UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------------------------
Commission File Number: 1-14659
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WILMINGTON TRUST CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0328154
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
RODNEY SQUARE NORTH, 1100 NORTH MARKET STREET,
WILMINGTON, DELAWARE 19890
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(Address of principal executive offices) (Zip Code)
(302) 651-1000
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(Registrant's telephone number, including area code)
NONE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b-2 of the Exchange Act.
[X] Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of March 31, 2007
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COMMON STOCK - PAR VALUE $1.00 68,721,903
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
FIRST QUARTER 2007 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 18
Item 3 Quantitative and Qualitative Disclosures About Market Risk 52
Item 4 Controls and Procedures 57
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 58
Item 1A Risk Factors 58
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 58
Item 3 Defaults upon Senior Securities 59
Item 4 Submission of Matters to a Vote of Security Holders 59
Item 5 Other Information 59
Item 6 Exhibits 59
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and subsidiaries
------------------------
MARCH 31, DECEMBER 31,
(In millions; except share amounts) 2007 2006
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ASSETS
Cash and due from banks $ 222.2 $ 249.7
------------------------
Federal funds sold and securities purchased
under agreements to resell 68.9 68.9
------------------------
Investment securities available for sale:
U.S. Treasury 102.5 125.2
Government agencies 743.9 807.1
Obligations of state and political subdivisions 7.7 8.1
Other securities 1,121.6 1,172.5
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Total investment securities available for sale 1,975.7 2,112.9
------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions 1.4 1.4
(fair values of $1.4 and $1.5 respectively)
Other securities (fair values of $0.3 and $0.3 respectively) 0.3 0.3
------------------------------------------------------------------------------------------
Total investment securities held to maturity 1.7 1.7
------------------------
Loans:
Commercial, financial, and agricultural 2,455.2 2,533.5
Real estate - construction 1,665.5 1,663.9
Mortgage - commercial 1,378.3 1,296.1
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Total commercial loans 5,499.0 5,493.5
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Mortgage - residential 553.5 536.9
Consumer 1,503.9 1,517.0
Secured with liquid collateral 532.0 547.5
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Total retail loans 2,589.4 2,601.4
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Total loans, net of unearned income 8,088.4 8,094.9
Reserve for loan losses (94.5) (94.2)
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Net loans 7,993.9 8,000.7
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Premises and equipment, net 148.8 150.3
Goodwill, net of amortization 291.5 291.4
Other intangible assets, net of amortization 34.2 35.4
Accrued interest receivable 76.0 74.0
Other assets 178.0 172.0
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Total assets $10,990.9 $11,157.0
========================
1
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
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MARCH 31, DECEMBER 31,
(In millions; except share amounts) 2007 2006
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 792.0 $ 913.6
Interest-bearing:
Savings 422.7 313.8
Interest-bearing demand 2,336.1 2,417.5
Certificates < $100,000 1,014.2 1,012.6
Local CDs > or = $100,000 447.6 474.4
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Total core deposits 5,012.6 5,131.9
National money market deposits 142.5 143.1
National CDs > or = $100,000 2,970.6 3,054.1
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Total deposits 8,125.7 8,329.1
------------------------
Short-term borrowings:
Federal funds purchased and securities sold under
agreements to repurchase 1,153.5 1,130.8
U.S. Treasury demand -- 13.0
Line of credit -- 15.0
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Total short-term borrowings 1,153.5 1,158.8
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Accrued interest payable 92.7 75.2
Other liabilities 137.1 146.1
Long-term debt 389.5 388.5
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Total liabilities 9,898.5 10,097.7
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Minority interest 0.2 --
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Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 174.6 168.6
Retained earnings 1,150.5 1,130.4
Accumulated other comprehensive loss (48.8) (52.7)
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Total contributed capital and retained earnings 1,354.8 1,324.8
Less: Treasury stock, at cost, 9,806,443 and
10,068,832 shares, respectively (262.6) (265.5)
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Total stockholders' equity 1,092.2 1,059.3
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Total liabilities and stockholders' equity $10,990.9 $11,157.0
========================
See Notes to Consolidated Financial Statements
2
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and subsidiaries
---------------
FOR THE THREE MONTHS ENDED MARCH 31
(in millions; except share amounts) 2007 2006
------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $155.0 $131.5
Interest and dividends on investment securities:
Taxable interest 22.9 19.5
Tax-exempt interest 0.1 0.1
Dividends 1.3 1.5
Interest on federal funds sold and securities
purchased under agreements to resell 0.7 0.2
------------------------------------------------------------------------
Total interest income 180.0 152.8
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Interest on deposits 66.4 47.8
Interest on short-term borrowings 16.2 11.5
Interest on long-term debt 6.5 6.2
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Total interest expense 89.1 65.5
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Net interest income 90.9 87.3
Provision for loan losses (3.6) (4.0)
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Net interest income after provision for loan losses 87.3 83.3
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NONINTEREST INCOME
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory services 36.9 34.2
Mutual fund fees 5.1 4.7
Planning and other services 9.5 7.4
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Total Wealth Advisory Services 51.5 46.3
---------------
Corporate Client Services:
Capital markets services 10.2 9.1
Entity management services 7.1 6.5
Retirement services 3.4 2.7
Investment/cash management services 3.3 2.1
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Total Corporate Client Services 24.0 20.4
---------------
Cramer Rosenthal McGlynn 4.7 4.0
Roxbury Capital Management 0.1 0.9
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Advisory fees 80.3 71.6
Amortization of affiliate intangibles (1.1) (1.0)
------------------------------------------------------------------------
Advisory fees after amortization of affiliate
intangibles 79.2 70.6
---------------
Service charges on deposit accounts 6.8 6.9
Loan fees and late charges 2.1 1.9
Card fees 1.9 2.0
Other noninterest income 1.4 1.3
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Total noninterest income 91.4 82.7
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Net interest and noninterest income $178.7 $166.0
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3
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
-----------------
FOR THE THREE MONTHS ENDED MARCH 31
(in millions; except share amounts) 2007 2006
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NONINTEREST EXPENSE
Salaries and wages $ 41.8 $ 36.9
Incentives and bonuses 14.0 10.3
Employment benefits 14.6 13.5
Net occupancy 6.8 5.9
Furniture, equipment, and supplies 9.7 9.0
Advertising and contributions 2.7 1.9
Servicing and consulting fees 2.4 2.3
Subadvisor expense 2.5 2.8
Travel, entertainment, and training 2.2 2.2
Originating and processing fees 2.5 2.8
Legal and auditing fees 1.8 1.5
Other noninterest expense 9.5 8.4
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Total noninterest expense 110.5 97.5
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NET INCOME
Income before income taxes and minority interest 68.2 68.5
Income tax expense 24.6 24.3
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Net income before minority interest 43.6 44.2
Minority interest 0.6 0.1
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Net income $ 43.0 $ 44.1
=================
Net income per share:
Basic $ 0.63 $ 0.65
=================
Diluted $ 0.62 $ 0.64
=================
Weighted average shares outstanding (in thousands):
Basic (000s) 68,525 68,070
Diluted (000s) 69,653 69,434
See Notes to Consolidated Financial Statements
4
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
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FOR THE THREE MONTHS ENDED MARCH 31 (in millions) 2007 2006
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OPERATING ACTIVITIES
Net income $ 43.0 $ 44.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3.6 4.0
Provision for depreciation and other amortization 5.6 4.8
Amortization of other intangible assets 1.4 1.3
Minority interest in net income 0.6 0.1
(Accretion)/amortization of investment securities available for sale
discounts and premiums (0.4) 0.4
Deferred income taxes (3.2) (12.2)
Originations of residential mortgages available for sale (25.3) (20.2)
Gross proceeds from sales of residential mortgages 25.5 20.4
Gains on sales of residential mortgages (0.2) (0.2)
Stock-based compensation expense 3.1 2.2
Tax benefit realized on employee exercise of stock options (0.7) (2.6)
(Increase)/decrease in other assets (4.2) 32.1
Increase in other liabilities 5.7 4.4
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Net cash provided by operating activities 54.5 78.6
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INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 4.1 7.9
Proceeds from maturities of investment securities available for sale 426.3 93.7
Proceeds from maturities of investment securities held to maturity -- 0.2
Purchases of investment securities available for sale (287.5) (20.6)
Purchases of residential mortgages (7.0) (7.1)
Net decrease/(increase) in loans 10.2 (136.0)
Purchases of premises and equipment (3.3) (5.8)
Increase in interest rate floor contracts -- (12.3)
Swap termination -- (12.7)
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Net cash provided by/(used for) investing activities 142.8 (92.7)
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5
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
----------------
FOR THE THREE MONTHS ENDED MARCH 31 (in millions) 2007 2006
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FINANCING ACTIVITIES
Net decrease in demand, savings, and interest-bearing
demand deposits (94.7) (190.8)
Net (decrease)/increase in certificates of deposit (108.7) 592.8
Net increase/(decrease) in federal funds purchased and securities sold
under agreements to repurchase 22.7 (371.4)
Net decrease in U.S. Treasury demand deposits (13.0) (17.5)
Net decrease in line of credit (15.0) --
Cash dividends (21.5) (20.4)
Distributions to minority shareholders (0.4) --
Proceeds from common stock issued under employment benefit plans 7.1 11.3
Tax benefit realized on employee exercise of stock options 0.7 2.6
Acquisition of treasury stock (2.0) (6.7)
-----------------------------------------------------------------------------------------
Net cash used for financing activities (224.8) (0.1)
----------------
Decrease in cash and cash equivalents (27.5) (14.2)
Cash and cash equivalents at beginning of period 318.6 278.3
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Cash and cash equivalents at end of period $ 291.1 $ 264.1
================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
-------------
FOR THE THREE MONTHS ENDED MARCH 31 (in millions) 2007 2006
-----------------------------------------------------------------------------------
Cash paid during the period for:
Interest $71.6 $51.6
Taxes 1.8 2.2
Non-cash items:
Net unrealized gains/(losses) on securities,
net of tax of $1.9 and $(2.5), respectively 3.4 (4.4)
Net unrealized holding gains/(losses) on derivatives used for
cash flow hedges, net of tax of $0.2 and $(1.7), respectively 0.4 (3.2)
Foreign currency translation adjustment,
net of tax of $0.0 and $0.1, respectively 0.1 0.1
Adoption of FASB Interpretation No. 48 1.4 --
See Notes to Consolidated Financial Statements
6
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ACCOUNTING AND REPORTING POLICIES
We maintain our accounting records and prepare our financial statements in
accordance with U.S. generally accepted accounting principles (GAAP) and
reporting practices prescribed for the banking industry. Using these principles,
we make subjective judgments about uncertainties and trends and we make
estimates and assumptions about the amounts we report in our financial
statements and notes, including amounts for revenue recognition, the reserve for
loan losses, stock-based employee compensation, goodwill impairments, loan
origination fees, mortgage servicing assets, and other items. 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 a range of possible outcomes. Circumstances
that differ significantly from our judgments and estimates could cause our
actual financial results to differ from our expectations. Our financial results
could be affected adversely by, among other things, changes in national or
regional economic conditions; changes in market interest rates; significant
changes in banking laws or regulations; the effects 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 (CRM) and Roxbury Capital Management (RCM);
unanticipated changes in the regulatory, judicial, legislative, or tax treatment
of business transactions; and uncertainty created by unrest in other parts of
the world.
Our consolidated financial statements include the accounts of Wilmington Trust
Corporation (Corporation), our wholly owned subsidiaries, and the subsidiaries
in which we are majority owner, with the exception of CRM and RCM. We eliminate
intercompany balances and transactions in consolidation. For more information
about our accounting policies, please read Note 2, "Summary of significant
accounting policies," in our 2006 Annual Report to Shareholders. For information
on how we account for CRM, RCM, and other subsidiaries and affiliates, please
read Note 4, "Affiliates and acquisitions," in our 2006 Annual Report to
Shareholders.
We have applied our critical accounting policies and estimation methods
consistently in all periods presented in this report and we have discussed these
policies with our Audit Committee. The information in this report has not been
audited. It 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. The consolidated
financial statements in this report should be read in conjunction with the
"Consolidated Financial Statements" and the "Notes to Consolidated Financial
Statements" in our 2006 Annual Report to Shareholders.
In the pages that follow, we may abbreviate the names of regulatory bodies and
authors of accounting literature as follows:
APB: Accounting Principles Board
ARB: Accounting Research Bulletin
FASB: The Financial Accounting Standards Board
FIN: FASB Interpretation (Number)
GAAP: U.S. generally accepted accounting principles
SAB: Staff Accounting Bulletin
SEC: Securities and Exchange Commission
SFAS: Statement of Financial Accounting Standards
EITF: Emerging Issues Task Force
7
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
NOTE 2 - STOCK-BASED COMPENSATION PLANS
We offer four types of stock-based compensation plans: long-term stock-based
incentive plans, an executive incentive plan, an employee stock purchase plan,
and a directors' deferred fee plan. The Compensation Committee and the Select
Committee of our Board of Directors administer these plans. We account for these
plans in accordance with SFAS No. 123 (revised), "Share-Based Payment." For more
information about these plans and how we determine valuations of stock-based
awards, please read Note 18, "Stock-based compensation plans," in our 2006
Annual Report to Shareholders.
At March 31, 2007, we held approximately 9.8 million shares of our stock in our
treasury. This is more than adequate to meet the share requirements of our
current stock-based compensation plans. Our current 8-million-share repurchase
program, which commenced in April 2002, permits us to acquire additional shares.
As of March 31, 2007, there were 6,601,468 shares available for repurchase under
this program.
---------------------
FOR THE THREE
MONTHS ENDED
---------------------
EFFECTS OF STOCK-BASED MARCH 31, MARCH 31,
COMPENSATION (in millions) 2007 2006
------------------------------------------------------------------------
Compensation expense $3.1 $2.2
Tax benefit 1.1 0.8
Net income effect $2.0 $1.4
-----------------------------------
FOR THE THREE MONTHS ENDED
-----------------------------------
STOCK OPTION VALUATION ASSUMPTIONS MARCH 31, 2007 MARCH 31, 2006
------------------------------------------------------------------------
Risk-free interest rate 4.48% - 4.81% 4.51% - 4.85%
Volatility of Corporation's stock 13.88% - 18.25% 14.59% - 20.82%
Expected dividend yield 2.88% - 3.02% 2.72% - 2.86%
Expected life of options 4.5 to 8.2 years 4.3 to 8.4 years
In the table above:
- We use the Black-Scholes valuation method.
- The risk-free interest rate is the U.S. Treasury rate commensurate with the
expected life of options on the date of each 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.
LONG-TERM STOCK-BASED INCENTIVE PLANS
---------------------
FOR THE THREE
MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
OPTIONS EXERCISED (dollars in millions) 2007 2006
---------------------------------------------------------------------
Number of options exercised 249,910 434,136
Total intrinsic value of options exercised $ 1.3 $ 1.7
Cash received from options exercised $ 7.1 $ 11.3
Tax deduction realized from options exercised $ 1.0 $ 2.0
8
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
WEIGHTED
WEIGHTED AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC VALUE
STOCK OPTION ACTIVITY STOCK EXERCISE CONTRACTUAL PER OPTION
FOR THE THREE MONTHS ENDED MARCH 31, 2007 OPTIONS PRICE TERM OUTSTANDING
----------------------------------------- --------- -------- ----------- ---------------
Outstanding at January 1, 2007 6,161,967 $33.43 6.3 years $5.89
Granted 932,701 $43.70
Exercised (249,910) $27.78
Expired (800) $27.39
Forfeited (62,773) $38.32
Outstanding at March 31, 2007 6,781,185 $35.01 6.1 years $6.08
Exercisable at March 31, 2007 3,956,457 $31.17 4.8 years $5.75
WEIGHTED
WEIGHTED AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC VALUE
STOCK OPTION ACTIVITY STOCK EXERCISE CONTRACTUAL PER OPTION
FOR THE THREE MONTHS ENDED MARCH 31, 2006 OPTIONS PRICE TERM OUTSTANDING
----------------------------------------- --------- -------- ----------- ---------------
Outstanding at January 1, 2006 6,335,292 $30.56 6.8 years $5.48
Granted 934,405 $43.20
Exercised (434,136) $21.78
Expired -- --
Forfeited (29,982) $33.82
Outstanding at March 31, 2006 6,805,579 $32.90 6.6 years $5.81
Exercisable at March 31, 2006 3,529,581 $29.26 4.8 years $5.43
UNVESTED STOCK OPTIONS
At March 31, 2007, total unrecognized compensation cost related to unvested
options was $11.8 million. We expect to record that expense over a weighted
average period of 2.3 years.
---------------------------------------------------------
UNVESTED STOCK OPTIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 STOCK OPTIONS WEIGHTED AVERAGE FAIR VALUE AT GRANT DATE
-----------------------------------------------------------------------------------------------------
Unvested at January 1, 2007 2,850,400 $6.41
Granted 932,701 $7.08
Vested (896,500) $6.69
Exercised -- --
Expired -- --
Forfeited (61,873) $6.00
-----------------------------------------------------------------------------------------------------
Unvested at March 31, 2007 2,824,728 $6.55
9
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
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UNVESTED STOCK OPTIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 STOCK OPTIONS WEIGHTED AVERAGE FAIR VALUE AT GRANT DATE
-----------------------------------------------------------------------------------------------------
Unvested at January 1, 2006 3,301,358 $5.59
Granted 934,405 $4.42
Vested (931,183) $5.00
Exercised -- --
Expired -- --
Forfeited (28,582) $5.76
-----------------------------------------------------------------------------------------------------
Unvested at March 31, 2006 3,275,998 $6.21
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 March 31, 2007, total unrecognized compensation cost related to
restricted stock grants was $2.5 million. We expect to record that expense over
a weighted average period of 1.4 years.
Under our incentive plans, restricted stock awards fully vest upon retirement,
although the vesting period may be accelerated in certain circumstances. When we
award restricted stock to people from whom we may not receive services in the
future, such as those who are eligible for retirement, GAAP requires us to
recognize the expense of restricted stock grants when we make the award instead
of amortizing the expense over the vesting period of the award. In the 2007
first quarter, we recorded $1.4 million of expense for restricted stock grants.
-------------------------------------------------------------
RESTRICTED STOCK ACTIVITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007 RESTRICTED SHARES WEIGHTED AVERAGE FAIR VALUE AT GRANT DATE
---------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2007 55,735 $40.84
Granted 54,370 $43.36
Vested (19,545) $39.06
Forfeited -- --
---------------------------------------------------------------------------------------------------------
Outstanding at March 31, 2007 90,560 $42.74
-------------------------------------------------------------
RESTRICTED STOCK ACTIVITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006 RESTRICTED SHARES WEIGHTED AVERAGE FAIR VALUE AT GRANT DATE
---------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 25,730 $34.84
Granted 27,860 $43.27
Vested (9,871) $35.12
Forfeited -- --
---------------------------------------------------------------------------------------------------------
Outstanding at March 31, 2006 43,719 $40.15
EMPLOYEE STOCK PURCHASE PLAN
For the employee stock purchase plan, we record stock-based compensation expense
that represents the fair value of plan participants' options to purchase shares,
amortized over the plan's fiscal year. For the three months ended March 31,
2007, total recognized compensation cost related to the employee stock purchase
plan was $0.2 million and total unrecognized compensation cost related to this
plan was $0.2 million.
10
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
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SHARES RESERVED SUBSCRIPTIONS
EMPLOYEE STOCK PURCHASE PLAN FOR FUTURE SUBSCRIPTIONS OUTSTANDING PRICE PER SHARE
-------------------------------------------------------------------------------------------------------
Balance at January 1, 2006 590,290 106,836
Subscriptions entered into on June 1, 2006 (95,551) 95,551 $37.07
Forfeitures 6,038 (6,038) $30.54 - $37.07
Shares issued -- (102,348) $30.54
-------------------------------------------------------------------------------------------------------
Balance at January 1, 2007 500,777 94,001
Forfeitures 682 (682) $37.07
-------------------------------------------------------------------------------------------------------
Balance at March 31, 2007 501,459 93,319
NOTE 3 - COMPREHENSIVE INCOME
------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
COMPREHENSIVE INCOME (in millions) 2007 2006
------------------------------------------------------------------------------------------------------------
Net income $43.0 $44.1
Other comprehensive income, net of tax:
Net unrealized gains/(losses) on securities 3.4 (4.4)
Net unrealized holding gains/(losses) arising during the period on
derivatives used for cash flow hedges 0.4 (3.2)
Foreign currency translation adjustments 0.1 0.1
------------------------------------------------------------------------------------------------------------
Total comprehensive income $46.9 $36.6
====================================
NOTE 4 - EARNINGS PER SHARE
------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
COMPUTATION OF BASIC AND DILUTED NET EARNINGS PER SHARE (in millions) 2007 2006
-------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 43.0 $44.1
Denominator for basic earnings per share - weighted-average shares 68.5 68.1
-------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 1.2 1.3
-------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed conversions 69.7 69.4
-------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.63 $0.65
=============================================================================================================
Diluted earnings per share $ 0.62 $0.64
=============================================================================================================
Cash dividends per share $0.315 $0.30
Anti-dilutive stock options excluded 0.2 0.9
11
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
NOTE 5 - DERIVATIVE AND HEDGING ACTIVITIES
We use derivative financial instruments, primarily interest rate swaps and
floors, to manage the effects of fluctuating interest rates on net interest
income. We also use interest rate swap contracts to help commercial loan clients
manage their interest rate risk. We do not hold or issue derivative financial
instruments for trading purposes.
As of March 31, 2007, the notional amount of our interest rate swap contracts
was $971.2 million, as follows:
- $423.1 million of swaps for clients that exchanged floating rates for fixed
rates.
- $423.1 million, the "mirror" of the above amount, of swaps that exchanged
fixed rates for floating rates. We made these swaps with other financial
institutions.
- $125.0 million of swaps made with other financial institutions that
exchanged fixed rates on our long-term subordinated debt issues for
floating rates.
At March 31, 2007, we had multiple interest rate floor contracts with notional
amounts that totaled $1.00 billion, the same as of December 31, 2006. We
amortize the premiums we pay for interest rate floor contracts over the life of
each floor and net expense against interest income from floating rate loans.
-----------
INTEREST RATE FLOOR EXPENSE FOR THE THREE MONTHS ENDED MARCH 31 2007 2006
--------------------------------------------------------------------------------------------------------
Interest rate floor contract expense (in millions) $0.3 --
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.
For more information about our derivative and hedging activities, please read
Note 14, "Derivative financial instruments," in our 2006 Annual Report to
Shareholders.
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
-----------------------------------------------------------------------
AT MARCH 31, 2007 AT DECEMBER 31, 2006
-----------------------------------------------------------------------
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) $321.3 $29.8 $291.5 $321.2 $29.8 $291.4
=======================================================================
Other intangibles:
Amortizing:
Mortgage servicing rights $ 8.5 $ 6.6 $ 1.9 $ 8.3 $ 6.4 $ 1.9
Client lists 49.3 17.7 31.6 49.3 16.5 32.8
Acquisition costs 1.7 1.7 -- 1.7 1.7 --
Other intangibles 1.8 1.1 0.7 1.8 1.1 0.7
---------------------------------------------------------------------------------------------------------
Total other intangibles $ 61.3 $27.1 $ 34.2 $ 61.1 $25.7 $ 35.4
=======================================================================
-----------
AMORTIZATION EXPENSE OF OTHER INTANGIBLES FOR THE THREE MONTHS ENDED MARCH 31 (in millions) 2007 2006
---------------------------------------------------------------------------------------------------------
Amortization expense of other intangible assets $1.4 $1.3
12
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
--------------------------------
FUTURE AMORTIZATION EXPENSE OF OTHER INTANGIBLE ASSETS
FOR THE YEAR ENDED DECEMBER 31 2008 2009 2010 2011 2012
--------------------------------------------------------------------------------------------------------------------
Estimated future amortization expense of other intangibles $4.7 $4.2 $3.6 $3.2 $2.5
-----------------------------------------------------
WEALTH CORPORATE AFFILIATE
CHANGES IN THE CARRYING AMOUNT OF GOODWILL REGIONAL ADVISORY CLIENT MONEY
BY BUSINESS SEGMENT (in millions) BANKING SERVICES SERVICES MANAGERS TOTAL
--------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2007 $3.8 $88.9 $22.7 $176.0 $291.4
Increase in carrying value due to
foreign currency translation adjustments -- -- 0.1 -- 0.1
--------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2007 $3.8 $88.9 $22.8 $176.0 $291.5
=====================================================
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CHANGES IN OTHER INTANGIBLE ASSETS AMORTIZATION AMORTIZATION
FOR THE THREE MONTHS ENDED MARCH 31 AMOUNT RESIDUAL PERIOD AMOUNT RESIDUAL PERIOD
(in millions) ASSIGNED VALUE IN YEARS ASSIGNED VALUE IN YEARS
--------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights $0.2 $-- 8 $ 0.2 $-- 8
Increase/(decrease) in carrying value
of client lists due to foreign currency
translation adjustments -- -- -- (0.1) -- --
--------------------------------------------------------------------------------------------------------------------
Changes in other intangible assets $0.2 $-- $ 0.1 $--
=================== ====================
NOTE 7 - COMPONENTS OF NET PERIODIC BENEFIT COST
We offer a pension plan, a supplemental executive retirement plan (SERP), and
other postretirement benefit plans for which we record net periodic costs. For
more information about these plans, please read Note 17, "Pension and other
postretirement benefits," in our 2006 Annual Report to Shareholders.
-------------------------------------------------
POSTRETIREMENT
PENSION BENEFITS SERP BENEFITS BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST -------------------------------------------------
For the three months ended March 31 2007 2006 2007 2006 2007 2006
-------------------------------------------------------------------------------------------
Service cost $ 2.3 $ 2.1 $0.2 $0.2 $ 0.3 $ 0.3
Interest cost 2.8 2.6 0.3 0.3 0.6 0.5
Expected return on plan assets (4.0) (3.6) -- -- -- --
Amortization of prior service cost 0.2 0.2 0.1 0.1 (0.1) (0.1)
Recognized actuarial (gain)/loss 0.4 0.5 -- 0.1 0.2 0.2
-------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1.7 $ 1.8 $0.6 $0.7 $ 1.0 $ 0.9
=================================================
Employer contributions $ -- $ -- $0.1 $0.1 $ 1.3 $ 1.0
Expected annual contribution $ -- $0.6 $ 5.4
13
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
NOTE 8 -- TEMPORARILY IMPAIRED INVESTMENT SECURITIES
We periodically review the debt and equity securities in our investment
portfolio in order to determine if their fair value is equal to, less than, or
in excess of their book value (their value at the time of initial investment).
When the fair value of a security falls below its book value, the security is
considered impaired. If we determine that the impairment is temporary, we report
an unrealized loss that represents the difference between the security's fair
value and its book value. For more information about our temporarily impaired
investment securities, please read Note 6, "Investment securities," in our 2006
Annual Report to Shareholders.
-------------------------------------------------------------------
FEWER
THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
-------------------------------------------------------------------
TEMPORARILY IMPAIRED SECURITIES ESTIMATED ESTIMATED ESTIMATED
AT MARCH 31, 2007 FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(in millions) VALUE LOSSES VALUE LOSSES VALUE LOSSES
-----------------------------------------------------------------------------------------------------
U.S. Treasury $ 25.9 $ -- $ 76.3 $ (1.1) $ 102.2 $ (1.1)
Government agencies 182.5 (0.3) 364.6 (3.7) 547.1 (4.0)
Mortgage-backed securities 5.8 (0.1) 624.5 (18.8) 630.3 (18.9)
Corporate debt securities 59.7 (1.1) 79.4 (1.0) 139.1 (2.1)
Preferred stocks 23.3 (0.7) 6.1 (0.4) 29.4 (1.1)
-----------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $297.2 $(2.2) $1,150.9 $(25.0) $1,448.1 $(27.2)
===================================================================
-------------------------------------------------------------------
FEWER
THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
-------------------------------------------------------------------
TEMPORARILY IMPAIRED SECURITIES ESTIMATED ESTIMATED ESTIMATED
AT DECEMBER 31, 2006 FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(in millions) VALUE LOSSES VALUE LOSSES VALUE LOSSES
-----------------------------------------------------------------------------------------------------
U.S. Treasury $ 48.9 $ -- $ 76.3 $ (1.4) $ 125.2 $ (1.4)
Government agencies 246.5 (0.5) 339.1 (4.7) 585.6 (5.2)
Mortgage-backed securities 2.9 -- 662.1 (22.4) 665.0 (22.4)
Corporate debt securities 72.1 (0.8) 58.7 (1.0) 130.8 (1.8)
Preferred stocks 33.8 (0.6) 5.6 (0.3) 39.4 (0.9)
-----------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $404.2 $(1.9) $1,141.8 $(29.8) $1,546.0 $(31.7)
===================================================================
NOTE 9 - INCOME TAXES
We adopted the provisions of FIN 48, "Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement No. 109" on January 1, 2007. As a result
of the implementation, we made a comprehensive review of our uncertain tax
positions in accordance with the recognition standards established by FIN 48.
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 the 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 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 more than 50 percent likely of being realized upon ultimate settlement.
As a result of this review, we adjusted our reserve for uncertain income tax
positions as of January 2007 by recognizing additional liabilities of $1.4
million through a charge to retained earnings, as provided by the
Interpretation. As of the adoption date, we had unrecognized tax benefits of
$3.0 million, accrued interest expense related to unrecognized tax benefits of
$0.4 million, and accrued penalties of $0.7 million. If recognized, the total
amount of unrecognized tax benefits that would affect the effective tax rate was
$4.1 million as of January 1, 2007. As of March 31, 2007, we had unrecognized
tax benefits of $3.4 million,
14
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
accrued interest expense related to unrecognized tax benefits of $0.6 million,
and accrued penalties of $0.7 million. If recognized, the total amount of
unrecognized tax benefits that would affect the effective tax rate was $4.7
million as of March 31, 2007. We recognize interest and penalties related to
uncertain tax positions in income tax expense. The tax years 2001 through 2006
remain subject to examination by state taxing jurisdictions. The tax years 2003
through 2006 remain subject to federal examination.
NOTE 10 - 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). For more information about these
segments, please read Note 1, "Nature of business," and Note 21, "Segment
reporting," in our 2006 Annual Report to Shareholders. Our business segment
accounting policies are the same as those described in Note 2, "Summary of
significant accounting policies," in our 2006 Annual Report to Shareholders.
Segment data for prior periods may differ from previously published figures due
to changes in reporting methodology and/or organizational structure.
-------------------------------------------------------
WEALTH CORPORATE AFFILIATE
THREE MONTHS ENDED MARCH 31, 2007 REGIONAL ADVISORY CLIENT MONEY
(in millions) BANKING SERVICES SERVICES MANAGERS TOTALS
-------------------------------------------------------------------------------------------------------
Net interest income $ 83.9 $ 6.3 $ 3.7 $ (3.0) $ 90.9
Provision for loan losses (3.6) -- -- -- (3.6)
-------------------------------------------------------------------------------------------------------
Net interest income after provision 80.3 6.3 3.7 (3.0) 87.3
Advisory fees:
Wealth Advisory Services 0.7 47.8 3.0 -- 51.5
Corporate Client Services 0.3 -- 23.7 -- 24.0
Affiliate Money Managers -- -- -- 4.8 4.8
-------------------------------------------------------------------------------------------------------
Advisory fees 1.0 47.8 26.7 4.8 80.3
Amortization of affiliate intangibles -- (0.7) (0.1) (0.3) (1.1)
-------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate intangibles 1.0 47.1 26.6 4.5 79.2
Other noninterest income 11.5 0.5 0.2 -- 12.2
-------------------------------------------------------------------------------------------------------
Net interest and noninterest income 92.8 53.9 30.5 1.5 178.7
Noninterest expense (42.5) (46.4) (21.6) -- (110.5)
-------------------------------------------------------------------------------------------------------
Segment profit before income taxes 50.3 7.5 8.9 1.5 68.2
Applicable income taxes and minority interest 18.5 2.7 3.1 0.9 25.2
-------------------------------------------------------------------------------------------------------
Segment net income $ 31.8 $ 4.8 $ 5.8 $ 0.6 $ 43.0
=======================================================================================================
Depreciation and amortization $ 3.1 $ 2.2 $ 1.1 $ 0.2 $ 6.6
Investment in equity method investees $ -- $ -- $ -- $201.0 $ 201.0
Segment average assets $9,145.4 $1,422.6 $210.3 $199.0 $10,977.3
15
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
-------------------------------------------------------
WEALTH CORPORATE AFFILIATE
THREE MONTHS ENDED MARCH 31, 2006 REGIONAL ADVISORY CLIENT MONEY
(in millions) BANKING SERVICES SERVICES MANAGERS TOTALS
-------------------------------------------------------------------------------------------------------
Net interest income $ 81.0 $ 6.5 $ 2.8 $ (3.0) $ 87.3
Provision for loan losses (3.8) (0.2) -- -- (4.0)
-------------------------------------------------------------------------------------------------------
Net interest income after provision 77.2 6.3 2.8 (3.0) 83.3
Advisory fees:
Wealth Advisory Services 0.5 43.6 2.2 -- 46.3
Corporate Client Services 0.2 -- 20.2 -- 20.4
Affiliate Money Managers -- -- -- 4.9 4.9
-------------------------------------------------------------------------------------------------------
Advisory fees 0.7 43.6 22.4 4.9 71.6
Amortization of affiliate intangibles -- (0.7) (0.1) (0.2) (1.0)
-------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate intangibles 0.7 42.9 22.3 4.7 70.6
Other noninterest income 11.4 0.5 0.2 -- 12.1
-------------------------------------------------------------------------------------------------------
Net interest and noninterest income 89.3 49.7 25.3 1.7 166.0
Noninterest expense (39.0) (38.5) (20.0) -- (97.5)
-------------------------------------------------------------------------------------------------------
Segment profit before income taxes 50.3 11.2 5.3 1.7 68.5
Applicable income taxes and minority interest 17.5 4.0 2.0 0.9 24.4
-------------------------------------------------------------------------------------------------------
Segment net income $ 32.8 $ 7.2 $ 3.3 $ 0.8 $ 44.1
=======================================================================================================
Depreciation and amortization $ 3.0 $ 2.2 $ 1.1 $ 0.2 $ 6.5
Investment in equity method investees $ -- $ -- $ -- $259.5 $ 259.5
Segment average assets $8,368.8 $1,374.7 $184.6 $257.2 $10,185.3
NOTE 11 - ACCOUNTING PRONOUNCEMENTS
The following recent accounting pronouncements may affect our financial
condition and results of operations.
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 GAAP, 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 effect, if
any, that SFAS No. 157 may have on our financial statements or current practices
regarding fair value measurements.
SFAS NO. 159. In February 2007, FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115." SFAS No. 159 provides entities the option to measure
eligible financial instruments at fair value as of specified dates. The election
to choose the fair value option may generally be applied on an
instrument-by-instrument basis and typically is irrevocable. SFAS No. 159 will
be effective for us with the fiscal year that begins on January 1, 2008. We have
not completed our initial assessment of the effect, if any, that SFAS No. 159
may have on our financial statements.
16
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
NOTE 12 -- SUBSEQUENT EVENTS
DEFINITIVE AGREEMENT
On May 4, 2007, we signed a definitive agreement to acquire Bingham Legg
Advisers LLC (BLA), a Boston-based wealth management firm that specializes in
tax-sensitive investment strategies for high-net-worth clients. BLA was formed
in 1999 in a joint venture between what is now Bingham McCutchen LLP, a leading
international law firm, and global asset manager Legg Mason, Inc. We expect to
complete this transaction in June 2007, at which time:
- BLA will take the Wilmington Trust name;
- BLA's 30 employees will become Wilmington Trust staff members; and
- BLA's revenue and expenses will be consolidated into our financial
statements.
We are not disclosing the terms of this transaction. We believe this acquisition
will be modestly accretive to our 2007 earnings. For more information about this
transaction, please read the news release we issued on May 7, 2007, which is
available on www.wilmingtontrust.com.
PUT OF OWNERSHIP INTERESTS
Our agreement with RCM includes provisions that permit some of the firm's
portfolio managers to put their ownership of certain free cash flow interests
(Class B interests) to us. These Class B interests are separate and distinct
from our equity ownership position in RCM. During the 2007 first quarter,
principals of RCM's office in Portland, Oregon, became eligible to exercise some
of their puts. On April 2, 2007, some of these principals put approximately $13
million of their Class B interests to us. Had these puts occurred on January 1,
2007, our total revenue for the 2007 first quarter would have been $425,000
higher.
17
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
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 providing fiduciary, wealth management,
investment advisory, financial planning, insurance, broker-dealer, lending, and
deposit-taking services. At December 31, 2006, we had client relationships in 92
countries.
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 deliver our services 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 of Maryland, New Jersey,
and Pennsylvania that are geographically contiguous to Delaware, including
those along the I-95 corridor from Princeton, New Jersey, to the
Baltimore-Washington, D.C., area; and Maryland's Eastern Shore. We seek
clients within this region with whom we can build long-term relationships.
We offer commercial banking services, including commercial loans,
construction loans, and commercial mortgages, throughout this region. We
focus our commercial banking services on middle market clients, which we
define as family-owned or closely held businesses with annual sales of up
to $250 million. In addition to our retail branch offices in Delaware, we
have commercial banking offices in Maryland, New Jersey, and Pennsylvania.
We staff the offices outside Delaware with teams of commercial bankers and
wealth managers.
We target our retail banking activities, including consumer lending,
residential mortgage lending, and core deposit gathering, to clients in
Delaware, where we maintain a traditional branch office network. Our
deposit products include demand checking, certificates of deposit,
negotiable order of withdrawal accounts, and various savings and money
market accounts. At March 31, 2007, we had 47 branch offices in Delaware.
CORPORATE CLIENT SERVICES
The Corporate Client Services (CCS) business serves institutional clients
who seek the advantageous legal, tax, and creditor protections available in
jurisdictions in the United States, the Caribbean, and Europe. At December
31, 2006, CCS had clients in 86 countries.
CCS provides a variety of trustee, agency, asset management, and
administrative services to clients who use capital markets financing
structures, who seek to establish and maintain legal residency (nexus) for
special purpose entities, and who use independent trustees to hold
retirement plan assets. We group these services into four categories:
capital markets services, entity management services, retirement services,
and investment and cash management services.
- Capital markets services include owner trustee, indenture trustee, and
other specialized services for capital markets transactions, including
asset-backed securitizations and other types of structures, such as
those used to finance aircraft, power generating facilities, ships,
and other types of capital equipment. CCS also serves as indenture,
successor, collateral, or liquidating trustee in corporate debt
issuances,
18
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
reorganizations, debt restructurings, mergers, and bankruptcies. In
addition, CCS provides indenture trustee, administrative, and
analytical services for collateralized debt obligations.
- Entity management services help special purpose entities and captive
insurance companies comply with legal residency requirements (nexus)
in preferred jurisdictions. CCS provides independent directors, office
space, administrative services, and corporate governance services for
these entities.
- Retirement services include trustee and administrative services for
401(k) and other types of retirement plans for which plan sponsors use
different investment management, recordkeeping, and trustee service
providers.
- Investment and cash management services help clients increase the
returns on short-term investments and other fixed income portfolios.
CCS has offices in Delaware, Nevada, New York, South Carolina, Vermont, Grand
Cayman, the Channel Islands, Dublin, London, and Frankfurt.
WEALTH ADVISORY SERVICES
The Wealth Advisory Services (WAS) business provides a variety of asset
management, family office, and fiduciary services for high-net-worth
individuals and families. WAS specializes in planning for the growth,
protection, and transfer of wealth across multiple generations and we
target clients with liquid assets of $10 million or more. At December 31,
2006, WAS had clients in all 50 states and 35 other countries.
- Asset management services help clients manage investment risk and
increase investment return by emphasizing diversification and by using
forward-looking asset allocation, tactical rebalancing, and a blend of
active and passive funds. WAS provides objectivity by using a mix of
investment managers. For fixed income and core equity investments, WAS
uses Wilmington Trust staff. For other asset classes and styles, WAS
uses independent investment managers. Because we can structure
investments in everything from limited partnerships to mutual funds,
all clients, regardless of account size, have access to our best
thinking.
- Family office services help clients identify, review, consolidate, and
execute financial and life-style management needs. We specialize in
four areas: legal structures for family offices; considerations for
clients with inherited wealth; compensation strategies for corporate
executives; and the needs of clients in the entertainment and sports
industries. Our family office services include family governance
planning, investment consulting, real estate acquisition and
disposition, cash flow management and budgeting, tax planning and
compliance, risk assessment, insurance oversight, family security,
bill payment and payroll management services, among others. Family
office clients may or may not also use our asset management services.
- Fiduciary services include trust, administrative, tax, philanthropic,
and estate settlement services.
- Other services include financial planning, private banking, custom
lending, mutual fund, broker-dealer, and insurance services.
WAS has offices in California, Connecticut, Delaware, Florida, Georgia,
Maryland, New Jersey, New York, and Pennsylvania. WAS offices located
within the Regional Banking geographic footprint (Delaware, Maryland, New
Jersey, and Pennsylvania) are staffed with teams of wealth managers and
commercial bankers in order to serve the middle market business clients
targeted in the commercial banking business.
19
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
Each of our three businesses provides different kinds of services, has a
different geographic scope, and targets specific kinds of clients. 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 104 years of economic
cycles.
AFFILIATE MONEY MANAGERS
We have ownership positions in two investment management firms: Cramer Rosenthal
McGlynn, LLC (CRM) and Roxbury Capital Management, LLC (RCM). CRM and RCM are
not part of our WAS business, and their managers and staff are not Wilmington
Trust employees. Revenue reported on our income statement from CRM and RCM is
recorded net of their expenses and is based on our ownership position in each.
For the purposes of business profitability and segment reporting, we combine
results from CRM and RCM into one segment called "Affiliate Money Managers." For
more information about CRM and RCM, please read Note 4, "Affiliates and
acquisitions," which begins on page 75 of our 2006 Annual Report to
Shareholders. For more information about segment reporting, please read Note 10,
"Segment reporting," in this report.
LEGAL ENTITIES AND SUBSIDIARIES
We provide our services through various legal entities and subsidiaries that we
own wholly or in part. For more information about these entities and
subsidiaries, the services they provide, and the regulations to which they are
subject, please read Note 1, "Nature of business," in our 2006 Annual Report to
Shareholders. There have been no changes in these items since December 31, 2006.
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2007
EXECUTIVE SUMMARY
This report discusses:
- Changes in our financial condition since December 31, 2006. All balances
cited are period-end balances unless otherwise noted. In some cases, we
present amounts as of March 31, 2006, for historical reference.
- The results of our operations for the first three months of 2007 and
compares them with the first three months of 2006. In some cases, we
provide amounts for the 2006 fourth quarter for historical reference.
Year-to-date (YTD) references are as of March 31.
CHANGES IN FINANCIAL CONDITION
Our capital position remained strong during the first three months of 2007.
Stockholders' equity increased 3% to $1.09 billion, and our regulatory capital
continued to exceed the Federal Reserve Board's minimum guidelines for
well-capitalized and adequately capitalized institutions. For more information
about these items, please read the capital resources discussion in this report.
On April 19, 2007, the strength of our capital position led the Board of
Directors to approve a 6% increase in the quarterly cash dividend, raising it by
$0.02, from $0.315 per share to $0.335 per share. On an annualized basis, this
increased the dividend from $1.26 per share to $1.34 per share. The quarterly
dividend will be paid on May 15, 2007, to stockholders of record as of May 1,
2007.
This increase marked the 26th consecutive year that Wilmington Trust has raised
its cash dividend. According to the winter 2007 edition of Mergent, Inc.'s
Dividend Achievers, only 108 of the 10,000 companies that trade on North
American exchanges have raised their dividends for 26 or more consecutive years.
20
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
Total assets at March 31, 2007, were $11.0 billion, which was 2% lower than at
year-end 2006. This was due mainly to a decline of balances in the investment
securities portfolio. As a percentage of total assets, the size of the
investment securities portfolio was relatively the same as for prior periods.
Loans continued to represent the majority of assets.
ASSETS AT 3/31/07 AT 12/31/06 AT 3/31/06
------ ---------- ----------- ----------
Loan balances (in millions) $8,088.4 $8,094.9 $7,539.0
Loans as a percentage of total assets 74% 73% 73%
Investment securities portfolio balances (in millions) $1,977.4 $2,114.6 $1,840.3
Investment securities as a percentage of total assets 18% 19% 18%
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.
EARNING ASSETS AT 3/31/07 AT 12/31/06 AT 3/31/06
-------------- ---------- ----------- ----------
Total earning assets (in millions) $10,134.7 $10,278.4 $9,424.2
Percentage in loans 80% 79% 80%
Percentage in investment securities 20% 21% 20%
For more information on earning assets, please read the investment securities
portfolio and the Regional Banking discussions in this report.
Total liabilities declined 2% from the year-end 2006 level mainly because core
deposit balances were lower. For more information about core balances, please
read the Regional Banking discussion in this report. For more information about
other deposits and short-term borrowings, please read the funding discussion in
this report.
On an annualized basis, first quarter 2007 results produced a return on average
assets of 1.59% and a return on average equity of 16.42%. The corresponding
returns for the first quarter of 2006 were 1.76% and 17.42%, respectively.
RESULTS OF OPERATIONS
For the three months ended March 31, 2007, net income was $43.0 million and
earnings per share (on a diluted basis) were $0.62 per share. This was $0.02
less than for the year-ago first quarter.
NET INCOME 2007 Q1 2006 Q4 2006 Q1
---------- ------- ------- -------
Net income (in millions) $ 43.0 $ 47.5 $ 44.1
Earnings per share (diluted) $ 0.62 $ 0.68 $ 0.64
Average shares outstanding
(diluted, in thousands) 69,653 69,680 69,434
In the 2007 first quarter, CCS and WAS each recorded double-digit increases in
revenue. The net interest margin stabilized at 3.67%. Loan balances, on average,
rose for the 16th consecutive quarter and surpassed $8 billion for the first
time. Credit quality remained high, with 97% of our loans receiving pass ratings
in the internal risk rating analysis. The net charge-off ratio, which was 4
basis points, remained within our historical range.
While revenue growth was good for each of our businesses, expenses rose at a
faster pace because of all the expansion investments we made in the second,
third, and fourth quarters of 2006. As a result of these initiatives, we
21
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
had 104 more full-time-equivalent staff members at the end of March 2007 than at
the end of March 2006, and we had corresponding increases in salaries,
incentives, benefits, and operating expenses.
Here is a list of the major 2006 initiatives and the months in which they
occurred:
- In April 2006, we opened a new office in the Lehigh Valley area of eastern
Pennsylvania, and staffed it with teams of commercial bankers and wealth
advisors.
- In May, we completed three initiatives:
- We acquired PwC Corporate Services in the Cayman Islands from the
accounting firm PricewaterhouseCoopers.
- We opened a new office in Princeton, New Jersey. Like the Lehigh
Valley office, we staffed Princeton with teams of commercial bankers
and wealth advisors.
- We moved our Pennsylvania headquarters in Villanova into a brand new,
and much larger, building.
- In June, we launched family office services on the East Coast. As part of
this launch, we opened a new office in Stamford, Connecticut. The family
office services expansion added 34 staff members and several important
areas of specialization to the Wealth Advisory Services business.
- In October, we expanded the CCS business in Europe by opening an office in
Frankfurt, Germany. The recently enacted German True Sale Initiative
removed adverse tax consequences for asset-backed securitizations and paved
the way for considerable expansion in that market.
- October also saw the rollout of the largest CCS initiative in 2006: the
investment in technology and a team of capital markets experts that
position us to capture a larger share of the rapidly growing market for
collateralized debt obligation administration.
- In November, we introduced WTDirect, our Internet-only banking product,
with a high-yield savings account. As of May 10, 2007, the annual
percentage yield on this account was 5.26% for depositors who maintained
average daily balances of at least $10,000. WTDirect is off to a strong
start, but its launch involved considerable up-front development and
advertising expense.
We incurred the additional expense associated with these investments as we
completed them. We expect to see the corresponding increases in revenue occur at
a more gradual pace as we develop these initiatives more fully.
Our sources of revenue remained diversified between net interest income and
noninterest income. We believe having a diversified stream of revenue enables us
to produce consistent profitability and growth, with low volatility, over the
long term and in a variety of economic conditions.
For the 2007 first quarter:
- The Regional Banking business generated approximately 92% of total net
interest income.
- WAS, CCS, and the affiliate money managers generated approximately 86% of
total noninterest income.
SOURCES OF INCOME 2007 Q1 2006 Q4 2006 Q1
----------------- ------- ------- -------
Total net interest and noninterest income (1) $178.7 $178.4 $166.0
Portion from net interest income 49% 48% 50%
Portion from noninterest income 51% 52% 50%
(1) After amortization and the provision for loan losses
More information about net interest income and the net interest margin follows
the Regional Banking discussion in this report. More information about
noninterest income follows the net interest income discussion. More information
about noninterest expenses follows the noninterest income discussion.
22
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
EFFICIENCY RATIOS
The costs of the 2006 expansion initiatives caused efficiency for the Regional
Banking business, WAS business, and company overall to decline (an increase in
the efficiency ratio reflects a decline in efficiency). As illustrated by the
efficiency ratio, the company spent slightly more than 60 cents for each dollar
of revenue generated in the 2007 first quarter, which was an increase from prior
periods.
In the CCS business, efficiency improved as higher revenue from investment and
cash management services offset higher expenses from expansion.
EFFICIENCY RATIOS 2007 Q1 2006 Q4 2006 Q1
----------------- ------- ------- -------
Regional Banking 43.68% 41.56% 41.49%
Wealth Advisory Services 85.93% 76.47% 77.00%
Corporate Client Services 70.82% 72.79% 79.05%
Wilmington Trust consolidated 60.28% 56.40% 57.02%
In general, lower efficiency ratios indicate higher profitability.
INVESTMENT SECURITIES PORTFOLIO
At March 31, 2007, balances in the investment securities portfolio totaled $1.98
billion. This was $137.2 million lower than at year-end 2006. As a percentage of
total assets, the size of the investment securities portfolio was relatively
unchanged.
Government agencies surpassed mortgage-backed instruments as the largest
concentration of securities in the portfolio, mainly because we opted to invest
in shorter-term instruments and because of higher volumes of prepayments of
mortgage-backed securities. At March 31, 2007, all of the mortgage-backed
securities in the portfolio were AAA-rated instruments issued by U.S. government
agencies for which the underlying collateral is residential mortgages, and there
were no subprime mortgages in this underlying collateral.
COMPOSITION OF INVESTMENT SECURITIES PORTFOLIO AT 3/31/07 AT 12/31/06 AT 3/31/06
---------------------------------------------- ---------- ----------- ----------
Collateralized mortgage obligations 12% 12% 18%
Mortgage-backed securities 21% 20% 26%
Corporate issues 18% 17% 20%
U.S. government agencies 37% 38% 21%
U.S. Treasury 5% 6% 7%
Preferred stocks 4% 4% 5%
Municipal bonds 1% 1% 1%
Other 2% 2% 2%
Percentage invested in fixed income instruments 81% 82% 78%
Almost all of the mortgage-backed securities we held at March 31, 2007, were
invested in fixed rate instruments with terms of 15 years or less. Instead of
retaining individual residential mortgages on our balance sheet, we believe we
can manage duration and interest rate risk more efficiently with
mortgage-related instruments in our investment securities portfolio.
The average life and duration declined during the first three months of 2007
because the balances of short-term investments increased and the negative yield
curve caused paydowns of mortgage-backed instruments to accelerate.
23
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
AVERAGE LIFE IN THE INVESTMENT SECURITIES
PORTFOLIO (in years) AT 3/31/07 AT 12/31/06 AT 3/31/06
----------------------------------------- ---------- ----------- ----------
Mortgage-backed instruments 3.60 4.10 4.48
Total portfolio 4.59 4.93 6.27
DURATION IN THE INVESTMENT SECURITIES
PORTFOLIO (in years) AT 3/31/07 AT 12/31/06 AT 3/31/06
------------------------------------- ---------- ----------- ----------
Mortgage-backed instruments 3.40 3.80 4.14
Total portfolio 2.05 2.24 2.71
We invest only in securities with an investment grade of "A" or better, as
assigned by Standard & Poor's or Moody's Investors Service, at the time of
purchase.
REGIONAL HOUSING MARKET AND RESIDENTIAL MORTGAGE ACTIVITY
The housing market, residential mortgage delinquencies, and subprime residential
mortgage lending garnered considerable attention from the news media and others
during the first three months of 2007. While we remain cautious, we consider our
exposure to the potential risks associated with these issues to be minimal
because:
- We do not engage in subprime residential mortgage lending.
- At March 31, 2007, none of the mortgage-backed securities in our investment
securities portfolio had subprime mortgages as the underlying collateral.
- While some of the asset-backed securitizations for which the CCS business
provides trust and administrative services hold a blend of prime and
subprime residential mortgages, the corresponding fees are based on the
complexity of the services we provide regardless of the underlying
collateral.
- According to the U.S. Census Bureau, housing starts in the Delaware Valley
region have slowed, but not to the extent seen in other parts of the United
States, as shown in the table below.
FEBRUARY FEBRUARY
SINGLE-FAMILY HOUSING PERMITS 2007 2006 CHANGE
----------------------------- -------- -------- ------
Delaware 757 851 (11)%
Philadelphia metropolitan area 1,481 1,800 (18)%
United States 158,344 227,948 (31)%
The following tables compare changes in other housing market indicators.
NUMBER OF HOME RESALES FULL YEAR 2006 FULL YEAR 2005 CHANGE
---------------------- -------------- -------------- ------
Delaware (1) 15,500 17,444 (11)%
Philadelphia metropolitan area (2) 74,130 81,101 (9)%
United States (3) 6,478,000 7,076,000 (9)%
(1) Source: Trend MLS and Sussex County (Delaware) Association of Realtors (R)
(2) Source: Trend MLS
(3) Source: National Association of Realtors (R)
24
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
AVERAGE PRICE OF HOMES SOLD
(dollars in thousands) FULL YEAR 2006 FULL YEAR 2005 CHANGE
--------------------------- -------------- -------------- ------
Delaware (1) $254.2 $254.0 1%
Philadelphia metropolitan area (2) $268.8 $256.9 5%
United States (3) $221.9 $219.6 1%
(1) Source: Trend MLS and Sussex County (Delaware) Association of Realtors (R)
(2) Source: Trend MLS
(3) Source: National Association of Realtors (R)
CHANGE IN AVERAGE PRICE OF HOMES
SOLD IN DELAWARE 2006 VS. 2005
-------------------------------- -------------
New Castle County 5%
Kent County 12%
Sussex County (9)%
State of Delaware 1%
Source: Multiple Listing Service reports
At March 31, 2007, Wilmington Trust's residential mortgage delinquency rate was
15 basis points below the U.S. national average and compared favorably with
other metropolitan areas. The following table compares first quarter 2007
delinquency rates with rates from the fourth quarter of 2005, when delinquencies
were at their most recent low, as reported by The Wall Street Journal on April
11, 2007.
RESIDENTIAL MORTGAGE
DELINQUENCY RATES 2007 Q1 2005 Q4
-------------------- ------- -------
Wilmington Trust 2.72% 4.25%
Wilmington/Maryland/New Jersey
metropolitan area 3.42% 2.10%
United States 2.87% 2.03%
We discuss other risks to which we are exposed in the normal course of business
elsewhere in this report.
THE REGIONAL BANKING BUSINESS
The Regional Banking business continued to benefit from the Delaware Valley's
diversified economy. According to the Federal Reserve Bank of Philadelphia,
February 2007 unemployment rates for Delaware, New Jersey, and Pennsylvania were
below the U.S. national average and the regional economic outlook was positive
for the remainder of 2007. For more information about the regional economy,
please read the "Economic risk" discussion in this report.
During the first three months of 2007, an increase in commercial loan balances
was offset by decreases in the balances of consumer loans and loans secured with
liquid collateral, which caused total loan balances to decline $6.5 million.
Loans secured with liquid collateral are associated mainly with WAS clients and
we do not regard changes in the balances of these loans as indicators of trends
in the Regional Banking business.
25
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
PERIOD-END LOAN BALANCES
(dollars in millions) AT 3/31/07 AT 12/31/06 AT 3/31/06
------------------------ ---------- ----------- ----------
Commercial loans $5,499.0 $5,493.5 $5,103.2
Retail loans 2,589.4 2,601.4 2,435.8
Total loans outstanding $8,088.4 $8,094.9 $7,539.0
Delaware market loans $5,857.6 $5,855.7 $5,543.5
Delaware market loans as a % of total loans 72% 72% 74%
Pennsylvania market loans $1,805.4 $1,836.4 $1,670.5
Pennsylvania market loans as a % of total loans 22% 23% 22%
Other market loans as a % of total loans 6% 5% 4%
On an average-balance basis, total loan balances increased for the 16th
consecutive quarter and exceeded $8 billion for the first time. Commercial and
retail balances were higher, on average, than for the 2006 fourth quarter and
full year. We present average balances as a point of comparison because we
believe they are a better measure than period-end balances of trends in the
Regional Banking business. For more detail on average balances, please see the
"Quarterly analysis of earnings" section of this report.
LOAN BALANCES ON AVERAGE (dollars in millions) 2007 Q1 2006 Q4 2006 Q1
---------------------------------------------- -------- -------- --------
Total loans outstanding $8,072.0 $7,912.9 $7,445.3
Delaware market loans $5,838.8 $5,735.9 $5,492.9
Delaware market loans as a % of total loans 72% 72% 74%
Pennsylvania market loans $1,819.2 $1,781.3 $1,633.7
Pennsylvania market loans as a % of total loans 23% 23% 22%
Other market loans as a % of total loans 5% 5% 4%
Compared to the year-ago first quarter, Pennsylvania market loan balances, on
average, rose 11%, while Delaware market loan balances increased 6%.
The pace of loan growth from markets outside Delaware accelerated on both a
period-end and average-balance basis because of the commercial banking expansion
initiatives we completed during 2006, which included opening new offices in the
Lehigh Valley area of eastern Pennsylvania and in Princeton, New Jersey, and
increasing the number of commercial bankers in our Baltimore office.
COMMERCIAL LOANS
We offer commercial banking services throughout the Delaware Valley region,
which we define as the state of Delaware; areas of Maryland, New Jersey, and
Pennsylvania that are geographically contiguous to Delaware, including those
along the I-95 corridor from Princeton, New Jersey, to the Baltimore-Washington,
D.C., area; and Maryland's Eastern Shore. Within this geographic footprint, we
focus our commercial banking services on middle market clients, which we define
as family owned or closely held businesses with annual sales of up to $250
million.
Commercial loan balances increased $5.5 million during the first three months of
2007, mainly on the strength of commercial mortgage lending.
26
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
PERIOD-END COMMERCIAL LOANS (in millions) AT 3/31/07 AT 12/31/06 AT 3/31/06
----------------------------------------- ---------- ----------- ----------
Commercial, industrial, and agricultural loans $2,455.2 $2,533.5 $2,445.9
Commercial real estate/construction (CRE) loans 1,665.5 1,663.9 1,411.9
Commercial mortgage loans 1,378.3 1,296.1 1,245.4
Total commercial loans $5,499.0 $5,493.5 $5,103.2
% of commercial loans from Delaware market 70% 70% 70%
% of commercial loans from Pennsylvania market 29% 29% 29%
% of commercial loans from other markets 1% 1% 1%
The $82.2 million increase in commercial mortgage loans during the first three
months of 2007 included approximately $15 million of loans that formerly were
recorded as commercial construction/real estate (CRE) loans. The rest were for a
variety of professional office, industrial, retail, and hotel properties
throughout the Regional Banking geographic footprint. Approximately 36% of the
increase was for projects in Delaware; approximately 29% was for projects in
Maryland; approximately 13% was for projects in New Jersey; approximately 11%
was for projects in Pennsylvania; and approximately 11% was for a Delaware-based
client's project in Virginia.
We continued to book CRE loans, but the pace of CRE loan growth decreased as
housing activity within the Regional Banking geographic footprint returned to
levels more in line with historical averages. Of the CRE loans booked during the
first three months of 2007, approximately 72% were for single-family tract homes
in eastern Pennsylvania, throughout Delaware, and on Maryland's Eastern Shore.
The rest were for a variety of retail and professional office projects.
In Delaware, the increase in CRE loans resulted from continued growth in
population and housing demand, especially in the state's two southernmost
counties. According to the U.S. Census Bureau, Delaware was the 15th fastest
growing state in the United States for the 12 months ended July 2006, and
Delaware's growth rate was more than double that of any other state in the
northeast. This population influx is spurring demand for retail and other
services, and approximately 44% of the CRE loans booked in Delaware during the
first three months of 2007 were for retail and other service-related projects.
Data in the following table are for CRE and commercial mortgage loans combined.
COMMERCIAL REAL
ESTATE/CONSTRUCTION
AND MORTGAGE LOANS AT 3/31/07 AT 12/31/06 AT 3/31/06
------------------- ---------- ----------- ----------
LOAN STATUS
Construction 48% 50% 48%
Owner 23% 21% 22%
Permanent 17% 17% 18%
Interim 6% 6% 6%
Other 6% 6% 6%
LOAN PROJECT TYPE
Residential tract 39% 39% 38%
Owner occupied 23% 21% 22%
Retail 9% 9% 10%
Office 6% 7% 6%
Other 23% 24% 24%
LOAN LOCATION
Delaware 61% 61% 61%
Pennsylvania 22% 22% 22%
Maryland 10% 10% 10%
New Jersey 5% 5% 5%
Other 2% 2% 2%
27
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
The balances of commercial, industrial, and agricultural loans declined during
the first three months of 2007 mainly because of payoffs and decreases in
revolving lines of credit. On an average-balance basis, commercial, industrial,
and agricultural loans were higher than for the 2006 fourth quarter and full
year due to demand for working capital and inventory financing in a variety of
industry sectors in eastern Pennsylvania, central New Jersey, and southern
Delaware.
In terms of loan size, the mix in the commercial loan portfolio was relatively
unchanged from prior periods.
COMMERCIAL LOANS BY SIZE AT 3/31/07 AT 12/31/06 AT 3/31/06
------------------------ ---------- ----------- ----------
More than $20 million 7% 7% 6%
$10 million to $20 million 18% 20% 16%
$5 million to $10 million 23% 22% 24%
$1 million to $5 million 37% 36% 37%
$250,000 to $1 million 12% 12% 13%
Less than $250,000 3% 3% 4%
RETAIL LOANS
The retail loan portfolio holds three categories of loans: residential
mortgages, consumer loans, and loans secured with liquid collateral. Most of our
residential mortgage and consumer loans are associated with clients in Delaware,
which is where we focus our branch banking activities.
In the first three months of 2007, consumer loans continued to account for more
than half of total retail loans. Decreases in the balances of consumer loans and
loans secured with liquid collateral during the first three months of 2007
caused total retail loan balances to decline.
PERIOD-END RETAIL LOANS (in millions) AT 3/31/07 AT 12/31/06 AT 3/31/06
------------------------------------- ---------- ----------- ----------
Residential mortgage loans $ 553.5 $ 536.9 $ 473.4
Consumer loans 1,503.9 1,517.0 1,408.5
Loans secured with liquid collateral 532.0 547.5 553.9
Total retail loans $2,589.4 $2,601.4 $2,435.8
RESIDENTIAL MORTGAGE LOANS
Residential mortgage balances increased during the first three months of 2007
because prepayment and refinancing volumes declined and because originations of
mortgages that qualify as low income mortgages under the Community Reinvestment
Act (CRA) increased. These increases corresponded with housing growth in
CRA-eligible communities in Delaware.
While we retain CRA mortgage production, we sell most newly originated fixed
rate residential mortgages into the secondary market instead of recording them
on our balance sheet. This ongoing practice is part of our interest rate risk
management strategy, which we discuss more fully in the "Quantitative and
qualitative disclosures about market risk" section of this report. Because of
this practice, changes in residential mortgage balances may not correspond with
changes in origination volumes. We are among the leading residential mortgage
originators in Delaware.
28
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
RESIDENTIAL MORTGAGE ACTIVITY (dollars in millions) AT 3/31/07 AT 12/31/06 AT 3/31/06
--------------------------------------------------- ---------- ----------- ----------
Residential mortgage balances (at period-end) $553.5 $536.9 $473.4
Percent of residential mortgages at fixed rates 77% 75% 76%
RESIDENTIAL MORTGAGE ORIGINATIONS (dollars in millions) 2007 Q1 2006 Q4 2006 Q1
------------------------------------------------------- ---------- ----------- ----------
Residential mortgage originations (dollar amount) $54.7 $52.2 $46.8
Residential mortgage originations (number of loans) 225 244 201
As noted earlier, we do not engage in subprime residential mortgage lending and
there are no subprime loans in the residential mortgage portfolio.
CONSUMER LOANS
In the consumer portfolio, growth in the balances of loans recorded as other
consumer loans during the first three months of 2007 was not strong enough to
offset declines or flatness in the other categories of consumer loans. Other
consumer loans include home equity loans. Consumer preference for fixed rate
loans caused home equity loan balances to increase and accounted for the
decrease in home equity lines of credit, most of which have floating rates.
PERIOD-END CONSUMER LOANS (in millions) AT 3/31/07 AT 12/31/06 AT 3/31/06
--------------------------------------- ---------- ----------- ----------
Home equity lines of credit $ 298.1 $ 313.4 $ 320.7
Indirect loans 687.0 687.0 642.4
Credit card loans 77.4 78.7 71.6
Other consumer loans 441.4 437.9 373.8
Total consumer loans $1,503.9 $1,517.0 $1,408.5
% of consumer loans from Delaware market 78% 78% 80%
% of consumer loans from Pennsylvania market 6% 7% 6%
% of consumer loans from other markets 16% 15% 14%
The increase from the end of 2006 in the percentage of consumer loans from
markets other than Delaware and Pennsylvania reflected higher volumes of
indirect lending in Maryland and New Jersey. Most of our indirect loans are for
late-model used cars. We make these loans through automobile dealers as an
extension of the commercial banking relationships we have with automobile
dealers throughout the Regional Banking geographic footprint.
DEPOSITS
We record two types of deposits:
- Core deposits, which are deposits from our clients. Core deposits include
noninterest-bearing demand deposits, interest-bearing demand deposits,
savings deposits, and certificates of deposit (CDs). We record two
categories of CDs in core deposits: CDs < $100,000 and local CDs
> or = $100,000.
- National deposits, which are not associated with client activity. We
purchase these deposits on a wholesale or brokered basis. This category of
deposits includes national money market deposits and national CDs > or =
$100,000.
29
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
To evaluate deposit trends fully, it is important to understand our Regional
Banking business model and 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 funding and
short-term borrowings. We believe this is a more cost-effective way of adding
deposits than building and operating a large-scale expansion of our branch
office network outside of Delaware. The efficiency of this funding model is
evident in the efficiency ratio of the Regional Banking business.
In addition, this practice helps us manage interest rate risk because we can
match the repricing characteristics of national funding with the repricing
characteristics of floating rate loans. For more information, about this, please
read the funding, net interest margin, and interest rate risk management
discussions in this report.
CORE DEPOSITS
Savings deposit balances rose 35% during the first three months of 2007. The
balances of other categories of core deposits decreased from or were flat with
their year-end 2006 levels, reflecting the cyclical increases we typically see
at the end of the year. The majority of core deposits continued to come from
consumer and commercial clients in Delaware.
PERIOD-END CORE DEPOSITS (in millions) AT 3/31/07 AT 12/31/06 AT 3/31/06
-------------------------------------- ---------- ----------- ----------
Noninterest-bearing demand deposits $ 792.0 $ 913.6 $ 830.2
Savings deposits 422.7 313.8 328.0
Interest-bearing demand deposits 2,336.1 2,417.5 2,352.1
CDs < $100,000 1,014.2 1,012.6 960.4
Local CDs > or = $100,000 447.6 474.4 513.3
Total core deposits $5,012.6 $5,131.9 $4,984.0
Percentage from Delaware clients 92% 94% 94%
Percentage from Pennsylvania clients 5% 5% 5%
Percentage from clients in other markets 3% 1% 1%
The early success of WTDirect, the Internet-only delivery channel we launched in
November 2006, was the main cause of the increase in savings deposits. WTDirect
currently features a high-interest savings account that is targeted to the
mass-affluent consumer market primarily in the states surrounding Delaware. For
more information about WTDirect, please visit www.wtdirect.com.
We include balances of local CDs > or = $100,000 (local CDs) in core deposits
because these CDs reflect client deposits, not wholesale or brokered deposits.
Most local CDs are from commercial banking clients in the Delaware Valley and
local municipalities, which frequently use these CDs to generate returns on
their excess cash.
LOCAL CDS
> or = $100,000 BY CLIENT CATEGORY AT 3/31/07 AT 12/31/06 AT 3/31/06
------------------------------------ ---------- ----------- ----------
Consumer banking clients 75% 74% 70%
DE commercial banking clients 8% 11% 13%
PA commercial banking clients 7% 8% 1%
Wealth Advisory Services clients 10% 7% 16%
Corporate Client Services clients -- -- --
30
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
As a general rule, we consider core deposit balances on average to be a better
indicator of trends in the Regional Banking business than period-end core
deposits. This is because CCS clients frequently deposit large sums of cash near
the ends of financial reporting periods. In many cases these funds are on
deposit for 72 hours or less. Typically these deposits are noninterest-bearing
demand deposits. The following comparison of changes in noninterest-bearing
demand deposits on a period-end and average-balance basis illustrates this
dynamic.
NONINTEREST-BEARING DEMAND DEPOSITS (in millions) 2007 Q1 2006 Q4 % CHANGE
------------------------------------------------- ------- ------- --------
Noninterest-bearing demand deposits at period-end $792.0 $913.6 (13)%
Noninterest bearing demand deposits on average $749.1 $793.6 (6)%
OTHER REGIONAL BANKING INFORMATION
The number of ATMs was higher at March 31, 2007, than at year-end 2006 mainly
because we added ATMs at non-branch locations.
ATMS AT 3/31/07 AT 12/31/06 AT 3/31/06
---- ---------- ----------- ----------
Number of ATMs in Delaware 197 185 185
Total number of ATMs 244 235 233
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 (in millions) 2007 Q1 2006 Q4 2006 Q1
--------------------------------- ------- ------- -------
Interest income $180.0 $182.0 $152.8
Interest expense 89.1 89.6 65.5
Net interest income $ 90.9 $ 92.4 $ 87.3
Provision for loan losses (3.6) (6.5) (4.0)
Net interest income (after provision) $ 87.3 $ 85.9 $ 83.3
Portion provided by Regional Banking 92% 91% 93%
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 10, "Segment
reporting," in this report.
NET INTEREST MARGIN
Effective January 1, 2007, we changed the way we calculate the quarterly net
interest margin to a day-weighted methodology that is more in line with industry
standards. The new methodology calculates the margin by dividing tax-adjusted
net interest income by the number of days in the quarter, multiplied by 365, and
then divided by average earning assets for the quarter. We have adjusted prior
periods to reflect this change.
31
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
2007 2006
---- -------------------------
NET INTEREST MARGIN Q1 Q4 Q3 Q2 Q1
------------------- ---- ---- ---- ---- ----
Previously reported n/a 3.65% 3.83% 3.80% 3.77%
Adjusted for new methodology 3.67% 3.67% 3.85% 3.84% 3.82%
The net interest margin was 3.67%, the same as for the 2006 fourth quarter, as
there were no changes in short-term market interest rates and the yield on
earning assets matched the rate on funds used to support earning assets. (Under
the old methodology, the margin for the 2007 first quarter would have been
3.62%.)
The market interest rate environment was considerably different in the year-ago
first quarter and for much of 2006. The Federal Open Market Committee raised
short-term interest rates four times between January and June 2006 for a total
of 100 basis points. After those increases, most of the company's floating rate
loans had repriced by August, but deposits continued to reprice throughout the
second half of 2006. The resulting lag between loan and deposit repricing was
the main cause of the 15-basis-point decline in the margin from the year-ago
first quarter. The table below illustrates the change in the pace of repricing.
CHANGES IN YIELDS AND RATES (in basis points) 2007 Q1 VS. 2006 Q4 2007 Q1 VS. 2006 Q1
--------------------------------------------- ------------------- -------------------
Change in yield on total earning assets 3 bps 57 bps
Change in rate on total funds to support earning assets 3 bps 72 bps
Savings deposit rates were considerably higher than for prior periods because
they include the high-rate savings account available through WTDirect. The
average rate on this account for the 2007 first quarter was 4.93%. For more
information about WTDirect, please read the core deposits discussion in this
report or visit www.wtdirect.com.
In the future, WTDirect rates may have little, if any, effect on the net
interest margin, because growth in WTDirect deposits will reduce our need for
national funding.
The margin reflected our interest rate risk management strategy of using
national funding with maturations that match the repricing characteristics of
floating rate loans. For more information about how we manage interest rate
risk, please read the section in this report on quantitative and qualitative
disclosures about market risk.
ANALYSIS OF EARNINGS
On the following pages, we present the consolidated comparative rate/volume and
net interest income data for the first quarters of 2007 and 2006.
32
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
QUARTERLY ANALYSIS OF EARNINGS
------------------------------------------------------------
2007 FIRST QUARTER 2006 FIRST QUARTER
------------------------------------------------------------
(Dollar amounts in millions; AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
rates on a tax-equivalent basis) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------------------------------------------------------------------------------------------
Earning assets
Federal funds sold and
securities purchased under
agreements to resell $ 57.3 $ 0.7 5.05% $ 17.5 $ 0.2 4.17%
U.S. Treasury 125.1 1.3 4.11 147.3 1.3 3.43
Government agencies 733.0 8.5 4.70 407.4 4.0 4.00
State and municipal 8.8 0.2 9.00 10.3 0.2 8.89
Preferred stock 84.6 1.6 7.50 90.9 1.7 7.70
Mortgage-backed securities 691.9 7.2 4.25 854.6 8.9 4.23
Other 390.6 6.0 6.28 402.3 5.6 5.60
------------------------------------------------------- ------------------
Total investment securities 2,034.0 24.8 4.95 1,912.8 21.7 4.60
------------------------------------------------------------
Commercial, financial, and
agricultural 2,466.2 48.9 8.04 2,448.1 44.2 7.33
Real estate - construction 1,669.8 35.4 8.60 1,322.0 26.1 8.00
Mortgage - commercial 1,339.9 26.5 8.03 1,229.8 22.6 7.44
------------------------------------------------------- ------------------
Total commercial loans 5,475.9 110.8 8.21 4,999.9 92.9 7.53
------------------------------------------------------------
Mortgage - residential 542.1 8.0 5.95 463.3 6.7 5.92
Consumer loans 1,512.3 27.6 7.41 1,423.9 24.1 6.86
Secured with liquid collateral 541.7 9.1 6.81 558.2 8.2 5.97
------------------------------------------------------- ------------------
Total retail loans 2,596.1 44.7 6.98 2,445.4 39.0 6.48
------------------------------------------------------------
Total loans net of
unearned income 8,072.0 155.5 7.81 7,445.3 131.9 7.19
Total earning assets at
------------------------------------------------------------
historical cost $10,163.3 $181.0 7.22% $9,375.6 $153.8 6.65%
============================================================
Fair valuation adjustment on
investment securities
available for sale (28.2) (33.9)
--------- --------
Total earning assets $10,135.1 $9,341.7
========= ========
33
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
--------------------------------------------------------------
2007 FIRST QUARTER 2006 FIRST QUARTER
--------------------------------------------------------------
(Dollar amounts in millions; AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
rates on a tax-equivalent basis) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------------------------------------------------------------------------------------------------
Funds supporting earning assets
Savings $ 365.3 $ 1.2 1.29% $ 326.0 $ 0.2 0.32%
Interest-bearing demand 2,250.4 6.7 1.20 2,346.8 5.9 1.02
Certificates < $100,000 1,012.9 10.9 4.35 938.6 7.6 3.27
Local certificates > or =
$100,000 457.7 5.6 5.00 463.3 4.5 3.95
------------------------------------------------------- ------------------
Total core interest-
bearing deposits 4,086.3 24.4 2.42 4,074.7 18.2 1.81
National money market deposits 143.0 1.9 5.53 -- -- --
National certificates > or =
$100,000 2,992.1 40.1 5.43 2,647.7 29.6 4.53
------------------------------------------------------- ------------------
Total interest-bearing
deposits 7,221.4 66.4 3.73 6,722.4 47.8 2.88
--------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,318.5 16.1 4.97 1,082.0 11.4 4.25
U.S. Treasury demand 5.4 0.1 5.02 11.7 0.1 4.27
------------------------------------------------------- ------------------
Total short-term
borrowings 1,323.9 16.2 4.97 1,093.7 11.5 4.25
--------------------------------------------------------------
Long-term debt 388.8 6.5 6.77 399.0 6.2 6.34
------------------------------------------------------- ------------------
Total interest-bearing
liabilities 8,934.1 89.1 4.04 8,215.1 65.5 3.23
--------------------------------------------------------------
Other noninterest funds 1,229.2 -- -- 1,160.5 -- --
------------------------------------------------------- ------------------
Total funds used to
support earning
assets $10,163.3 $89.1 3.55% $9,375.6 $65.5 2.83%
==============================================================
Net interest income/yield 91.9 3.67% 88.3 3.82%
Tax-equivalent adjustment (1.0) (1.0)
----- ----
Net interest income $90.9 $87.3
===== =====
In order to ensure the comparability of yields and rates and their impact on net
interest income, average rates are calculated using average balances based on
historical cost and do not reflect the market valuation adjustment required by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
34
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
------------------------------------
INCREASE/(DECREASE) DUE TO CHANGE IN
------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2007/2006 (in millions) VOLUME (1) RATE (2) TOTAL
--------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and securities purchased under agreements to resell $ 0.4 $ 0.1 $ 0.5
U.S. Treasury (0.2) 0.2 --
Government agencies 3.2 1.3 4.5
State and municipal *
Preferred stock * (0.1) -- (0.1)
Mortgage-backed securities (1.7) -- (1.7)
Other * (0.2) 0.6 0.4
--------------------------------------------------------------------------------------------------------------------
Total investment securities 1.0 2.1 3.1
------------------------------------
Commercial, financial, and agricultural * 0.3 4.4 4.7
Real estate - construction 6.9 2.4 9.3
Mortgage - commercial * 2.0 1.9 3.9
--------------------------------------------------------------------------------------------------------------------
Total commercial loans 9.2 8.7 17.9
------------------------------------
Mortgage - residential 1.2 0.1 1.3
Consumer 1.5 2.0 3.5
Secured with liquid collateral (0.2) 1.1 0.9
--------------------------------------------------------------------------------------------------------------------
Total retail loans 2.5 3.2 5.7
------------------------------------
Total loans net of unearned income 11.7 11.9 23.6
--------------------------------------------------------------------------------------------------------------------
Total interest income $ 13.1 $14.1 $27.2
------------------------------------
Interest expense:
Savings $ -- $ 1.0 $ 1.0
Interest-bearing demand (0.2) 1.0 0.8
Certificates under $100,000 0.6 2.7 3.3
Local CDs > or = $100,000 (0.1) 1.2 1.1
--------------------------------------------------------------------------------------------------------------------
Total core interest-bearing deposits 0.3 5.9 6.2
National money market deposits 1.9 -- 1.9
National CDs > or = $100,000 3.8 6.7 10.5
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6.0 12.6 18.6
------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 2.5 2.2 4.7
U.S. Treasury demand (0.1) 0.1 --
--------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 2.4 2.3 4.7
Long-term debt (0.2) 0.5 0.3
--------------------------------------------------------------------------------------------------------------------
Total interest expense $ 8.2 $15.4 $23.6
------------------------------------
Changes in net interest income $ 4.9 $(1.3) $ 3.6
====================================
* Variances are calculated on a fully tax-equivalent basis, which includes
the effects of any disallowed interest expense.
(1) Changes attributable to volume are defined as a change in average balance
multiplied by the prior year's rate.
(2) Changes attributable to rate are defined as a change in rate multiplied by
the average balance in the applicable period of the prior year. A change in
rate/volume (change in rate multiplied by change in volume) has been
allocated to the change in rate.
35
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
NONINTEREST INCOME
The majority of noninterest income continued to come from the Wealth Advisory
Services (WAS) business, the Corporate Client Services (CCS) business, and the
affiliate money managers (Cramer Rosenthal McGlynn and Roxbury Capital
Management).
NONINTEREST INCOME (in millions) 2007 Q1 2006 Q4 2006 Q1
-------------------------------- ------- ------- -------
Advisory business revenue (1) $79.2 $79.0 $70.6
Service charges on deposit accounts 6.8 7.1 6.9
Other noninterest income 5.4 6.2 5.2
Securities gains -- 0.2 --
Total noninterest income $91.4 $92.5 $82.7
Portion provided by advisory business revenue 86% 85% 85%
(1) Includes revenue from WAS, CCS, and the affiliate money managers, 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. Assets we manage for clients include equities, fixed
income instruments, cash and cash equivalents, and other assets. Depending
on the mix of assets in client accounts, changes in trust and investment
advisory revenue may or may not correspond with changes in financial
markets such as the Dow Jones Industrial Average, the S&P 500, NASDAQ, or
other markets.
2. Planning and other services fees. These fees are from financial planning,
estate settlement, family office management, tax, and other services. These
fees are not associated with asset valuations. They are based on the level
and complexity of the services we provide. In some cases these fees are
based on a client's annual income. 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
balances, and do not reflect equity market movements.
Strong growth during the 2007 first quarter in two categories of WAS revenue -
trust and investment advisory services plus planning and other services -
accounted for most of the 11% year-over-year increase in total WAS revenue.
These increases reflected the expansion investments the WAS business made in
2006.
As of March 31, 2007, approximately 48% of assets we manage for clients were
invested in traditional equities, approximately 27% were invested in fixed
income securities, approximately 14% were cash and cash equivalents, and the
remainder consisted of real estate, commodities, alternative investments, and
other types of assets.
36
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
WEALTH ADVISORY SERVICES REVENUE (in millions) 2007 Q1 2006 Q1 % CHANGE
---------------------------------------------- ------- ------- --------
Trust and investment advisory fees $36.9 $34.2 8%
Planning and other services fees 9.5 7.4 28%
Mutual fund fees 5.1 4.7 9%
Total Wealth Advisory Services revenue $51.5 $46.3 11%
The 28% year-over-year growth in revenue from planning and other services was
due in large part to the substantial expansion of family office services that
began in June 2006. As part of this expansion, WAS opened new offices in
Princeton, New Jersey, and Stamford, Connecticut, and added staff with expertise
in structuring family offices as legal entities and in developing strategies for
executive compensation and inherited wealth. These initiatives complemented the
services for sports and entertainment industry professionals offered by the
company's Beverly Hills-based subsidiary, Grant Tani Barash & Altman, and
positioned Wilmington Trust among the largest full-service family office
practices in the industry.
WAS sales for the 2007 first quarter were lower than for the 2006 first quarter,
when we recorded several very large planning fees. Sales in the Maryland market
were 74% higher than for the 2006 first quarter. Sales also increased in the New
Jersey market. The decline in family office sales from the 2006 fourth quarter
reflected the revenue fluctuations inherent with these services and some
seasonality.
PERCENTAGE CONTRIBUTION 2007 2006 2006
TO TOTAL WAS SALES Q1 Q4 Q1
----------------------- ---- ---- ----
California 4% 2% 4%
Delaware (1) 57% 41% 57%
Florida 3% 7% 8%
Georgia 2% 2% 3%
Maryland 3% 2% 2%
New Jersey 2% 0% 0%
New York 11% 6% 10%
Pennsylvania 10% 14% 14%
Family office services (2) 8% 26% 3%
Total WAS sales (in millions) $5.2 $7.9 $6.6
(1) Sales recorded for Delaware include business from clients in other states
who choose to establish accounts in Delaware 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 clients from our Delaware headquarters.
(2) Includes GTBA.
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 corporate
governance and administrative services we provide for special purpose
entities in preferred jurisdictions.
37
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
3. Retirement services. Approximately 50% of these fees are based on equity
market valuations of retirement plan assets for which we serve as trustee.
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 retirement services clients and capital
markets clients who have residual cash management needs. Some of these fees
are based on money market fund balances and some are based on the
valuations of investment-grade fixed income instruments.
Corporate Client Services (CCS) revenue for the first quarter of 2007 was 18%
higher than for the year-ago first quarter, as all components of the business
recorded year-over-year increases. First quarter 2007 sales exceeded $5 million
for the first time and were 31% higher than for the year-ago first quarter.
CORPORATE CLIENT SERVICES REVENUE (in millions) 2007 Q1 2006 Q1 % CHANGE
---------------------------------------------- ------- ------- --------
Capital markets services $10.2 $ 9.1 12%
Entity management services 7.1 6.5 9%
Retirement services 3.4 2.7 26%
Investment/cash management services 3.3 2.1 57%
Total Corporate Client Services revenue $24.0 $20.4 18%
The 12% year-over-year increase in capital markets revenue reflected strong
demand for services that support trust-preferred securities, collateral trust
and default administration, defeasance of commercial mortgage-backed
securitizations, and tender option bonds. Sales of capital markets services were
27% higher than for the year-ago first quarter.
Capital markets revenue includes fees for services that support asset-backed
securitizations. As noted earlier, some of these securitizations hold a blend of
prime and subprime residential mortgages. Prevailing concerns about the subprime
market have little, if any, effect on CCS because the corresponding fees are
based on services provided regardless of the underlying collateral.
Securitizations backed by U.S. residential mortgages accounted for approximately
6% of total CCS revenue for the 2007 first quarter.
Entity management revenue was 9% higher than for the year-ago first quarter
mainly because of expansion in and continued demand from European markets,
especially for administrative and corporate governance services for structured
finance transactions in Ireland, the United Kingdom, and Germany. CCS opened an
office in Frankfurt, Germany, in August 2006 following passage of the German
True Sale Initiative, which removed adverse tax consequences for asset-backed
securitizations in that country and paved the way for considerable expansion in
that market. Also contributing to the year-over-year growth in entity management
revenue was our acquisition in May 2006 of PwC Corporate Services (Cayman) from
the accounting firm PricewaterhouseCoopers.
In the retirement services component, a combination of market appreciation,
additional retirement plan contributions, and demand for executive compensation
plan trusts accounted for the year-over-year increase in revenue. Approximately
$300,000 of retirement services revenue for the 2007 first quarter was
associated with paying agent services for plan distributions and is not expected
to occur again in 2007.
Fees for investment and cash management services were the largest contributor to
the year-over-year growth in total CCS revenue. Fees for these services and the
percentage tied to fixed income investments rose mainly because we began to
market these services more proactively late in 2005.
CCS INVESTMENT AND CASH MANAGEMENT SERVICES 2007 Q1 2006 Q1
------------------------------------------- ------- -------
Percent tied to the valuations of domestic fixed income instruments 43% 27%
Percent tied to money market mutual fund values 57% 73%
38
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
ASSETS UNDER MANAGEMENT AND ADMINISTRATION AT WILMINGTON TRUST
Assets under management are assets for which we make investment decisions on
behalf of clients, most of whom are WAS clients. Assets under administration are
assets we hold in custody or for which we serve as fiduciary on behalf of
clients, most of whom are CCS clients. Changes in the levels of assets under
management or administration do not necessarily indicate that we have gained or
lost business. Since most of the assets we manage or administer are held in
trusts, the levels of these assets are affected not just by business development
and financial market fluctuations, but also by fund distributions from trusts
for tax payments, philanthropic obligations, discretionary spending, trust
terminations, and other purposes. Asset levels also are affected by the duration
of trust agreements, which can range from a few months to 99 years or more.
We believe that changes in revenue are better indicators of trends in the WAS
and CCS businesses than changes in assets under management or administration
because:
- Asset management is only one of the holistic range of wealth management
services we offer.
- Only the portion of WAS revenue that we record as trust and investment
advisory revenue is based on asset valuations.
- WAS trust and investment advisory revenue includes fees we receive for
direction trust services, but we do not include assets held in direction
trusts in assets under management.
- In the CCS business, except for revenue from investment and cash management
services, the majority of revenue is generated on a fee-for-service basis
regardless of the value of any associated asset.
- Monetary assets we manage or administer for CCS clients can fluctuate by
hundreds of millions of dollars from one reporting period to the next,
depending on the cash management needs of these clients.
For more information about the portion of our revenue that is based on financial
market valuations, please read the financial market risk discussion in this
report.
CLIENT ASSETS AT WILMINGTON AT AT AT
TRUST (1) (in billions) 3/31/07 12/31/06 3/31/06
--------------------------- ------- -------- -------
Assets under management (2) $ 31.8 $ 31.3 $ 29.2
Assets under administration 80.3 76.2 74.8
Total client assets $112.1 $107.5 $104.0
(1) Excludes CRM and RCM.
(2) Includes estimates of asset values that are not readily available, such as
those held in limited partnerships.
On a percentage basis, the investment mix of managed assets at Wilmington Trust
(excluding CRM and RCM) remained relatively unchanged.
INVESTMENT MIX OF WILMINGTON AT AT AT
TRUST MANAGED ASSETS (1) 3/31/07 12/31/06 3/31/06
---------------------------- ------- -------- -------
Equities 48% 47% 53%
Fixed income 27% 27% 24%
Cash and equivalents 14% 16% 14%
Other assets 11% 10% 9%
(1) Excludes CRM and RCM.
Effective January 1, 2007, amounts of assets under management at Wilmington
Trust (excluding the affiliate money managers) were adjusted to include
approximately $2 billion of institutional and individual client assets not held
in trust accounts. Prior periods were changed to reflect this adjustment. Total
client assets consist of assets under management and assets under
administration.
39
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
CLIENT ASSETS AT WILMINGTON
TRUST (1) (in billions) 3/31/07 12/31/06 9/30/06 6/30/06 3/31/06
--------------------------- ------- -------- ------- ------- -------
ASSETS UNDER MANAGEMENT
Previously reported n/a $ 29.0 $ 27.2 $ 26.4 $ 27.2
Adjusted amount $ 31.8 $ 31.3 $ 29.1 $ 28.3 $ 29.2
TOTAL CLIENT ASSETS
Previously reported n/a $105.3 $100.5 $100.7 $102.1
Adjusted amount $112.1 $107.5 $102.4 $102.7 $104.0
(1) Excludes CRM and RCM.
Changes in managed assets at CRM and RCM reflect business flows as well as
financial market movements and are indicative of business trends.
ASSETS UNDER MANAGEMENT AT AT AT
(in billions) 3/31/07 12/31/06 3/31/06
----------------------- ------- -------- -------
Wilmington Trust (1) $31.8 $31.3 $29.2
Cramer Rosenthal McGlynn 11.2 10.6 9.7
Roxbury Capital Management 3.1 3.1 3.5
Total assets under management $46.1 $45.0 $42.4
(1) Includes estimates for values associated with certain assets that lack
readily ascertainable values, such as limited partnership interests.
AFFILIATE MONEY MANAGERS
We have ownership positions in two money management firms:
- 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.
We do not consolidate CRM's or RCM's results in our financial statements because
the principals of these firms retain management controls, including veto powers,
over a variety of matters. The revenue we record from CRM and RCM is net of
their expenses and based on our ownership position in each.
For more information about our investments in CRM and RCM, please read the
affiliate money managers discussion and Notes 4, 10, and 21 in our 2006 Annual
Report to Shareholders.
AFFILIATE MONEY MANAGER REVENUE (in millions) 2007 Q1 2006 Q4 2006 Q1
-------------------------------------------- ------- ------- -------
Total revenue from affiliate money managers
(net of expenses) $4.8 $5.4 $4.9
CRAMER ROSENTHAL MCGLYNN (CRM)
At March 31, 2007, assets under management at value-style manager CRM reached
$11.20 billion, another record high. This was $600 million more than at the end
of December 2006 and $1.50 billion more than at the end of March 2006. These
increases, which were due mainly to new business inflows, caused revenue from
CRM to be 18% higher for the 2007 first quarter than for the 2006 first quarter.
Compared to the 2006 fourth quarter, revenue
40
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
from CRM was lower for the 2007 first quarter because hedge fund performance
fees were lower and compensation and benefits costs were higher, which is
typical for the first quarter.
AS OF AND FOR THE THREE MONTHS ENDED (in millions) 3/31/07 12/31/06 3/31/06
-------------------------------------------------- --------- --------- --------
Assets under management at Cramer Rosenthal McGlynn $11,215.7 $10,623.8 $9,733.9
Revenue from Cramer Rosenthal McGlynn (net of expenses) $ 4.7 $ 5.3 $ 4.0
Ownership position in Cramer Rosenthal McGlynn 81.73% 81.73% 77.24%
Our ownership position in CRM was higher at the end of March 2007 than at the
end of March 2006 because some of CRM's principals put their ownership interests
(relinquished their interests) to us during the 2006 second quarter. This was
permitted by the put provisions in our investment agreement with CRM and it had
a nominal effect on the revenue we receive from CRM.
ROXBURY CAPITAL MANAGEMENT (RCM)
At growth-style manager Roxbury Capital Management (RCM), managed asset levels
and revenue declined from the year-ago first quarter because RCM terminated its
micro-cap and fixed income products during the second half of 2006. RCM's core
small- and mid-cap products continued to perform well and attract assets. First
quarter 2007 revenue from RCM was flat compared to the 2006 fourth quarter
because the firm continued to record expenses related to the fund terminations.
AS OF AND FOR THE THREE MONTHS ENDED (in millions) 3/31/07 12/31/06 3/31/06
-------------------------------------------------- -------- -------- --------
Assets under management at Roxbury Capital Management $3,121.6 $3,138.1 $3,515.7
Revenue from Roxbury Capital Management (net of expenses) $ 0.1 $ 0.1 $ 0.9
Ownership position in Roxbury Capital Management
Ownership of preferred profits 30% 30% 30%
Ownership of common shares 41.23% 41.23% 41.23%
Our agreement with RCM includes provisions that permit some of the firm's
portfolio managers to put their ownership of certain free cash flow interests
(Class B interests) to us. These Class B interests are separate and distinct
from our equity ownership position in RCM. During the 2007 first quarter,
principals of RCM's office in Portland, Oregon, became eligible to exercise some
of their puts. On April 2, 2007, some of these principals put approximately $13
million of their Class B interests to us. Had these puts occurred on January 1,
2007, our total revenue for the 2007 first quarter would have been $425,000
higher.
NONINTEREST EXPENSE
Noninterest expenses increased because salaries, incentives, benefits, and
operating expenses were higher, due to the expansion investments we made
throughout 2006. Staffing-related costs continued to account for the majority of
noninterest expenses.
41
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
EXPENSES (dollars in millions) 2007 Q1 2006 Q4 2006 Q1
------------------------------ ------- ------- -------
Full-time-equivalent staff members 2,579 2,562 2,475
Salaries and wages $ 41.8 $ 40.3 $ 36.9
Stock option expense $ 3.1 $ 2.2 $ 2.2
Total incentives and bonuses (1) $ 14.0 $ 10.3 $ 10.3
Employment benefits expense $ 14.6 $ 11.4 $ 13.5
Total staffing-related expenses $ 70.4 $ 62.0 $ 60.7
Total noninterest expenses $110.5 $104.9 $ 97.5
(1) Includes stock option expense.
The expansion initiatives we completed during the 12 months ended March 31,
2007, added 104 staff members and included:
- The WAS expansion in June 2006 of family office services, which added 34
staff members and one new office;
- New commercial banking and wealth management offices in Pennsylvania and
New Jersey and staff additions throughout the Regional Banking footprint;
- The CCS acquisition in Grand Cayman;
- CCS expansion in Europe, including the new Frankfurt office;
- Investments in staff and technology that significantly enhanced the ability
of the CCS business to provide analytical, administrative, and other
services for collateralized debt obligations; and
- The November 2006 launch of WTDirect, the company's Internet-only outlet,
which accounted for most of the year-over-year increase in advertising
costs.
Incentives and bonuses for the 2007 first quarter included approximately $2
million of expense that is not expected to occur again in 2007. Approximately $1
million of this amount was for restricted stock grants. For more information
about these grants and this expense, please read Note 2, "Stock-based
compensation plans," in this report.
Employment benefits expense for the 2007 first quarter included approximately $3
million of payroll tax payments and 401(k) plan contributions that reset at the
start of each year.
The other large increase in expenses for the 2007 first quarter was in the
category recorded as "other" expenses. Included in this category of expenses are
legal expenses and costs associated with credit and debit card transaction
volumes, all of which were higher for the 2007 first quarter than for the
year-ago first quarter.
INCOME TAXES
Although pre-tax income was lower for the 2007 first quarter than for the 2006
first quarter, income tax expense and the effective tax rate were higher mainly
because our state income tax expense increased. This is a reflection of our
expansion initiatives. We adopted the provisions of FIN 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," on
January 1, 2007. Please see Note 9, "Income taxes," in this report.
42
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
INCOME TAXES AND TAX RATE (dollars in millions) 2007 Q1 2006 Q4 2006 Q1
----------------------------------------------- ------- ------- -------
Pre-tax income $ 67.6 $ 73.8 $ 68.4
Income tax expense $ 24.6 $ 26.3 $ 24.3
Effective tax rate 36.39% 35.64% 35.53%
MINORITY INTEREST
The amount recorded as minority interest for the 2007 first quarter included an
adjustment of approximately $500,000 associated with Wilmington Trust Conduit
Services, the subsidiary that we formed in the fall of 2006 to provide
administrative services for collateralized debt obligations. Absent this amount,
minority interest for the quarter would have been approximately $100,000, which
is what we anticipate for each of the remaining quarters in 2007.
CAPITAL RESOURCES
We manage capital to meet or exceed appropriate standards of financial safety
and soundness, comply with regulatory requirements, and provide for future
growth. Our wholly owned bank subsidiaries are the main users of our capital,
and they are subject to regulatory capital requirements. The advisory businesses
are not as capital-intensive and they are not subject to regulatory capital
requirements.
Our capital position remained strong during the first three months of 2007.
Stockholders' equity increased 3% and regulatory capital continued to exceed
minimum requirements.
On April 19, 2007, the strength of our capital position led the Board of
Directors to approve a 6% increase in the quarterly cash dividend, raising it by
$0.02, from $0.315 per share to $0.335 per share. On an annualized basis, this
increased the dividend from $1.26 per share to $1.34 per share. The quarterly
dividend will be paid on May 15, 2007, to stockholders of record as of May 1,
2007.
3 MONTHS YEAR 3 MONTHS
ENDED ENDED ENDED
CAPITAL STRENGTH (dollars in millions) 3/31/07 12/31/06 3/31/06
-------------------------------------- -------- -------- --------
Stockholders' equity (period end) $1,092.2 $1,059.3 $1,043.3
Stockholders' equity (on average) $1,062.2 $1,067.4 $1,026.4
Return on average stockholders' equity (annualized) 16.42% 13.58% 17.42%
Return on average assets (annualized) 1.59% 1.37% 1.76%
Capital generation ratio (annualized) 8.23% 5.77% 9.44%
Dividend payout ratio 50.00% 59.18% 46.26%
During the first three months of 2007, we added $36.3 million to capital,
including:
- $21.5 million, which reflected earnings of $43.0 million net of $21.5
million in cash dividends;
- $7.1 million from the issue of common stock under employment benefit plans;
- $0.7 million in tax benefits from stock-based compensation costs;
- $3.4 million in unrealized gains on securities, net of taxes;
- $0.1 million in foreign currency exchange adjustments;
- $0.4 million in derivative gains included in other comprehensive income,
net of taxes; and
43
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
- $3.1 million of stock-based compensation expense.
Offsetting these additions were $3.4 million of reductions in capital, which
consisted of:
- $2.0 million for the repurchase of shares; and
- $1.4 million for the adoption of FIN 48. For more information about FIN 48,
please read Note 9, "Income taxes," in this report and Note 3, "Recent
accounting pronouncements," in our 2006 Annual Report to Shareholders.
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. For more information about these guidelines, please
read the capital resources discussion in our 2006 Annual Report to Shareholders.
MINIMUM
TO BE MINIMUM
AT AT ADEQUATELY TO BE WELL
REGULATORY CAPITAL RATIOS 3/31/07 12/31/06 CAPITALIZED CAPITALIZED
------------------------- ------- -------- ----------- -----------
Total risk-based capital 12.53% 12.10% 8% 10%
Tier 1 risk-based capital 8.64% 8.25% 4% 6%
Tier 1 leverage capital 7.64% 7.39% 4% 5%
We review our capital position and make adjustments as needed to assure that our
capital base is sufficient to satisfy existing and impending regulatory
requirements, meet appropriate standards of safety, and provide for future
growth. Our goal is to maintain capital ratios at least 100 basis points higher
than the minimum for well-capitalized institutions.
SHARE REPURCHASES
Our share repurchase activity reflects how we choose to deploy capital. Our
current share repurchase plan, which was authorized by our Board of Directors in
April 2002, permits us to buy back up to 8 million shares of Wilmington Trust
stock.
SHARE REPURCHASES 2007 Q1 2006 Q4 2006 Q1
----------------- ---------- ---------- ----------
Number of shares repurchased 47,291 1,164 154,924
Average price per share repurchased $ 42.52 $ 43.39 $ 43.48
Total cost of shares repurchased $2,010,993 $ 50,510 $6,736,748
Shares available for repurchase 6,601,468 6,648,759 7,156,831
LIQUIDITY AND FUNDING
Liquidity is a measure of how well a company is positioned to obtain the funding
it needs to conduct business. As a bank holding company, we need liquidity to
support operating and investing activities, to comply with regulatory
requirements, and to minimize the risk of having insufficient funds to conduct
business.
44
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
We have a liquidity risk management policy that has been established by our
Asset/Liability Committee and approved by our Board of Directors. We use a
funds-at-risk (FAR) ratio to measure liquidity risk. The FAR ratio, which we
calculate monthly, expresses liquid assets and other dedicated funding sources
as a percentage of wholesale liabilities. The FAR ratio considers these items on
three-month, six-month, and one-year time horizons.
We categorize liquidity risk into three levels that consider various internal
and external scenarios: Level I, Level II, and Level III. Level I is the most
favorable level. It indicates a normal operating environment with no 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.
We believe our ability to obtain funding from the national markets mitigates our
liquidity risk. 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. At March 31, 2007 all of our credit ratings:
- Were investment grade.
- Were unchanged since August 2004.
- Substantiated our financial stability and the consistency, over time, of
our earnings.
Factors or conditions that could affect our liquidity include changes in types
of assets and liabilities 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. We monitor our existing and projected liquidity
requirements continually. We believe our liquidity management practices give us
the flexibility to react to any changes that might affect our liquidity
adversely.
For more information about how we manage liquidity and about our credit ratings,
please read the discussion on managing liquidity that begins on page 32 of our
2006 Annual Report to Shareholders.
LIQUIDITY IN THE FIRST THREE MONTHS OF 2007
At March 31, 2007, we were operating within Level I parameters of our liquidity
management policy. In addition, our FAR ratio calculations placed our liquidity
position within Level I parameters. We have maintained a Level I position since
the levels were established in 2004.
Our sources of liquidity remained diversified. As of March 31, 2007, our sources
of liquidity included:
- Core deposit balances of $5.01 billion.
- National money market deposits of $142.5 million.
- National CDs > or = $100,000 of $2.97 billion.
- Short-term borrowings of $1.15 billion.
- Long-term debt of $389.5 million.
- Stockholders' equity of $1.09 billion.
- Investment securities of $1.98 billion.
- Borrowing capacity of $100 million from lines of credit with U.S. financial
institutions.
- Borrowing capacity of $895.8 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, as of December
31, 2006. The FHLB adjusts our borrowing capacity on a quarterly basis. Its
adjustment calculations for March 31, 2007, were not available as of the
filing date of this report (May 10, 2007).
Among the risks to our liquidity is a partial guaranty of a line of credit
obligation for Cramer Rosenthal McGlynn (CRM). At March 31, 2007, 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 3, 2007.
45
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
MANAGING FUNDING
We use a mix of funding sources to support our Regional Banking business and to
help us manage interest rate risk. There is an inherent disparity between loan
growth and core deposit growth in the Regional Banking business model, because
we make commercial loans in four states, but gather core deposits mainly in
Delaware. To compensate, we augment core deposits with national funding because:
- It is a cost-effective way to add deposits without having to invest capital
in a large-scale expansion of our branch office network.
- It helps us curb annual operating expense growth. On an absolute basis,
national funding rates tend to be higher than core deposit rates, but core
deposit rates do not include the all-in expense of staffing and operating a
branch office network.
- It helps our Regional Banking business produce an efficiency ratio that is
much better than our peer average. For more information about this, please
see the Regional Banking discussion in this report.
- It helps us manage interest rate risk, because we can match the repricing
characteristics of wholesale funds closely with the repricing
characteristics of floating rate loans. We adjust the mix between national
CDs > or = to $100,000 and short-term borrowings, depending on which has
more favorable terms. 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.
As we expand our commercial banking business throughout the Delaware Valley
region, we expect that loan growth will continue to outpace core deposit growth,
and we will continue to use a blend of core deposits and national funding to
support loan growth.
FUNDING IN THE FIRST THREE MONTHS OF 2007
During the first three months of 2007, core deposits (demand deposits,
interest-bearing demand deposits, time deposits, and local CDs > or = $100,000)
continued to be our primary source of funding.
During the 2006 fourth quarter, we diversified our funding sources by launching
WTDirect and adding national money market deposits. Previously included in
interest-bearing demand deposit balances, national money market deposits now are
reported separately. Prior period amounts were adjusted to reflect this change.
PROPORTION OF FUNDING PROVIDED BY (ON AVERAGE) 2007 Q1 2006 Q4 2006 Q1
---------------------------------------------- ------- ------- -------
Core deposits 52% 53% 56%
National funding 34% 34% 31%
Short-term borrowings 14% 13% 13%
Loan-to-deposit ratio 1.01% 0.98% 0.99%
On an absolute basis, the rates on national funding tend to be higher than the
rates on core deposits. Using rates alone to compare funding costs, however, can
be misleading. While core deposit rates express the absolute cost of the funds,
they do not reflect the associated staffing and other operating expenses. For a
comparison of core deposit and national funding rates, please refer to the
interest rate risk discussion in the "Quantitative and Qualitative Disclosures
about Market Risk" section of this report.
46
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION
The assets on our balance sheet consist primarily of investment securities,
which we discuss elsewhere in the report, and loans. Loans accounted for 74% of
our assets at March 31, 2007, and most of our asset quality remained tied to
loan, or credit, quality. Credit quality, or credit risk, is an assessment of
the ability of borrowers to repay loans according to contractual terms.
Borrowers not repaying loans could affect our earnings negatively.
Lending money is inherently risky. When we make a loan, we make subjective
judgments about the borrower's ability to repay the loan. 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 external factors.
For more details on the steps we take to mitigate the risks associated with
lending money, please read the credit risk discussion in our 2006 Annual Report
to Shareholders.
CREDIT QUALITY IN THE FIRST THREE MONTHS OF 2007
Credit quality remained stable in the first three months of 2007. The net
charge-off ratio was at the low end of historical levels and 97% of loans
outstanding had pass ratings in the internal risk rating analysis. Less than 1%
of loans outstanding were classified as nonperforming, past due 90 days or more,
or serious doubt. On a percentage basis, there was minimal change in the mix of
loans outstanding.
CREDIT QUALITY INDICATORS (dollars in millions) AT 3/31/07 AT 12/31/06 AT 3/31/06
----------------------------------------------- ---------- ----------- ----------
Period-end loan balances $8,088.4 $8,094.9 $7,539.0
Period-end nonperforming assets:
Nonaccruing loans $ 23.1 $ 31.0 $ 35.5
Other real estate owned (OREO) $ 4.8 $ 4.8 $ 0.2
Renegotiated loans $ 4.8 $ -- $ 4.9
Total nonperforming assets $ 7.3 $ 5.8 $ 10.1
Ratio of nonperforming assets to loans 0.40% 0.44% 0.54%
Loans past due 90 days or more at period end $ 7.3 $ 5.8 $ 10.1
Ratio of loans past due 90 days to total loans 0.09% 0.07% 0.13%
Gross charge-offs $ 5.1 $ 7.1 $ 3.2
Recoveries $ 1.8 $ 1.2 $ 1.4
Net charge-offs $ 3.3 $ 5.9 $ 1.8
Year-to-date net charge-offs $ 3.3 $ 18.5 $ 1.8
Ratio of net charge-offs to loans on average 0.04% 0.07% 0.02%
Nonaccruing loans were 25% lower than at December 31, 2006, as some returned to
accruing status and others were paid in full.
The amount recorded as OREO was unchanged from the second quarter of 2006, when
a parcel of agricultural land in New Jersey was transferred to OREO from
nonaccruing status.
Renegotiated loans consisted of one personal loan to a commercial banking client
in New Jersey.
Multiple projects in Delaware, Maryland, and Pennsylvania accounted for the
increase during the first three months of 2007 in loans past due 90 days or
more.
47
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
The net charge-off ratio, which we regard as the primary indicator of credit
quality, was 4 basis points, or 16 basis points annualized. Since 1996, the
annualized net charge-off ratio has ranged from a low of 14 basis points for
2005 to a high of 44 basis points for 2000.
COMPOSITION OF NET CHARGE-OFFS
FOR THE QUARTER (in millions) 2007 Q1 2006 Q4 2006 Q1
------------------------------ ------- ------- -------
Consumer loans $ 3.0 $2.7 $1.7
Commercial, financial, and
agricultural loans $ 0.5 $3.2 $0.1
Commercial real estate/
construction and mortgage
loans $(0.2) $ -- $ --
Total net charge-offs $ 3.3 $5.9 $1.8
At the end of the 2007 first quarter, 97% of loans outstanding had pass ratings
in the internal risk rating analysis. The percentage of pass-rated loans has
been 97% since the first quarter of 2005, and has exceeded 95% since 2000.
INTERNAL RISK
RATING ANALYSIS AT 3/31/07 AT 12/31/06 AT 3/31/06
--------------- ---------- ----------- ----------
Pass 96.89% 97.39% 97.20%
Watchlisted 2.32% 1.82% 1.97%
Substandard 0.78% 0.79% 0.76%
Doubtful 0.01% -- 0.07%
We apply the internal risk rating classifications consistently. For more
information about these classifications, please read the credit risk discussion
in our 2006 Annual Report to Shareholders.
Serious-doubt loans are loans that we do not think will be repaid even though
they are performing in accordance with the contractual terms or are fewer than
90 days past due. At March 31, 2007, approximately 88% of the loans classified
as serious-doubt loans were commercial loans. Two commercial loans accounted for
most of the increase in serious doubt loans during the first three months of
2007.
SERIOUS-DOUBT LOANS AT 3/31/07 AT 12/31/06 AT 3/31/06
------------------- ---------- ----------- ----------
Serious-doubt loans (in millions) $26.2 $18.8 $10.2
Ratio of serious doubt loans to
total loan balances 0.32% 0.23% 0.13%
On a percentage basis, the composition of the loan portfolio remained well
diversified and relatively unchanged.
COMPOSITION OF THE LOAN PORTFOLIO AT 3/31/07 AT 12/31/06 3/31/06
--------------------------------- ---------- ----------- -------
Commercial/financial/agricultural 30% 31% 32%
Commercial real estate/construction 21% 21% 19%
Commercial mortgage 17% 16% 17%
Residential mortgage 7% 7% 6%
Home equity 4% 4% 4%
Indirect loans 8% 8% 9%
Credit card 1% 1% 1%
Other consumer 5% 5% 5%
Secured with liquid collateral 7% 7% 7%
48
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
LOAN LOSS RESERVE AND LOAN LOSS PROVISION
We reserve an amount for loan losses that represents our best estimate of known
and inherent estimated losses and we make subjective judgments about amounts we
might be able to recover. We also consider loan growth, the results of the
internal risk rating analysis, the levels of loan recoveries and repayments, the
stability of the Delaware Valley regional economy, market interest rates, and
regulatory guidelines. For more information about how we establish and account
for the loan loss reserve, please read Note 2, "Summary of significant
accounting policies," in our 2006 Annual Report to Shareholders.
In light of the levels of past due, nonaccruing, and nonperforming loans at
March 31, 2007, we believe that our loan loss reserve and loan loss provision
reflected a reasonable assessment of inherent loan losses.
PROVISION FOR LOAN LOSSES 2007 Q1 2006 Q4 2006 Q1
------------------------- ------- ------- -------
Provision for loan losses (in millions) $3.6 $6.5 $4.0
RESERVE FOR LOAN LOSSES AT 3/31/07 AT 12/31/06 AT 3/31/06
----------------------- ---------- ----------- ----------
Reserve for loan losses (in millions) $94.5 $94.2 $93.6
Loan loss reserve ratio 1.17% 1.16% 1.24%
The reserve and provision for loan losses do not necessarily increase in
conjunction with loan growth, because newly added loans do not automatically
carry a higher degree of risk than loans already in the portfolio.
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.
For more information about these instruments and contracts, please read the
discussion that begins on page 49 of the 2006 Annual Report to Shareholders.
As of March 31, 2007, our derivative instruments included a total of $971.2
million of interest rate swaps, as follows:
- $423.1 million of swaps for loan clients for whom we exchanged floating
rates for fixed rates.
- $423.1 million of swaps with other financial institutions that exchanged
fixed rates for floating rates, in order to offset the exposure from
changes in the market values of the aforementioned swaps we made on behalf
of clients.
- $125.0 million of swaps with other financial institutions made in
connection with our issues of subordinated long-term debt. On March 31,
2006, we sold $250.0 million of interest rate swaps 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.
- $1.0 billion of interest rate floors associated with floating rate
commercial loans.
Our other contractual obligations as of March 31, 2007, consisted of:
- One $28.0 million loan from the Federal Home Loan Bank of Pittsburgh. 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
$67.5 million. In Delaware, we lease many of our branch offices. We lease
all of our branch and other offices outside of Delaware.
49
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
- 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 3, 2007.
- Certificates of deposit amounting to $4.43 billion.
- Letters of credit, unfunded loan commitments, and unadvanced lines of
credit amounting to $3.85 billion.
The following table summarizes our current contractual obligations and the
periods over which they extend.
LESS THAN 1 TO 3 3 TO 5 MORE THAN
PAYMENTS DUE (in millions) TOTAL 1 YEAR YEARS YEARS 5 YEARS
-------------------------- -------- --------- ------ ------ ---------
Certificates of deposit $4,432.4 $4,292.2 $ 95.6 $33.0 $ 11.6
Long-term debt obligations (1) 501.2 22.3 157.2 53.4 268.3
Operating lease obligations 67.5 10.9 19.2 13.4 24.0
Guaranty obligations 2.5 2.5 -- -- --
------- -------- ------ ----- ------
Total $5,003.6 $4,327.9 $272.0 $99.8 $303.9
======== ======== ====== ===== ======
(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 $125.0 million, was issued in 1998, was used to support
acquisitions and expansion, and is due in 2008. The second debt issue, for
$250.0 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 4, "Affiliates and acquisitions,"
which begins on page 75 of our 2006 Annual Report to Shareholders.
OTHER INFORMATION
ACCOUNTING PRONOUNCEMENTS
Please refer to Note 11, "Accounting pronouncements," of this report for a
discussion of the effects 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, mortgage
servicing assets, and other items.
For more information about our critical accounting policies, please refer to:
- Note 2, "Summary of significant accounting policies," which begins on page
71 of our 2006 Annual Report to Shareholders;
50
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
- Note 1, "Accounting and reporting policies," in this report; and
- Note 11, "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 include
references to our financial goals, dividend policy, financial and business
trends, new business results and outlook, business prospects, marketing
positioning, pricing trends, strategic initiatives, credit quality and 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.
These statements are based on a number of assumptions, estimates, expectations,
and assessments of potential developments, and are subject to various risks and
uncertainties that could cause our actual results to differ from our
expectations. Our ability to achieve the results reflected in these statements
could be affected adversely 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.
51
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to a variety of risks in the normal course of business. We
monitor these risks closely to safeguard the assets of our clients and company.
From time to time, however, we may incur losses related to these risks, and we
cannot assure that such losses will not occur.
The main risks in our banking business are credit risk, which we discuss
elsewhere in this report, and interest rate risk. The main risk in our advisory
businesses is financial market risk, since much of our advisory revenue is based
on the market values of investments we manage or hold for clients.
As a financial institution, nearly all of our assets and liabilities are
monetary in nature and priced according to market interest rates. Since interest
rates do not necessarily move in the same direction, or at the same magnitude,
as the prices of goods and services, we are unable to determine the effects of
inflation on our financial performance.
INTEREST RATE RISK
Interest rate risk is the risk to net interest income from changes in market
interest rates. Changes in market interest rates, and the pace at which they
occur, can affect the yields we earn on loans and investments and the rates we
pay on deposits and other borrowings. These changes can affect our net interest
income and net interest margin, positively or negatively, and ultimately affect
our financial performance.
Our interest rate risk management objective is to minimize the negative effect
on net interest income from market interest rate changes. We have an
asset/liability policy that sets limits for interest rate risk. Our current
policy states that changes in market interest rates should not reduce net
interest income by 10% or more within a 12-month period.
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, or ramps, 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.
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 core deposits and national funding. National 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. We discuss our funding strategy more fully in
the liquidity and funding section of this report.
- Selling most of our new fixed rate residential mortgage production into the
secondary market. By limiting the fixed rate residential mortgages 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. For more information about this, please read the
investment securities discussion in this report.
- Purchasing interest rate floors to hedge interest income risk associated
with some of our floating rate commercial loans. For more information about
this, please read Note 5, "Derivative and hedging activities," and the
derivatives and hedging instruments discussion in this report.
For more information about our interest rate risk management strategies, please
read the discussion that begins on page 43 of our 2006 Annual Report to
Shareholders.
52
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
INTEREST RATE RISK IN THE FIRST THREE MONTHS OF 2007
We continued to benefit from stability in the market interest rate environment.
During the first three months of 2007, the change in the yield on our earning
assets - an increase of 3 basis points - was the same as the change in the rate
on funds we used to support earning assets. We discuss this in more detail in
the net interest margin section of this report.
SELECTED YIELDS AND RATES
(on average, for the quarter) 2007 Q1 2006 Q4 2006 Q1
----------------------------- ------- ------- -------
YIELDS ON EARNING ASSETS
Commercial loans 8.21% 8.24% 7.53%
Retail loans 6.98% 6.95% 6.48%
Total loans 7.81% 7.82% 7.19%
Total earning assets 7.22% 7.19% 6.65%
RATES ON FUNDS TO SUPPORT EARNING
ASSETS
Core interest-bearing deposits 2.42% 2.35% 1.81%
Total interest-bearing deposits 3.73% 3.68% 2.88%
Total interest-bearing liabilities 4.04% 4.00% 3.23%
Total funds to support earning
assets 3.55% 3.52% 2.83%
The following table shows how our prime lending rate has changed. This rate
serves as a point of reference for a substantial number of our commercial
floating rate loans.
WILMINGTON TRUST PRIME LENDING RATE AT 3/31007 AT 12/31/06 AT 3/31/06
----------------------------------- ---------- ----------- ----------
Prime lending rate (period end) 8.25% 8.25% 7.75%
Prime lending rate (on average) 8.25% 8.25% 7.43%
The following table shows how closely matched the pricing and maturity
characteristics were of commercial floating rate loans and wholesale funding.
AS A PERCENTAGE OF TOTAL BALANCES AT 3/31/07 AT 12/31/06 AT 3/31/06
--------------------------------- ---------- ----------- ----------
Loans outstanding with floating
rates 73% 74% 77%
Commercial floating rate loans
repricing in < or = 30 days 93% 93% 81%
Commercial loans tied to a prime
rate 61% 61% 58%
Commercial loans tied to the
30-day LIBOR 34% 35% 34%
National CDs maturing in
< or = 90 days 77% 55% 75%
Short-term borrowings maturing in
< or = 90 days 95% 92% 84%
The percentage of national CDs maturing in 90 days or less decreased over the
last nine months of 2006 due to changes in the yield curve. With little
difference between 90-day rates and longer-term rates, we opted to purchase
instruments with longer terms.
As of March 31, 2007, our interest rate risk simulation model projected that:
- If short-term rates were to increase gradually over a 10-month period in a
series of moves that totaled 250 basis points, our net interest income
would increase 3.42% over the 12 months beginning March 31, 2007.
- If short-term rates were to decrease gradually over a 10-month period in a
series of moves that totaled 250 basis points, our net interest income
would decline by 3.36% over the 12 months beginning March 31, 2007.
53
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
IMPACT OF INTEREST RATE CHANGES FOR THE 12 MONTHS FOR THE 12 MONTHS
ON NET INTEREST INCOME BEGINNING 3/31/07 BEGINNING 12/31/06
------------------------------- ----------------- ------------------
Gradual increase of 250 basis points 3.42% 4.22%
Gradual decrease of 250 basis points (3.36)% (3.99)%
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
read Note 5, "Derivative and hedging activities," and the derivatives and
hedging instruments discussion in this report.
- To reflect pricing characteristics more accurately, we changed some of the
assets in the model from fixed rates to floating rates.
Our discussion of the interest rate risk simulation contains 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, loan 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 how actual interest rate changes might affect our net interest income.
FINANCIAL MARKET RISK
Financial market risk is the risk to income from fluctuations or volatility in
the equity markets, the fixed income markets, or both markets. These markets
determine the valuations of assets we manage or hold in custody for clients.
Since some of our CCS and WAS fees, and all of the affiliate money manager fees,
are based on asset valuations, the performance of one or more financial markets
can affect noninterest income, positively or negatively and ultimately affect
our financial results.
Financial markets also determine the valuations of investments in our securities
portfolio, and can have positive or negative effects on the amount of interest
income the securities portfolio generates. For more information about income
from the investment securities portfolio, please see the "Quarterly analysis of
earnings" in this report.
Our exposure to financial market risk is mitigated by our mix of businesses,
which produces a diversified stream of net interest and noninterest income. Most
of our financial market risk is to the noninterest income from our advisory
businesses. Some, but not all, of our advisory revenue is based on financial
market valuations.
In Wealth Advisory Services, all trust and investment advisory revenue is based
on the market values of equity, fixed income, and other classes of assets.
In Corporate Client Services, part of retirement services revenue is based on
the market values of retirement plans for which we are custodian. All revenue
from 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 revenue 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.
54
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
REVENUE SUBJECT TO FINANCIAL MARKET RISK 2007 Q1 2006 Q4 2006 Q1
---------------------------------------- ------- ------- -------
WAS trust and investment advisory revenue $ 36.9 $ 36.1 $ 34.2
CCS retirement services revenue 3.4 2.9 2.7
CCS investment/cash management revenue 3.3 3.0 2.1
Affiliate money manager revenue 4.8 5.4 4.9
Total revenue subject to financial market risk $ 48.4 $ 47.4 $ 43.9
Total noninterest income (after amortization) $ 91.4 $ 92.5 $ 82.7
Percent of total subject to financial market risk 53% 51% 53%
Total net interest and noninterest income $178.7 $178.4 $166.0
Percent of total subject to financial market risk 27% 27% 26%
ECONOMIC RISK
Economic risk is the risk to income from changes in economic conditions like
employment and population levels and the consumption of goods and services.
Changes in these and other conditions could change demand for the services we
provide and ultimately, affect loan and deposit balances, revenue, net income,
and overall results, positively or negatively.
Among our businesses, Regional Banking has the most exposure to economic risk.
We believe this exposure is mitigated by the diversified economy within the
Regional Banking geographic footprint and includes the life sciences, financial
services, pharmaceuticals, health care, education, construction, manufacturing,
retail, agriculture, and tourism sectors. This diversification provides a degree
of economic stability and helps the region withstand the effects of downturns in
any single sector.
As of the end of March 2007, the Federal Reserve Bank of Philadelphia reported
that unemployment rates for Delaware, New Jersey, and Pennsylvania were below
the U.S. national average and that the regional economic outlook was positive
for the remainder of 2007.
MARCH 2007 MARCH 2006
EMPLOYMENT -------------------------------------- --------------------------------------
INDICATORS EMPLOYMENT GROWTH* UNEMPLOYMENT RATE EMPLOYMENT GROWTH* UNEMPLOYMENT RATE
---------- ------------------ ----------------- ------------------ -----------------
Delaware 0.9% 3.4% 1.7% 3.6%
New Jersey 0.4% 4.3% 1.4% 4.7%
Pennsylvania 1.0% 3.8% 1.2% 4.6%
United States 1.4% 4.4% 2.1% 4.7%
* Year-over-year percent change.
Sources: U.S. Bureau of Labor Statistics and Federal Reserve Bank of
Philadelphia.
Population growth continued in the region, especially in Delaware. According to
the U.S. Census Bureau, Delaware was the 15th fastest-growing state in the
United States for the 12 months ended July 2006, and Delaware's growth rate was
more than double that of any state in the Bureau's northeast geographic area.
The parts of Maryland within our Regional Banking footprint are slated to grow
considerably as a result of the U.S. military's Base Realignment and Closing
(BRAC) initiative. One of the military bases that will benefit is the Aberdeen
Proving Ground, which is near our office in Bel Air, Maryland. According to the
Associated Press, on April 27, 2007, a military spokesman said that the proving
ground was expected to gain approximately 8,200 jobs
55
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
between 2009 and 2011. According to a December 2006 report by the Maryland
Department of Planning, BRAC will bring 45,000 to 60,000 direct and indirect
jobs to the Baltimore region over the next eight years.
Delaware is among the East Coast's leading poultry producers and we make loans
to clients in the poultry industry. It is impossible to predict how an outbreak
of avian influenza might affect the state's economy, our credit quality, or our
financial condition.
POULTRY INDUSTRY CREDIT EXPOSURE (in millions) AT 3/31/07 AT 12/31/06
---------------------------------------------- ---------- -----------
Loans outstanding to poultry industry clients (approximately) $ 68.1 $ 70.8
Total loans outstanding $8,088.4 $8,094.9
In February 2007 DaimlerChrysler AG announced plans to idle its plant in Newark,
Delaware, in 2009. This plant employs approximately 2,100 workers. It is too
early to determine what, if any, effect the idling of this plant might have on
the regional economy or our financial results.
OPERATIONAL RISK AND FIDUCIARY RISK
Operational risk is the risk of unexpected losses attributable to human error,
systems failures, fraud, or inadequate internal controls and procedures.
Fiduciary risk is the risk of loss that may occur if we were to breach a
fiduciary duty to a client. To mitigate operational and fiduciary risk, we have
policies, procedures, and internal controls designed to reduce the risks of
failing to comply with applicable legal and regulatory requirements and failing
to discharge our obligations to clients faithfully.
In view of the operational and fiduciary risks inherent in the markets and
businesses in which we engage, we aim to keep these risks at levels we believe
are acceptable, through policies and procedures for authorizing, approving,
documenting, and monitoring transactions, and for creating, selling, and
managing investment products; trading securities; and selecting counterparties.
All staff members share responsibility for adhering to our policies, procedures,
and internal controls. Our internal auditors continually monitor the overall
effectiveness of our system of internal controls.
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
and we remediate them as needed. Each 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, the Securities and Exchange
Commission, the New York Stock Exchange, 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 read the
section on regulatory matters in our 2006 Annual Report on Form 10-K.
56
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
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 legal
matters outstanding as of March 31, 2007, will have a materially adverse effect
on our consolidated financial statements. Furthermore, some of these proceedings
involve claims that we believe may be covered by insurance, and we have advised
our insurance carriers accordingly.
OTHER RISK
We are exposed to a variety of risks in the normal course of our business. We
monitor these risks closely and take every step to safeguard the assets of our
clients and our company. From time to time, however, we may incur losses related
to these risks, and there can be no assurance that such losses will not occur in
the future.
ITEM 4. CONTROLS AND PROCEDURES.
Our chairman and chief executive officer, and our chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of
March 31, 2007, 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 any material information about
our company (including our consolidated subsidiaries) that we are required to
include in the periodic filings we make with the Securities and Exchange
Commission. There was no change in our internal control over financial reporting
during the first quarter of 2007 that materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
57
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
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 statements. Further, management believes that some of the
claims may be covered by insurance, and has advised its insurance carriers of
the proceedings.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table shows our repurchases of Wilmington Trust stock during the
first quarter of 2007.
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
(b) Shares (or Units) Shares (or Units)
(a) Total Number of Average Price Purchased as Part of that May Yet Be
Shares (or Units) Paid per Share Publicly Announced Purchased Under the
Period Purchased (or Unit) Plans or Programs Plans or Programs
------ ------------------- -------------- -------------------- -------------------
Month #1
January 1, 2007 -
January 31, 2007 16,379 $40.86 16,379 6,632,380
Month #2
February 1, 2007 -
February 28, 2007 16,737 $44.06 16,737 6,615,643
Month #3
March 1, 2007 -
March 31, 2007 14,175 $42.62 14,175 6,601,468
------ ------ ------ ---------
Total 47,291 $42.52 47,291 6,601,468
====== ====== ====== =========
In April 2002, we announced a plan to repurchase up to 8 million shares of our
stock.
The Federal Reserve Board's policy is that bank holding companies should not pay
dividends unless the institution's prospective earnings retention rate is
consistent with its capital needs, asset quality, and overall financial
condition. We believe our payment of dividends during the first quarter of 2007
was consistent with the Federal Reserve Board's policy.
58
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
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.
59
Wilmington Trust Corporation
Form 10-Q for the three months ended March 31, 2007
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILMINGTON TRUST CORPORATION
Date: May 10, 2007 /s/ Ted T. Cecala
----------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and Chief
Executive Officer
(Authorized Officer)
Date: May 10, 2007 /s/ David R. Gibson
----------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
60