive stock options excluded was 0.2 and 0.6 million,
respectively, for the three- and nine-month periods ended September 30, 2006.
The number of anti-dilutive stock options excluded was 0.0 and 0.7 million,
respectively, for the three- and nine-month periods ended September 30, 2005.
NOTE 5 - SEGMENT REPORTING
For segment reporting purposes, 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
14
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
basis. Lending activities include commercial loans, commercial and residential
mortgages, and construction and consumer loans. Deposit products include demand
checking, certificates of deposit, negotiable order of withdrawal accounts, and
various savings and money market accounts.
The Wealth Advisory Services (WAS) segment includes financial planning, asset
management, investment counseling, trust services, estate settlement, private
banking, tax preparation, mutual fund services, broker-dealer services,
insurance services, business management services, and family office services. We
provide WAS services to clients throughout the United States and around the
world.
The Corporate Client Services (CCS) segment includes a variety of trust,
custody, and administrative services that support capital markets transactions,
entity management, and retirement plan assets. We provide CCS services to
clients around the world.
The Affiliate Money Managers segment represents the combined contributions from
CRM and RCM. These contributions are based on our partial ownership interest in
each firm. Services provided by these two affiliates include fixed income and
equity investing services and investment portfolio management services. Neither
CRM's nor RCM's results are consolidated in our financial statements. The $72.3
million impairment write-down recorded for the third quarter of 2006 is included
in the noninterest expense reported for this segment.
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
nine-month periods ended September 30, 2006 and 2005.
15
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
-----------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Three months ended September 30, 2006 (in millions) Banking Services Services Managers Totals
----------------------------------------------------------------------------------------------------------
Net interest income $ 85.7 $ 6.4 $ 4.4 $ (3.5) $ 93.0
Provision for loan losses (6.7) 0.1 -- -- (6.6)
----------------------------------------------------------------------------------------------------------
Net interest income after provision 79.0 6.5 4.4 (3.5) 86.4
Total advisory fees:
Wealth Advisory Services 0.5 44.0 2.6 -- 47.1
Corporate Client Services 0.3 -- 20.8 -- 21.1
Affiliate Money Managers -- -- -- 4.6 4.6
----------------------------------------------------------------------------------------------------------
Advisory fees 0.8 44.0 23.4 4.6 72.8
Amortization of other intangibles -- (0.8) (0.1) (0.2) (1.1)
----------------------------------------------------------------------------------------------------------
Advisory fees after amortization of
of other intangibles 0.8 43.2 23.3 4.4 71.7
Other noninterest income 12.2 0.4 0.2 -- 12.8
Securities gains 0.1 -- -- -- 0.1
----------------------------------------------------------------------------------------------------------
Net interest and noninterest income 92.1 50.1 27.9 0.9 171.0
Noninterest expense (39.9) (38.9) (19.8) (72.3) (170.9)
----------------------------------------------------------------------------------------------------------
Segment profit/(loss) before income taxes 52.2 11.2 8.1 (71.4) 0.1
Applicable income taxes and minority interest 18.4 3.7 2.9 (30.1) (5.1)
----------------------------------------------------------------------------------------------------------
Segment net income/(loss) $ 33.8 $ 7.5 $ 5.2 $(41.3) $ 5.2
==========================================================================================================
Depreciation and amortization $ 3.1 $ 2.4 $ 1.3 $ 0.2 $ 7.0
-----------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Three months ended September 30, 2005 (in millions) Banking Services Services Managers Totals
----------------------------------------------------------------------------------------------------------
Net interest income $ 77.4 $ 6.2 $ 2.6 $ (2.5) $ 83.7
Provision for loan losses (2.7) (0.2) -- -- (2.9)
----------------------------------------------------------------------------------------------------------
Net interest income after provision 74.7 6.0 2.6 (2.5) 80.8
Total advisory fees:
Wealth Advisory Services 0.4 40.8 2.3 -- 43.5
Corporate Client Services 0.2 -- 18.9 -- 19.1
Affiliate Money Managers -- -- -- 3.7 3.7
----------------------------------------------------------------------------------------------------------
Advisory fees 0.6 40.8 21.2 3.7 66.3
Amortization of other intangibles -- (0.7) (0.1) (0.2) (1.0)
----------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of other intangibles 0.6 40.1 21.1 3.5 65.3
Other noninterest income 13.5 0.6 0.3 -- 14.4
----------------------------------------------------------------------------------------------------------
Net interest and noninterest income 88.8 46.7 24.0 1.0 160.5
Noninterest expense (39.6) (35.5) (18.4) -- (93.5)
----------------------------------------------------------------------------------------------------------
Segment profit before income taxes 49.2 11.2 5.6 1.0 67.0
Applicable income taxes and minority interest 17.0 4.0 2.4 0.8 24.2
----------------------------------------------------------------------------------------------------------
Segment net income $ 32.2 $ 7.2 $ 3.2 $ 0.2 $ 42.8
==========================================================================================================
Depreciation and amortization $ 3.8 $ 2.1 $ 1.3 $ 0.2 $ 7.4
16
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
-------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Nine months ended September 30, 2006 (in millions) Banking Services Services Managers Totals
------------------------------------------------------------------------------------------------------------
Net interest income $ 250.5 $ 19.1 $ 10.7 $ (9.6) $ 270.7
Provision for loan losses (14.1) (0.7) -- -- (14.8)
------------------------------------------------------------------------------------------------------------
Net interest income after provision 236.4 18.4 10.7 (9.6) 255.9
Total advisory fees:
Wealth Advisory Services 1.4 131.9 7.2 -- 140.5
Corporate Client Services 0.8 -- 61.5 -- 62.3
Affiliate Money Managers -- -- -- 15.2 15.2
------------------------------------------------------------------------------------------------------------
Advisory fees 2.2 131.9 68.7 15.2 218.0
Amortization of other intangibles -- (2.1) (0.3) (0.7) (3.1)
------------------------------------------------------------------------------------------------------------
Advisory fees after amortization of other
intangibles 2.2 129.8 68.4 14.5 214.9
Other noninterest income 36.1 1.8 0.8 -- 38.7
------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 274.7 150.0 79.9 4.9 509.5
Noninterest expense (117.4) (117.9) (59.0) (72.5) (366.8)
------------------------------------------------------------------------------------------------------------
Segment profit/(loss) before income taxes 157.3 32.1 20.9 (67.6) 142.7
Applicable income taxes and minority interest 55.4 11.2 7.6 (27.8) 46.4
------------------------------------------------------------------------------------------------------------
Segment net income/(loss) $ 101.9 $ 20.9 $ 13.3 $(39.8) $ 96.3
============================================================================================================
Depreciation and amortization $ 9.0 $ 6.4 $ 3.8 $ 0.7 $ 19.9
Investment in equity method investees -- -- -- 199.0 199.0
Segment average assets $8,508.0 $1,377.0 $205.1 $264.3 $10,354.4
17
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
------------------------------------------------------
Wealth Corporate Affiliate
Regional Advisory Client Money
Nine months ended September 30, 2005 (in millions) Banking Services Services Managers Totals
-----------------------------------------------------------------------------------------------------------
Net interest income $ 223.3 $ 17.3 $ 7.8 $ (7.0) $ 241.4
Provision for loan losses (9.3) (0.5) -- -- (9.8)
-----------------------------------------------------------------------------------------------------------
Net interest income after provision 214.0 16.8 7.8 (7.0) 231.6
Total advisory fees:
Wealth Advisory Services 1.2 121.9 6.3 -- 129.4
Corporate Client Services 0.7 -- 55.0 -- 55.7
Affiliate Money Managers -- -- -- 12.6 12.6
-----------------------------------------------------------------------------------------------------------
Advisory fees 1.9 121.9 61.3 12.6 197.7
Amortization of other intangibles -- (2.2) (0.4) (0.5) (3.1)
-----------------------------------------------------------------------------------------------------------
Advisory fees after amortization of other
intangibles 1.9 119.7 60.9 12.1 194.6
Other noninterest income 35.9 1.4 0.8 -- 38.1
Securities gains 0.8 -- -- -- 0.8
-----------------------------------------------------------------------------------------------------------
Net interest and noninterest income 252.6 137.9 69.5 5.1 465.1
Noninterest expense (112.7) (107.9) (55.0) -- (275.6)
-----------------------------------------------------------------------------------------------------------
Segment profit before income taxes 139.9 30.0 14.5 5.1 189.5
Applicable income taxes and minority interest 49.7 10.8 5.6 2.9 69.0
-----------------------------------------------------------------------------------------------------------
Segment net income $ 90.2 $ 19.2 $ 8.9 $ 2.2 $ 120.5
===========================================================================================================
Depreciation and amortization $ 10.8 $ 6.5 $ 3.8 $ 0.5 $ 21.6
Investment in equity method investees -- -- -- 259.8 259.8
Segment average assets $7,920.0 $1,320.6 $ 189.6 $ 259.1 $9,689.3
Segment data for prior periods may differ from previously published figures due
to changes in reporting methodology and/or organizational structure.
NOTE 6 - DERIVATIVE AND HEDGING ACTIVITIES
We enter into interest rate swap and interest rate floor contracts to manage
interest rate risk, and to reduce the impact of fluctuations in interest rates
of identifiable asset categories, principally floating-rate commercial loans and
commercial mortgage loans. We also have used interest rate swaps in conjunction
with our issues of subordinated long-term debt.
We do not hold or issue derivative financial instruments for trading purposes.
Swaps are contracts to exchange, at specified intervals, the difference between
fixed- and floating-rate interest amounts computed on contractual notional
principal amounts. Floors are contracts that generate interest payments to us
that are based on the difference between the floating-rate index and a
predetermined strike rate of the specific floor when the index is below the
strike rate. When the index is equal to or above the strike rate, we do not
receive or make any payments. We amortize the premiums paid for interest rate
floors over the life of each floor.
We employ interest rate swaps so that clients may convert floating-rate loan
payments to fixed-rate loan payments without exposing us to interest rate risk.
In these arrangements, we retain the credit risk associated with the potential
18
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
failure of counter-parties. As of September 30, 2006, we had entered into a
total of $987.6 million notional amount of interest rate swaps as follows:
- $431.3 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,
$431.3 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, and record it in our income statement as interest expense on
long-term debt.
We employ interest rate floors to hedge the interest revenue of floating rate
loans against declines in market interest rates. At September 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
-----------------------------------------------------------------------
September 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) $320.9 $29.8 $291.1 $378.1 $29.8 $348.3
=======================================================================
Other intangibles
Amortizing:
Mortgage servicing rights $ 8.3 $ 6.3 $ 2.0 $ 8.0 $ 5.6 $ 2.4
Client lists 49.1 15.2 33.9 43.0 12.0 31.0
Acquisition costs 1.7 1.7 -- 1.7 1.7 --
Other intangibles 1.8 1.1 0.7 1.6 1.0 0.6
Nonamortizing
Other intangible assets 2.2 -- 2.2 2.2 -- 2.2
-----------------------------------------------------------------------------------------------------
Total other intangibles $ 63.1 $24.3 $ 38.8 $ 56.5 $20.3 $ 36.2
=====================================================================
------------------------------------------
For the three months For the nine months
ended ended
September 30, September 30,
------------------------------------------
(In millions) 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------
Amortization expense of other intangible assets $1.4 $1.3 $4.0 $4.0
19
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
Estimated annual amortization expense of other intangible assets (in millions)
------------------------------------------------------------------------------------------------
For the year ended December 31, 2007 $5.3
For the year ended December 31, 2008 5.0
For the year ended December 31, 2009 4.0
For the year ended December 31, 2010 3.4
For the year ended December 31, 2011 3.0
Changes in the carrying amount of goodwill by business segment for nine months
ended September 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 -- -- 1.3 12.4 13.7
Impairment write-down (72.3) (72.3)
Increase in carrying value due to foreign
currency translation adjustments -- -- 1.4 -- 1.4
------------------------------------------------------------------------------------------------
Balance as of September 30, 2006 $ 3.8 $ 86.7 $ 21.9 $178.7 $291.1
====================================================
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.
- $1.3 million recorded under Corporate Client Services in connection with
the acquisition of PwC Corporate Services (Cayman) Limited.
During the 2006 third quarter, we reassessed the valuation of our investment in
RCM, one of our affiliate money managers, after RCM terminated its micro-cap
fund and decided to exit its fixed income fund by the end of 2006. Because these
actions reduced current and future levels of assets under management and numbers
of client accounts at RCM, we determined that our investment in RCM was other
than temporarily impaired, and that the carrying value of the firm should be
reduced from $137.6 million to $65.3 million, as of September 30, 2006. We
recorded the difference of $72.3 million in our income statement as an
impairment write-down for the 2006 third quarter. The impairment write-down
reduced the amount of goodwill associated with RCM from $131.3 million to $59.0
million, as of September 30, 2006.
20
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
-----------------------------------------------------------------------
2006 2005
-----------------------------------------------------------------------
Weighted Weighted
Other intangible assets average average
acquired during the amortization amortization
nine months ended September 30 Amount Residual period Amount Residual period
(in millions) assigned value in years assigned value in years
---------------------------------------------------------------------------------------------------------
Mortgage servicing rights $0.3 -- 8 $ 0.8 -- 8
Client lists 5.9 -- 16 -- -- --
Client list increase/(decrease)
in carrying value
due to foreign currency
translation adjustments 0.2 -- -- (0.4) -- --
Other intangibles 0.2 -- 6 -- -- --
--------------- ----------------
$6.6 -- $ 0.4 --
=============== ================
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 nine-month periods ended September 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 -------------------------------------------------
September 30 (in millions) 2006 2005 2006 2005 2006 2005
--------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 2.1 $ 2.0 $0.2 $0.2 $ 0.3 $0.2
Interest cost 2.6 2.4 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 $15.0 $25.0 $0.1 $0.2 $ 1.0 $1.1
21
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
--------------------------------------------
Pension SERP Postretirement
benefits benefits benefits
For the nine months ended --------------------------------------------
September 30 (in millions) 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 6.2 $ 5.6 $0.6 $0.6 $ 0.9 $0.6
Interest cost 7.7 7.6 1.0 1.0 1.6 1.7
Expected return on plan assets (10.6) (9.3) -- -- -- --
Amortization of prior service cost 0.6 0.6 0.3 0.3 (0.3) --
Recognized actuarial (gain)/loss 1.5 1.2 0.2 0.3 0.6 0.5
--------------------------------------------------------------------------------------
Net periodic benefit cost $ 5.4 $ 5.7 $2.1 $2.2 $ 2.8 $2.8
===========================================
Employer contributions $15.0 $25.0 $0.4 $0.5 $ 3.2 $3.3
Expected annual contribution $15.0 $0.6 $ 4.2
NOTE 9 - TEMPORARILY IMPAIRED INVESTMENT SECURITIES
We periodically review the debt and equity securities in our investment
portfolio in order to determine if their market value is equal to, less than, or
in excess of their book value (the value at the time of initial investment).
When the market value of a security falls below its book value, the security is
considered temporarily impaired. When this happens, we report an unrealized loss
that represents the difference between the security's market value and its book
value.
For debt securities, the key determinants of market value are long-term market
interest rates and the yield curve. When long-term market interest rates rise,
the market values of debt securities typically decline, and unrealized losses
increase. Conversely, when long-term market interest rates fall, the market
values of debt securities typically increase. As their market values rise, the
unrealized loss diminishes or disappears.
When we classify a debt security as temporarily impaired, we do so because we
have both the intent and the ability to hold it until it matures, at which point
its market value equals its book value. We retain temporarily impaired debt
securities because we know when they will mature, 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 interest rates
could further reduce the market values of these securities, and create
additional unrealized losses.
The temporarily impaired equity securities in our investment portfolio are
dividend-paying preferred stocks with perpetual maturities. The key determinants
of preferred stock market values are market interest rates and credit spreads,
which can be affected by investor perceptions. As market interest rates decline
or as credit spreads tighten, the valuations of preferred stocks typically
increase and unrealized losses decline. Conversely, when interest rates rise or
when credit spreads widen, the valuations of preferred stocks typically decline
and unrealized losses increase.
We consider the impairments on preferred stock to be temporary because they
continue to pay dividends, they have investment-grade credit ratings, and their
valuation levels normalize over the course of market interest rate cycles.
The primary risks associated with temporarily impaired equity securities are
interest rate risk and credit erosion. An extended period of increases in
long-term interest rates, or a decline in a preferred stock's creditworthiness,
could further reduce the market values of these securities and create additional
unrealized losses.
22
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
The following table shows the estimated market value and gross unrealized loss
of debt and marketable equity securities that were temporarily impaired as of
September 30, 2006.
------------------------------------------------------------------------------
Less than 12 months 12 months or longer Total
------------------------------------------------------------------------------
Estimated
market Unrealized Estimated Unrealized Estimated Unrealized
(In millions) value losses market value losses market value losses
----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2006
U.S. Treasury $142.0 $(0.2) $ 86.8 $ (1.4) $ 228.8 $ (1.6)
Government agencies 88.4 (0.4) 338.3 (5.6) 426.7 (6.0)
Other securities:
Preferred stock 38.0 (0.7) 5.5 (0.4) 43.5 (1.1)
Mortgage-backed securities 3.0 0.0 697.6 (24.6) 700.6 (24.6)
Other debt securities 72.3 (0.7) 58.6 (1.1) 130.9 (1.8)
----------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities $343.7 $(2.0) $1,186.8 $(33.1) $1,530.5 $(35.1)
============================================================================
NOTE 10 - ACCOUNTING PRONOUNCEMENTS
Following are recent accounting pronouncements that affect our financial
condition and results of operations.
SFAS NO. 155. In February 2006, 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. A great deal of
uncertainty exists throughout the banking community regarding the impact that
SFAS No. 155 will have on certain types of securitizations. Requests have been
made to the FASB to clarify these issues. Due to this uncertainty, we are still
evaluating the effect that SFAS No. 155 will have on our financial statements,
but we do not expect it to have a material effect.
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. 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 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
23
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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. FIN 48 will be
effective for us with the fiscal year that begins on January 1, 2007. We have
not completed our initial assessment of the impact, if any, that FIN 48 may have
on our financial statements.
SFAS NO. 157. In September 2006, FASB issued SFAS No. 157, "Fair Value
Measurements." SFAS No. 157 defines fair value, provides a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures related to fair value measurements. The
definitions, framework, and disclosures required by SFAS No. 157 apply to other
accounting pronouncements that require or permit fair value measurement. This
Statement does not require any new fair value measurements and will be effective
for us with the fiscal year that begins on January 1, 2008. We have not
completed our initial assessment of the impact, if any, that SFAS No. 157 may
have on our financial statements or current practices regarding fair value
measurements.
SFAS NO. 158. In September 2006, FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132R." SFAS No. 158 requires
an employer to recognize in its statement of financial position an asset for a
plan's overfunded status or a liability for a plan's underfunded status; measure
a plan's assets and obligations that determine its funded status as of the end
of the employer's fiscal year (with limited exceptions); and recognize changes
in the funded status of a defined benefit postretirement plan in the year in
which the changes occur as other comprehensive income. The requirement to
recognize the funded status of our benefit plans will be effective for our
fiscal year ending December 31, 2006. The requirement to measure plan assets and
benefit obligations as of the date of our fiscal year-end statement of financial
position will be effective for our fiscal year ending December 31, 2008.
Adopting the requirement to recognize the funded status of our benefit plans
will result in an increase in the balance of pension liabilities (which we
record in other liabilities) at December 31, 2006, with a corresponding
adjustment to accumulated other comprehensive income. Our preliminary estimates
are that this will increase liabilities by approximately $60 million on a
pre-tax basis, and that it will decrease other comprehensive income by
approximately $39 million on an after-tax basis.
SAB 108. In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB 108 addresses SEC staff concerns regarding the methods
companies use to quantify misstatements on their financial statements. It
concludes that prior year misstatements should be considered in quantifying
misstatements in current year financial statements. SAB 108 will be effective
for us with the fiscal year that begins on January 1, 2007. We do not expect the
adoption of SAB 108 to have a material impact on our financial statements.
24
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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 the
Baltimore-Washington, D.C., area; 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 81 countries
with a variety of trust, custody, and administrative services, plus investment
management 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. We target clients with liquid assets of $10 million or more.
We offer 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.
Our investment services 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.
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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 September 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 affiliate money managers, 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. WTI also holds our interest in
Wilmington Trust Conduit Services, LLC (WTCS), which provides conduit
servicing for special purpose vehicles.
- 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, captive insurance
management 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
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, 2006
EXECUTIVE SUMMARY
Net income for the three months ended September 30, 2006 (the third quarter of
2006) was $5.2 million and earnings per share (on a diluted basis) were $.07 per
share. These were declines of 88% and 89%, respectively. For the first nine
months of 2006, net income was $96.3 million and earnings per share (diluted)
were $1.38. These were declines of 20% and 22%, respectively. Results for the
third quarter and first nine months of the year were affected by a $72.3 million
impairment write-down of the carrying value of our investment in affiliate money
manager Roxbury Capital Management (RCM).
This impairment write-down, which we recorded as a non-cash charge, reduced
operating net income for the quarter by $41.7 million and reduced earnings per
share (on a diluted basis) by $0.60 per share. In addition to reducing net
income and earnings per share, the impairment write-down increased noninterest
expense, reduced income tax expense, and reduced the returns on average assets
and equity.
Absent the impairment write-down, operating net income for the 2006 third
quarter would have been $46.9 million and earnings per share (diluted) would
have been $0.67 per share. These amounts would have been increases of 10% and
8%, respectively, from the year-ago third quarter.
Operating net income for the first nine months of 2006, absent the impairment
write-down, would have been $138.0 million and earnings per share (diluted)
would have been $1.98. These amounts would have been increases of 15% and 13%,
respectively, from the first nine months of 2005.
Throughout this report we discuss results that include the impairment write-down
as well as results that exclude its effects, and we provide a reconciliation
between the two at the end of the executive summary section of this report. We
believe our operating results - those that exclude the non-cash charge - are the
better measure of the trends we see in each of our businesses and how our
company is performing overall. We also believe our operating results give
investors a more relevant and comparative basis on which to evaluate our
quarterly and year-to-date performance.
EVENTS THAT TRIGGERED THE IMPAIRMENT WRITE-DOWN
RCM is a growth-style manager headquartered in Santa Monica, California. During
the 2006 third quarter, RCM terminated its micro-cap fund and decided to exit
its fixed income fund by the end of 2006. Because these actions reduced current
and future levels of assets under management and numbers of client accounts at
RCM, we decided to reassess the valuation of our investment in the firm.
Since we use the equity method of accounting to account for our investment in
RCM, we performed our assessment of the firm's valuation in accordance with APB
No. 18, "The Equity Method of Accounting for Investments in Common Stock." We
used a discounted cash flow methodology in our assessment.
27
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
As a result of that reassessment, we determined that our investment in RCM was
other than temporarily impaired, and that the carrying value of the firm should
be reduced from $137.6 million to $65.3 million, as of September 30, 2006. We
recorded the difference of $72.3 million in our income statement as an
impairment write-down for the 2006 third quarter.
Most of RCM's carrying value is recorded as goodwill. As a result of the
impairment write-down, the amount of goodwill associated with RCM decreased from
$131.3 million to $59.0 million, as of September 30, 2006.
The impairment write-down on RCM's carrying value and the non-cash charge did
not:
- Decrease our capital ratios;
- Cause us to violate any of our debt covenants;
- Interfere with our ability to pay dividends; or
- Cause us to change our ownership position in the firm.
As of September 30, 2006, our investment in RCM consisted of 41.23% of the
firm's common shares and a preferred profits interest equal to 30% of the firm's
revenues. There has been no change in our ownership position since the fourth
quarter of 2003, and none is currently planned. Ted T. Cecala, Wilmington
Trust's chairman and chief executive officer, and David R. Gibson, Wilmington
Trust's chief financial officer, remain members of RCM's board of managers.
RCM's results are not consolidated with ours, and RCM is not part of our Wealth
Advisory Services business. The amount of revenue we receive from RCM is based
on our ownership position. It is recorded in our income statement net of
expenses. For segment reporting purposes, we record our investment in RCM in the
Affiliate Money Managers segment, which also includes our investment in
value-style manager Cramer Rosenthal McGlynn. For more information about RCM's
contributions to our results, please refer to Note 5, "Segment reporting," and
the section on affiliate money managers in the noninterest income discussion in
this report.
Our 1998 investment in RCM gave us access to growth-style investment management
capabilities and helped us establish a physical presence in southern California
without having to open an office on a de-novo basis. Since then, the investment
in RCM has generated $58.8 million of revenue for Wilmington Trust. RCM
continues to be profitable and, although we have reduced its carrying value, RCM
continues to be an important investment for our company.
COMPARISON OF RESULTS WITH AND WITHOUT THE IMPAIRMENT WRITE-DOWN
Three months ended September 30, 2006 Nine months ended September 30, 2006
------------------------------------- ------------------------------------
With Without With Without
impairment impairment Impairment impairment impairment Impairment
------------------------------------ ------------------------------------
OPERATING RESULTS (in millions)
--------------------------------------------------------------------------------------------------------------
Net interest income $ 93.0 $93.0 $ -- $270.7 $270.7 $ --
Provision for loan losses (6.6) (6.6) -- (14.8) (14.8) --
Noninterest income 84.6 84.6 -- 253.6 253.6 --
Noninterest expense 170.9 98.6 72.3 366.8 294.5 72.3
--------------------------------------------------------------------------------------------------------------
Income before taxes
and minority interest 0.1 72.4 (72.3) 142.7 215.0 (72.3)
Applicable income taxes (5.0) 25.6 (30.6) 46.3 76.9 (30.6)
--------------------------------------------------------------------------------------------------------------
Net income before
minority interest 5.1 46.8 (41.7) 96.4 138.1 (41.7)
Minority interest (0.1) (0.1) -- 0.1 0.1 --
--------------------------------------------------------------------------------------------------------------
Net income $ 5.2 $46.9 $(41.7) $ 96.3 $138.0 $(41.7)
===========================================================================
28
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
PER SHARE DATA
-----------------------------------------------------------------------------------------------
Diluted shares outstanding 69.9 69.9 -- 69.7 69.7 --
(in millions)
Per-share earnings $ 0.07 $ 0.07 $(0.60) $ 1.38 $ 1.98 $(0.60)
STATISTICS AND RATIOS
(dollars in millions)
-----------------------------------------------------------------------------------------------
Total assets, on average $10,522.2 $10,523.0 $ (0.8) $10,354.4 $10,354.6 $ (0.2)
Stockholders' equity,
on average 1,081.7 1,082.2 (0.5) 1,056.3 1,056.4 (0.1)
Return on average assets 0.20% 1.77% (1.57)% 1.24% 1.78% (0.54)%
Return on equity 1.91% 17.23% (15.32)% 12.19% 17.47% (5.28)%
Net interest income
before provision and
noninterest income $ 177.6 $ 177.6 $ -- $ 524.3 $ 524.3 $ --
Tax-equivalent
interest income 1.1 1.1 -- 3.2 3.2 --
-----------------------------------------------------------------------------------------------
$ 178.7 $ 178.7 $ -- $ 527.5 $ 527.5 $ --
Noninterest expense $ (170.9) $ (98.6) $ (72.3) $ (366.8) $ (294.5) $ (72.3)
------------------------------------------------------------------
Efficiency ratio 95.64% 55.18% 40.46% 69.54% 55.83% 13.71%
OPERATING RESULTS WERE POSITIVE
Absent the impairment write-down, our 2006 third quarter results were positive
and each of our three businesses recorded good growth. Compared to the year-ago
third quarter:
- Total loan balances were $7.76 billion, on average, up 9%.
- On average, commercial loan balances rose 11% and consumer loan balances
rose 7%.
- Balance sheet assets surpassed $10.5 billion for the first time on an
average balance basis.
- Net interest income, before the provision for loan losses, was 11% more
than for third quarter last year.
- The net interest margin was 3.83%, up 3 basis points on a linked-quarter
basis, and 17 basis points year over year.
- Wealth Advisory revenue rose 8%; Corporate Client revenue increased 11%;
and revenue from affiliate money manager Cramer Rosenthal McGlynn was 35%
higher.
- Expense growth, excluding the impairment write-down, was less than 6%.
Including the impairment write-down, expenses rose 83%.
For the first nine months of 2006, compared to the first nine months of last
year:
- Total loan balances were $7.63 billion, on average, a 10% increase.
- On average, commercial loan balances were $5.14 billion, up 12%, and
consumer loan balances were $1.45 billion, up 11%.
- Net interest income, before the provision for loan losses, was $270.7
million, a 12% increase.
- The net interest margin was 3.80%, up 15 basis points.
29
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
- Wealth Advisory revenue was $140.5 million, up 9%.
- Corporate Client revenue was $62.3 million, up 12%.
- Revenue from the affiliate money managers totaled $15.2 million, a 21%
increase.
- Absent the impairment write-down, noninterest expenses were $294.5 million,
an increase of less than 7%. Including the impairment write-down,
noninterest expenses increased 33%.
We continued to invest in expansion, acquisitions, staff, and products that
strengthen our relationships with clients. Since the end of September 2005, we:
- Launched the Wilmington Family Office practice on the East Coast.
- Opened new offices in Pennsylvania, New Jersey, Connecticut, and Frankfurt,
Germany.
- Expanded existing offices in Delaware, Pennsylvania, Maryland, and New
York.
- Acquired the corporate services book of business from
PricewaterhouseCoopers in the Cayman Islands.
- Invested in technology and added staff to expand services that support
collateralized debt obligations.
Credit quality trends for the third quarter and first nine months of 2006
remained positive overall, and the percentage of loans with pass ratings in the
internal risk rating analysis continued to exceed 97%. One commercial loan
charge-off during the 2006 third quarter increased net charge-offs and the net
charge-off ratio, and led to an increase in the provision for loan losses. More
details on this are in the credit quality section of this report.
The impairment write-down, all of which was attributed to the Affiliate Managers
business segment, reduced our consolidated efficiency ratio for the third
quarter and first nine months of 2006. The table below shows that, for every
dollar of revenue recorded for the 2006 third quarter, we spent slightly more
than 55 cents, excluding the non-cash charge. It also shows that, compared to
the third quarter and first nine months of last year, our efficiency improved,
excluding the impairment write-down.
EFFICIENCY RATIOS 2006 Q3 2005 Q3 2006 YTD 2005 YTD
------------------------------ ------- ------- -------- --------
Regional Banking 40.02% 42.86% 40.25% 42.61%
Wealth Advisory Services 77.64% 75.53% 78.13% 77.85%
Corporate Client Services 70.71% 76.67% 73.75% 79.02%
Wilmington Trust consolidated 95.64% 56.87% 69.54% 57.68%
Wilmington Trust consolidated,
excluding impairment 55.18% 56.87% 55.83% 57.68%
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. More information about the efficiency ratios
and profitability of each business is included in their respective sections of
this report.
On an annualized basis, third quarter 2006 results produced a return on average
assets of 0.20% and a return on average equity of 1.91%. Excluding the
impairment write-down for RCM, the return on average assets would have been
1.77% and the return on average equity would have been 17.23%. The corresponding
returns for the third quarter of 2005 were 1.70% and 17.65%, respectively.
Stockholders' equity, on average, was 13% higher for the first nine months of
2006 than for the comparable year-ago period, and our capital position remained
strong. On October 19, 2006, our Board of Directors declared a regular quarterly
cash dividend of $0.315 per share. This quarterly dividend will be paid on
November 15, 2006, to shareholders of record on November 1, 2006. The amount of
the quarterly dividend is 5% higher than the cash dividend paid in November
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.
30
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
STATEMENT OF CONDITION
This section discusses the changes in our balance sheet between December 31,
2005, and September 30, 2006. We present amounts as of September 30, 2005, for
historical reference. All balances cited are period-end balances unless
otherwise noted. Year-to-date (YTD) references are as of September 30.
ASSETS
At September 30, 2006, balance sheet assets totaled $10.70 billion. This was
$464.4 million, or 5%, more than at December 31, 2005. On a percentage basis,
our mix of assets remained relatively unchanged. Loans comprised 73% of assets
at September 30, 2006, compared with 72% at December 31, 2005.
ASSET BALANCES (in millions) AT 9/30/06 AT 12/31/05 AT 9/30/05
---------------------------- ---------- ----------- ----------
Investment securities $ 1,982.3 $ 1,928.8 $ 1,927.0
Loans 7,780.2 7,397.7 7,292.8
Other assets 737.2 649.4 727.7
Reserve for loan losses (93.6) (91.4) (93.4)
Goodwill 291.1 348.3 344.3
--------- --------- ---------
Total assets $10,697.2 $10,232.8 $10,198.4
========= ========= =========
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 nine months of 2006 reflected
increased levels of short-term investments, derivative valuation adjustments,
and higher accruals for interest receivable and advisory fees receivable.
Goodwill declined because we reduced the carrying value of our investment in
RCM, as discussed in the executive summary section of this report.
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 $460.1 million increase in
earning assets during the first nine months of 2006.
COMPOSITION OF EARNING ASSETS AT 9/30/06 AT 12/31/05 AT 9/30/05
----------------------------- ---------- ----------- ----------
Total earning assets (in millions) $9,800.9 $9,340.8 $9,283.8
% represented by loans 79.4% 79.2% 78.6%
% represented by investment securities 20.2% 20.6% 20.8%
% represented by other 0.4% 0.2% 0.6%
INVESTMENT SECURITIES PORTFOLIO
The investment securities portfolio was $1,982.3 million at September 30, 2006.
This was $53.5 million higher 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.
31
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
COMPOSITION OF INVESTMENT SECURITIES PORTFOLIO AT 9/30/06 AT 12/31/05 AT 9/30/05
---------------------------------------------- ---------- ----------- ----------
Collateralized mortgage obligations 14% 18% 19%
Mortgage-backed securities 22% 26% 28%
Corporate issues 18% 19% 18%
U.S. government agencies 26% 21% 20%
U.S. Treasury 12% 8% 7%
Money market preferred stocks 5% 5% 5%
Municipal bonds 1% 1% 1%
Other 2% 2% 2%
As of September 30, 2006, approximately 80% of the portfolio was invested in
fixed rate instruments.
FIXED VS. FLOATING RATE INVESTMENTS AT 9/30/06 AT 12/31/05 AT 9/30/05
---------------------------------------------------- ---------- ----------- ----------
Percentage of portfolio in fixed rate investments 80% 79% 80%
Percentage of portfolio in floating rate investments 20% 21% 20%
Almost all of the mortgage-backed securities we held at September 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 9/30/06 AT 12/31/05 AT 9/30/05
-------------------------------------------------------------- ---------- ----------- ----------
Mortgage-backed instruments 4.20 4.30 4.15
Total portfolio 5.39 6.14 6.21
DURATION IN THE INVESTMENT SECURITIES PORTFOLIO (in years) AT 9/30/06 AT 12/31/05 AT 9/30/05
------------------------------------------------------------------------------------------------------
Mortgage-backed instruments 3.90 3.92 3.68
Total portfolio 2.39 2.63 2.74
During the 2006 third quarter, we purchased short-term U.S. Treasury and
government agencies, which contributed to the year-to-date declines in the
average life and duration of the total portfolio. The rising market interest
rate environment in the first half of the year was also a factor in the
declines.
LOANS
Loan balances rose for the 22nd consecutive quarter, reaching $7.78 billion at
September 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 85% of the growth in total loan balances during the first nine
months of 2006.
32
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
PERIOD-END LOAN BALANCES (in millions) AT 9/30/06 AT 12/31/05 AT 9/30/05
-------------------------------------- ---------- ----------- ----------
Commercial loans $5,243.5 $4,919.1 $4,804.2
Retail loans $2,536.7 $2,478.6 $2,488.6
-------- -------- --------
Total loans outstanding $7,780.2 $7,397.7 $7,292.8
======== ======== ========
In addition to discussing balances on a period-end basis, we present average
balances 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.
9 MONTHS ENDED 9 MONTHS ENDED
LOAN BALANCES, ON AVERAGE (dollars in millions) 9/30/06 FULL YEAR 2005 9/30/05
----------------------------------------------- -------------- -------------- --------------
Commercial loans $5,143.8 $4,673.5 $4,608.3
Retail loans $2,484.2 $2,373.6 $2,338.5
Total loans $7,628.0 $7,047.1 $6,946.8
Delaware market loans $5,703.8 $5,312.8 $5,242.8
Delaware market loans as a % of total loans 75% 75% 75%
Pennsylvania market loans $1,698.5 $1,525.7 $1,496.9
Pennsylvania market loans as a % of total loans 22% 22% 22%
Other market loans as a % of total loans 3% 3% 3%
The Delaware market continued to account for the majority of loans outstanding,
with balances rising 7%, on average, since the end of 2005. Balances from the
Pennsylvania market rose at a faster pace, up 11% since the end of 2005, on
average.
A primary factor in our ability to generate loan growth is the stable and well
diversified economy in the Delaware Valley region, where economic indicators
remained positive. According to the Federal Reserve Bank of Philadelphia,
economic activity over the past 12 months (as of August 2006, the most recent
data available) increased in Delaware and was stable in Pennsylvania and New
Jersey. Delaware's unemployment rate for September 2006 was 3.7%, below the U.S.
rate of 4.6%. 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 September 30,
2006. This was an increase of $324.4 million, or 7%, from December 31, 2005.
33
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
PERIOD-END COMMERCIAL LOANS (in millions) AT 9/30/06 AT 12/31/05 AT 9/30/05
----------------------------------------- ---------- ----------- ----------
Commercial and industrial (C&I) $2,378.1 $2,461.3 $2,465.9
Commercial real estate/construction (CRE) 1,610.9 1,233.9 1,098.9
Commercial mortgage 1,254.5 1,223.9 1,239.4
-------- -------- --------
Total commercial loans $5,243.5 $4,919.1 $4,804.2
======== ======== ========
Almost all of the loan growth during the first nine months of 2006 was in the
commercial real estate/construction (CRE) portfolio, which was $377.0 million,
or 31% larger at September 30, 2006, than at December 31, 2005. More than
two-thirds of this amount was for single family residential tract developments,
and more than half came from the Delaware market. The remainder of the growth
was for a variety of industrial, retail, office, and other commercial and
residential projects.
CONTRIBUTION TO CRE LOAN GROWTH BY MARKET AT 9/30/06 AT 12/31/05 AT 9/30/05
----------------------------------------- ---------- ----------- ----------
Delaware 58% 59% 52%
Pennsylvania 26% 24% 31%
Maryland 8% 9% 7%
New Jersey 6% 7% 8%
Other 2% 1% 2%
The increase in CRE loan balances continued to reflect population growth and
demand for housing, especially in Delaware. Published reports attest to this
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 University of Delaware's Center for Applied Demography,
Delaware's new residents include retirees attracted by the state's
relatively low property taxes and lack of a sales tax, as well as
working-age people from New Jersey and Pennsylvania who are willing to
trade longer commuting time for lower housing prices. A July 28, 2006,
ranking by USA Today using U.S. Census Bureau statistics listed Delaware as
having the eighth lowest property taxes per capita for 2004, the most
recent data available.
- Mayflower Transit's 2006 relocation report ranked Delaware as the second
most popular relocation destination in the United States.
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 pace of CRE loan growth slowed somewhat during the 2006 third quarter, which
we believe reflected a return to more normal conditions in the housing market.
In September 2006, several housing industry groups, including the National
Association of Realtors, Moody's Economy.com, and multiple listing service
Trend, predicted that any housing downturn in Delaware would be short-lived and
less severe than elsewhere in the United States. Trend reported that in
Delaware, as of August 2006, the median sales price of single-family homes for
the first eight months of 2006 was between 6% and 12% higher than for the first
eight months of 2005, depending on location.
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.
- 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.
34
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
Our CRE underwriting standards call for:
- A maximum term 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.
- A target loan size of $1 million to $10 million.
- Personal guarantees.
- An evaluation of the cash flow and financial position of CRE borrowers on a
client basis, not on a project basis.
- Maximum loan-to-value requirements of 65% on unimproved land; 75% on land
development; and 80% on residential construction and income property loans.
- Limiting construction activity on residential tract projects to pre-sold
inventory, plus a maximum of six unsold single family homes or 10 unsold
townhomes.
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.
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 2006 YTD
------------------- ---- ----- ---- ----- ---- --------
CRE NET CHARGE-OFFS $0.1 $(1.4) $0.0 $(0.8) $0.1 $0.3
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 $2,536.7 million at September 30, 2006, which was
slightly higher than at December 31, 2005. Residential mortgage and consumer
loan balances rose during the first nine months of 2006, but these increases
were offset by a decline in the balance of loans secured with liquid collateral,
which change according to WAS client demand. Consumer loans continued to account
for more than half of total retail loan balances.
PERIOD-END RETAIL LOANS (in millions) AT 9/30/06 AT 12/31/05 AT 9/30/05
------------------------------------- ---------- ----------- ----------
Residential mortgage $ 518.7 $ 455.5 $ 450.9
Consumer $1,489.7 $1,438.3 $1,414.8
Secured with liquid collateral $ 528.3 $ 584.8 $ 622.9
-------- -------- --------
Total retail loans $2,536.7 $2,478.6 $2,488.6
======== ======== ========
RESIDENTIAL MORTGAGE LOANS
Residential mortgage balances rose 14% during the first nine months of 2006,
mainly because origination volumes increased. Origination volumes (dollar
amounts) were 10% higher for the first nine months of 2006 than for the
corresponding period in 2005, and the number of originated loans was 6% lower.
As of September 30, 2006, residential mortgages comprised 7% of total loans
outstanding, compared with 6% at December 31, 2005.
35
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
RESIDENTIAL MORTGAGE ACTIVITY 9 MONTHS ENDED 9 MONTHS ENDED
(dollar amounts in millions) 9/30/06 FULL YEAR 2005 9/30/05
----------------------------- -------------- -------------- --------------
Residential mortgage originations (number of loans) 728 1,077 772
Residential mortgage originations (dollar amount) $173.0 $221.0 $156.8
Residential mortgage balances (at period-end) $518.7 $455.5 $450.9
Changes in 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.
During the first nine months of 2006, residential mortgage balances rose but
origination volumes declined in large part because:
- We retain mortgages that qualify as low income mortgages for Community
Reinvestment Act (CRA) purposes in the portfolio. CRA loans originated
during the 2006 third quarter were nearly twice as high as for the year-ago
third quarter.
- The average loan size increased. In the 2006 third quarter, the average
loan amount originated was 12% higher than for the year-ago third quarter.
- The pace of refinancings and paydowns slowed.
There are no interest-only mortgages, payment option adjustable rate mortgages,
negatively amortizing adjustable rate mortgages, or other types of
nontraditional mortgages in our residential mortgage portfolio.
CONSUMER LOANS
Consumer loan balances increased 4% during the first nine months of 2006. Most
of this growth occurred in indirect loans and the category of consumer loans
recorded as "other consumer" loans. The majority of consumer loans continued to
come from the Delaware market.
PERIOD-END CONSUMER LOANS (in millions) AT 9/30/06 AT 12/31/05 AT 9/30/05
--------------------------------------- ---------- ----------- ----------
Home equity (lines of credit) $ 321.3 $ 326.4 $ 331.0
Indirect 668.3 651.3 633.8
Credit card 75.5 74.5 72.4
Other consumer 424.6 386.1 377.6
Total consumer loans $1,489.7 $1,438.3 $1,414.8
Percentage booked in Delaware 79% 81% 81%
Percentage booked in Pennsylvania 7% 6% 6%
Percentage booked in Maryland 14% 13% 13%
"Other consumer" loans comprise a variety of personal and installment loans to
individuals, and include home equity loans. Most of the "other consumer" loans
are fixed rate loans. Higher volumes of home equity loans accounted for much of
the growth in "other consumer" balances, as the market interest rate environment
increased client demand for fixed rate loans.
36
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
These same interest rate dynamics decreased client demand for home equity lines
of credit, most of which are floating rate loans, and caused home equity line of
credit balances to decrease.
The increase in indirect loan balances reflected our expansion in the New Jersey
and Pennsylvania markets, as the percentage of indirect loans originated in
those two markets increased substantially during the 2006 third quarter. The
pace of growth in indirect lending slowed compared to the first nine months of
2005, mainly because of the low-rate financing promotions that auto
manufacturers have offered this year. Most of our indirect loans are auto loans
made through auto dealers, and are mainly for late-model used cars. These loans
typically have shorter terms and higher yields than new car loans.
RESERVE FOR LOAN LOSSES
During the first nine months of 2006, total loan balances increased $382.5
million, or 5%. This loan growth was our main reason for increasing the reserve
for loan losses to $93.6 million, which was $2.2 million, or 2%, more than at
December 31, 2005. The loan loss reserve ratio at September 30, 2006, was 1.20%,
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 $417.7 million, or 5%, during the first nine months
of 2006. The mix of liabilities remained relatively unchanged. Deposits
accounted for 82% of total liabilities as of September 30, 2006, the same
percentage as at September 30, 2005.
Stockholders' equity rose $46.6 million, or 5%, during the first nine months of
2006. The portion of year-to-date earnings that we added to capital, plus the
proceeds of stock option exercises, were the main factors in this 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 9/30/06 AT 12/31/05 AT 9/30/05
------------------------------------ ---------- ----------- ----------
Total deposits $ 7,884.2 $ 7,289.2 $ 7,548.9
Short-term borrowings 1,168.7 1,373.7 1,117.3
Other liabilities 579.7 552.0 559.3
Total liabilities $ 9,632.6 $ 9,214.9 $ 9,225.5
Minority interest 0.3 0.2 0.2
Stockholders' equity 1,064.3 1,017.7 972.7
--------- --------- ---------
Total liabilities and stockholders'
equity $10,697.2 $10,232.8 $10,198.4
========= ========= =========
DEPOSITS
We record 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.
37
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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. We adjust the mix
of national CDs and short-term borrowings depending on which instruments offer
more favorable rates. As a result, in periods when national CD balances decline,
it is likely that short-term borrowing will increase, and vice versa.
Although rates on wholesale funds may be somewhat higher than core deposit
rates, we use wholesale funds because:
- We believe wholesale funds are a cost-effective and efficient way to
support loan growth. To acquire significantly higher levels of core
deposits, we would need to undertake a large-scale expansion of our branch
office network beyond Delaware, which would require us to invest capital
and increase our annual operating costs.
- Using wholesale funding 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, which we discuss in this report at the end of the
section on deposits. For more details on our funding, 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.
As the table below shows, total deposit balances rose $595.0 million, or 8%,
during the first nine months of 2006. Almost all of this growth was in national
CD balances, with core deposits contributing $80.9 million of the increase. The
year-to-date growth in core deposits and wholesale funding, combined, was 5%,
which matched the year-to-date growth in loan balances.
LOAN AND DEPOSIT GROWTH COMPARISON (in millions) AT 9/30/06 AT 12/31/05 CHANGE
------------------------------------------------ ---------- ----------- ------
Total loans $7,780.2 $7,397.7 5%
Total deposits $7,884.2 $7,289.2 8%
Core deposits $5,141.5 $5,060.6 2%
National CDs $100,000 and over $2,742.7 $2,228.6 23%
Short-term borrowings 1,168.7 1,373.7 (15)%
Total wholesale funding $3,911.4 $3,602.3 9%
Total core deposits and wholesale funding $9,052.9 $8,662.9 5%
CORE DEPOSITS
At September 30, 2006, core deposit balances were $80.9 million higher than at
December 31, 2005. CD and interest-bearing demand deposit balances rose, but
these increases were offset by decreases in noninterest-bearing demand and
savings deposits. The majority of core deposits continued to come from consumer
and commercial banking clients in Delaware.
38
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
PERIOD-END CORE DEPOSITS (in millions) AT 9/30/06 AT 12/31/05 AT 9/30/05
-------------------------------------- ---------- ----------- ----------
Noninterest-bearing demand $ 861.3 $1,014.8 $1,060.8
Savings 292.5 326.3 332.7
Interest-bearing demand 2,417.5 2,360.0 2,317.5
CDs under $100,000 995.5 923.0 840.6
Local CDs $100,000 and more 574.7 436.5 411.0
-------- -------- --------
Total core deposits $5,141.5 $5,060.6 $4,962.6
======== ======== ========
The decreases in savings and noninterest-bearing demand deposits appeared to
reflect the rising market interest rate environment during the first half of the
year, with clients opting to deposit funds in higher-yielding instruments. In
addition, the decrease 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 sweeps accounted for
approximately $188 million of the year-to-date decrease in noninterest-bearing
demand balances.
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 9/30/06 AT 12/31/05 AT 9/30/05
-------------------------------------------- ---------- ----------- ----------
Consumer clients in Delaware 73% 65% 66%
Commercial banking clients in Delaware 10% 12% 11%
Commercial banking clients in Pennsylvania 10% 9% 6%
Wealth Advisory clients 7% 14% 16%
Corporate Client Services clients --% --% 1%
In addition to discussing core deposit balances on a period-end basis, we
present average balances as a point of comparison. Period-end core deposit
balances frequently differ from average core deposit balances, mainly due to
Corporate Client Services (CCS) activity. CCS clients frequently deposit funds
for very short amounts of time near the ends of financial reporting periods.
Since these deposits are not from Regional Banking clients, we believe that
average core deposit 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 nine
months of 2006. While noninterest-bearing demand and savings balances declined,
interest-bearing demand deposits increased 3%; CDs under $100,000 rose 18%, and
local CD balances were 29% higher.
9 MONTHS ENDED FULL YEAR 9 MONTHS ENDED
CORE DEPOSITS (on average, in millions) 9/30/06 2005 9/30/05
--------------------------------------- -------------- --------- --------------
Noninterest-bearing demand $ 747.5 $ 992.0 $ 983.4
Savings 317.0 344.9 351.3
Interest-bearing demand 2,361.8 2,303.8 2,298.0
CDs under $100,000 969.4 824.4 398.5
Local CDs $100,000 and more 516.9 401.5 386.2
Total core deposits $4,912.6 $4,866.6 $4,817.4
% from Delaware clients 94% 94% 94%
% from Pennsylvania clients 5% 5% 5%
% from other markets 1% 1% 1%
39
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
REGIONAL BANKING PROFITABILITY
The efficiency ratio of the Regional Banking business, compared with the
efficiency ratio of the company overall, reflected the efficiency of our funding
model and use of wholesale funds to support loan growth. The Regional Banking
efficiency ratio improved from prior periods, mainly because income growth far
exceeded expense growth.
EFFICIENCY RATIOS 2006 Q3 2005 Q3 2006 YTD 2005 YTD
----------------- ------- ------- -------- --------
Regional Banking 40.02% 42.86% 40.25% 42.61%
Wilmington Trust consolidated 95.64% 56.87% 69.54% 57.68%
Wilmington Trust consolidated,
excluding impairment 55.18% 56.87% 55.83% 57.68%
For more information about the profitability of the Regional Banking business,
please refer to Note 5, "Segment reporting," in this report.
INCOME STATEMENT
This section compares our income and expenses for the third quarter and first
nine months of 2006 with the corresponding periods in 2005. Year-to-date (YTD)
references are as of September 30.
Net income for the third quarter of 2006 was $5.2 million and earnings per share
(on a diluted basis) were $0.07. For the first nine months of 2006, net income
was $96.3 million and earnings per share (diluted) were $1.38. These amounts
were lower than for the corresponding year-ago periods because we recorded a
non-cash impairment write-down of $72.3 million during the 2006 third quarter,
which reflected the reduced carrying value of our investment in affiliate money
manager RCM. We discuss this write-down in detail in the executive summary
section of this report.
NET INCOME 2006 Q3 2005 Q3 2006 YTD 2005 YTD
---------- ------- ------- -------- --------
Net income (in millions) $ 5.2 $ 42.8 $ 96.3 $ 120.5
Earnings per share (diluted) $ 0.07 $ 0.62 $ 1.38 $ 1.76
Average shares outstanding (diluted,
in thousands) 69,933 68,699 69,716 68,440
Absent the impairment write-down, net income for the 2006 third quarter would
have been $46.9 million and earnings per share (diluted) would have been $0.67
per share. These amounts would have been increases of 10% and 8%, respectively,
from the year-ago third quarter.
Net income for the first nine months of 2006, excluding the impairment
write-down, would have been $138.0 million and earnings per share (diluted)
would have been $1.98. These amounts would have been increases of 15% and 13%,
respectively, from the first nine months of 2005.
The main factors in the third quarter and year-to-date growth in net income
(excluding the impairment write-down) were:
- Higher amounts of net interest income due to loan growth, relatively modest
deposit pricing pressure, and the combination of our asset sensitivity and
the rising market interest rate environment;
- Increases in advisory business revenue;
- Carefully managed expense growth and credit quality; 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.
40
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
SOURCES OF INCOME
We generate two types of revenue: Net interest income and 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 nine months of 2006, our sources of income remained diversified
and balanced between net interest and noninterest income. The advisory
businesses generated the majority of our noninterest income.
NET INTEREST AND NONINTEREST INCOME (1) 2006 Q3 2005 Q3 2006 YTD 2005 YTD
--------------------------------------- ------- ------- -------- --------
Total net interest and noninterest income (in millions) $171.0 $160.5 $509.5 $465.1
Portion from net interest income 51% 50% 50% 50%
Portion from advisory business income 42% 41% 42% 42%
Portion from total noninterest income 49% 50% 50% 50%
(1) After amortization and the provision for loan losses.
NET INTEREST INCOME
Net interest income 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.
Net interest income for the 2006 third quarter, after the provision for loan
losses, was $86.4 million. This was 7% higher than for the year-ago third
quarter. For the first nine months of 2006, net interest income was $255.9
million, 10% higher than for the corresponding period in 2005.
NET INTEREST INCOME (in millions) 2006 Q3 2005 Q3 2006 YTD 2005 YTD
--------------------------------- ------- ------- -------- --------
Interest income $175.0 $134.9 $492.9 $370.4
Interest expense 82.0 51.2 222.2 129.0
Net interest income $ 93.0 $ 83.7 $270.7 $241.4
Provision for loan losses (6.6) (2.9) (14.8) (9.8)
Net interest income (after provision) $ 86.4 $ 80.8 $255.9 $231.6
The primary reasons for the third quarter and year-to-date increases in net
interest income were:
- Loan growth. Loan balances were 7% higher at September 30, 2006, than at
September 30, 2005.
- Our asset-sensitive interest rate position, in which assets continued to
reprice at a faster pace than liabilities.
- Credit quality. The growth in net interest income far exceeded the
increases in the provision for loan losses. For more information about the
provision for loan losses, please refer to the asset quality section of
this report.
CREDIT QUALITY EFFECT ON NET INTEREST INCOME Q3 2006 VS. 2005 YTD 2006 VS. 2005
-------------------------------------------- ---------------- -----------------
Increase in net interest income before the provision (in millions) $9.3 $29.3
Increase in the provision (in millions) $3.7 $ 5.0
The Regional Banking business generated 92% of our net interest income for the
2006 third quarter, and 93% of our year-to-date net interest income, the same
percentages as for the corresponding year-ago periods. We attribute portions of
net interest income to the Wealth Advisory Services and Corporate Client
Services businesses, because these businesses have clients who use our banking
services. For more information about how we allocate net interest income among
our businesses, please refer to Note 5, "Segment reporting," in this report.
41
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
NET INTEREST MARGIN
As market interest rates increased, we remained asset sensitive, and assets
continued to reprice faster than liabilities. This helped generate a net
interest margin of 3.83% for the 2006 third quarter, which was 17 basis points
higher than for the year-ago third quarter. The year-to-date net interest margin
was 3.80%, 15 basis points higher than for the first nine months of 2005.
NET INTEREST MARGIN 2006 Q3 2006 Q2 2006 Q1 2005 Q4 2005 Q3
------------------- ------- ------- ------- ------- -------
Net interest margin 3.83% 3.80% 3.77% 3.74% 3.66%
The 2006 third quarter was the first quarter to reflect the full effects of the
short-term rate increase the Federal Open Market Committee (FOMC) made on June
29, 2006, which was the FOMC's sixth short-term rate increase since the end of
the 2005 third quarter. At September 30, 2006, short-term rates were:
- 100 basis points higher than at December 31, 2005.
- 150 basis points higher than at September 30, 2005.
For the third quarter and first nine months of 2006, asset yields continued to
rise at a faster pace than deposit costs. Deposit pricing pressure was
relatively modest, except on CDs. For example:
- Between June 30, 2006, and September 30, 2006, loan yields increased 30
basis points, compared with an increase of 18 basis points in core
interest-bearing deposit rates.
- Between December 31, 2005, and September 30, 2006, loan yields rose 105
basis points, while core-interest-bearing deposit rates rose 52 basis
points.
- Comparing the third quarter of 2006 with the third quarter of 2005, loan
yields rose 143 basis points, while core interest-bearing deposit rates
increased 71 basis points.
BASIS POINT (BPS) CHANGES IN YIELDS/RATES 9/30/06 VS. 6/30/06 9/30/06 VS. 12/31/05 9/30/06 VS. 9/30/05
----------------------------------------- ------------------- -------------------- -------------------
Investment securities 11 bps 34 bps 51 bps
Commercial loans 34 bps 119 bps 165 bps
Total loans 30 bps 105 bps 143 bps
Total earning assets 25 bps 93 bps 128 bps
Core interest-bearing deposits 18 bps 52 bps 71 bps
National CDs 32 bps 129 bps 179 bps
Total interest-bearing deposits 28 bps 88 bps 117 bps
Funds to support earning assets 22 bps 84 bps 111 bps
One of the reasons for our asset sensitivity is the fact that, while more than
90% of our floating rate loans reprice within 30 days of an FOMC rate change,
deposit repricing does not occur as quickly. When market interest rates
stabilize after a series of increases, most asset repricing slows or stabilizes,
but deposit repricing continues and may outpace asset repricing. When this
happens, the net interest margin may decrease.
As of the date of this report (November 9, 2006), the FOMC had not changed
short-term interest rates since the June 29, 2006, move. As a result, we expect
our deposit rates to increase further, and we expect our net interest margin to
decline modestly from its year-to-date level of 3.80%.
For more information on how we match the repricing of our assets and
liabilities, please refer to the discussions on funding and interest rate risk
management in this report.
42
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
To compute the quarterly net interest margin, we subtract the weighted average
rate on our cost of funds from the weighted average rate on earning assets.
To calculate the weighted average rate on earning assets, we use weighted
average rates on federal funds sold and securities purchased under agreements to
resell, the investment securities portfolio, and the loan portfolio, each of
which is based on an underlying day-weighting of 360 or 365 days, depending on
the asset's pricing characteristics.
To calculate the weighted average rate on the cost of funds, we use weighted
average rates on interest-bearing deposits, short-term borrowings, and long-term
debt, each of which is based on an underlying day-weighting of 360 or 365 days,
depending on the liability's pricing characteristics.
DOLLAR AMOUNTS IN MILLIONS 2006 Q3 2005 Q3 2006 YTD 2005 YTD
--------------------------- -------- -------- -------- --------
FTE (1) net interest income $ 94.1 $ 84.7 $ 273.9 $ 244.4
Earning assets (on average) $9,645.1 $9,111.3 $9,501.0 $8,844.6
Weighted average rate on
earning assets 7.15% 5.87% 6.88% 5.58%
Weighted average rate on
cost of funds 3.32% 2.21% 3.08% 1.93%
Net interest margin 3.83% 3.66% 3.80% 3.65%
(1) Fully tax-equivalent
For more details about the weighted average rates, please refer to the analysis
of earnings on the pages that follow.
ANALYSIS OF EARNINGS
On the following pages, we present the consolidated comparative rate/volume and
net interest income data for the third quarters and first nine months of 2006
and 2005.
43
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
QUARTERLY ANALYSIS OF EARNINGS
------------------------------------------------------------
2006 Third Quarter 2005 Third 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 $ 28.8 $ 0.3 4.55% $ 52.9 $ 0.5 3.45%
U.S. Treasury 157.0 1.6 4.06 134.4 1.1 3.17
Government agencies 475.9 5.1 4.23 390.7 3.8 3.87
State and municipal 9.6 0.1 8.75 11.3 0.2 8.76
Preferred stock 89.4 1.7 7.63 92.5 1.7 7.58
Mortgage-backed securities 735.1 7.8 4.05 931.9 9.5 4.02
Other 390.0 6.3 6.42 369.2 4.5 4.84
------------------------------------------------------ ------------------
Total investment securities 1,857.0 22.6 4.78 1,930.0 20.8 4.27
------------------------------------------------------------
Commercial, financial, and
agricultural 2,407.7 48.9 7.96 2,449.3 39.5 6.32
Real estate - construction 1,588.7 34.9 8.60 1,022.8 18.1 6.94
Mortgage - commercial 1,238.5 25.3 7.98 1,232.8 20.6 6.55
------------------------------------------------------ ------------------
Total commercial loans 5,234.9 109.1 8.16 4,704.9 78.2 6.51
------------------------------------------------------------
Mortgage - residential 507.8 7.4 5.81 443.8 6.6 5.99
Consumer loans 1,470.5 27.2 7.31 1,369.7 22.2 6.43
Secured with liquid collateral 546.1 9.5 6.78 610.0 7.6 4.89
------------------------------------------------------ ------------------
Total retail loans 2,524.4 44.1 6.89 2,423.5 36.4 5.96
------------------------------------------------------------
Total loans net of
unearned income 7,759.3 153.2 7.75 7,128.4 114.6 6.32
Total earning assets $9,645.1 $176.1 7.15% $9,111.3 $135.9 5.87%
============================================================
44
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
------------------------------------------------------------
2006 Third Quarter 2005 Third 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 $ 304.1 $ 0.3 0.42% $ 345.1 $ 0.2 0.28%
Interest-bearing demand 2,374.1 6.6 1.10 2,257.2 5.1 0.90
Certificates under $100,000 988.1 9.7 3.87 825.0 5.5 2.64
Local CDs $100,000 and over 546.5 6.5 4.65 409.3 3.2 3.04
----------------------------------------------------- ------------------
Total core interest-
bearing deposits 4,212.8 23.1 2.16 3,836.6 14.0 1.45
National CDs $100,000
and over 2,864.6 38.7 5.30 2,500.6 22.5 3.51
----------------------------------------------------- ------------------
Total interest-bearing
deposits 7,077.4 61.8 3.43 6,337.2 36.5 2.26
-----------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,048.8 13.4 4.98 1,056.7 9.1 3.37
U.S. Treasury demand 6.8 0.1 5.09 12.1 0.1 3.41
----------------------------------------------------- ------------------
Total short-term borrowings 1,055.6 13.5 4.98 1,068.8 9.2 3.37
-----------------------------------------------------------
Long-term debt 394.2 6.7 6.85 408.7 5.5 5.39
----------------------------------------------------- ------------------
Total interest-bearing
liabilities 8,527.2 82.0 3.78 7,814.7 51.2 2.58
-----------------------------------------------------------
Other noninterest funds 1,117.9 -- -- 1,296.6 -- --
----------------------------------------------------- ------------------
Total funds used to
support earning assets $9,645.1 $82.0 3.32% $9,111.3 $51.2 2.21%
===========================================================
Net interest income/yield 94.1 3.83% 84.7 3.66%
Tax-equivalent adjustment (1.1) (1.0)
----- ------
Net interest income $93.0 $83.7
===== ======
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."
45
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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 $ 21.8 $ 0.7 4.54% $ 31.5 $ 0.7 3.05%
U.S. Treasury 149.5 4.2 3.67 121.3 2.7 2.97
Government agencies 423.9 13.1 4.04 349.4 10.1 3.83
State and municipal 10.2 0.7 8.77 11.7 0.7 8.74
Preferred stock 90.0 5.3 7.61 95.4 5.3 7.48
Mortgage-backed securities 780.9 25.3 4.13 940.6 29.1 4.06
Other 396.7 17.8 6.02 347.9 11.8 4.52
------------------------------------------------------ ------------------
Total investment securities 1,851.2 66.4 4.66 1,866.3 59.7 4.23
------------------------------------------------------------
Commercial, financial, and
agricultural 2,439.7 140.4 7.61 2,460.8 109.7 5.88
Real estate-construction 1,477.0 92.7 8.26 921.9 45.5 6.47
Mortgage-commercial 1,227.1 71.5 7.68 1,225.6 57.1 6.17
------------------------------------------------------ ------------------
Total commercial loans 5,143.8 304.6 7.81 4,608.3 212.3 6.07
------------------------------------------------------------
Mortgage-residential 485.2 21.1 5.81 434.5 19.3 5.92
Consumer loans 1,445.5 76.7 7.08 1,301.2 61.3 6.28
Secured with liquid collateral 553.5 26.6 6.34 602.8 20.1 4.40
------------------------------------------------------ ------------------
Total retail loans 2,484.2 124.4 6.67 2,338.5 100.7 5.73
------------------------------------------------------------
Total loans net of
unearned income 7,628.0 429.0 7.44 6,946.8 313.0 5.96
Total earning assets $9,501.0 $496.1 6.88% $8,844.6 $373.4 5.58%
============================================================
46
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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 $ 317.0 $ 0.9 0.38% $ 351.3 $ 0.7 0.26%
Interest-bearing demand 2,361.8 18.6 1.05 2,298.0 14.3 0.83
Certificates under $100,000 969.4 25.8 3.56 798.5 14.4 2.41
Local CDs $100,000 and over 516.9 16.9 4.30 386.2 8.1 2.75
---------------------------------------------------- ------------------
Total core interest-
bearing deposits 4,165.1 62.2 1.99 3,834.0 37.5 1.30
National CDs $100,000
and over 2,723.6 101.8 4.93 2,249.7 51.9 3.05
---------------------------------------------------- ------------------
Total interest-bearing
deposits 6,888.7 164.0 3.15 6,083.7 89.4 1.95
----------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,092.1 38.2 4.61 1,095.7 24.4 2.94
U.S. Treasury demand 11.5 0.4 4.63 12.8 0.3 2.75
---------------------------------------------------- ------------------
Total short-term
borrowings 1,103.6 38.6 4.61 1,108.5 24.7 2.93
Long-term debt 395.5 19.6 6.60 407.3 14.9 4.87
---------------------------------------------------- ------------------
Total interest-bearing
liabilities 8,387.8 222.2 3.51 7,599.5 129.0 2.25
----------------------------------------------------------
Other noninterest funds 1,113.2 -- -- 1,245.1 -- --
---------------------------------------------------- ------------------
Total funds used to
support earning assets $9,501.0 $222.2 3.08% $8,844.6 $129.0 1.93%
==========================================================
Net interest income/yield 273.9 3.80% 244.4 3.65%
Tax-equivalent adjustment (3.2) (3.0)
Net interest income $270.7 $241.4
====== ======
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."
47
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
----------------------------- ------------------------------
For the three months ended For the nine months ended
Sept. 30, 2006/2005 Sept. 30, 2006/2005
----------------------------- ------------------------------
Increase/(decrease) Increase/(decrease)
due to change in 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 $(0.2) $ -- $(0.2) $(0.2) $ 0.2 $ --
U.S. Treasury 0.2 0.3 0.5 0.7 0.8 1.5
Government agencies 0.9 0.4 1.3 2.3 0.7 3.0
State and municipal * -- (0.1) (0.1) (0.1) 0.1 --
Preferred stock * -- -- -- (0.2) 0.2 --
Mortgage-backed securities (1.8) 0.1 (1.7) (4.3) 0.5 (3.8)
Other * 0.3 1.5 1.8 1.6 4.4 6.0
-----------------------------------------------------------------------------------------------------------
Total investment securities (0.4) 2.2 1.8 0.0 6.7 6.7
------------------------------------------------------------
Commercial, financial, and
agricultural * (0.7) 10.1 9.4 (1.0) 31.7 30.7
Real estate - construction 9.9 6.9 16.8 26.9 20.3 47.2
Mortgage - commercial * 0.1 4.6 4.7 0.1 14.3 14.4
-----------------------------------------------------------------------------------------------------------
Total commercial loans 9.3 21.6 30.9 26.0 66.3 92.3
------------------------------------------------------------
Mortgage - residential 1.0 (0.2) 0.8 2.2 (0.4) 1.8
Installment loans to individuals 1.6 3.4 5.0 6.8 8.6 15.4
Secured with liquid collateral (0.8) 2.7 1.9 (1.6) 8.1 6.5
-----------------------------------------------------------------------------------------------------------
Total retail loans 1.8 5.9 7.7 7.4 16.3 23.7
------------------------------------------------------------
Total loans net of unearned income 11.1 27.5 38.6 33.4 82.6 116.0
-----------------------------------------------------------------------------------------------------------
Total interest income $10.5 $29.7 $40.2 $33.2 $89.5 $122.7
------------------------------------------------------------
Interest expense:
Savings $ -- $ 0.1 $ 0.1 $(0.1) $ 0.3 $ 0.2
Interest-bearing demand 0.3 1.2 1.5 0.4 3.9 4.3
Certificates under $100,000 1.1 3.1 4.2 3.1 8.3 11.4
Local CDs $100,000 and over 1.1 2.2 3.3 2.6 6.2 8.8
-----------------------------------------------------------------------------------------------------------
Total core interest-bearing deposits 2.5 6.6 9.1 6.0 18.7 24.7
National CDs $100,000 and over 3.3 12.9 16.2 11.1 38.8 49.9
-----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5.8 19.5 25.3 17.1 57.5 74.6
------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase (0.1) 4.4 4.3 (0.1) 13.9 13.8
U.S. Treasury demand -- -- -- -- 0.1 0.1
-----------------------------------------------------------------------------------------------------------
Total short-term borrowings (0.1) 4.4 4.3 (0.1) 14.0 13.9
Long-term debt (0.2) 1.4 1.2 (0.4) 5.1 4.7
------------------------------------------------------ ----------------------------------------------------
Total interest expense $ 5.5 $25.3 $30.8 $16.6 $76.6 $ 93.2
Changes in net interest income $ 5.0 $ 4.4 $ 9.4 $16.6 $12.9 $ 29.5
============================================================
* 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.
48
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
NONINTEREST INCOME
Noninterest income consists primarily of income from the advisory businesses,
which comprise Wealth Advisory Services, Corporate Client Services, and the two
affiliate money managers, Cramer Rosenthal McGlynn and Roxbury Capital
Management. Noninterest income also includes service charges on deposit
accounts, loan fees and late charges, card fees, securities gains (or losses),
and other noninterest income.
Noninterest income for the 2006 third quarter was $84.6 million. This was 6%
more than for the year-ago third quarter. For the first nine months of 2006,
noninterest income was $253.6 million. This was 9% higher than for the first
nine months of 2005. Revenue from the Wealth Advisory Services, Corporate Client
Services, and Cramer Rosenthal McGlynn businesses accounted for most of the
increases in noninterest income.
NONINTEREST INCOME (in millions) 2006 Q3 2005 Q3 2006 YTD 2005 YTD
-------------------------------- ------- ------- -------- --------
Advisory business revenue (1) $71.7 $65.3 $214.9 $194.6
Service charges on deposit accounts 7.3 7.4 21.1 20.9
Other noninterest income 5.5 7.0 17.6 17.2
Securities gains 0.1 -- -- 0.8
----- ----- ------ ------
Total noninterest income $84.6 $79.7 $253.6 $233.5
===== ===== ====== ======
(1) Includes revenue from Wealth Advisory Services, Corporate Client Services,
Cramer Rosenthal McGlynn, and Roxbury Capital Management, after
amortization.
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 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.
Total WAS revenue was 8% higher for the third quarter of 2006, and 9% higher for
the first nine 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, financial planning services, and family office services. Weakness in
the financial markets during almost all of the third quarter and first nine
months of 2006 masked the WAS growth overall.
49
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
WEALTH ADVISORY SERVICES REVENUE (in millions) 2006 Q3 2005 Q3 2006 YTD 2005 YTD
---------------------------------------------- ------- ------- -------- --------
Trust and investment advisory fees $33.0 $32.7 $100.4 $92.9
Planning and other services fees 8.8 6.4 25.1 23.3
Mutual fund fees 5.3 4.4 15.0 13.2
----- ----- ------ ------
Total Wealth Advisory Services revenue $47.1 $43.5 $140.5 $129.4
===== ===== ====== ======
For the 2006 third quarter, planning and other services fees were the primary
contributor to WAS revenue growth. Most of this growth came from activity at
Grant Tani Barash & Altman (GTBA), our West Coast provider of business
management and family office services. Revenue from planning services also was a
factor in the year-to-date increase in total WAS revenue.
Third quarter 2006 revenue from trust and investment advisory services was only
slightly higher than for the year-ago third quarter. Business development was
good, but was offset by lackluster performance in the financial markets.
Although the markets rallied in September 2006, the increases occurred too late
in the quarter to affect revenue. Despite the minimal increase during the third
quarter, trust and investment advisory revenue accounted for most of the
year-to-date growth in total WAS revenue, reflecting the strength of business
development.
Increases in the mutual fund component of WAS revenue reflected the market
interest rate environment, which increased the attractiveness of money market
mutual funds as an alternative to lower-yielding instruments.
WAS sales were 9% higher for the first nine months of 2006 than for the
corresponding period last year, with the Pennsylvania and New York markets
contributing most of the increase. Sales attributed to Delaware include business
from clients in other states whose accounts are located 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 Q3 2005 Q3 2006 YTD 2005 YTD
------------------------------------------ ------- ------- -------- --------
California 4% 3% 4% 5%
Delaware (1) 57% 36% 56% 53%
Florida 6% 11% 7% 8%
Georgia 1% 8% 3% 6%
Maryland 3% 2% 2% 3%
New York 11% 16% 12% 11%
Pennsylvania 18% 24% 16% 14%
(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
Total WAS revenue (net interest income plus noninterest income, minus the
provision for loan losses) for the 2006 third quarter was 7% higher than for the
year-ago third quarter, but the corresponding increase in expenses was 10%. This
caused profitability to decline somewhat, even though pre-tax income was the
same for both the 2006 and 2005 third quarters. Expense growth also caused the
slight decrease in year-to-date profitability, even though WAS pre-tax income
was 7% higher than for the first nine months of 2005.
The increase in WAS expenses reflected expansion activity during the second and
third quarters of 2006, which included:
- Establishing WAS offices in Allentown, Pennsylvania (in the Lehigh Valley),
and Princeton, New Jersey, and hiring staff for those offices; and
50
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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.
EFFICIENCY RATIOS 2006 Q3 2005 Q3 2006 YTD 2005 YTD
----------------- ------- ------- -------- --------
Wealth Advisory Services 77.64% 75.53% 78.13% 77.85%
Wilmington Trust consolidated 95.64% 56.87% 69.54% 57.68%
Wilmington Trust consolidated,
excluding impairment 55.18% 56.87% 55.83% 57.68%
For more information about the profitability of the WAS business, please refer
to Note 5, "Segment reporting," in this report.
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. The remainder are priced on a fee-for-service basis.
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.
Total CCS revenue was 11% higher for the third quarter of 2006, and 12% higher
for the first nine months of 2006, than for the corresponding periods in 2005.
All components of the CCS business contributed to the year-over-year growth, and
all but the capital markets component contributed to the third quarter growth.
CORPORATE CLIENT SERVICES REVENUE
(in millions) 2006 Q3 2005 Q3 2006 YTD 2005 YTD
----------------------------------- ------- ------- -------- --------
Capital markets services $8.2 $8.3 $25.4 $23.7
Entity management services 6.8 5.7 19.8 17.5
Retirement services 3.4 3.2 9.8 9.1
Investment/cash management services 2.7 1.9 7.3 5.4
----- ----- ----- -----
Total Corporate Client Services
revenue $21.1 $19.1 $62.3 $55.7
===== ===== ===== =====
The largest revenue increases, for both the third quarter and first nine months
of 2006, were recorded by the entity management component. Business development
in Europe and the Cayman Islands accounted for most of the growth.
In Europe, demand was strong for the independent directorships and
administrative services we provide, most of which support asset-backed
securitizations. Business from Ireland and England drove the third quarter
revenue growth. These two countries, plus Greece, accounted for most of the
year-to-date growth. Many of the European securitizations we serve are backed by
residential and commercial mortgages. Securitizations of credit card
51
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Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
receivables, especially in Greece, are also increasing. Greece has one of the
highest credit card utilization rates in Europe.
The increases in entity management revenue from the Cayman Islands reflected the
addition of the book of business from PwC Corporate Services (Cayman), which we
acquired from the accounting firm PricewaterhouseCoopers in May 2006.
After the entity management component, the largest contributor to total CCS
revenue growth for the third quarter and first nine months of 2006 was the
investment/cash management component. These fees were up 42% for the quarter,
and 35% year to date. These increases were 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, revenue for the first nine months of 2006 was
7% higher than for the first nine months of 2005, but there has been a
progression of small decreases in capital markets revenue for every quarter in
2006. Although demand for collateral trustee, successor trustee, and commercial
mortgage-backed defeasance services rose, it was not strong enough to offset
weakness in the U.S. market for asset-backed securitizations (ABS), which is
occurring because:
- As ABS transactions 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.
In the retirement services component, the revenue increases reflected higher
asset valuations, which rose as clients added funds to their retirement plans.
CORPORATE CLIENT SERVICES PROFITABILITY
CCS pre-tax income for the 2006 third quarter was 45% higher than for the
year-ago third quarter, and 44% higher year to date. These increases reflected
the effects of business expansion, and caused the CCS efficiency ratio to
improve by 596 basis points for the third quarter 2006 versus 2005, and by 527
basis points year to date.
EFFICIENCY RATIOS 2006 Q3 2005 Q3 2006 YTD 2005 YTD
----------------- ------- ------- -------- --------
Corporate Client Services 70.71% 76.67% 73.75% 79.02%
Wilmington Trust consolidated 95.64% 56.87% 69.54% 57.68%
Wilmington Trust consolidated,
excluding impairment 55.18% 56.87% 55.83% 57.68%
For more information about the profitability of the CCS business, please refer
to Note 5, "Segment reporting," in this report.
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, asset levels
are affected by not just business flows and financial market movements, but also
by trust distributions. Funds
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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, changes in assets under management may not reflect new or lost
business, because:
- 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 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 9/30/06 AT 6/30/06 AT 12/31/05 AT 9/30/05
------------------------------------- ---------- ---------- ----------- ----------
Wilmington Trust (1) $27.2 $26.4 $26.0 $26.3
Cramer Rosenthal McGlynn 9.8 9.4 8.9 8.5
Roxbury Capital Management 3.1 3.3 3.3 3.2
----- ----- ----- -----
Total assets under management $40.1 $39.1 $38.2 $38.0
===== ===== ===== =====
(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 9/30/06 AT 6/30/06 AT 12/31/05 AT 9/30/05
----------------------------------------------- ---------- ---------- ----------- ----------
Assets under management (1) $27.2 $26.4 $26.0 $26.3
Assets under administration 73.3 74.3 74.9 70.6
------ ------ ------ -----
Total client assets $100.5 $100.7 $100.9 $96.9
====== ====== ====== =====
(1) Includes estimates for values associated with certain assets that lack
readily ascertainable values, such as limited partnership interests.
On a percentage basis, the investment mix of managed assets at Wilmington Trust
(excluding CRM and RCM) remained relatively unchanged.
INVESTMENT MIX OF WILMINGTON TRUST MANAGED ASSETS (1) AT 9/30/06 AT 6/30/06 AT 12/31/05 AT 9/30/05
----------------------------------------------------- ---------- ---------- ----------- ----------
Equities 48% 51% 56% 55%
Fixed income 28% 26% 23% 23%
Cash and equivalents 14% 13% 12% 13%
Other assets 10% 10% 9% 9%
(1) Excluding CRM and RCM.
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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 principals of these two firms retain certain management controls, including
veto powers, over a variety of matters. As a result, we do not consolidate their
results in our financial statements, and the revenue we record from them, which
is based on our ownership position in each, is net of expenses.
AFFILIATE MANAGER REVENUE (in millions) 2006 Q3 2005 Q3 2006 YTD 2005 YTD
--------------------------------------- ------- ------- -------- --------
Revenue from Cramer Rosenthal McGlynn $4.6 $3.4 $14.1 $11.8
Revenue from Roxbury Capital Management -- $0.3 $ 1.1 $ 0.8
AFFILIATE MANAGER MANAGED ASSETS (in millions) AT 9/30/06 AT 6/30/06 AT 12/31/05 AT 9/30/05
---------------------------------------------- ---------- ---------- ----------- ----------
Managed assets at Cramer Rosenthal McGlynn $9,784.5 $9,392.0 $8,899.0 $8,480.5
Managed assets at Roxbury Capital Management $3,122.9 $3,253.3 $3,287.3 $3,246.6
CRAMER ROSENTHAL MCGLYNN (CRM)
CRM's assets under management rose $1.30 billion, or 15%, during the 12 months
ended September 30, 2006. More than two-thirds of this increase occurred during
the first nine months of 2006. Asset inflows into CRM's small- and mid-cap
products, as well as market appreciation, were the main reasons for these
increases.
Revenue from CRM for the 2006 third quarter was $4.6 million, a 35% increase
from the year-ago third quarter. For the first nine months of 2006, revenue from
CRM was $14.1 million, a 20% increase. Revenue from CRM for the first nine
months 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 nine months
of 2005 would have been $10.4 million and the 2006 year-to-date increase would
have been 36%.
The 2006 third quarter growth in revenue from CRM resulted mainly from the
higher levels of assets under management. The year-to-date revenue increase
resulted from higher asset levels as well as hedge fund performance fees.
At September 30, 2006, we held an 81.73% ownership interest in CRM, compared
with 77.24% at September 30, 2005. The increase in our ownership position
occurred during the 2006 second quarter, as permitted by the put (relinquishment
of interests) provisions in our acquisition agreement with CRM. This increase
had a nominal effect on the revenue we receive from CRM.
ROXBURY CAPITAL MANAGEMENT (RCM)
During the 2006 third quarter, RCM terminated its micro-cap product, which
reduced managed asset levels and revenue. In addition, costs associated with the
fund termination caused expenses to be higher than usual. As a result, RCM's
revenue contribution for the quarter was negative and a nominal loss was
recorded. For the first nine months of 2006, revenue from RCM was $1.1 million.
The firm's core small- and mid-cap products continued to perform well and
attract assets.
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
During the 2006 third quarter, we reassessed the valuation of our investment in
RCM, after the firm terminated its micro-cap fund and decided to exit its fixed
income fund by the end of 2006. Because these actions reduced current and future
levels of assets under management and numbers of client accounts at RCM, we
determined that our investment in RCM was other than temporarily impaired, and
that the carrying value of the firm should be reduced from $137.6 million to
$65.3 million, as of September 30, 2006. We recorded the difference of $72.3
million in our income statement as an impairment write-down for the 2006 third
quarter. The impairment write-down reduced the amount of goodwill associated
with RCM from $131.3 million to $59.0 million, as of September 30, 2006. For
more information on this impairment write-down, please refer to the executive
summary section of this report.
At September 30, 2006, our investment in RCM consisted of 41.23% of the firm's
common shares and a preferred profits interest equal to 30% of the firm's
revenues, unchanged from the fourth quarter of 2003.
OTHER TYPES OF NONINTEREST INCOME
NON-ADVISORY NONINTEREST INCOME
(in millions) 2006 Q3 2005 Q3 2006 YTD 2005 YTD
-------------------------------------- ------- ------- -------- --------
Service charges on deposit accounts $ 7.3 $ 7.4 $21.1 $20.9
Other noninterest income $ 5.5 $ 7.0 $17.6 $17.2
Securities gains $ 0.1 -- -- $ 0.8
----- ----- ----- -----
Total non-advisory noninterest income $12.9 $14.4 $38.7 $38.9
===== ===== ===== =====
Changes in income from service charges on deposit accounts were due mainly to
changes in the volume of returned items and revenue from ATMs.
ATMS AT 9/30/06 AT 6/30/06 AT 12/31/05 AT 9/30/05
---- ---------- ---------- ----------- ----------
Number of ATMs 229 226 230 227
The amount reported for other noninterest income for the 2006 third quarter was
21% less than for the year-ago third quarter. On a year-to-date basis, other
noninterest income was 2% higher. Other noninterest income included two items
that did not reflect ongoing business operations:
- The 2005 third quarter and year-to-date amounts included approximately $2.0
million of gains from executive life insurance policies.
- The 2006 year-to-date amount included approximately $1.0 million from a
gain on the sale of real estate.
Absent these two items, other noninterest income would have been 10% higher for
the 2006 third quarter. On a year-to-date basis, other noninterest income would
have been 9% higher. These increases reflected higher revenue from loan fees,
which rose due to higher volumes of letters of credit extended on unfunded loan
commitments.
OTHER NONINTEREST INCOME (in millions) 2006 Q3 2005 Q3 2006 YTD 2005 YTD
-------------------------------------- ------- ------- -------- --------
Other noninterest income, excluding two
items noted above $5.5 $5.0 $16.6 $15.2
Securities gains for the 2006 third quarter were $0.1 million. For the first
nine months of 2006, securities gains were zero, because the $0.1 million
securities loss we recorded for the 2006 second quarter offset the gain we
recorded for the third quarter.
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
NONINTEREST EXPENSE
Noninterest expenses were $170.9 million and $366.8 million, respectively, for
the third quarter and first nine months of 2006. These amounts included the
$72.3 million impairment write-down we recorded against our investment in RCM,
which we discuss in the executive summary section of this report.
NONINTEREST EXPENSE 2006 Q3 2005 Q3 2006 YTD 2005 YTD
------------------- ------- ------- -------- --------
Noninterest expense before the impairment $ 98.6 $93.5 $294.5 $275.6
Impairment write-down $ 72.3 -- $ 72.3 --
------ ----- ------ ------
Total noninterest expense $170.9 $93.5 $366.8 $275.6
====== ===== ====== ======
Absent the impairment write-down, the increases in noninterest expense reflected
the initiatives we have undertaken over the past 12 months to add staff and
capabilities that strengthen our relationships with clients.
Since the end of September 2005, we have:
- Launched the Wilmington Family Office practice on the East Coast.
- Opened new offices in Pennsylvania, New Jersey, Connecticut, and Frankfurt,
Germany.
- Expanded existing offices in Delaware, Pennsylvania, Maryland, and New
York.
- Acquired the corporate services book of business from
PricewaterhouseCoopers in the Cayman Islands.
- Invested in technology and added staff to expand services that support
collateralized debt obligations.
At September 30, 2006, there were 51 more full-time-equivalent staff members
than at December 31, 2005, and 81 more than at September 30, 2005.
STAFFING AT 9/30/06 AT 12/31/05 AT 9/30/05
-------- ---------- ----------- ----------
Full-time equivalent staff members 2,520 2,469 2,439
Excluding the impairment write-down, staffing-related expenses continued to
represent the majority of our noninterest expense. For the third quarter of
2006, higher salary and wage expense was offset by lower incentives and
employment benefits expense. The year-to-date increase in staffing-related
expense reflected the additions to staff shown above.
STAFFING-RELATED EXPENSES (in millions) 2006 Q3 2005 Q3 2006 YTD 2005 YTD
--------------------------------------- ------- ------- -------- --------
Salaries and wages $39.5 $35.4 $114.1 $103.3
Incentives and bonuses 8.9 9.3 29.5 29.1
Employment benefits 11.4 11.6 36.8 35.8
----- ----- ------ ------
Total staffing-related expense $59.8 $56.3 $180.4 $168.2
===== ===== ====== ======
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 bonuses expense line.
INCENTIVES AND BONUSES (in millions) 2006 Q3 2006 Q2 2006 Q1 2005 Q4 2005 Q3
------------------------------------ ------- ------- ------- ------- -------
Stock-based compensation expense $1.7 $ 1.4 $ 2.0 $1.8 $1.7
Total incentives and bonuses $8.9 $10.3 $10.3 $8.8 $9.3
56
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
The adjusted amounts for all of the items affected by the accounting change are
available for the full years 1995 through 2005 at wilmingtontrust.com, by e-mail
request to IR@wilmingtontrust.com, or by telephone request to (302) 651-8527.
The third quarter and year-to-date increases in other expense categories also
were related primarily to our expansion activities. In addition, higher energy
costs added to net occupancy expense.
Two expense items recorded during the first nine months of 2005 were not
indicative of continuing business operations:
- The amount of subadvisor expense reported for the first nine months of 2005
included a nonrecurring credit of approximately $1 million that we recorded
as a result of account reconciliations made when we consolidated subadvisor
expenses under Wilmington Trust Investment Management. Subadvisor expense
represents the payments we make to third-party investment advisors used in
the Wealth Advisory business. Absent this credit, subadvisor expense for
the first nine months of 2005 would have been $1 million higher.
- The amount of other noninterest expense reported for the first nine months
of 2005 included approximately $1 million of product development expense.
Absent this amount, other noninterest expenses for the first nine months of
2005 would have been approximately $1 million lower.
INCOME TAXES
Income tax expense for the third quarter and first nine months of 2006 was lower
than for the corresponding year-ago periods, mainly because the impairment
write-down we recorded against our investment in RCM resulted in a tax benefit
of approximately $30 million for the subsidiary in which we hold our investment
in RCM. Since the effective tax rate for that subsidiary, WT Investments, Inc.
(WTI), is higher than Wilmington Trust's overall effective state tax rate on a
consolidated basis, the impairment write-down resulted in an additional state
tax benefit of $5.0 million for the Corporation and reduced our effective tax
rate.
Also affecting our effective tax rate were the volumes of stock options
exercised in 2006. Option exercise volumes were higher for the third quarter and
first nine months of 2006 than for the corresponding year-ago periods, which
increased the tax-deductible portion of our stock-based compensation expense.
INCOME TAXES AND TAX RATE 2006 Q3 2005 Q3 2006 YTD 2005 YTD
------------------------- -------------- ------- -------- --------
Pre-tax income (in millions) $ 0.1 $ 67.0 $142.7 $189.5
Income tax expense (in millions) $(5.0) $ 24.1 $ 46.3 $ 68.8
Effective tax rate Not meaningful 35.97% 32.45% 36.31%
Excluding the impairment write-down, our effective tax rate was 35.36% for the
third quarter of 2006, and 35.77% for the first nine months of the year.
INCOME TAXES AND TAX RATE, EXCLUDING THE
IMPAIRMENT WRITE-DOWN 2006 Q3 2005 Q3 2006 YTD 2005 YTD
---------------------------------------- ------- ------- -------- --------
Pre-tax income (in millions) $ 72.4 $ 67.0 $215.0 $189.5
Income tax expense (in millions) $ 25.6 $ 24.1 $ 76.9 $ 68.8
Effective tax rate 35.36% 35.97% 35.77% 36.31%
57
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
CAPITAL RESOURCES
Our capital position remained strong during the first nine months of 2006.
Stockholders' equity rose 5%, and our regulatory capital continued to exceed the
minimum levels established by the Federal Reserve Board for well-capitalized
institutions.
On April 20, 2006, the strength of our capital position led our Board of
Directors to raise the quarterly cash dividend by 5%, from $0.30 per share to
$0.315 per share. On an annualized basis, this action raised the cash dividend
from $1.20 per share to $1.26 per share. On July 20, 2006, the Board declared a
regular quarterly dividend of $0.315 per share, which was paid on August 15,
2006, to shareholders of record as of August 1, 2006. On October 19, 2006, the
Board declared another regular quarterly dividend of $0.315 per share. This
dividend will be paid on November 15, 2006, to shareholders of record as of
November 1, 2006.
The tables below compare how the impairment write-down affected stockholders'
equity, on average, the returns on average equity and average assets, the
capital generation rate, and the dividend payout ratio.
9 MOS. ENDED YEAR ENDED 9 MOS. ENDED
CAPITAL STRENGTH 9/30/06 12/31/05 9/30/05
---------------- ------------ ---------- ------------
Stockholders' equity (period-end,
in millions) $1,064.3 $1,017.7 $972.7
Return on average stockholders'
equity (annualized) 12.19% 17.59% 17.18%
Return on average assets (annualized) 1.24% 1.70% 1.66%
Capital generation rate (annualized) 4.31% 9.54% 8.92%
Dividend payout ratio 65.9% 48.0% 49.6%
CAPITAL STRENGTH EXCLUDING 9 MOS. ENDED YEAR ENDED 9 MOS. ENDED
THE IMPAIRMENT WRITE-DOWN 9/30/06 12/31/05 9/30/05
-------------------------- ------------ ---------- ------------
Stockholders' equity (period-end,
in millions) $1,106.0 $1,017.7 $972.7
Return on average stockholders'
equity (annualized) 17.47% 17.59% 17.18%
Return on average assets (annualized) 1.78% 1.70% 1.66%
Capital generation rate (annualized) 9.79% 9.54% 8.92%
Dividend payout ratio 46.0% 48.0% 49.6%
During the first nine months of 2006, we added $46.6 million to capital,
including:
- $32.8 million, which reflected earnings of $96.3 million net of $63.5
million in cash dividends;
- $35.4 million from the issue of common stock under employment benefit
plans;
- $4.3 million in tax benefits from stock-based compensation costs;
- $2.9 million in unrealized gains on securities, net of taxes; and
- $0.8 million in foreign currency exchange adjustments.
Offsetting these additions were $29.6 million of reductions in capital, which
consisted of:
- $29.1 million for the repurchase of shares; and
- $0.5 million in derivative losses included in other comprehensive income,
net of taxes.
CAPITAL RATIOS
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.
58
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
REGULATORY AT AT MINIMUM TO BE MINIMUM TO BE
CAPITAL RATIOS 9/30/06 12/31/05 ADEQUATELY CAPITALIZED WELL CAPITALIZED
-------------- ------- -------- ---------------------- ----------------
Total risk-based
capital 12.28% 12.02% 8% 10%
Tier 1 risk-based
capital 8.26% 7.54% 4% 6%
Tier 1 leverage
capital 7.34% 6.74% 4% 5%
During a review of risk-based capital calculations, we discovered that the total
risk-based capital ratios reported as of December 31, 2005; March 31, 2006; and
June 30, 2006, inadvertently included portions of subordinated long-term debt
that should have been excluded due to their approaching maturity. The total
risk-based capital ratio was the only capital ratio affected. All of the
company's capital ratios remained well above the regulatory minimum to be
considered a well capitalized institution. The corrected ratios appear in the
table below.
CORRECTIONS AT JUNE 30, 2006 AT MARCH 31, 2006 AT DECEMBER 31, 2005
TO THE TOTAL ------------------- ------------------- --------------------
RISK-BASED REPORTED CORRECTED REPORTED CORRECTED REPORTED CORRECTED
CAPITAL RATIO RATIO RATIO RATIO RATIO RATIO RATIO
------------- -------- --------- -------- --------- -------- ---------
Total risk-based
capital 12.66% 11.80% 12.72% 12.21% 12.36% 12.02%
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.
SHARE REPURCHASES
We repurchased 504,515 of our shares during the 2006 third quarter. The cost for
the quarter was $22.2 million and the average price per share was $44.08. This
brought the number of shares repurchased during the first nine months of 2006 to
661,832, at a total cost of $29.1 million and an average price per share of
$43.93.
The current share buy-back program was authorized in April 2002 for 8 million
shares. As of September 30, 2006, there were 6,649,923 shares available for
repurchase under this program.
LIQUIDITY AND FUNDING
LIQUIDITY POLICY
Liquidity refers to the ability to obtain cash, or to convert an asset into cash
(or a cash equivalent) without substantially affecting the asset's price, in a
timely manner at a reasonable cost. It is an indicator of how well positioned a
company is to acquire the cash, or funding, it needs to conduct its business.
For banks, liquidity is defined as the ability to accommodate, efficiently and
economically, decreases in deposits and increases in assets (such as loans), as
well as to manage the cash flows associated with amortization, prepayments, and
maturities of loans and investment securities.
Our sources of liquidity include:
- Core deposits;
- Non-core deposits, such as national CDs of $100,000 and higher;
- Short-term borrowings;
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
- Long-term borrowings (such as long-term debt);
- Cash flow from our loan and investment securities portfolios;
- Capital (stockholders' equity); and
- Other credit facilities.
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;
- Comply with regulatory funding and liquidity requirements; and
- Minimize funding and liquidity risk.
We manage liquidity risk 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.
- 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.
We categorize liquidity risk into three levels: Level I, Level II, and Level
III. Each level considers 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.
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.
60
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
We use a funds-at-risk (FAR) ratio to measure our liquidity needs and liquidity
risk. 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.
We believe our liquidity management practices give us the flexibility to react
to any potential changes that might affect our liquidity risk adversely. 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.
Factors or conditions that could affect our liquidity management objectives
include changes in the mix of items on our balance sheet; our investment, loan,
and deposit balances; our reputation; and our credit ratings. A significant
change in our financial performance or credit ratings could reduce the
availability, or increase the cost, of funding from the national markets.
LIQUIDITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006
Our liquidity position was strong for the third quarter and first nine months of
2006. As of September 30, 2006:
- We were operating within Level I parameters of our liquidity risk policy.
- Our FAR ratio calculations indicated that our liquidity position was within
the parameters described in Level I of our liquidity risk policy.
We have undergone no credit rating changes since August 2004. Fitch Ratings
affirmed its credit ratings of Wilmington Trust Corporation and Wilmington Trust
Company on June 28, 2006, and Standard & Poor's affirmed its credit ratings of
both institutions on August 30, 2006. After we announced our 2006 third quarter
results on October 20, 2006, Standard & Poor's and Moody's Investor Services
issued statements saying the non-cash write down would have no effect on our
credit ratings. Our most recent credit ratings are posted on wilmingtontrust.com
in the "Investor Relations" section.
Sources of liquidity available to us as of September 30, 2006, included:
- Deposit balances of $7.88 billion.
- Short-term borrowings of $1.17 billion.
- Long-term debt of $395 million.
- Stockholders' equity of $1.06 billion.
- Investment securities of $1.98 billion. We expect the investment securities
portfolio to generate approximately $470 million of cash over the next 12
months from maturities, calls, and income.
- $85 million in available credit from lines of credit with U.S. financial
institutions.
In addition, we had a borrowing capacity of $833 million, secured with
collateral, from the Federal Home Loan Bank (FHLB) of Pittsburgh, of which
Wilmington Trust Company and Wilmington Trust of Pennsylvania are members. This
amount is as of June 30, 2006. The FHLB adjusts our borrowing capacity on a
quarter-by-quarter basis. Because its adjustment calculations for September 30,
2006, were not complete as of the filing date of this report (November 9, 2006),
the amount as of June 30, 2006, is the most current data available.
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
September 30, 2006, this line of credit was $3.0 million, the balance was zero,
and our guaranty was for 81.73%, an amount equal to our ownership interest in
CRM. This line of credit is scheduled to expire on December 4, 2006.
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Form 10-Q for the three and nine months ended September 30, 2006
FUNDING STRATEGY
As noted above, we use a mix of funding sources to achieve liquidity. The mix of
funding sources we use reflects the business model of our Regional Banking
business.
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 depending on which funding source 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.
FUNDING IN THE FIRST NINE MONTHS OF 2006
During the first nine months 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, given the disparity between loan growth and
core deposit growth. Between December 31, 2005, and September 30, 2006, loan
balances increased 5%, while core deposit balances increased 2%. This reflected
our business strategy of expanding the commercial banking business throughout
the Delaware Valley region while focusing our retail banking (and core deposit
gathering) activities in the state of Delaware.
PROPORTION OF FUNDING PROVIDED BY: AT 9/30/06 AT 12/31/05 AT 9/30/05
---------------------------------- ---------- ----------- ----------
Core deposits 48.1% 49.5% 48.7%
Core deposits and stockholders' equity 58.0% 59.4% 58.2%
National CDs and short-term borrowings 36.6% 35.2% 36.3%
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 associated staffing and other operating
expenses. 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.
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 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. We
discuss our investment securities portfolio in the section of this report about
the Statement of Condition. For the purposes of this section, our discussion of
asset quality centers on loan (credit) quality.
As of September 30, 2006, loans represented 73% of our assets; investment
securities represented 19%; goodwill represented 3%; premises and equipment
represented 1%; and a combination of other assets accounted for the remainder.
During the 2006 third quarter, we reduced the carrying value of our investment
in affiliate money manager RCM from $137.6 million to $65.3 million. The change
in RCM's carrying value reduced the amount of goodwill associated with RCM from
$131.3 million to $59.0 million, as of September 30, 2006. The remaining $6.3
million of RCM's carrying value was included in other assets. As a result of
this write-down, we recorded a $72.3 million non-cash impairment charge for the
2006 third quarter. More information about the change to RCM's carrying value is
in the executive summary of this report.
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;
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Form 10-Q for the three and nine months ended September 30, 2006
- "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.
- We have no interest-only mortgages, payment option adjustable rate
mortgages, negatively amortizing adjustable rate mortgages, or other types
of nontraditional mortgages in our residential mortgage portfolio.
More details about our commercial real estate/construction loan underwriting and
credit quality are in the commercial loan discussion in this report.
We reserve an amount for loan losses that represents our best estimate of known
and inherent estimated losses, based on subjective judgments we make regarding
loan collectibility. In calculating the reserve for loan losses, we evaluate
micro- and macro-economic factors, historical net loss experience, delinquency
trends, and movements within the internal risk rating classifications, among
other things. We reassess the reserve quarterly and we charge loans deemed
uncollectible against the reserve quarterly. We credit recoveries, if any, to
the reserve. The process we use to calculate the reserve has provided an
appropriate reserve over an extended period of time, and we believe that our
reserve methodology is sound.
We allocate the majority of our reserve for loan losses to specific commercial
and retail loans. The portion of the reserve that we do not allocate
specifically reflects the inherent losses that we have not accounted for
otherwise.
Loan growth does not automatically result in increases in the provision and
reserve for loan losses, because the reserve reflects the credit quality of the
loan portfolio overall. New loans do not automatically carry higher levels of
risk than loans already in the portfolio.
To us, the primary indicator of credit quality is the net charge-off ratio. The
net charge-off ratio measures loan losses as a percentage of total loans
outstanding. We continue to pursue repayment even after we charge off loans.
CREDIT QUALITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006
As loan growth continued, credit quality trends remained positive. As of
September 30, 2006:
- More than 97% of loans outstanding continued to receive pass ratings in the
internal risk rating analysis.
- Nonaccruing loans, total nonperforming assets, and the ratio of
nonperforming assets to total loans were all lower than their year-end 2005
and year-ago third quarter amounts.
- Loans past due 90 days or more were 48% lower than at September 30, 2005.
- Renegotiated loans fell to zero.
- The percentage of loans recorded as doubtful in the internal risk rating
analysis dropped to zero.
- The composition of the loan portfolio remained well diversified.
The net charge-off ratio for the 2006 third quarter was 9 basis points, which
brought the net charge-off ratio on an annualized basis to 22 basis points. This
was below historical levels. Between 1995 and 2005, the annual net charge-off
ratio ranged from 24 to 44 basis points.
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2006 Q3 10-Q #5
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Form 10-Q for the three and nine months ended September 30, 2006
KEY MEASURES OF CREDIT QUALITY 3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
(dollars in millions) 9/30/06 9/30/05 9/30/06 9/30/05
------------------------------ -------------- -------------- --------------- --------------
Total loan balances (period end) $7,780.2 $7,292.8 $7,780.2 $7,292.8
Total loan balances (on average) $7,759.3 $7,128.4 $7,628.0 $6,946.8
Gross charge-offs $ 8.6 $ 3.1 $ 17.5 $ 9.4
Recoveries $ (1.3) $ (1.2) $ (4.9) $ (3.3)
Net charge-offs $ 7.3 $ 1.9 $ 12.6 $ 6.1
Net charge-off ratio (1) 9 basis points 3 basis points 16 basis points 9 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.
NET CHARGE-OFFS: We charged off one loan of approximately $4.7 million during
the 2006 third quarter, which caused the net charge-off ratio to increase. The
charged-off loan, which was to a Delaware Valley-based client in the restaurant
and entertainment industry, had been recorded in renegotiated loans since the
fourth quarter of 2004. This charge-off accounted for the declines in total
nonperforming assets, renegotiated loans, and the percentage of loans rated
doubtful in the internal risk rating analysis.
NONPERFORMING ASSETS: At $36.8 million, nonperforming assets were $7.4 million
less than at December 31, 2005, and $18.1 million less than at the end of the
year-ago third quarter.
NONPERFORMING ASSETS (dollars in millions) AT 9/30/06 AT 12/31/05 AT 9/30/05
------------------------------------------ ---------- ----------- ----------
Nonaccruing loans $32.0 $39.3 $49.9
Ratio of nonaccruing loans to total loans 0.41% 0.53% 0.68%
Other real estate owned (OREO) (1) $ 4.8 $ 0.2 $ 0.2
Ratio of OREO to total loans 0.06% --% --%
Renegotiated loans (nonaccruing) -- $ 4.7 $ 4.8
Total nonperforming assets $36.8 $44.2 $54.9
Ratio of nonperforming assets to total loans 0.47% 0.60% 0.75%
(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.
Nonaccruing loans at September 30, 2006, were $7.3 million less than at the end
of 2005 and $17.9 million less than at the end of September 2005. There were two
main reasons for these declines:
- Proceeds from a settlement we recorded in October 2005 reduced nonaccruing
loans by approximately $8.5 million.
- During the 2006 second quarter, we transferred one loan of approximately
$4.6 million from nonaccruing status to other real estate owned (OREO).
The increase in OREO reflected the loan transferred from nonaccruing status, as
noted above. This asset is an agricultural parcel of land in central New Jersey.
LOANS PAST DUE 90 DAYS OR MORE: Loans past due 90 days or more at September 30,
2006, were higher than at the end of 2005 on a dollar-amount basis but, on a
percentage basis, they continued to represent less than 1% of total
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Form 10-Q for the three and nine months ended September 30, 2006
loans outstanding. Most of the year-to-date increase occurred during the 2006
third quarter. Fewer than 10 loans, most of which were commercial loans,
accounted for the increase. None of these loans were commercial
construction/real estate loans.
LOANS PAST DUE 90 DAYS OR MORE (dollars in millions) AT 9/30/06 AT 12/31/05 AT 9/30/05
----------------------------------------------------- ---------- ----------- ----------
Total loans past due 90 days or more $ 7.7 $ 4.1 $14.9
Amount in the commercial portfolio $ 4.9 $ 1.5 $12.7
Amount in the retail portfolio $ 2.8 $ 2.6 $ 2.2
Ratio of total past-due loans to total loans outstanding 0.10% 0.06% 0.20%
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 9/30/06 AT 12/31/05 AT 9/30/05
------------------- ---------- ----------- ----------
Serious-doubt loans (in millions) $24.5 $ 6.9 $ 7.7
Ratio of serious doubt loans to total loan balances 0.31% 0.09% 0.11%
More than 90% of the loans classified as serious doubt loans at September 30,
2006, were commercial loans. Two commercial loans accounted for most of the
year-to-date increase in serious doubt loans.
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. The loan we
charged-off during the 2006 third quarter reduced the percentage of loans rated
doubtful to zero.
INTERNAL RISK RATING ANALYSIS AT 9/30/06 AT 12/31/05 AT 9/30/05
----------------------------- ---------- ----------- ----------
Pass 97.41% 97.24% 96.96%
Watchlisted 1.73% 1.96% 2.00%
Substandard 0.86% 0.73% 0.82%
Doubtful -- 0.07% 0.22%
PROVISION AND RESERVE FOR LOAN LOSSES: The provision for loan losses was higher
than for prior periods mainly because of the one commercial loan we charged off
during the 2006 third quarter.
PROVISION FOR LOAN LOSSES 3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
(In millions) 9/30/06 9/30/05 9/30/06 9/30/05
------------------------- -------------- -------------- -------------- --------------
Provision for loan losses $6.6 $2.9 $14.8 $9.8
Changes in the 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.
RESERVE FOR LOAN LOSSES (dollars in millions) AT 9/30/06 AT 12/31/05 AT 9/30/05
--------------------------------------------- ---------- ----------- ----------
Reserve for loan losses $93.6 $91.4 $93.4
Loan loss reserve ratio 1.20% 1.24% 1.28%
Unallocated reserve amount $ 6.1 $ 6.1 $ 6.1
% of total reserve that is unallocated 6.5% 6.7% 6.6%
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Form 10-Q for the three and nine months ended September 30, 2006
In light of the levels of past due, nonaccruing, and problem loans, we believed
that the September 30, 2006, amounts of our provision and reserve for loan
losses reflected a reasonable assessment of inherent loan losses.
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 9/30/06 AT 12/31/05 AT 9/30/05
--------------------------------- ---------- ----------- ----------
Commercial/financial/agricultural 31% 33% 34%
Commercial real estate/construction 21% 17% 15%
Commercial mortgage 16% 17% 17%
Residential mortgage 7% 6% 6%
Home equity 4% 4% 4%
Indirect auto 9% 9% 9%
Credit card 1% 1% 1%
Other consumer 4% 5% 5%
Secured with liquid collateral 7% 8% 9%
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, unadvanced lines of credit, operating lease
obligations, and other guaranties.
- Contractual obligations that do appear on our balance sheet, including
certificates of deposit and long-term debt.
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 September 30, 2006, our derivative instruments included a total of $987.6
million of interest rate swaps, as follows:
- $431.3 million of swaps for loan clients for whom we exchanged floating
rates for fixed rates.
- $431.3 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 the amount at December 31, 2005, because we
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Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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 September 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
$63.5 million. In Delaware, we lease many of our branch offices. We lease
all of our branch and other offices outside of Delaware.
- An 81.73% 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 $4.31 billion.
- Letters of credit, unfunded loan commitments, and unadvanced lines of
credit amounting to $3.76 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 $4,312.9 $4,142.9 $112.8 $ 40.2 $ 17.0
Long-term debt obligations (1) 652.8 29.9 294.2 54.4 274.3
Operating lease obligations 63.5 10.6 25.3 14.8 12.8
Guaranty obligations 2.5 2.5 -- -- --
-------- -------- ------ ------ ------
Total $5,031.7 $4,185.9 $432.3 $109.4 $304.1
======== ======== ====== ====== ======
(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 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, GTBA, and WTCS 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.
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Form 10-Q for the three and nine months ended September 30, 2006
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 revenue
recognition; the reserve for loan losses; stock-based employee compensation;
affiliate fee income; impairment of goodwill; 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.
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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Form 10-Q for the three and nine months ended September 30, 2006
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, create risk because they 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.
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 September 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 4.7%
over the 12 months beginning September 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 5.5%
over the 12 months beginning September 30, 2006.
IMPACT OF INTEREST RATE CHANGES ON FOR THE 12 MONTHS FOR THE 12 MONTHS
NET INTEREST INCOME BEGINNING 9/30/06 BEGINNING 12/31/05
---------------------------------- ----------------- ------------------
Gradual increase of 250 basis points 4.7% 0.56%
Gradual decrease of 250 basis points (5.5)% (3.97)%
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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 to eliminate the potential volatility of
changing market valuations. 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.
- To reflect pricing characteristics more accurately, 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.
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 and wholesale
funding, such as national (brokered) CDs in amounts of $100,000 and more,
and other short-term borrowings. Wholesale funding helps us match pricing
and maturity characteristics because we can predict the balances of
wholesale funding with more certainty than we can predict the balances of
client deposits.
- 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
fixed rate instruments that typically have 15- to 30-year maturities.
- Managing the size of our investment securities portfolio and the mix of
instruments in it.
- Purchasing interest rate floors to hedge interest income risk associated
with some of our floating rate commercial loans.
For the third quarter and first nine months of 2006:
- Loans comprised the majority of our assets.
- The majority of our loans were floating rate loans.
- Of our total floating-rate loans, approximately 81% were commercial loans.
- The repricing characteristics of our loan portfolio closely matched those
of our wholesale funding sources.
FLOATING- VS. FIXED-RATE LOANS OUTSTANDING AT 9/30/06 AT 12/31/05 AT 9/30/05
------------------------------------------ ---------- ----------- ----------
Percentage of loans with floating rates 75% 77% 77%
Percentage of loans with fixed rates 25% 23% 23%
COMMERCIAL
FLOATING RATE LOANS NATIONAL CDS SHORT-TERM BORROWINGS
AS OF REPRICING IN < or = 30 DAYS MATURING < or = 90 DAYS MATURING < or = 90 DAYS
----- --------------------------- ----------------------- -----------------------
9/30/06 93% 74% 98%
6/30/06 92% 59% 91%
12/31/05 92% 87% 90%
9/30/05 92% 91% 90%
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
Changes since September 30, 2005, in the percentage of national CDs maturing in
90 days or less reflected the yield curve. With little difference between 90-day
rates and longer-term rates, we opted to purchase the longer-term instruments.
The following table summarizes changes in 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.
WILMINGTON TRUST PRIME LENDING RATES AT 9/30/06 AT 12/31/05 AT 9/30/05
------------------------------------ ---------- ----------- ----------
Prime lending rate (period end) 8.25% 7.25% 6.75%
Prime lending rate (YTD average) 7.86% 6.19% 5.93%
As of September 30, 2006:
- The pricing on approximately 62% of commercial floating-rate loans was tied
to a prime lending rate of 8.25%.
- The pricing on approximately 34% of commercial floating-rate loans was tied
to the 30-day London Interbank Offered Rate (Libor) of 5.32%.
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 our prime lending rate,
and
- We factor competitive considerations into our pricing decisions.
During the third quarter and first nine months of 2006, our interest rate
position remained asset sensitive. This means that our loan yields continued to
rise at a faster pace than our deposit rates. Except for certificates of
deposit, deposit pricing pressure was relatively modest, even though short-term
market interest rates (as set by the Federal Open Market Committee) at September
30, 2006, were 100 basis points higher than at December 31, 2005, and 150 basis
points higher than at the end of the year-ago third quarter.
Our asset sensitivity contributed to improvement in the net interest margin. The
margin was 3.80% for the first nine months of 2006, which was 15 basis points
higher than for the first nine months of 2005, and 9 basis points higher than
for the 2005 full year.
One of the reasons for our asset sensitivity is the fact that, while more than
90% of our floating rate loans reprice within 30 days of an FOMC rate change,
deposit repricing does not occur as quickly. When market interest rates do not
change, the lag in deposit repricing diminishes, and changes in deposit costs
occur more on pace with changes in loan yields.
As of the date of this report (November 9, 2006), the FOMC had not changed
short-term interest rates since June 29, 2006. As a result, we expect our
deposit rates to increase further, and we expect our net interest margin to
decline modestly from its year-to-date level of 3.80%.
For more information about the net interest margin, please refer to the income
statement discussion in this report.
FINANCIAL MARKET RISK
Financial market risk is the risk that arises from fluctuations, or volatility,
in the equity markets, the fixed income markets, or both. Financial market
volatility could change the market value of assets we manage, hold in custody,
or own for our own account. Changes in asset valuations could affect our revenue
and overall results.
Most of our financial market risk exposure is in noninterest income, where some
categories of advisory revenue are based on the market values of assets we
manage or hold in custody for clients.
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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 third quarter and first nine months of 2006, approximately 52% 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 third quarter and first nine months of 2006 was subject to financial
market risk.
NONINTEREST INCOME BASED ON MARKET VALUATIONS 2006 2005 2006 2005
(dollars in millions) Q3 Q3 YTD YTD
--------------------------------------------- ------ ------ ------ -----
WAS trust and investment advisory fees $ 33.0 $ 32.7 $100.4 $ 92.9
CCS retirement services revenue 3.4 3.2 9.8 9.1
CCS investment and cash management revenue 2.7 1.9 7.3 5.4
Affiliate manager revenue 4.6 3.7 15.2 12.6
Total revenue based on market valuations $ 43.7 $ 41.5 $132.7 $120.0
Total noninterest income (after amortization) $ 84.6 $ 79.7 $253.6 $233.5
% of total noninterest income tied to market
values 52% 52% 52% 51%
Total net interest and noninterest income
(after the provision and amortization) $171.0 $160.5 $509.5 $465.1
% 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.
Economic indicators for the Delaware Valley region remained positive in the
third quarter and first nine months of 2006:
- According to data published by the Federal Reserve Bank of Philadelphia for
August 2006 (the most recent data available), economic activity over the
past 12 months increased in Delaware and was stable in
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
Pennsylvania and New Jersey. Modest growth was projected for all three
states through the first quarter of 2007.
- In its State Profiles for fall 2006, the Federal Deposit Insurance
Corporation reported that the U.S. job growth rate was 1.4%. In comparison,
Delaware's was 1.6%; the Lehigh Valley area of eastern Pennsylvania had a
job growth rate of 1.5%, and the job growth rate for central and southern
New Jersey was 2.1%. In Delaware, job losses from consolidation in the
financial sector were offset by gains in the professional, business,
health, and government sectors. The job growth in central and southern New
Jersey occurred in the leisure, financial, and other service sectors.
- According to the U.S. Bureau of Labor Statistics, Delaware's unemployment
rate for September 2006 was 3.7%, below the U.S. rate of 4.6%. In
comparison, for September 2005, Delaware's unemployment rate was 4.1% and
the U.S. rate was 5.1%. Delaware's unemployment rate has been lower than
the national unemployment rate since 2001.
- 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 University of Delaware's Center for Applied Demography,
Delaware had a net gain in population between July 2004 and July 2005 (the
most recent data available). The Center reported that Delaware's new
residents include retirees attracted by the state's relatively low property
taxes and lack of a sales tax, as well as working-age people from New
Jersey and Pennsylvania who are willing to trade longer commuting time for
lower housing prices.
- A July 28, 2006, ranking by USA Today using U.S. Census Bureau statistics
listed Delaware as having the eighth lowest property taxes per capita for
2004, the most recent data available.
- The 2006 relocation report published by Mayflower Transit ranked Delaware
as the second most popular relocation destination in the United States.
- In August 2006, Forbes ranked Delaware the eighth most business-friendly
state in the nation.
- A study conducted by Towson University for Maryland'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 11,700 people in Delaware. According to news reports
published on July 26, 2006, Bank of America had eliminated approximately 800
jobs in Delaware. 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. The Delaware job losses at Bank of
America do not appear to have had any significant negative effect on Delaware's
economy.
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 September 30, 2006, we had
approximately $67 million in loans outstanding to clients in 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.
74
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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 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
September 30, 2006, to have a materially adverse effect on our consolidated
financial condition.
75
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
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 third quarter or first nine months
of 2006 that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
76
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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
third quarter of 2006.
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
(b) Shares (or Units) Shares (or Units)
Average Price Purchased as Part that May Yet Be
(a) Total Number Paid per of Publicly Purchased Under
of Shares (or Share (or Announced Plans or the Plans or
Period Units) Purchased Unit) Programs Programs
------ ---------------- ------------- ------------------- ------------------
Month #1
July 1, 2006 -
July 30, 2006 2,007 $43.86 2,007 7,152,431
Month #2
August 1, 2006 -
August 31, 2006 169,308 $43.80 169,308 6,983,123
Month #3
September 1, 2006 -
September 30, 2006 333,200 $44.23 333,200 6,649,923
------- ------ ------- ---------
Total 504,515 $44.08 504,515 6,649,923
======= ====== ======= =========
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.
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2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 30, 2006
We believe our payment of dividends during the third quarter of 2006 was
consistent with the Federal Reserve Board's policy.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
Exhibit
Number Exhibit
------- -------
3.1 Amended and Restated Certificate of Incorporation of the Corporation
(Commission File Number 1-14659)(1)
3.2 Amended Certificate of Designation of Series A Junior Participating
Preferred Stock of the Corporation (Commission File Number 1-14659)
(2)
3.3 Amended and Restated Bylaws of the Corporation (Commission File Number
1-14659) (3)
31 Rule 13a-14(a)/15d-14(a) Certifications (4)
32 Section 1350 Certification (4)
(1) Incorporated by reference to Exhibit 3(a) to the Report on Form S-8 of
Wilmington Trust Corporation filed on October 31, 1991.
(2) Incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form
10-Q of Wilmington Trust Corporation filed on May 9, 2005.
(3) Incorporated by reference to Exhibit 1 to the Current Report on Form 8-K of
Wilmington Trust Corporation filed on December 22, 2004.
(4) Filed herewith.
78
2006 Q3 10-Q #5
Wilmington Trust Corporation
Form 10-Q for the three and nine months ended September 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: November 9, 2006 /s/ Ted T. Cecala
----------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and Chief
Executive Officer (Authorized
Officer)
Date: November 9, 2006 /s/ David R. Gibson
----------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
79