UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2007
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission File Number: 1-14659
--------------------------------------------------------
WILMINGTON TRUST CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0328154
--------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
RODNEY SQUARE NORTH,
1100 NORTH MARKET STREET,
WILMINGTON, DELAWARE 19890
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(302) 651-1000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12-b-2 of the Exchange Act.
[X] Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of September 30, 2007
------------------------------ ------------------------------------
COMMON STOCK - PAR VALUE $1.00 67,656,221
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES
THIRD 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 8
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Company overview 24
Summary of results 27
Regional Banking, net interest income, and net interest
margin 33
Wealth Advisory Services, Corporate Client Services, and
other noninterest income 47
Assets under management and administration 51
Noninterest expenses 53
Capital resources and funding 55
Asset quality 60
Item 3 Quantitative and Qualitative Disclosures About Market Risk 67
Item 4 Controls and Procedures 73
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 74
Item 1A Risk Factors 74
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 74
Item 3 Defaults upon Senior Securities 75
Item 4 Submission of Matters to a Vote of Security Holders 75
Item 5 Other Information 75
Item 6 Exhibits 75
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
Wilmington Trust Corporation and subsidiaries
----------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions; except share amounts) 2007 2006
-----------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 286.3 $ 249.7
----------------------------
Federal funds sold and securities purchased
under agreements to resell 16.5 68.9
----------------------------
Investment securities available for sale:
U.S. Treasury 101.9 125.2
Government agencies 701.4 807.1
Obligations of state and political subdivisions 17.5 8.1
Mortgage-backed securities 581.7 689.3
Other securities 446.7 483.2
-----------------------------------------------------------------------------------
Total investment securities available for sale 1,849.2 2,112.9
----------------------------
Investment securities held to maturity:
Obligations of state and political subdivisions
(fair values of $1.0 and $1.5, respectively) 1.0 1.4
Other securities (fair values of $1.2 and $0.3,
respectively) 1.2 0.3
-----------------------------------------------------------------------------------
Total investment securities held to maturity 2.2 1.7
----------------------------
Loans:
Commercial, financial, and agricultural 2,529.0 2,533.5
Real estate - construction 1,759.9 1,663.9
Mortgage - commercial 1,388.8 1,296.1
-----------------------------------------------------------------------------------
Total commercial loans 5,677.7 5,493.5
----------------------------
Mortgage - residential 566.3 536.9
Consumer 1,546.0 1,517.0
Secured with liquid collateral 546.5 547.5
-----------------------------------------------------------------------------------
Total retail loans 2,658.8 2,601.4
----------------------------
Total loans, net of unearned income 8,336.5 8,094.9
Reserve for loan losses (101.6) (94.2)
-----------------------------------------------------------------------------------
Net loans 8,234.9 8,000.7
----------------------------
Premises and equipment, net 148.9 150.3
Goodwill, net of amortization 329.0 291.4
Other intangible assets, net of amortization 38.7 35.4
Accrued interest receivable 82.1 74.0
Other assets 199.3 172.0
-----------------------------------------------------------------------------------
Total assets $11,187.1 $11,157.0
============================
1
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
----------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions; except share amounts) 2007 2006
------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 827.8 $ 913.6
Interest-bearing:
Savings 580.1 313.8
Interest-bearing demand 2,202.3 2,417.5
Certificates < $100,000 1,002.4 1,012.6
Local CDs > or = $100,000 389.6 474.4
------------------------------------------------------------------------------------
Total core deposits 5,002.2 5,131.9
----------------------------
National money market deposits 144.4 143.1
National CDs > or = $100,000 2,353.1 3,054.1
------------------------------------------------------------------------------------
Total deposits 7,499.7 8,329.1
----------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 1,915.5 1,130.8
U.S. Treasury demand 40.9 13.0
Line of credit 10.0 15.0
------------------------------------------------------------------------------------
Total short-term borrowings 1,966.4 1,158.8
----------------------------
Accrued interest payable 80.5 75.2
Other liabilities 150.9 146.1
Long-term debt 391.5 388.5
------------------------------------------------------------------------------------
Total liabilities 10,089.0 10,097.7
----------------------------
Minority interest 0.1 --
----------------------------
Stockholders' equity:
Common stock ($1.00 par value) authorized
150,000,000 shares; issued 78,528,346 78.5 78.5
Capital surplus 185.9 168.6
Retained earnings 1,199.4 1,130.4
Accumulated other comprehensive loss (47.7) (52.7)
------------------------------------------------------------------------------------
Total contributed capital and retained earnings 1,416.1 1,324.8
Less: Treasury stock, at cost, 10,872,125 and
10,068,832 shares, respectively (318.1) (265.5)
------------------------------------------------------------------------------------
Total stockholders' equity 1,098.0 1,059.3
----------------------------
Total liabilities and stockholders' equity $11,187.1 $11,157.0
============================
See Notes to Consolidated Financial Statements
2
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Wilmington Trust Corporation and subsidiaries
------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------
(In millions; except share amounts) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Interest and fees on loans $160.7 $152.6 $473.1 $427.6
Interest and dividends on investment securities:
Taxable interest 21.1 20.5 65.4 59.7
Tax-exempt interest 0.1 0.1 0.4 0.4
Dividends 1.1 1.5 3.7 4.5
Interest on federal funds sold and securities
purchased under agreements to resell 0.4 0.3 1.6 0.7
---------------------------------------------------------------------------------------------------
Total interest income 183.4 175.0 544.2 492.9
------------------------------------------
Interest on deposits 66.0 61.8 198.3 164.0
Interest on short-term borrowings 16.7 13.5 48.3 38.6
Interest on long-term debt 6.6 6.7 19.9 19.6
---------------------------------------------------------------------------------------------------
Total interest expense 89.3 82.0 266.5 222.2
------------------------------------------
Net interest income 94.1 93.0 277.7 270.7
Provision for loan losses (8.9) (6.6) (19.0) (14.8)
---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 85.2 86.4 258.7 255.9
------------------------------------------
NONINTEREST INCOME
Advisory fees:
Wealth Advisory Services:
Trust and investment advisory services 40.5 33.0 115.8 100.4
Mutual fund fees 5.3 5.3 15.4 15.0
Planning and other services 10.3 8.8 29.8 25.1
---------------------------------------------------------------------------------------------------
Total Wealth Advisory Services 56.1 47.1 161.0 140.5
------------------------------------------
Corporate Client Services:
Capital markets services 10.2 8.7 31.5 26.6
Entity management services 7.4 6.8 21.9 19.8
Retirement services 3.0 2.9 9.6 8.6
Investment/cash management services 3.0 2.7 9.4 7.3
---------------------------------------------------------------------------------------------------
Total Corporate Client Services 23.6 21.1 72.4 62.3
------------------------------------------
Cramer Rosenthal McGlynn 4.2 4.6 15.2 14.1
Roxbury Capital Management 0.4 -- 0.7 1.1
---------------------------------------------------------------------------------------------------
Advisory fees 84.3 72.8 249.3 218.0
Amortization of affiliate intangibles (1.2) (1.1) (3.4) (3.1)
---------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate intangibles 83.1 71.7 245.9 214.9
------------------------------------------
Service charges on deposit accounts 7.2 7.3 21.0 21.1
Loan fees and late charges 2.1 2.1 6.2 5.9
Card fees 2.0 2.4 5.9 6.7
Other noninterest income 0.6 1.0 4.3 5.0
Securities gains/(losses) (0.2) 0.1 (0.1) --
---------------------------------------------------------------------------------------------------
Total noninterest income 94.8 84.6 283.2 253.6
------------------------------------------
Net interest and noninterest income $180.0 $171.0 $541.9 $509.5
------------------------------------------
3
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------
(In millions; except share amounts) 2007 2006 2007 2006
------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and wages $ 44.1 $ 39.5 $ 127.7 $ 114.1
Incentives and bonuses 10.0 8.9 35.4 29.5
Employment benefits 12.7 11.4 38.9 36.8
Net occupancy 7.3 6.7 20.9 19.0
Furniture, equipment, and supplies 10.0 9.2 29.5 28.2
Advertising and contributions 2.0 2.2 7.5 6.2
Servicing and consulting fees 2.6 2.8 7.8 7.5
Subadvisor expense 2.7 2.7 7.7 8.4
Travel, entertainment, and training 2.8 2.5 7.4 7.0
Originating and processing fees 2.8 2.8 8.0 8.0
Legal and auditing fees 2.2 1.7 6.4 4.9
Impairment write-down -- 72.3 -- 72.3
Other noninterest expense 11.6 8.2 30.0 24.9
------------------------------------------------------------------------------------------------
Total noninterest expense 110.8 170.9 327.2 366.8
------------------------------------------
NET INCOME
Income before income taxes and minority interest 69.2 0.1 214.7 142.7
Income tax expense 22.9 (5.0) 75.9 46.3
------------------------------------------------------------------------------------------------
Net income before minority interest 46.3 5.1 138.8 96.4
Minority interest 0.1 (0.1) 0.8 0.1
------------------------------------------------------------------------------------------------
Net income $ 46.2 $ 5.2 $ 138.0 $ 96.3
==========================================
Net income per share:
Basic $ 0.68 $ 0.08 $ 2.02 $ 1.41
==========================================
Diluted $ 0.67 $ 0.07 $ 1.99 $ 1.38
==========================================
Weighted average shares outstanding (in thousands):
Basic 67,698 68,647 68,206 68,399
Diluted 68,582 69,900 69,222 69,695
See Notes to Consolidated Financial Statements
4
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Wilmington Trust Corporation and Subsidiaries
-----------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30 (in millions) 2007 2006
-------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 138.0 $ 96.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 19.0 14.8
Provision for depreciation and other amortization 17.0 15.0
Impairment write-down -- 72.3
Amortization of other intangible assets 4.3 4.0
Minority interest in net income 0.8 0.1
(Accretion)/amortization of discounts and premiums on investment
securities available for sale (0.7) 0.9
Deferred income taxes 1.6 (11.8)
Employer pension contribution (10.0) (15.0)
Originations of residential mortgages available for sale (78.5) (62.4)
Gross proceeds from sales of residential mortgages 79.3 63.0
Gains on sales of residential mortgages (0.8) (0.6)
Securities losses 0.1 --
Stock-based compensation expense 6.2 5.6
Tax benefit realized on employee exercise of stock options (1.2) (4.3)
Increase in other assets (27.1) (11.5)
Increase in other liabilities 17.6 46.5
-------------------------------------------------------------------------------------------
Net cash provided by operating activities 165.6 212.9
-----------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 43.6 21.2
Proceeds from maturities of investment securities available for sale 934.0 660.7
Proceeds from maturities of investment securities held to maturity 0.4 0.6
Purchases of investment securities available for sale (715.7) (732.4)
Purchases of investment securities held to maturity (0.9) --
Cash paid for acquisitions (27.9) (2.6)
Investment in affiliates (17.9) (15.9)
Purchase of client list -- (0.6)
Purchases of residential mortgages (7.0) (10.7)
Net increase in loans (246.2) (384.4)
Purchases of premises and equipment (12.8) (20.3)
Dispositions of premises and equipment 0.2 1.6
Increase in interest rate floor contracts -- (20.7)
Swap termination -- (12.7)
-------------------------------------------------------------------------------------------
Net cash used for investing activities $ (50.2) $(516.2)
-----------------
5
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
-----------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30 (in millions) 2007 2006
---------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in demand, savings, and interest-bearing demand
deposits $ (33.4) $(129.8)
Net (decrease)/increase in certificates of deposit (796.0) 724.8
Net increase/(decrease) in federal funds purchased and
securities sold under agreements to repurchase 784.7 (208.9)
Net increase/(decrease) in U.S. Treasury demand deposits 27.9 (11.1)
Net (decrease)/increase in line of credit (5.0) 15.0
Cash dividends (67.4) (63.5)
Distributions to minority shareholders (0.7) --
Proceeds from common stock issued under employment benefit plans 22.4 29.8
Tax benefit realized on employee exercise of stock options 1.2 4.3
Acquisition of treasury stock (65.1) (29.1)
---------------------------------------------------------------------------------------
Net cash (used for)/provided by financing activities (131.4) 331.5
-----------------
Effect of foreign currency translation on cash 0.2 0.3
-----------------
(Decrease)/increase in cash and cash equivalents (15.8) 28.5
Cash and cash equivalents at beginning of period 318.6 278.3
---------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 302.8 $ 306.8
=================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
-----------------
CASH PAID DURING THE NINE MONTHS ENDED SEPTEMBER 30 (in millions) 2007 2006
---------------------------------------------------------------------------------------
Interest $261.2 $190.7
Taxes 70.2 79.9
Liabilities were assumed in connection with our interests in Cramer Rosenthal
McGlynn, LLC and Roxbury Capital Management, LLC; and our acquisitions of
Bingham Legg Advisers, LLC; GTBA Holdings, Inc.; Amaco (Luxembourg) S.A.; and
PwC Corporate Services (Cayman) Limited as follows.
---------------
LIABILITIES ASSUMED DURING THE NINE MONTHS ENDED SEPTEMBER 30 (in millions) 2007 2006
---------------------------------------------------------------------------------------------
Fair value of assets acquired $ 4.6 $ 0.3
Goodwill and other intangible assets from acquisitions 43.7 19.7
Cash paid (45.8) (19.1)
---------------------------------------------------------------------------------------------
Liabilities assumed $ 2.5 $ 0.9
6
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
-------------
NON-CASH ITEMS DURING THE NINE MONTHS ENDED SEPTEMBER 30 (in millions) 2007 2006
--------------------------------------------------------------------------------------
Net unrealized gains/(losses) on securities,
net of tax of $(0.9) and $1.6, respectively $(1.5) $ 2.9
Net unrealized holding gains/(losses) on derivatives used for
cash flow hedges, net of tax of $2.1 and $(0.2), respectively 3.8 (0.6)
Foreign currency translation adjustment, net of tax of $0.3 and $0.4,
respectively 0.6 0.8
Adoption of FASB Interpretation No. 48 (1.6) --
Amortization of derivative costs, net of tax of $0.4 and $0.0,
respectively 0.9 0.1
Minimum pension liability adjustment, net of tax of $0.7 1.3 --
Postretirement benefits liability adjustment, net of tax of $0.1 (0.3) --
SERP (1) liability adjustment, net of tax of $0.2 0.2 --
(1) Supplemental executive retirement plan
See Notes to Consolidated Financial Statements
7
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 impairment, loan
origination fees, income taxes, 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 subsidiaries
(except for CRM) in which we are majority owner. We eliminate intercompany
balances and transactions in consolidation. Although we are majority owner of
CRM, we do not consolidate its results because CRM owners retain control over
certain governance matters. We do not consolidate the results of RCM because we
are not majority owner and RCM owners retain control over certain governance
matters. For more information about our accounting policies, 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, 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.
We may use the following abbreviations throughout this report:
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
8
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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, read Note 18, "Stock-based compensation plans," in our 2006 Annual
Report to Shareholders.
At September 30, 2007, we held approximately 10.9 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.
----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------
EFFECTS OF STOCK-BASED COMPENSATION (in millions) 2007 2006 2007 2006
----------------------------------------------------------------------------------------------
Compensation expense $1.6 $1.9 $6.2 $5.6
----------------------------------------------------------------------------------------------
Tax benefit 0.6 0.7 2.2 2.0
----------------------------------------------------------------------------------------------
Net income effect $1.0 $1.2 $4.0 $3.6
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------
STOCK OPTION VALUATION ASSUMPTIONS 2007 2006 2007 2006
----------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.28% - 4.60% 4.53% - 4.85% 4.28% - 4.84% 4.51% - 4.94%
----------------------------------------------------------------------------------------------------------
Volatility of Corporation's stock 13.53% - 13.88% 14.39% - 14.82% 13.53% - 18.25% 14.39% - 20.82%
----------------------------------------------------------------------------------------------------------
Expected dividend yield 3.32% - 3.32% 2.79% - 2.83% 2.88% - 3.32% 2.72% - 2.86%
----------------------------------------------------------------------------------------------------------
Expected life of options 4.5 - 8.2 years 4.3 - 8.4 years 4.5 - 8.2 years 4.3 - 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 FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
OPTIONS EXERCISED (dollars in millions) 2007 2006 2007 2006
-------------------------------------------------------------------------------------------
Number of options exercised 188,607 272,510 627,294 1,026,890
-------------------------------------------------------------------------------------------
Total intrinsic value of options exercised $ 1.1 $ 1.4 $ 3.5 $ 4.7
-------------------------------------------------------------------------------------------
Cash received from options exercised $ 6.1 $ 7.9 $ 22.4 $ 29.8
-------------------------------------------------------------------------------------------
Tax deduction realized from options exercised $ 0.7 $ 1.4 $ 2.3 $ 5.7
-------------------------------------------------------------------------------------------
9
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
----------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC VALUE
STOCK OPTION ACTIVITY FOR THE THREE EXERCISE CONTRACTUAL PER OPTION
MONTHS ENDED SEPTEMBER 30, 2007 STOCK OPTIONS PRICE TERM OUTSTANDING
----------------------------------------------------------------------------------------------
Outstanding at July 1, 2007 6,610,686 $35.12 6.0 years $6.09
----------------------------------------------------------------------------------------------
Granted 8,900 $40.48 $4.91
----------------------------------------------------------------------------------------------
Exercised (188,607) $30.97 $5.75
----------------------------------------------------------------------------------------------
Expired (1,800) $29.75 $5.33
----------------------------------------------------------------------------------------------
Forfeited (110,046) $39.83 $7.88
----------------------------------------------------------------------------------------------
Outstanding at September 30, 2007 6,319,133 $35.17 6.1 years $6.07
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Exercisable at September 30, 2007 3,616,195 $31.21 4.3 years $5.75
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC VALUE
STOCK OPTION ACTIVITY FOR THE THREE EXERCISE CONTRACTUAL PER OPTION
MONTHS ENDED SEPTEMBER 30, 2006 STOCK OPTIONS PRICE TERM OUTSTANDING
----------------------------------------------------------------------------------------------
Outstanding at July 1, 2006 6,493,846 $33.11 6.3 years $5.96
----------------------------------------------------------------------------------------------
Granted 41,736 $42.72
----------------------------------------------------------------------------------------------
Exercised (272,510) $35.73
----------------------------------------------------------------------------------------------
Expired (1,300) $27.86
----------------------------------------------------------------------------------------------
Forfeited (44,415) $36.93
----------------------------------------------------------------------------------------------
Outstanding at September 30, 2006 6,217,357 $33.35 6.4 years $5.89
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Exercisable at September 30, 2006 3,325,858 $29.28 4.6 years $5.44
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC VALUE
STOCK OPTION ACTIVITY FOR THE NINE EXERCISE CONTRACTUAL PER OPTION
MONTHS ENDED SEPTEMBER 30, 2007 STOCK OPTIONS PRICE TERM OUTSTANDING
----------------------------------------------------------------------------------------------
Outstanding at January 1, 2007 6,161,967 $33.43 6.3 years $5.89
----------------------------------------------------------------------------------------------
Granted 964,933 $43.62 $7.02
----------------------------------------------------------------------------------------------
Exercised (627,294) $29.85 $5.50
----------------------------------------------------------------------------------------------
Expired (3,000) $28.75 $5.17
----------------------------------------------------------------------------------------------
Forfeited (177,473) $38.50 $7.55
----------------------------------------------------------------------------------------------
Outstanding at September 30, 2007 6,319,133 $35.17 6.1 years $6.07
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Exercisable at September 30, 2007 3,616,195 $31.21 4.3 years $5.75
----------------------------------------------------------------------------------------------
10
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
----------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC VALUE
STOCK OPTION ACTIVITY FOR THE NINE EXERCISE CONTRACTUAL PER OPTION
MONTHS ENDED SEPTEMBER 30, 2006 STOCK OPTIONS PRICE TERM OUTSTANDING
----------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 6,335,292 $30.56 6.8 years $5.48
----------------------------------------------------------------------------------------------
Granted 998,202 $43.19
----------------------------------------------------------------------------------------------
Exercised (1,026,890) $27.21
----------------------------------------------------------------------------------------------
Expired (2,100) $27.38
----------------------------------------------------------------------------------------------
Forfeited (87,147) $35.87
----------------------------------------------------------------------------------------------
Outstanding at September 30, 2006 6,217,357 $33.35 6.4 years $5.89
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Exercisable at September 30, 2006 3,325,858 $29.28 4.6 years $5.44
----------------------------------------------------------------------------------------------
UNVESTED STOCK OPTIONS
At September 30, 2007, total unrecognized compensation cost related to unvested
options was $8.6 million. We expect to record that expense over a weighted
average period of 1.9 years.
----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
UNVESTED STOCK OPTIONS FOR THE THREE FAIR VALUE
MONTHS ENDED SEPTEMBER 30, 2007 STOCK OPTIONS AT GRANT DATE
----------------------------------------------------------------------------------------------
Unvested at July 1, 2007 2,819,494 $6.55
----------------------------------------------------------------------------------------------
Granted 8,900 $4.91
----------------------------------------------------------------------------------------------
Vested (19,256) $5.93
----------------------------------------------------------------------------------------------
Exercised -- --
----------------------------------------------------------------------------------------------
Expired -- --
----------------------------------------------------------------------------------------------
Forfeited (106,200) $7.99
----------------------------------------------------------------------------------------------
Unvested at September 30, 2007 2,702,938 $6.49
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
UNVESTED STOCK OPTIONS FOR THE THREE FAIR VALUE
MONTHS ENDED SEPTEMBER 30, 2006 STOCK OPTIONS AT GRANT DATE
----------------------------------------------------------------------------------------------
Unvested at July 1, 2006 2,894,613 $6.63
----------------------------------------------------------------------------------------------
Granted 41,736 $6.03
----------------------------------------------------------------------------------------------
Vested (6,035) $5.93
----------------------------------------------------------------------------------------------
Exercised -- --
----------------------------------------------------------------------------------------------
Expired -- --
----------------------------------------------------------------------------------------------
Forfeited (38,815) $5.78
----------------------------------------------------------------------------------------------
Unvested at September 30, 2006 2,891,499 $6.41
----------------------------------------------------------------------------------------------
11
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
----------------------------------------------------------------------------------
UNVESTED STOCK OPTIONS FOR THE NINE MONTHS WEIGHTED AVERAGE FAIR
ENDED SEPTEMBER 30, 2007 STOCK OPTIONS VALUE AT GRANT DATE
----------------------------------------------------------------------------------
Unvested at January 1, 2007 2,850,400 $6.41
----------------------------------------------------------------------------------
Granted 964,933 $7.02
----------------------------------------------------------------------------------
Vested (946,472) $6.67
----------------------------------------------------------------------------------
Exercised (1,000) $5.38
----------------------------------------------------------------------------------
Expired -- --
----------------------------------------------------------------------------------
Forfeited (164,923) $7.19
----------------------------------------------------------------------------------
Unvested at September 30, 2007 2,702,938 $6.49
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
UNVESTED STOCK OPTIONS FOR THE NINE MONTHS WEIGHTED AVERAGE FAIR
ENDED SEPTEMBER 30, 2006 STOCK OPTIONS VALUE AT GRANT DATE
----------------------------------------------------------------------------------
Unvested at January 1, 2006 3,301,358 $5.59
----------------------------------------------------------------------------------
Granted 998,202 $7.10
----------------------------------------------------------------------------------
Vested (1,329,314) $4.95
----------------------------------------------------------------------------------
Exercised -- --
----------------------------------------------------------------------------------
Expired -- --
----------------------------------------------------------------------------------
Forfeited (78,747) $5.81
----------------------------------------------------------------------------------
Unvested at September 30, 2006 2,891,499 $6.41
----------------------------------------------------------------------------------
RESTRICTED STOCK GRANTS
We amortize the value of restricted stock grants into stock-based compensation
expense on a straight-line basis over the requisite service period for the
entire award. At September 30, 2007, total unrecognized compensation cost
related to restricted stock grants was $1.8 million. We expect to record that
expense over a weighted average period of 1.3 years.
Under our incentive plans, the vesting period for restricted stock awards is
accelerated upon retirement and in certain other 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, we 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 third quarter, we
recorded $0.2 million of expense for restricted stock grants. In the first nine
months of 2007, we recorded $1.9 million of expense for restricted stock grants.
---------------------------------------------------------------------------------
RESTRICTED STOCK ACTIVITY FOR THE WEIGHTED AVERAGE FAIR
THREE MONTHS ENDED SEPTEMBER 30, 2007 RESTRICTED SHARES VALUE AT GRANT DATE
---------------------------------------------------------------------------------
Outstanding at July 1, 2007 90,874 $42.72
---------------------------------------------------------------------------------
Granted -- --
---------------------------------------------------------------------------------
Vested -- --
---------------------------------------------------------------------------------
Forfeited (4,743) $41.82
---------------------------------------------------------------------------------
Outstanding at September 30, 2007 86,131 $42.77
---------------------------------------------------------------------------------
12
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
---------------------------------------------------------------------------------
RESTRICTED STOCK ACTIVITY FOR THE WEIGHTED AVERAGE FAIR
THREE MONTHS ENDED SEPTEMBER 30, 2006 RESTRICTED SHARES VALUE AT GRANT DATE
---------------------------------------------------------------------------------
Outstanding at July 1, 2006 53,719 $40.75
---------------------------------------------------------------------------------
Granted 3,000 $42.31
---------------------------------------------------------------------------------
Vested -- --
---------------------------------------------------------------------------------
Forfeited (984) $40.60
---------------------------------------------------------------------------------
Outstanding at September 30, 2006 55,735 $40.84
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
RESTRICTED STOCK ACTIVITY
FOR THE NINE MONTHS ENDED SEPTEMBER WEIGHTED AVERAGE FAIR
30, 2007 RESTRICTED SHARES VALUE AT GRANT DATE
---------------------------------------------------------------------------------
Outstanding at January 1, 2007 55,735 $40.84
---------------------------------------------------------------------------------
Granted 54,370 $43.36
---------------------------------------------------------------------------------
Vested (19,231) $39.07
---------------------------------------------------------------------------------
Forfeited (4,743) $41.82
---------------------------------------------------------------------------------
Outstanding at September 30, 2007 86,131 $42.77
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
RESTRICTED STOCK ACTIVITY
FOR THE NINE MONTHS ENDED SEPTEMBER WEIGHTED AVERAGE FAIR
30, 2006 RESTRICTED SHARES VALUE AT GRANT DATE
---------------------------------------------------------------------------------
Outstanding at January 1, 2006 25,730 $34.84
---------------------------------------------------------------------------------
Granted 40,860 $43.23
---------------------------------------------------------------------------------
Vested (9,871) $35.12
---------------------------------------------------------------------------------
Forfeited (984) $40.60
---------------------------------------------------------------------------------
Outstanding at September 30, 2006 55,735 $40.84
---------------------------------------------------------------------------------
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 September 30,
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 $0.5 million. For the nine months ended September 30, 2007, total
recognized compensation cost related to the employee stock purchase plan was
$0.5 million and total unrecognized compensation cost related to this plan was
$0.5 million.
----------------------------------------------------------------------------------------------------
SHARES RESERVED FOR SUBSCRIPTIONS
EMPLOYEE STOCK PURCHASE PLAN 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 $37.06
----------------------------------------------------------------------------------------------------
Forfeitures 6,038 (6,038) $30.54 - $37.06
----------------------------------------------------------------------------------------------------
Shares issued -- (102,348) $30.54
----------------------------------------------------------------------------------------------------
Balance at January 1, 2007 500,777 94,001
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Subscriptions entered into on June 1, 2007 (106,012) 106,012 $36.64
----------------------------------------------------------------------------------------------------
Forfeitures 2,090 (2,090) $37.06
----------------------------------------------------------------------------------------------------
Shares issued -- (91,911) $37.06
----------------------------------------------------------------------------------------------------
Balance at June 30, 2007 396,855 106,012
----------------------------------------------------------------------------------------------------
Forfeitures 1,639 (1,639) $36.64
----------------------------------------------------------------------------------------------------
Balance at September 30, 2007 398,494 104,373
----------------------------------------------------------------------------------------------------
13
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
NOTE 3 - COMPREHENSIVE INCOME
-------------------- -------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------
COMPREHENSIVE INCOME (in millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------
Net income $46.2 $ 5.2 $138.0 $96.3
Other comprehensive income, net of tax:
Net unrealized gains/(losses) on securities 5.2 20.1 (1.6) 2.9
Reclassification adjustment for securities losses/(gains)
included in net income 0.1 (0.1) 0.1 --
Net unrealized holding gains/(losses) arising during
the period on derivatives used for cash flow hedges 8.8 5.2 3.8 (0.6)
Amortization of derivative costs 0.4 0.1 0.9 0.1
Foreign currency translation adjustments 0.3 0.1 0.6 0.8
SERP liability adjustment -- -- 0.2 --
Postretirement benefits liability adjustment 0.3 -- (0.3) --
Minimum pension liability adjustment 0.5 -- 1.3 --
---------------------------------------------------------------------------------------------------------
Total comprehensive income $61.8 $30.6 $143.0 $99.5
==========================================
NOTE 4 - EARNINGS PER SHARE
-------------------- -------------------
COMPUTATION OF BASIC AND DILUTED NET EARNINGS PER SHARE FOR THE THREE MONTHS FOR THE NINE MONTHS
(in millions, except earnings per share and dividends per ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
share) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 46.2 $ 5.2 $138.0 $96.3
Denominator for basic earnings per share -
weighted-average shares 67.7 68.6 68.2 68.4
---------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 0.9 1.3 1.0 1.3
---------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed conversions 68.6 69.9 69.2 69.7
---------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.68 $ 0.08 $ 2.02 $1.41
==========================================
Diluted earnings per share $ 0.67 $ 0.07 $ 1.99 $1.38
==========================================
Cash dividends declared per share $0.335 $0.315 $0.985 $0.93
Anti-dilutive stock options excluded 0.2 0.2 0.2 0.6
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 September 30, 2007, the notional amount hedged in derivative instruments
for our own interest rate risk management purposes amounted to $1,125.0 million,
as follows:
14
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
- $1,000.0 million of interest rate floor contracts in connection with
floating rate loans in our commercial loan portfolio, and
- $125.0 million of swaps with other financial institutions made in
connection with our issues of subordinated long-term debt.
Both of these amounts were the same as at December 31, 2006.
We amortize the premiums we pay for interest rate floor contracts over the life
of each floor and net the expense against interest income from floating rate
loans.
------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------
INTEREST RATE FLOOR EXPENSE (in millions) 2007 2006 2007 2006
--------------------------------------------------------------------------------------
Interest rate floor contract expense $0.6 $0.1 $1.3 $0.1
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.
As of September 30, 2007, we also had client swap contracts of $378.1 million
and an equal amount of swap contracts with third parties to mirror the client
swaps, for a total of $756.2 million of swaps associated with loans to clients.
For more information about our derivative and hedging activities, read Note 14,
"Derivative financial instruments," in our 2006 Annual Report to Shareholders.
NOTE 6 - RESERVE FOR LOAN LOSSES
------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------
CHANGES IN THE RESERVE FOR LOAN LOSSES (in millions) 2007 2006 2007 2006
-------------------------------------------------------------------------------------------------
Reserve for loan losses at beginning of period $ 97.5 $94.3 $ 94.2 $ 91.4
Charge-offs (6.4) (8.6) (16.9) (17.5)
Recoveries 1.6 1.3 5.3 4.9
-------------------------------------------------------------------------------------------------
Net charge-offs (4.8) (7.3) (11.6) (12.6)
Provision charged to operations 8.9 6.6 19.0 14.8
-------------------------------------------------------------------------------------------------
Reserve for loan losses at end of period $101.6 $93.6 $101.6 $ 93.6
==========================================
15
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
-----------------------------------------------------------------------
AT SEPTEMBER 30, 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) $358.8 $29.8 $329.0 $321.2 $29.8 $291.4
=======================================================================
Other intangibles:
Amortizing:
Mortgage servicing rights $ 8.7 $ 7.0 $ 1.7 $ 8.3 $ 6.4 $ 1.9
Client lists 56.4 20.1 36.3 49.3 16.5 32.8
Acquisition costs 1.7 1.7 -- 1.7 1.7 --
Other intangibles 1.9 1.2 0.7 1.8 1.1 0.7
---------------------------------------------------------------------------------------------------------
Total other intangibles $ 68.7 $30.0 $ 38.7 $ 61.1 $25.7 $ 35.4
=======================================================================
------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------
AMORTIZATION EXPENSE OF OTHER INTANGIBLES (in millions) 2007 2006 2007 2006
-------------------------------------------------------------------------------------------------------
Amortization expense of other intangible assets $1.5 $1.4 $4.3 $4.0
--------------------------------
FUTURE AMORTIZATION EXPENSE OF OTHER INTANGIBLE ASSETS
FOR THE YEAR ENDED DECEMBER 31 (in millions) 2008 2009 2010 2011 2012
---------------------------------------------------------------------------------------------
Estimated future amortization expense of other intangibles $5.5 $5.0 $4.4 $3.8 $3.1
----------------------------------------------------
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
Goodwill acquired -- 17.0 2.3 17.3 36.6
Increase in carrying value due to
foreign currency translation adjustments -- -- 1.0 -- 1.0
----------------------------------------------------------------------------------------------------
Balance as of September 30, 2007 $3.8 $105.9 $26.0 $193.3 $329.0
====================================================
The goodwill acquired in 2007 consists of:
- $17.0 million recorded under Wealth Advisory Services in connection with
the acquisition of Bingham Legg Advisers, LLC.
- $2.3 million recorded under Corporate Client Services in connection with
the acquisition of Amaco (Luxembourg) S.A.
- $4.3 million recorded under Affiliate Money Managers in connection with an
increase in WT Investments, Inc.'s equity interest in Cramer Rosenthal
McGlynn.
- $13.0 million recorded under Affiliate Money Managers in connection with
the purchase of a portion of the Class B interests of principals of the
Portland, Oregon, office of Roxbury Capital Management.
16
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
WEIGHTED WEIGHTED
CHANGES IN OTHER INTANGIBLE AVERAGE AVERAGE
ASSETS FOR THE NINE MONTHS ENDED AMOUNT RESIDUAL AMORTIZATION AMOUNT RESIDUAL AMORTIZATION
SEPTEMBER 30 (in millions) ASSIGNED VALUE PERIOD ASSIGNED VALUE PERIOD
--------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights $0.4 $-- 8 years $0.3 $-- 8 years
Client lists 7.0 -- 16 years 5.9 -- 16 years
Increase in carrying value of client lists
due to foreign currency
translation adjustments 0.1 -- -- 0.2 -- --
Other intangibles 0.1 -- 9 years 0.2 -- 6 years
------------------- -------------------
Changes in other intangible assets $7.6 $-- $6.6 $--
=================== ===================
The amount recorded for client lists in 2007 consists of:
- $6.3 million recorded under Wealth Advisory Services in connection with the
acquisition of Bingham Legg Advisers, LLC.
- $0.7 million recorded under Affiliate Money Managers in connection with an
increase in WT Investments, Inc.'s equity interest in Cramer Rosenthal
McGlynn.
NOTE 8 - COMPONENTS OF NET PERIODIC BENEFIT COST
We offer a pension plan, a supplemental executive retirement plan (SERP), and
a postretirement benefit plan for which we record net periodic costs. For
more information about these plans, read Note 17, "Pension and other
postretirement benefits," in our 2006 Annual Report to Shareholders.
-------------------------------------------------
POSTRETIREMENT
COMPONENTS OF NET PERIODIC BENEFIT COST PENSION BENEFITS SERP BENEFITS BENEFITS
For the three months ended September 30 -------------------------------------------------
(in millions) 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 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 $10.0 $15.0 $ 0.1 $0.1 $ 1.4 $ 1.0
17
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
-------------------------------------------------
POSTRETIREMENT
COMPONENTS OF NET PERIODIC BENEFIT COST PENSION BENEFITS SERP BENEFITS BENEFITS
For the three months ended September 30 -------------------------------------------------
(in millions) 2007 2006 2007 2006 2007 2006
-------------------------------------------------------------------------------------------
Service cost $ 6.8 $ 6.2 $0.5 $0.6 $ 1.0 $ 0.9
Interest cost 8.4 7.7 1.0 1.0 1.8 1.6
Expected return on plan assets (12.0) (10.6) -- -- -- --
Amortization of prior service cost 0.6 0.6 0.3 0.3 (0.4) (0.3)
Recognized actuarial loss 1.3 1.5 0.1 0.2 0.6 0.6
-------------------------------------------------------------------------------------------
Net periodic benefit cost $ 5.1 $ 5.4 $1.9 $2.1 $ 3.0 $ 2.8
=================================================
Employer contributions $ 10.0 $ 15.0 $0.4 $0.4 $ 4.1 $ 3.2
Expected annual contribution $ 10.0 $0.6 $ 5.5
NOTE 9 - 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 amortized cost. 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, 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 SEPTEMBER 30, 2007 FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(in millions) VALUE LOSSES VALUE LOSSES VALUE LOSSES
----------------------------------------------------------------------------------------------------
U.S. Treasury $ -- $ -- $ 76.6 $ (0.2) $ 76.6 $ (0.2)
Government agencies 109.8 (0.1) 204.6 (1.3) 314.4 (1.4)
Mortgage-backed securities 1.7 -- 557.9 (18.5) 559.6 (18.5)
Corporate debt securities 146.4 (6.6) 68.4 (3.4) 214.8 (10.0)
Preferred stocks 37.8 (2.0) 10.3 (1.2) 48.1 (3.2)
----------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $295.7 $(8.7) $917.8 $(24.6) $1,213.5 $ (33.3)
==================================================================
--------------------------------------------------------------------
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)
====================================================================
18
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
NOTE 10 - 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 this 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.
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. During the third quarter of 2007, an agreement with state
taxing authorities required us to adjust the FIN 48 reserve, which resulted in
a credit to income tax expense of approximately $2.7 million.
NOTE 11 - 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).
We report segment assets on an average-balance basis, because we
- Believe average balances offer a more relevant measure of business trends
than period-end balances;
- Maintain and review all internal segment data on an average-balance basis;
and
- Base some expense allocations on an average-balance basis.
For more information about these segments, 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 differs from previously published figures due
to changes in reporting methodology and/or organizational structure.
19
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
------------------------------------------------------
WEALTH CORPORATE AFFILIATE
THREE MONTHS ENDED SEPTEMBER 30, 2007 REGIONAL ADVISORY CLIENT MONEY
(in millions) BANKING SERVICES SERVICE MANAGERS TOTALS
------------------------------------------------------------------------------------------------------
Net interest income $ 87.6 $ 6.4 $ 3.2 $(3.1) $ 94.1
Provision for loan losses (7.8) (1.1) -- -- (8.9)
------------------------------------------------------------------------------------------------------
Net interest income after provision 79.8 5.3 3.2 (3.1) 85.2
Advisory fees:
Wealth Advisory Services 0.7 53.6 1.8 -- 56.1
Corporate Client Services 0.3 -- 23.3 -- 23.6
Affiliate Money Managers -- -- -- 4.6 4.6
------------------------------------------------------------------------------------------------------
Advisory fees 1.0 53.6 25.1 4.6 84.3
Amortization of affiliate intangibles -- (0.8) (0.2) (0.2) (1.2)
------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate intangibles 1.0 52.8 24.9 4.4 83.1
Other noninterest income 11.3 0.4 0.2 -- 11.9
Securities losses (0.2) -- -- -- (0.2)
------------------------------------------------------------------------------------------------------
Net interest and noninterest income 91.9 58.5 28.3 1.3 180.0
Noninterest expense (43.0) (46.2) (21.6) -- (110.8)
------------------------------------------------------------------------------------------------------
Segment profit before income taxes 48.9 12.3 6.7 1.3 69.2
Applicable income taxes and minority interest 15.5 4.2 2.5 0.8 23.0
------------------------------------------------------------------------------------------------------
Segment net income $ 33.4 $ 8.1 $ 4.2 $ 0.5 $ 46.2
======================================================
Depreciation and amortization $ 3.2 $ 2.3 $ 1.1 $ 0.2 $ 6.8
20
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
------------------------------------------------------
WEALTH CORPORATE AFFILIATE
THREE MONTHS ENDED SEPTEMBER 30, 2006 REGIONAL ADVISORY CLIENT MONEY
(in millions) BANKING SERVICES SERVICES MANAGERS TOTALS
------------------------------------------------------------------------------------------------------
Net interest income $ 85.7 $ 6.4 $ 4.4 $ (3.5) $ 93.0
Provision for loan losses (6.7) 0.1 -- -- (6.6)
------------------------------------------------------------------------------------------------------
Net interest income after provision 79.0 6.5 4.4 (3.5) 86.4
Advisory fees:
Wealth Advisory Services 0.6 45.2 1.3 -- 47.1
Corporate Client Services 0.2 -- 20.9 -- 21.1
Affiliate Money Managers -- -- -- 4.6 4.6
------------------------------------------------------------------------------------------------------
Advisory fees 0.8 45.2 22.2 4.6 72.8
Amortization of affiliate intangibles -- (0.7) (0.2) (0.2) (1.1)
------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate intangibles 0.8 44.5 22.0 4.4 71.7
Other noninterest income 12.2 0.4 0.2 -- 12.8
Securities gains 0.1 -- -- -- 0.1
------------------------------------------------------------------------------------------------------
Net interest and noninterest income 92.1 51.4 26.6 0.9 171.0
Noninterest expense (39.6) (40.4) (18.5) (72.4) (170.9)
------------------------------------------------------------------------------------------------------
Segment profit before income taxes 52.5 11.0 8.1 (71.5) 0.1
Applicable income taxes and minority interest 18.4 3.7 2.8 (30.0) (5.1)
------------------------------------------------------------------------------------------------------
Segment net income $ 34.1 $ 7.3 $ 5.3 $(41.5) $ 5.2
======================================================
Depreciation and amortization $ 3.1 $ 2.4 $ 1.2 $ 0.3 $ 7.0
21
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
--------------------------------------------------------
WEALTH CORPORATE AFFILIATE
NINE MONTHS ENDED SEPTEMBER 30, 2007 REGIONAL ADVISORY CLIENT MONEY
(in millions) BANKING SERVICES SERVICES MANAGERS TOTALS
--------------------------------------------------------------------------------------------------------
Net interest income $ 257.7 $ 18.8 $ 10.4 $ (9.2) $ 277.7
Provision for loan losses (17.5) (1.5) -- -- (19.0)
--------------------------------------------------------------------------------------------------------
Net interest income after provision 240.2 17.3 10.4 (9.2) 258.7
Advisory fees:
Wealth Advisory Services 2.0 154.4 4.6 -- 161.0
Corporate Client Services 0.9 -- 71.5 -- 72.4
Affiliate Money Managers -- -- -- 15.9 15.9
--------------------------------------------------------------------------------------------------------
Advisory fees 2.9 154.4 76.1 15.9 249.3
Amortization of affiliate intangibles -- (2.2) (0.5) (0.7) (3.4)
--------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate intangibles 2.9 152.2 75.6 15.2 245.9
Other noninterest income 35.4 1.3 0.7 -- 37.4
Securities losses (0.1) -- -- -- (0.1)
--------------------------------------------------------------------------------------------------------
Net interest and noninterest income 278.4 170.8 86.7 6.0 541.9
Noninterest expense (125.3) (138.8) (63.0) (0.1) (327.2)
--------------------------------------------------------------------------------------------------------
Segment profit before income taxes 153.1 32.0 23.7 5.9 214.7
Applicable income taxes and minority interest 53.6 11.3 8.3 3.5 76.7
--------------------------------------------------------------------------------------------------------
Segment net income $ 99.5 $ 20.7 $ 15.4 $ 2.4 $ 138.0
========================================================
Depreciation and amortization $ 9.8 $ 6.7 $ 3.4 $ 0.7 $ 20.6
Investment in equity method investees $ -- $ -- $ -- $215.3 $ 215.3
Segment average assets $9,137.1 $1,406.8 $201.5 $208.6 $10,954.0
22
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
--------------------------------------------------------
WEALTH CORPORATE AFFILIATE
NINE MONTHS ENDED SEPTEMBER 30, 2006 REGIONAL ADVISORY CLIENT MONEY
(in millions) BANKING SERVICES SERVICES MANAGERS TOTALS
--------------------------------------------------------------------------------------------------------
Net interest income $ 250.5 $ 19.2 $ 10.6 $ (9.6) $ 270.7
Provision for loan losses (14.1) (0.7) -- -- (14.8)
--------------------------------------------------------------------------------------------------------
Net interest income after provision 236.4 18.5 10.6 (9.6) 255.9
Advisory fees:
Wealth Advisory Services 1.7 135.1 3.7 -- 140.5
Corporate Client Services 0.7 -- 61.6 -- 62.3
Affiliate Money Managers -- -- -- 15.2 15.2
--------------------------------------------------------------------------------------------------------
Advisory fees 2.4 135.1 65.3 15.2 218.0
Amortization of affiliate intangibles -- (2.1) (0.3) (0.7) (3.1)
--------------------------------------------------------------------------------------------------------
Advisory fees after amortization
of affiliate intangibles 2.4 133.0 65.0 14.5 214.9
Other noninterest income 36.1 1.8 0.8 -- 38.7
--------------------------------------------------------------------------------------------------------
Net interest and noninterest income 274.9 153.3 76.4 4.9 509.5
Noninterest expense (116.6) (122.5) (55.3) (72.4) (366.8)
--------------------------------------------------------------------------------------------------------
Segment profit before income taxes 158.3 30.8 21.1 (67.5) 142.7
Applicable income taxes and minority interest 55.7 10.9 7.6 (27.8) 46.4
--------------------------------------------------------------------------------------------------------
Segment net income $ 102.6 $ 19.9 $ 13.5 $(39.7) $ 96.3
========================================================
Depreciation and amortization $ 8.9 $ 6.8 $ 3.5 $ 0.7 $ 19.9
Investment in equity method investees $ -- $ -- $ -- $199.0 $ 199.0
Segment average assets $8,522.6 $1,377.4 $207.1 $264.3 $10,371.4
NOTE 12 - 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.
23
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 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.
24
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
- 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, 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, Minnesota, Nevada, New York, South Carolina,
Vermont, Grand Cayman, the Channel Islands, Dublin (Ireland), London (England),
Frankfurt (Germany), and Luxembourg.
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.
25
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
WAS has offices in California, Connecticut, Delaware, Florida, Georgia,
Maryland, Massachusetts, 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.
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, read Note 4, "Affiliates and acquisitions,"
in our 2006 Annual Report to Shareholders. For more information about segment
reporting, read Note 11, "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, read Note 1, "Nature of business," in our 2006 Annual Report to
Shareholders.
Since January 1, 2007, we:
- Formed WT Luxembourg SARL to acquire Amaco (Luxembourg) S.A. (Amaco) and
hold the equity interests in most of our offshore companies. We
subsequently changed Amaco's name to Wilmington Trust SP Services
(Luxembourg) S.A.
- Acquired Bingham Legg Advisers, LLC (BLA), which we subsequently liquidated
into Wilmington Trust FSB.
- Acquired BLA Holdings Corp. (as a subsidiary of BLA).
- Acquired BDG&CO, a company that holds nominee title to shares of stock
managed by BLA and whose partners are BLA (now Wilmington Trust FSB) and
BLA Holdings Corp.
26
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 2006, for historical reference.
- The results of our operations for the third quarter and first nine months
of 2007, compared with the corresponding period in 2006. In some cases, we
provide amounts for other periods to provide historical context.
Year-to-date (YTD) references are as of September 30.
For the 2007 third quarter, net income was $46.2 million and earnings per share
(on a diluted basis) were $0.67 per share. Compared to the year-ago third
quarter, the Wealth Advisory and Corporate Client Services businesses each
recorded double-digit increases in revenue. Although the pace of loan growth
slowed, loan balances rose for the 18th consecutive quarter, on average. On a
period-end basis, loan balances topped $8.3 billion for the first time. The net
interest margin was 3.73%, the same as for the 2007 second quarter, and expenses
were in line with expectations.
These achievements were offset by an increase in the loan loss provision to a
level more in line with what we have experienced historically, and by lower
revenue from affiliate money manager Cramer Rosenthal McGlynn, where volatility
in the equity markets reduced the firm's real estate hedge fund performance
fees.
For the year-ago third quarter, net income was $5.2 million and earnings per
share (diluted) were $0.07 per share. These amounts reflected a non-cash
impairment write-down of $72.3 million recorded in the 2006 third quarter
against the valuation of affiliate money manager Roxbury Capital Management
(RCM). Absent this non-cash write-down, net income for the 2006 third quarter
would have been $46.9 million and earnings per share (diluted) would have been
$0.67 per share.
Throughout this report we discuss results that include and exclude the effects
of the non-cash write-down. We believe results that exclude the write-down are
the better measure of trends we see in each of our businesses and how our
company is performing overall. We also believe our operating results (those that
exclude the write-down) provide a more relevant and comparative basis on which
to evaluate our performance.
Two tables below compare results with and without the 2006 third quarter
non-cash write-down.
1. The first compares results for the three and nine months ended September
30, 2006, with and without the write-down.
2. The second compares results for the three and nine months ended September
30, 2007, with the corresponding operating results for the same periods in
2006.
27
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
COMPARISON OF RESULTS WITH AND WITHOUT THE NON-CASH IMPAIRMENT WRITE-DOWN
Three months ended Nine months ended
September 30, 2006 September 30, 2006
------------------------------------ ------------------------------------
With Without With Without
impairment impairment Impairment impairment impairment Impairment
------------------------------------ ------------------------------------
OPERATING RESULTS (in millions)
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 93.0 $ 93.0 $ -- $ 270.7 $ 270.7 $ --
Provision for loan losses (6.6) (6.6) -- (14.8) (14.8) --
Noninterest income 84.6 84.6 -- 253.6 253.6 --
Noninterest expense 170.9 98.6 72.3 366.8 294.5 72.3
-------------------------------------------------------------------------------------------------------------------------
Income before taxes
and minority interest 0.1 72.4 (72.3) 142.7 215.0 (72.3)
Applicable income taxes (5.0) 25.6 (30.6) 46.3 76.9 (30.6)
-------------------------------------------------------------------------------------------------------------------------
Net income before minority interest 5.1 46.8 (41.7) 96.4 138.1 (41.7)
Minority interest (0.1) (0.1) -- 0.1 0.1 --
-------------------------------------------------------------------------------------------------------------------------
Net income $ 5.2 $ 46.9 $ (41.7) $ 96.3 $ 138.0 $(41.7)
===========================================================================
PER SHARE DATA
-------------------------------------------------------------------------------------------------------------------------
Diluted shares outstanding (in millions) 69.9 69.9 -- 69.7 69.7 --
Per-share earnings $ 0.07 $ 0.67 $ (0.60) $ 1.38 $ 1.98 $(0.60)
STATISTICS AND RATIOS (dollars in millions)
-------------------------------------------------------------------------------------------------------------------------
Total assets, on average $10,540.4 $10,541.2 $ (0.8) $10,371.4 $10,371.6 $ (0.2)
Stockholders' equity, on average 1,081.7 1,082.2 (0.5) 1,056.3 1,056.4 (0.1)
Return on average assets 0.20% 1.77% (1.57)% 1.24% 1.78% (0.54)%
Return on equity 1.91% 17.19% (15.32)% 12.19% 17.47% (5.28)%
Net interest income before provision
and noninterest income $ 177.6 $ 177.6 $ -- $ 524.3 $ 524.3 $ --
Tax-equivalent interest income 1.1 1.1 -- 3.2 3.2 --
-------------------------------------------------------------------------------------------------------------------------
$ 178.7 $ 178.7 $ -- $ 527.5 $ 527.5 $ --
Noninterest expense $ (170.9) $ (98.6) $ (72.3) $ (366.8) $ (294.5) $(72.3)
---------------------------------------------------------------------------
Efficiency ratio 95.64% 55.18% 40.46% 69.54% 55.83% 13.71%
For more information about the 2006 third quarter non-cash write-down, read
Note 4, "Affiliates and acquisitions," and Note 10, "Goodwill and other
intangible assets," in our 2006 Annual Report to Shareholders, and see the
financial comparison on pages 52 and 53 of that report.
28
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
COMPARISON OF OPERATING RESULTS EXCLUDING THE 2006 Q3 IMPAIRMENT WRITE-DOWN
------------------------------ ------------------------------
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
Sept. 30, Sept. 30, % Sept. 30, Sept. 30, %
OPERATING RESULTS (in millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------------------------------------------
Net interest income $ 94.1 $ 93.0 1.2 $ 277.7 $ 270.7 2.6
Provision for loan losses (8.9) (6.6) 34.8 (19.0) (14.8) 28.4
Noninterest income 94.8 84.6 12.1 283.2 253.6 11.7
Total noninterest expense before
impairment write-down 110.8 98.6 12.4 327.2 294.5 11.1
Impairment write-down -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------
Total noninterest expense 110.8 98.6 12.4 327.2 294.5 11.1
---------------------------------------------------------------
Income before income taxes and
minority interest 69.2 72.4 (4.4) 214.7 215.0 (0.1)
Applicable income taxes 22.9 25.6 (10.5) 75.9 76.9 (1.3)
-------------------------------------------------------------------------------------------------------------
Net income before minority interest 46.3 46.8 (1.1) 138.8 138.1 0.5
Minority interest 0.1 (0.1) -- 0.8 0.1 N/M
-------------------------------------------------------------------------------------------------------------
Net income $ 46.2 $ 46.9 (1.5) $ 138.0 $ 138.0 --
===============================================================
PER-SHARE DATA
-------------------------------------------------------------------------------------------------------------
Diluted shares outstanding (in millions) 68.6 69.9 (1.9) 69.2 69.7 (0.7)
Per-share earnings (diluted) $ 0.67 $ 0.67 -- $ 1.99 $ 1.98 0.5
STATISTICS AND RATIOS (dollars in millions)
-------------------------------------------------------------------------------------------------------------
Total assets, on average $10,963.3 $10,541.2 4.0 $10,954.0 $10,371.6 5.6
Stockholders' equity, on average 1,087.8 1,082.2 0.5 1,090.1 1,056.4 3.2
Return on average assets 1.67% 1.77% (5.6) 1.68% 1.78% (5.6)
Return on equity 16.85% 17.19% (2.2) 16.93% 17.47% (3.1)
Net interest income before provision
and noninterest income $ 188.9 $ 177.6 6.4 $ 560.9 $ 524.3 7.0
Tax-equivalent interest income 1.0 1.1 (9.1) 3.0 3.2 (6.3)
-------------------------------------------------------------------------------------------------------------
$ 189.9 $ 178.7 6.3 $ 563.9 $ 527.5 6.9
Noninterest expense $ 110.8 $ 98.6 12.4 $ 327.2 $ 294.5 11.1
---------------------------------------------------------------
Efficiency ratio 58.35% 55.18% 5.7 58.02% 55.83% 3.9
29
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
CHANGES IN FINANCIAL CONDITION
Our capital position remained strong during the first nine months of 2007:
- Our regulatory capital continued to exceed the Federal Reserve Board's
minimum guidelines for well-capitalized and adequately capitalized
institutions.
- In April, our Board of Directors increased the cash dividend for the 26th
consecutive year.
- We repurchased more than 1.5 million of our shares.
- Stockholders' equity increased $38.7 million to $1.10 billion, even though
we increased the dividend and repurchased shares of our stock.
In June 2007, we acquired a wealth management firm in Boston and a small
corporate services provider in Luxembourg. These two acquisitions accounted for
the majority of the year-to-date increases in goodwill and other assets.
Results for the first nine months of 2007, on an annualized basis, produced a
return on average assets of 1.68% and return on average equity of 16.93%.
Total assets at September 30, 2007, were higher than at the end of 2006 mainly
due to loan growth.
---------------------------------------------------------------------------------------------
ASSETS (dollars in millions) AT 9/30/07 AT 12/31/06 AT 9/30/06
---------------------------------------------------------------------------------------------
Loan balances $ 8,336.5 $ 8,094.9 $ 7,780.2
---------------------------------------------------------------------------------------------
Loans as a percentage of total assets 75% 73% 73%
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Investment securities portfolio balances $ 1,851.4 $ 2,114.6 $ 1,982.3
---------------------------------------------------------------------------------------------
Investment securities as a percentage of total assets 17% 19% 19%
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Total assets $11,187.1 $11,157.0 $10,709.1
---------------------------------------------------------------------------------------------
Assets that generate interest 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. Most of
our assets are earning assets. They are discussed in more detail in the
investment securities portfolio and Regional Banking sections of this report.
---------------------------------------------------------------------------
EARNING ASSETS AT 9/30/07 AT 12/31/06 AT 9/30/06
---------------------------------------------------------------------------
Total earning assets (in millions) $10,204.4 $10,278.4 $9,800.9
---------------------------------------------------------------------------
Percentage in loans 82% 79% 79%
---------------------------------------------------------------------------
Percentage in investment securities 18% 21% 21%
---------------------------------------------------------------------------
Core deposits continued to account for more than half of total liabilities. For
more information about core balances, see the Regional Banking discussion in
this report. For more information about other deposits and short-term
borrowings, read the funding discussion in this report.
30
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
---------------------------------------------------------------------------------------------
LIABILITIES (dollars in millions) AT 9/30/07 AT 12/31/06 AT 9/30/06
---------------------------------------------------------------------------------------------
Core deposits $ 5,002.2 $ 5,131.9 $5,141.5
---------------------------------------------------------------------------------------------
Core deposits as a percentage of total liabilities 50% 51% 53%
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
National funding $ 2,497.5 $ 3,197.2 $2,742.7
---------------------------------------------------------------------------------------------
National funding as a percentage of total liabilities 25% 32% 28%
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Short-term borrowings (STBs) $ 1,966.4 $ 1,158.8 $1,168.7
---------------------------------------------------------------------------------------------
STBs as a percentage of total liabilities 20% 12% 12%
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Total liabilities $10,089.0 $10,097.7 $9,644.5
---------------------------------------------------------------------------------------------
For more information about our capital position, see the capital resources
discussion in this report.
INVESTMENT SECURITIES PORTFOLIO
The size of the investment securities portfolio decreased during the first nine
months of 2007 because we had less need for short-term investments to satisfy
collateral requirements on some types of client deposits. As we shifted some of
these deposits into products that do not require collateral, we had less need to
replace the associated securities as they matured or were called. Consequently,
the investment securities portfolio at September 30, 2007, was $263.2 million
less than at December 31, 2006.
----------------------------------------------------------------------------------------------
ASSETS AT 9/30/07 AT 12/31/06 AT 9/30/06
----------------------------------------------------------------------------------------------
Investment securities portfolio balances (in millions) $1,851.4 $2,114.6 $1,982.3
----------------------------------------------------------------------------------------------
Investment securities as a percentage of total assets 17% 19% 19%
----------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
COMPOSITION OF INVESTMENT SECURITIES PORTFOLIO AT 9/30/07 AT 12/31/06 AT 9/30/06
---------------------------------------------------------------------------------------
Collateralized mortgage obligations 11% 12% 14%
---------------------------------------------------------------------------------------
Mortgage-backed securities 20% 20% 22%
---------------------------------------------------------------------------------------
Corporate issues 19% 17% 18%
---------------------------------------------------------------------------------------
U.S. government agencies 37% 38% 26%
---------------------------------------------------------------------------------------
U.S. Treasury 6% 6% 12%
---------------------------------------------------------------------------------------
Preferred stocks 4% 5% 5%
---------------------------------------------------------------------------------------
Municipal bonds 1% 1% 1%
---------------------------------------------------------------------------------------
Other 2% 1% 2%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Percentage invested in fixed income instruments 81% 82% 80%
---------------------------------------------------------------------------------------
At September 30, 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;
- There were no subprime mortgages in this underlying collateral; and
- Almost all of these securities were invested in fixed rate instruments with
terms of 15 years or less.
Balances of mortgage-related instruments, which tend to be higher than
residential mortgage balances, reflect one element of our strategies to manage
the duration and interest rate risk associated with mortgage-related
instruments. We believe we can manage this risk more efficiently in the
investment securities portfolio than by retaining
31
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
residential mortgages on our balance sheet. More details about our interest rate
risk management strategies are in the section of this report on quantitative and
qualitative disclosures about market risk.
The estimated average life and duration of the portfolio declined during the
first nine months of 2007 because:
- Pay downs of mortgage-backed instruments accelerated during the first six
months of 2007, mainly because the yield curve was flat; and
- In the 2007 third quarter, shifts in the yield curve and the Federal
Reserve's reduction of short-term interest rates led to assumptions that
prepayments of mortgage-backed securities would accelerate.
------------------------------------------------------------------------------------------------------
AVERAGE LIFE IN THE INVESTMENT SECURITIES PORTFOLIO (in years) AT 9/30/07 AT 12/31/06 AT 9/30/06
------------------------------------------------------------------------------------------------------
Mortgage-backed instruments 3.58 4.10 4.20
------------------------------------------------------------------------------------------------------
Total portfolio 4.66 4.93 5.39
------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
DURATION IN THE INVESTMENT SECURITIES PORTFOLIO (in years) AT 9/30/07 AT 12/31/06 AT 9/30/06
--------------------------------------------------------------------------------------------------
Mortgage-backed instruments 3.30 3.80 3.90
--------------------------------------------------------------------------------------------------
Total portfolio 1.85 2.24 2.39
--------------------------------------------------------------------------------------------------
Our policy is to invest 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.
RESULTS OF OPERATIONS
On an operating basis, net income and earnings per share for the third quarter
and first nine months of 2007 essentially were level with their year-ago levels,
as double-digit growth in revenue from the advisory businesses was offset by:
- Lower revenue from Cramer Rosenthal McGlynn (CRM), mainly because
volatility in the equity markets reduced CRM's hedge fund performance fee
revenue;
- Lower net interest income, which resulted from slower loan growth in the
third quarter and a lower year-to-date net interest margin; and
- A downgrade of several loans in the internal risk rating analysis, which
caused the provision for loan losses to increase.
We discuss each of these factors in more detail in the affiliate money manager,
Regional Banking, net interest margin, and asset quality sections, respectively.
--------------------------------------------------------------------------------------------
OPERATING NET INCOME
(dollars in millions, except share amounts) 2007 Q3 2006 Q3 2007 YTD 2006 YTD
--------------------------------------------------------------------------------------------
Net interest income $ 94.1 $ 93.0 $ 277.7 $ 270.7
--------------------------------------------------------------------------------------------
Provision for loan losses (8.9) (6.6) (19.0) (14.8)
--------------------------------------------------------------------------------------------
Noninterest income 94.8 84.6 283.2 253.6
--------------------------------------------------------------------------------------------
Noninterest expense 110.8 98.6 327.2 294.5
--------------------------------------------------------------------------------------------
Net income $ 46.2 $ 46.9 $ 138.0 $ 138.0
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Earnings per share (diluted) $ 0.67 $ 0.67 $ 1.99 $ 1.98
--------------------------------------------------------------------------------------------
Average shares outstanding (diluted, in thousands) 68,582 69,900 69,222 69,695
--------------------------------------------------------------------------------------------
32
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
The growth in noninterest expenses (on an operating basis) reflected expansion
investments made since the end of September 2006. These initiatives added to our
expenses as we completed each one, but we expect the corresponding increases in
revenue to occur more gradually, as we develop each of these initiatives more
fully over time. We discuss these activities in more detail in the noninterest
expense section of this report.
MIX OF REVENUE
Our sources of revenue remained diversified between net interest income and
noninterest income. Most of our net interest income is generated by the Regional
Banking business. Most of our noninterest income is generated by the advisory
businesses.
---------------------------------------------------------------------------------------
SOURCES OF INCOME 2007 Q3 2006 Q3 2007 YTD 2006 YTD
---------------------------------------------------------------------------------------
Total net interest and noninterest income (1) $180.0 $171.0 $541.9 $509.5
---------------------------------------------------------------------------------------
Portion from net interest income $ 85.2 $ 86.4 $258.7 $255.9
---------------------------------------------------------------------------------------
Portion from noninterest income $ 94.8 $ 84.6 $283.2 $253.6
---------------------------------------------------------------------------------------
(1) After amortization and the provision for loan losses
---------------------------------------------------------------------------------------
MIX OF INCOME 2007 Q3 2006 Q3 2007 YTD 2006 YTD
---------------------------------------------------------------------------------------
Net interest income 47% 51% 48% 50%
---------------------------------------------------------------------------------------
Noninterest income 53% 49% 52% 50%
---------------------------------------------------------------------------------------
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.
EFFICIENCY RATIOS
Efficiency was slightly lower than for previous periods (on an operating basis)
because expansion investments in all three businesses increased expenses. In
addition, the higher provision for loan losses dampened Regional Banking
efficiency. The individual business discussions in this report include more
information about their respective efficiency ratios.
On a reported basis, the efficiency ratios for the third quarter and first nine
months of 2006 were high because the non-cash impairment write-down recorded in
the 2006 third quarter added $72.3 million to 2006 expenses.
---------------------------------------------------------------------------------------------------
EFFICIENCY RATIOS 2007 Q3 2006 Q3 2007 YTD 2006 YTD
---------------------------------------------------------------------------------------------------
Regional Banking 42.74% 39.72% 41.96% 39.96%
---------------------------------------------------------------------------------------------------
Wealth Advisory Services 77.39% 78.60% 80.46% 79.44%
---------------------------------------------------------------------------------------------------
Corporate Client Services 76.33% 69.29% 72.58% 72.19%
---------------------------------------------------------------------------------------------------
Wilmington Trust consolidated, absent non-cash write-down 58.35% 55.18% 58.02% 55.83%
---------------------------------------------------------------------------------------------------
Wilmington Trust consolidated 58.35% 95.64% 58.02% 69.54%
---------------------------------------------------------------------------------------------------
In general, lower efficiency ratios indicate higher profitability.
THE REGIONAL BANKING BUSINESS
The Regional Banking business continued to benefit from the broadly diversified
and stable economy in the Delaware Valley region. According to the Federal
Reserve Bank of Philadelphia, unemployment rates for Delaware,
33
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
Pennsylvania, and New Jersey for September 2007 (the most recent data available)
remained below the U.S. national average. The regional housing market slowed to
a level that we would characterize as a return to normalcy following the rapid
price appreciation and absorption rates seen in 2005 and 2006. For more
information about the regional economy, read the "Economic risk" discussion in
this report.
During the first nine months of 2007, total loan balances increased 3%, with
growth occurring in both the commercial and retail portfolios. Delaware
accounted for 72% of the increase in total loan balances.
---------------------------------------------------------------------------------------
PERIOD-END LOAN BALANCES (dollars in millions) AT 9/30/07 AT 12/31/06 AT 9/30/06
---------------------------------------------------------------------------------------
Commercial loans $5,677.7 $5,493.5 $5,243.5
---------------------------------------------------------------------------------------
Retail loans 2,658.8 2,601.4 2,536.7
---------------------------------------------------------------------------------------
Total loans outstanding $8,336.5 $8,094.9 $7,780.2
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Delaware market loans $6,030.1 $5,855.7 $5,655.0
---------------------------------------------------------------------------------------
Delaware market loans as a % of total loans 72% 72% 73%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Pennsylvania market loans $1,827.2 $1,836.4 $1,742.3
---------------------------------------------------------------------------------------
Pennsylvania market loans as a % of total loans 22% 23% 22%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Other market loans $ 479.2 $ 402.8 $ 382.9
---------------------------------------------------------------------------------------
Other market loans as a % of total loans 6% 5% 5%
---------------------------------------------------------------------------------------
On an average-balance basis, total loan balances increased for the 18th
consecutive quarter and exceeded $8.26 billion. 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, see the "Quarterly analysis of earnings" section of this report.
-------------------------------------------------------------------------------------------
LOAN BALANCES, ON AVERAGE (dollars in millions) 2007 Q3 2006 Q3 2007 YTD 2006 YTD
-------------------------------------------------------------------------------------------
Total loans outstanding $8,260.3 $7,759.3 $8,163.6 $7,628.0
-------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Delaware market loans $5,963.1 $5,651.3 $5,898.6 $5,585.5
-------------------------------------------------------------------------------------------
Delaware market loans as a % of total loans 72% 73% 72% 73%
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Pennsylvania market loans $1,833.9 $1,736.9 $1,827.1 $1,698.5
-------------------------------------------------------------------------------------------
Pennsylvania market loans as a % of total loans 22% 22% 22% 22%
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Other market loans $ 463.3 $ 371.1 $ 438.1 $ 344.0
-------------------------------------------------------------------------------------------
Other market loans as a % of total loans 6% 5% 6% 5%
-------------------------------------------------------------------------------------------
On a percentage basis, the composition of the loan portfolio remained well
diversified and relatively unchanged from prior periods.
-----------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION 9/30/07 12/31/06 9/30/06
-----------------------------------------------------------------------------------
Commercial, financial, and agricultural (C&I) loans 30% 31% 30%
-----------------------------------------------------------------------------------
Commercial real estate/construction (CRE) loans 21% 21% 21%
-----------------------------------------------------------------------------------
Commercial mortgage loans 16% 16% 16%
-----------------------------------------------------------------------------------
Residential mortgage loans 7% 7% 7%
-----------------------------------------------------------------------------------
Consumer loans 19% 18% 19%
-----------------------------------------------------------------------------------
Loans secured with liquid collateral 7% 7% 7%
-----------------------------------------------------------------------------------
34
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
Loans secured with liquid collateral are associated mainly with Wealth Advisory
Services clients. Management does not consider changes in the balances of these
loans to be indicative of trends in the Regional Banking business.
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.
During the first nine months of 2007, commercial loan balances increased $184.2
million, or 3%, as increases in commercial mortgage and commercial real
estate/construction (CRE) balances offset a decrease in the balance of
commercial, financial, and agricultural (C&I) loans.
-------------------------------------------------------------------------------------------
PERIOD-END COMMERCIAL LOANS (in millions) AT 9/30/07 AT 12/31/06 AT 9/30/06
-------------------------------------------------------------------------------------------
Commercial, financial, and agricultural (C&I) loans $2,529.0 $2,533.5 $2,378.1
-------------------------------------------------------------------------------------------
Commercial real estate/construction (CRE) loans 1,759.9 1,663.9 1,610.9
-------------------------------------------------------------------------------------------
Commercial mortgage loans 1,388.8 1,296.1 1,254.5
-------------------------------------------------------------------------------------------
Total commercial loans $5,677.7 $5,493.5 $5,243.5
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
% of commercial loans from Delaware market 71% 70% 70%
-------------------------------------------------------------------------------------------
% of commercial loans from Pennsylvania market 28% 29% 29%
-------------------------------------------------------------------------------------------
% of commercial loans from other markets 1% 1% 1%
-------------------------------------------------------------------------------------------
We recorded approximately $180 million of new C&I loans during the first nine
months of 2007, but these additions were offset by a high volume of loan pay
downs and pay offs, and by decreases in revolving lines of credit. The
new-in-2007 C&I loans were primarily for working capital and equipment purchases
by clients in a variety of service, transportation, contracting, agricultural,
and retail businesses. Nearly half of these loans for were projects in Delaware,
and approximately 29% were for projects in southeastern Pennsylvania.
While CRE and commercial mortgage balances rose, these two loan categories
continued to account for approximately the same percentages of commercial loans
and total loans as in prior periods.
----------------------------------------------------------------------------------------------------
COMMERCIAL CONSTRUCTION/REAL ESTATE (CRE) LOANS AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
----------------------------------------------------------------------------------------------------
As a percentage of commercial loans 31% 31% 30% 31%
----------------------------------------------------------------------------------------------------
As a percentage of total loans 21% 21% 21% 21%
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
----------------------------------------------------------------------------------------------------
As a percentage of commercial loans 25% 25% 24% 24%
----------------------------------------------------------------------------------------------------
As a percentage of total loans 16% 17% 16% 16%
----------------------------------------------------------------------------------------------------
Favorable economic conditions in the Delaware Valley region continued to spur
demand for CRE loans. Although the housing market in this region was slower than
in 2005 and 2006, the level of activity was more in line with what we have
experienced historically.
Delaware's tax climate, among other attributes, continued to attract new
residents and create housing demand. Delaware has no sales tax, and real estate
taxes are considerably lower than those of surrounding states.
35
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
Of the CRE loans recorded during the first nine months of 2007, approximately
57% were for projects in Delaware and 29% were for projects in southeastern
Pennsylvania. Nearly half of these loans were for single-family housing
development projects. Most of the increase in single-family housing projects was
split evenly between Delaware and southeastern Pennsylvania.
Approximately 33% of the CRE loans recorded during the first nine months of 2007
were for non-residential projects, primarily in Delaware. These loans were for a
variety of retail, wholesale, professional offices, industrial parks, and other
projects.
The following table compares the period-end loan status, project type, and
location of real estate-related loans. These figures combine CRE and commercial
mortgage loans.
----------------------------------------------------------------------------------------------
COMMERCIAL REAL ESTATE/CONSTRUCTION AND MORTGAGE LOANS AT 9/30/07 AT 12/31/06 AT 9/30/06
----------------------------------------------------------------------------------------------
LOAN STATUS
----------------------------------------------------------------------------------------------
Construction 49% 50% 50%
----------------------------------------------------------------------------------------------
Owner-occupied 24% 21% 20%
----------------------------------------------------------------------------------------------
Permanent 15% 17% 18%
----------------------------------------------------------------------------------------------
Interim 6% 6% 6%
----------------------------------------------------------------------------------------------
Other 6% 6% 6%
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
LOAN PROJECT TYPE
----------------------------------------------------------------------------------------------
Residential tract 40% 39% 40%
----------------------------------------------------------------------------------------------
Owner-occupied 24% 21% 24%
----------------------------------------------------------------------------------------------
Retail 8% 9% 9%
----------------------------------------------------------------------------------------------
Office 5% 7% 7%
----------------------------------------------------------------------------------------------
Other 23% 24% 20%
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
LOAN LOCATION
----------------------------------------------------------------------------------------------
Delaware 62% 61% 63%
----------------------------------------------------------------------------------------------
Pennsylvania 23% 22% 22%
----------------------------------------------------------------------------------------------
Maryland 9% 10% 10%
----------------------------------------------------------------------------------------------
New Jersey 4% 5% 4%
----------------------------------------------------------------------------------------------
Other 2% 2% 1%
----------------------------------------------------------------------------------------------
In terms of loan size, the mix in the commercial loan portfolio was relatively
unchanged from prior periods.
-------------------------------------------------------------------
COMMERCIAL LOANS BY SIZE AT 9/30/07 AT 12/31/06 AT 9/30/06
-------------------------------------------------------------------
More than $20 million 6% 7% 5%
-------------------------------------------------------------------
$10 million to $20 million 19% 20% 18%
-------------------------------------------------------------------
$5 million to $10 million 24% 22% 24%
-------------------------------------------------------------------
$1 million to $5 million 37% 36% 36%
-------------------------------------------------------------------
$250,000 to $1 million 11% 12% 13%
-------------------------------------------------------------------
Less than $250,000 3% 3% 4%
-------------------------------------------------------------------
36
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
CONSUMER LOANS
Consumer loan balances were $29 million, or 2%, higher at September 30, 2007,
than at the end of 2006. Indirect loan balances rose steadily in the second and
third quarters, but these increases were offset by loan pay downs and pay offs,
decreases in home equity lines of credit, and lower credit card balances.
------------------------------------------------------------------------------------
PERIOD-END CONSUMER LOANS (in millions) AT 9/30/07 AT 12/31/06 AT 9/30/06
------------------------------------------------------------------------------------
Home equity lines of credit $ 295.3 $ 313.4 $ 321.3
------------------------------------------------------------------------------------
Indirect loans 740.8 687.0 668.3
------------------------------------------------------------------------------------
Credit card loans 65.0 64.5 61.1
------------------------------------------------------------------------------------
Other consumer loans 444.9 452.1 439.0
------------------------------------------------------------------------------------
Total consumer loans $1,546.0 $1,517.0 $1,489.7
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
% of consumer loans from Delaware market 76% 78% 79%
------------------------------------------------------------------------------------
% of consumer loans from Pennsylvania market 6% 7% 7%
------------------------------------------------------------------------------------
% of consumer loans from other markets 18% 15% 14%
------------------------------------------------------------------------------------
The category of consumer loans recorded as "other" consumer loans includes home
equity loans, most of which have fixed rates. The increase in these loans
reflected client preference for loans with fixed rates. This preference also
accounted for the decrease in home equity lines of credit, most of which have
floating rates.
Most loans in the indirect portfolio are for late-model used cars. We make the
majority of these loans through automobile dealers, as an extension of the
commercial banking relationships we have with automobile dealers throughout the
Regional Banking geographic footprint. The increase in indirect balances was due
largely to our expansion of this business in Maryland, New Jersey, and
Pennsylvania. In addition, indirect balances were boosted in the 2007 third
quarter by a new product that offers an 84-month term on luxury automobiles.
RESIDENTIAL MORTGAGE LOANS
Residential mortgage balances increased during the first nine 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.
Except for a portion of the CRA mortgages we originate, we sell most newly
originated fixed rate residential mortgages into the secondary market instead of
retaining them in our loan portfolio. 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.
-------------------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE ACTIVITY (dollars in millions) AT 9/30/07 AT 12/31/06 AT 9/30/06
-------------------------------------------------------------------------------------------
Residential mortgage balances (at period-end) $566.3 $536.9 $518.7
-------------------------------------------------------------------------------------------
Percent of residential mortgages at fixed rates 78% 75% 76%
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE ORIGINATIONS (dollars in millions) 2007 Q3 2006 Q3 2007 YTD 2006 YTD
-------------------------------------------------------------------------------------------------
Residential mortgage originations (dollar amount) $46.3 $58.6 $160.0 $173.0
-------------------------------------------------------------------------------------------------
Residential mortgage originations (number of loans) 213 239 682 728
-------------------------------------------------------------------------------------------------
37
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
At September 30, 2007, our residential mortgage delinquency rate was 109 basis
points lower than at year-end 2006.
-------------------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE DELINQUENCY RATES AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
-------------------------------------------------------------------------------------------
Wilmington Trust 3.16% 2.48% 4.25% 3.06%
-------------------------------------------------------------------------------------------
We do not engage in subprime residential mortgage lending and, as of September
30, 2007, there were no subprime loans in our residential mortgage portfolio.
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.
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 by far the smallest of these four states. 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, read
the funding, net interest margin, and interest rate risk management discussions
in this report.
CORE DEPOSITS
Continued growth in savings deposits helped offset declines in other categories
of core deposits. The majority of core deposits continued to come from consumer
and commercial clients in Delaware.
--------------------------------------------------------------------------------
PERIOD-END CORE DEPOSITS (in millions) AT 9/30/07 AT 12/31/06 AT 9/30/06
--------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 827.8 $ 913.6 $ 861.3
--------------------------------------------------------------------------------
Savings deposits 580.1 313.8 292.5
--------------------------------------------------------------------------------
Interest-bearing demand deposits 2,202.3 2,417.5 2,417.5
--------------------------------------------------------------------------------
CDs < $100,000 1,002.4 1,012.6 995.5
--------------------------------------------------------------------------------
Local CDs > or = $100,000 389.6 474.4 574.7
--------------------------------------------------------------------------------
Total core deposits $5,002.2 $5,131.9 $5,141.5
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Percentage from Delaware clients 88% 94% 94%
--------------------------------------------------------------------------------
Percentage from Pennsylvania clients 4% 5% 5%
--------------------------------------------------------------------------------
Percentage from clients in other markets 8% 1% 1%
--------------------------------------------------------------------------------
38
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
The increase in savings deposit balances was due mainly to the success of
WTDirect, the Internet-only delivery channel we launched in November 2006.
WTDirect currently features a high-interest savings account for depositors who
maintain average daily balances of at least $10,000. We target WTDirect to the
mass-affluent consumer market, primarily in the states surrounding Delaware. For
more information about WTDirect, 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 clients in the Delaware Valley region, including
commercial banking clients and local municipalities, which frequently use these
CDs to generate returns on their excess cash.
--------------------------------------------------------------------------------
LOCAL
CDS > or = $100,000 BY CLIENT CATEGORY AT 9/30/07 AT 12/31/06 AT 9/30/06
--------------------------------------------------------------------------------
Consumer banking clients 64% 74% 73%
--------------------------------------------------------------------------------
DE commercial banking clients 11% 11% 10%
--------------------------------------------------------------------------------
PA commercial banking clients 10% 8% 10%
--------------------------------------------------------------------------------
Wealth Advisory Services clients 15% 7% 7%
--------------------------------------------------------------------------------
Generally, 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. These deposits typically are noninterest-bearing
demand deposits. In many cases, these funds are on deposit for 72 hours or less.
-----------------------------------------------------------------------------------
CORE DEPOSITS, ON AVERAGE (in millions) 2007 Q3 2006 Q3 2007 YTD 2006 YTD
-----------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 714.9 $ 737.2 $ 722.0 $ 747.5
-----------------------------------------------------------------------------------
Total core deposits $4,902.2 $4,950.0 $4,886.2 $4,912.6
-----------------------------------------------------------------------------------
OTHER REGIONAL BANKING INFORMATION
The number of ATMs increased because we added ATMs at non-branch locations,
mainly in Delaware.
------------------------------------------------------------------
ATMS AT 9/30/07 AT 12/31/06 AT 9/30/06
------------------------------------------------------------------
Number of ATMs in Delaware 203 186 186
------------------------------------------------------------------
Total number of ATMs 251 234 234
------------------------------------------------------------------
REGIONAL BANKING PROFITABILITY
Regional Banking profitability was slightly lower than for the corresponding
year-ago periods, mainly because:
- Expenses rose compared to the year-ago periods due to expansion in
Pennsylvania, New Jersey, and Maryland, and the launch of WTDirect; and
- Increases in net interest income were offset by increases in the provision
for loan losses. For more information about the provision, read the asset
quality discussion in this report.
--------------------------------------------------------------------------
REGIONAL BANKING PROFITABILITY 2007 Q3 2006 Q3 2007 YTD 2006 YTD
--------------------------------------------------------------------------
Segment net income (in millions) $ 33.4 $ 34.1 $ 99.5 $ 102.6
--------------------------------------------------------------------------
Efficiency ratio 42.74% 39.72% 41.96% 39.96%
--------------------------------------------------------------------------
39
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
The efficiency ratio of the Regional Banking business reflects how our funding
strategy reduces the operating expenses associated with maintaining a
large-scale branch office network. For more information about this, read the
funding discussion in this report.
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.
Factors affecting net interest income year to date in 2007 include the slowing
pace of loan growth, a high volume of loan pay downs and pay offs, increases in
interest expense after deposits repriced in the 2006 fourth quarter, and higher
provisioning for loan losses.
-------------------------------------------------------------------------------
NET INTEREST INCOME (in millions) 2007 Q3 2006 Q3 2007 YTD 2006 YTD
-------------------------------------------------------------------------------
Interest income $183.4 $175.0 $544.2 $492.9
-------------------------------------------------------------------------------
Interest expense 89.3 82.0 266.5 222.2
-------------------------------------------------------------------------------
Net interest income $ 94.1 $ 93.0 $277.7 $270.7
-------------------------------------------------------------------------------
Provision for loan losses (8.9) (6.6) (19.0) (14.8)
-------------------------------------------------------------------------------
Net interest income (after provision) $ 85.2 $ 86.4 $258.7 $255.9
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Portion generated by Regional Banking 94% 91% 93% 92%
-------------------------------------------------------------------------------
We generate net interest income mainly through banking and funding activities.
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, refer to Note 11, "Segment reporting," in
this report.
NET INTEREST MARGIN
The net interest margin was 3.73% for the third quarter and 3.71% for the first
nine months of 2007. These were declines of 12 basis points and 13 basis points,
respectively, from the corresponding year-ago periods. This happened mainly
because the market interest rate environment was considerably different in the
first half of 2006 than in 2007.
Between January and June 2006, the Federal Open Market Committee raised
short-term interest rates four times, for a total of 100 basis points. Since
most of our floating rate loans reprice within 30 days of a rate change, most of
our floating rate loans had repriced by the end of August 2006.
Deposit repricing, however, did not occur in the same timeframe or at the same
pace. Deposits continued to reprice throughout the second half of 2006, which
caused our cost of funds to increase. At the same time, our yield on earning
assets decreased slightly. This disparity between funding costs and asset yields
contributed to the decline in the margin between the third and fourth quarters
of 2006. The margin for the fourth quarter of 2006 also was affected negatively
by the narrow spreads on the short-term securities we added to the investment
portfolio to collateralize client deposits.
At the end of 2006, as deposit repricing caught up to loan repricing, the
disparity between funding costs and asset yields narrowed, and the margin
stabilized at 3.67%.
40
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
----------------------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------------------
NET INTEREST MARGIN Q3 Q2 Q1 Q4 Q3
----------------------------------------------------------------------------------------
Quarterly net interest margin 3.73% 3.73% 3.67% 3.67% 3.85%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
FIRST NINE MONTHS OF 2007 FIRST NINE MONTHS OF 2006
----------------------------------------------------------------------------------------
Year-to-date net interest margin 3.71% 3.84%
----------------------------------------------------------------------------------------
The margin trended upward to 3.73% during the 2007 second quarter, mainly
because the decrease in balances of lower-yielding instruments in the investment
securities portfolio helped raise asset yields. Also, rates on national funding
decreased.
The margin remained at 3.73% for the 2007 third quarter, due mainly to two
factors: An increase in consumer loan yields helped offset a decrease in
commercial loan yields; and a decline in the cost of short-term borrowings
helped offset an increase in the rate on core interest-bearing deposits.
Although the increase in WTDirect deposits caused savings rates to rise, we
expect WTDirect rates to have minimal effect on the net interest margin in the
future, because growth in these deposits offsets our use of national funding.
Changes in the margin also reflected our ability to match the repricing
characteristics of floating rate loans closely with the repricing
characteristics of national funding.
-------------------------------------------------------------------------------------------------
9/30/07 VS. 9/30/07 VS. 9/30/07 VS.
CHANGES IN YIELDS AND RATES (in basis points) 6/30/07 12/31/06 9/30/06
-------------------------------------------------------------------------------------------------
Change in yield on total earning assets 0 bps 4 bps 2 bps
-------------------------------------------------------------------------------------------------
Change in rate on total funds to support earning assets 0 bps (2) bps 14 bps
-------------------------------------------------------------------------------------------------
On October 19, 2007, in our third quarter earnings conference call, we said
that:
- Because the Federal Reserve's action on September 18 reduced short-term
market interest rates, we expect our net interest margin to decline
approximately 15 basis points from the 2007 third quarter level.
- We further expect a subsequent improvement of 7 to 10 basis points in the
2008 first quarter.
- These expectations assume that short-term rates remain unchanged from the
September 18, 2007, level.
On October 31, 2007, the Federal Reserve lowered short-term rates by 25 basis
points. This action could cause changes in our net interest margin to differ
from the guidance we gave on October 19, 2007.
We remain slightly asset sensitive. This means that, when market interest rates
decline, our floating rate loans reprice more quickly than our funding sources.
This compresses the net interest margin until our funding sources reprice
downward. For more information about our asset sensitivity and interest rate
risk management, read the interest rate risk discussion in this report.
ANALYSIS OF EARNINGS
On the following pages, we present the consolidated comparative rate/volume and
net interest income data for the third quarters and first nine months of 2007
and 2006.
41
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
QUARTERLY ANALYSIS OF EARNINGS
----------------------------- ----------------------------
2007 THIRD QUARTER 2006 THIRD 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 $ 27.3 $ 0.4 6.36% $ 28.8 $ 0.3 4.61%
U.S. Treasury 104.0 0.9 3.40 159.8 1.6 4.03
Government agencies 635.2 7.6 4.76 484.6 5.1 4.19
State and municipal 18.5 0.3 6.96 9.5 0.1 8.68
Preferred stock 65.7 1.3 7.82 90.4 1.7 7.57
Mortgage-backed securities 616.5 6.7 4.20 772.4 7.8 4.02
Other 386.4 6.0 6.24 389.7 6.3 6.37
-------------------------------------------------------- ------------------
Total investment securities 1,826.3 22.8 4.94 1,906.4 22.6 4.74
------------------------------------------------------------
Commercial, financial, and
agricultural 2,454.9 48.9 7.91 2,407.7 48.9 8.06
Real estate - construction 1,769.2 37.5 8.41 1,588.7 34.9 8.72
Mortgage - commercial 1,387.3 28.1 8.04 1,238.5 25.3 8.09
-------------------------------------------------------- ------------------
Total commercial loans 5,611.4 114.5 8.10 5,234.9 109.1 8.27
------------------------------------------------------------
Mortgage - residential 564.4 8.2 5.74 507.8 7.4 5.77
Consumer loans 1,533.0 28.9 7.48 1,470.5 27.2 7.33
Secured with liquid collateral 551.5 9.6 6.88 546.1 9.5 6.87
-------------------------------------------------------- ------------------
Total retail loans 2,648.9 46.7 6.98 2,524.4 44.1 6.91
------------------------------------------------------------
Total loans net of
unearned income 8,260.3 161.2 7.74 7,759.3 153.2 7.83
------------------------------------------------------------
Total earning assets at
historical cost $10,113.9 $184.4 7.23% $9,694.5 $176.1 7.21%
Fair valuation adjustment on
investment securities available
for sale (38.9) (49.4)
--------- --------
Total earning assets $10,075.0 $9,645.1
========= ========
42
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
----------------------------- -----------------------------
2007 THIRD QUARTER 2006 THIRD 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 $ 540.9 $ 3.6 2.63% $ 304.1 $ 0.3 0.42%
Interest-bearing demand 2,262.5 6.9 1.21 2,374.1 6.6 1.10
Certificates < $100,000 1,007.7 10.7 4.23 988.1 9.7 3.87
Local certificates > or =
$100,000 376.2 4.5 4.78 546.5 6.5 4.71
-------------------------------------------------------- -----------------
Total core interest-
bearing deposits 4,187.3 25.7 2.44 4,212.8 23.1 2.17
-------------------------------------------------------------------------------------------------
National money market deposits 143.3 1.9 5.28 -- -- --
National certificates > or =
$100,000 2,817.9 38.4 5.41 2,864.6 38.7 5.37
-------------------------------------------------------- -----------------
Total interest-bearing
deposits 7,148.5 66.0 3.67 7,077.4 61.8 3.47
-----------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,386.8 16.6 4.73 1,048.8 13.4 5.05
U.S. Treasury demand 11.0 0.1 4.87 6.8 0.1 5.16
-------------------------------------------------------- -----------------
Total short-term borrowings 1,397.8 16.7 4.74 1,055.6 13.5 5.05
-----------------------------------------------------------
Long-term debt 390.7 6.6 6.66 394.2 6.7 6.79
-------------------------------------------------------- -----------------
Total interest-bearing
liabilities 8,937.0 89.3 3.97 8,527.2 82.0 3.82
-----------------------------------------------------------
Other noninterest-bearing funds 1,176.9 -- -- 1,167.3 -- --
-------------------------------------------------------------------------------------------------
Total funds used to
support earning
assets $10,113.9 $89.3 3.50% $9,694.5 $82.0 3.36%
===========================================================
Net interest income/yield 95.1 3.73% 94.1 3.85%
Tax-equivalent adjustment (1.0) (1.1)
----- -----
Net interest income $94.1 $93.0
===== =====
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."
43
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
YEAR-TO-DATE ANALYSIS OF EARNINGS
----------------------------- ----------------------------
2007 YTD 2006 YTD
----------------------------- ----------------------------
(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 $ 40.6 $ 1.6 5.39% $ 21.8 $ 0.7 4.60%
U.S. Treasury 111.6 3.2 3.82 152.3 4.2 3.68
Government agencies 674.2 23.8 4.73 431.8 13.1 4.05
State and municipal 13.3 0.8 7.67 10.0 0.7 8.80
Preferred stock 73.0 4.2 7.76 90.6 5.3 7.63
Mortgage-backed securities 653.9 20.7 4.22 813.7 25.3 4.14
Other 389.6 18.3 6.28 396.3 17.8 6.04
-------------------------------------------------------- ------------------
Total investment securities 1,915.6 71.0 4.95 1,894.7 66.4 4.67
------------------------------------------------------------
Commercial, financial, and
agricultural 2,473.9 147.1 7.95 2,439.7 140.4 7.70
Real estate - construction 1,712.2 109.1 8.52 1,477.0 92.7 8.39
Mortgage - commercial 1,368.2 82.2 8.03 1,227.1 71.5 7.79
-------------------------------------------------------- ------------------
Total commercial loans 5,554.3 338.4 8.14 5,143.8 304.6 7.92
------------------------------------------------------------
Mortgage - residential 553.5 24.2 5.85 485.2 21.1 5.82
Consumer loans 1,516.5 84.4 7.44 1,445.5 76.7 7.10
Secured with liquid collateral 539.3 27.6 6.84 553.5 26.6 6.43
-------------------------------------------------------- ------------------
Total retail loans 2,609.3 136.2 6.98 2,484.2 124.4 6.70
------------------------------------------------------------
Total loans net of
unearned income 8,163.6 474.6 7.77 7,628.0 429.0 7.52
------------------------------------------------------------
Total earning assets at
historical cost $10,119.8 $547.2 7.23% $9,544.5 $496.1 6.95%
============================================================
Fair valuation adjustment on
investment securities available
for sale (29.9) (43.5)
--------- --------
Total earning assets $10,089.9 $9,501.0
========= ========
44
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
----------------------------- ----------------------------
2007 YTD 2006 YTD
----------------------------- ----------------------------
(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 $ 457.2 $ 7.1 2.09% $ 317.0 $ 0.9 0.38%
Interest-bearing demand 2,275.2 20.5 1.20 2,361.8 18.6 1.05
Certificates < $100,000 1,011.7 32.9 4.34 969.4 25.8 3.56
Local certificates > or = $100,000 420.1 15.0 4.78 516.9 16.9 4.36
-------------------------------------------------------------- ------------------
Total core interest-
bearing deposits 4,164.2 75.5 2.42 4,165.1 62.2 2.00
------------------------------------------------------------
National money market deposits 142.9 5.8 5.42 -- -- --
National certificates > or = $100,000 2,887.2 117.0 5.41 2,723.6 101.8 5.00
-------------------------------------------------------------- ------------------
Total interest-bearing
deposits 7,194.3 198.3 3.68 6,888.7 164.0 3.18
------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase 1,325.6 48.0 4.84 1,092.1 38.2 4.68
U.S. Treasury demand 9.0 0.3 4.99 11.5 0.4 4.69
-------------------------------------------------------------- ------------------
Total short-term
borrowings 1,334.6 48.3 4.84 1,103.6 38.6 4.68
------------------------------------------------------------
Long-term debt 389.8 19.9 6.84 395.5 19.6 6.61
-------------------------------------------------------------- ------------------
Total interest-bearing
liabilities 8,918.7 266.5 3.99 8,387.8 222.2 3.54
------------------------------------------------------------
Other noninterest-bearing funds 1,201.1 -- -- 1,156.7 -- --
-------------------------------------------------------------- ------------------
Total funds used to
support earning
assets $10,119.8 $266.5 3.52% $9,544.5 $222.2 3.11%
============================================================
Net interest income/yield 280.7 3.71% 273.9 3.84%
Tax-equivalent adjustment (3.0) (3.2)
------- -------
Net interest income $277.7 $270.7
======= =======
In order to ensure the comparability of yields and rates and their impact on net
interest income, average rates are calculated using average balances based on
historical cost and do not reflect the market valuation adjustment required by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
45
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
----------------------------- ------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2007/2006 SEPTEMBER 30, 2007/2006
----------------------------- ------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
----------------------------- ------------------------------
VOLUME (1) RATE (2) TOTAL VOLUME (1) RATE (2) TOTAL
-------------------------------------------------------------------------------------------------------------
Interest income
Federal funds sold and securities
purchased under agreements to resell $ -- $ 0.1 $ 0.1 $ 0.6 $ 0.3 $ 0.9
U.S. Treasury (0.6) (0.1) (0.7) (1.1) 0.1 (1.0)
Government agencies 1.6 0.9 2.5 7.3 3.4 10.7
State and municipal * 0.2 -- 0.2 0.2 (0.1) 0.1
Preferred stock * (0.5) 0.1 (0.4) (1.0) (0.1) (1.1)
Mortgage-backed securities (1.6) 0.5 (1.1) (4.9) 0.3 (4.6)
Other * (0.1) (0.2) (0.3) (0.3) 0.8 0.5
-------------------------------------------------------------------------------------------------------------
Total investment securities (1.0) 1.2 0.2 0.2 4.4 4.6
--------------------------------------------------------------
Commercial, financial, and agricultural * 1.0 (1.0) -- 2.0 4.7 6.7
Real estate - construction 4.0 (1.4) 2.6 14.8 1.6 16.4
Mortgage - commercial * 3.0 (0.2) 2.8 8.2 2.5 10.7
-------------------------------------------------------------------------------------------------------------
Total commercial loans 8.0 (2.6) 5.4 25.0 8.8 33.8
--------------------------------------------------------------
Mortgage - residential 0.8 -- 0.8 3.0 0.1 3.1
Consumer 1.2 0.5 1.7 3.8 3.9 7.7
Secured with liquid collateral 0.1 -- 0.1 (0.7) 1.7 1.0
-------------------------------------------------------------------------------------------------------------
Total retail loans 2.1 0.5 2.6 6.1 5.7 11.8
--------------------------------------------------------------
Total loans net of unearned income 10.1 (2.1) 8.0 31.1 14.5 45.6
--------------------------------------------------------------
Total interest income $ 9.1 $(0.8) $ 8.3 $31.9 $19.2 $51.1
--------------------------------------------------------------
Interest expense:
Savings $ 0.3 $ 3.0 $ 3.3 $ 0.4 $ 5.8 $ 6.2
Interest-bearing demand (0.3) 0.6 0.3 (0.7) 2.6 1.9
Certificates under $100,000 0.2 0.8 1.0 1.1 6.0 7.1
Local CDs > or = $100,000 (2.0) -- (2.0) (3.2) 1.3 (1.9)
-------------------------------------------------------------------------------------------------------------
Total core interest-bearing deposits (1.8) 4.4 2.6 (2.4) 15.7 13.3
--------------------------------------------------------------
National money market deposits 1.9 -- 1.9 5.8 -- 5.8
National CDs > or = $100,000 (0.6) 0.3 (0.3) 6.1 9.1 15.2
-------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (0.5) 4.7 4.2 9.5 24.8 34.3
--------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 4.3 (1.1) 3.2 8.2 1.6 9.8
U.S. Treasury demand 0.1 (0.1) -- (0.1) -- (0.1)
-------------------------------------------------------------------------------------------------------------
Total short-term borrowings 4.4 (1.2) 3.2 8.1 1.6 9.7
--------------------------------------------------------------
Long-term debt (0.1) -- (0.1) (0.3) 0.6 0.3
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 3.8 $ 3.5 $ 7.3 $17.3 $27.0 $44.3
--------------------------------------------------------------
Changes in net interest income $ 5.3 $(4.3) $ 1.0 $14.6 $(7.8) $ 6.8
==============================================================
* We calculate variances on a fully tax-equivalent basis, which includes the
effects of any disallowed interest expense.
(1) We define changes attributable to volume as a change in average balance
multiplied by the prior year's rate.
(2) We define changes attributable to rate 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.
46
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 (CRM) and Roxbury Capital
Management (RCM).
---------------------------------------------------------------------------------------
NONINTEREST INCOME (in millions) 2007 Q3 2006 Q3 2007 YTD 2006 YTD
---------------------------------------------------------------------------------------
WAS, CCS, and affiliate money manager
revenue(1) $83.1 $71.7 $245.9 $214.9
--------------------------------------------------------------------------------------
Service charges on deposit accounts 7.2 7.3 21.0 21.1
--------------------------------------------------------------------------------------
Other noninterest income 4.7 5.5 16.4 17.6
--------------------------------------------------------------------------------------
Securities gains/(losses) (0.2) 0.1 (0.1) --
--------------------------------------------------------------------------------------
Total noninterest income $94.8 $84.6 $283.2 $253.6
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Portion provided by advisory business revenue 88% 85% 87% 85%
--------------------------------------------------------------------------------------
(1) 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, 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, not on the assets we manage or hold
in custody. In some cases, these fees are based on the 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 primarily to money market mutual fund
and cash balances, and do not reflect equity market movements.
----------------------------------------------------------------------------------------
WEALTH ADVISORY SERVICES REVENUE (in millions) 2007 Q3 2006 Q3 2007 YTD 2006 YTD
----------------------------------------------------------------------------------------
Trust and investment advisory fees $40.5 $33.0 $115.8 $100.4
---------------------------------------------------------------------------------------
Planning and other services fees 10.3 8.8 29.8 25.1
---------------------------------------------------------------------------------------
Mutual fund fees 5.3 5.3 15.4 15.0
---------------------------------------------------------------------------------------
Total Wealth Advisory Services revenue $56.1 $47.1 $161.0 $140.5
---------------------------------------------------------------------------------------
WAS revenue was 19% higher for the third quarter and 15% higher for the first
nine months of 2007 than for the corresponding periods in 2006. These increases
were due mainly to growth in revenue from investment management, asset
allocation, and family office services.
47
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
The increases in trust and investment advisory fees were due to new business
development, market appreciation, and business from the acquisition of
Boston-based Bingham Legg Advisers, LLC (BLA). We completed this acquisition in
June and BLA took the Wilmington Trust name then.
Most of the growth in revenue from planning and other services was from family
office services, which we expanded significantly beginning in June 2006.
In this expansion, we opened new offices in Princeton, New Jersey, and Stamford,
Connecticut, and added staff with expertise in structuring family offices as
legal entities; developing strategies for executive compensation; and working
with clients who have inherited their wealth. These initiatives complement the
services for sports and entertainment industry professionals offered by our
Beverly Hills-based subsidiary, Grant Tani Barash & Altman (GTBA), and position
us among the largest full-service family office practices in the industry.
Three markets had notable increases in their contributions to total WAS sales
(new fees, annualized) for the quarter and first nine months of 2007:
California, Florida, and Georgia. Total WAS sales were lower than for the
year-ago periods because last year's figures included a book of business we
acquired when we added family office services staff in 2006. This acquisition
skewed year-ago family office sales higher than what we would expect in the
normal course of business.
------------------------------------------------------------------------------------
PERCENTAGE CONTRIBUTION TO TOTAL WAS SALES 2007 Q3 2006 Q3 2007 YTD 2006 YTD
------------------------------------------------------------------------------------
California 6% 3% 5% 3%
----------------------------------------------------------------------------------
Delaware (1) 57% 56% 56% 51%
----------------------------------------------------------------------------------
Florida 9% 5% 8% 6%
----------------------------------------------------------------------------------
Georgia 5% 1% 4% 2%
----------------------------------------------------------------------------------
Maryland 2% 2% 2% 2%
----------------------------------------------------------------------------------
New Jersey -- -- 1% --
----------------------------------------------------------------------------------
New York 8% 9% 7% 8%
----------------------------------------------------------------------------------
Pennsylvania 12% 14% 11% 13%
----------------------------------------------------------------------------------
Family office services (2) 1% 10% 6% 15%
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Total WAS sales (in millions) $5.5 $5.6 $17.9 $26.6
----------------------------------------------------------------------------------
(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.
WEALTH ADVISORY SERVICES PROFITABILITY
Compared to the year-ago third quarter, WAS profitability improved, as we began
to see returns on the family office and other expansion investments we made in
2006. Revenue growth outpaced expense growth because of this positive operating
leverage.
On a year-to-date basis, WAS profitability was slightly lower than for the first
nine months of 2006, mainly because the Boston acquisition added expenses
beginning with the third quarter of 2007. Also, the amount of the loan loss
provision allocated to the WAS business was higher than for the first nine
months of 2006.
------------------------------------------------------------------------------------
WEALTH ADVISORY SERVICES PROFITABILITY 2007 Q3 2006 Q3 2007 YTD 2006 YTD
------------------------------------------------------------------------------------
Segment net income (in millions) $ 8.1 $ 7.3 $ 20.7 $ 19.9
-----------------------------------------------------------------------------------
Efficiency ratio 77.39% 78.60% 80.46% 79.44%
-----------------------------------------------------------------------------------
48
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
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.
3. Retirement services. Approximately 50% of these fees are based on 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 REVENUE (in millions) 2007 Q3 2006 Q3 2007 YTD 2006 YTD
-----------------------------------------------------------------------------------------
Capital markets services $10.2 $ 8.7 $31.5 $26.6
---------------------------------------------------------------------------------------
Entity management services 7.4 6.8 21.9 19.8
---------------------------------------------------------------------------------------
Retirement services 3.0 2.9 9.6 8.6
---------------------------------------------------------------------------------------
Investment/cash management services 3.0 2.7 9.4 7.3
---------------------------------------------------------------------------------------
Total Corporate Client Services revenue $23.6 $21.1 $72.4 $62.3
---------------------------------------------------------------------------------------
CCS revenue was 12% higher for the third quarter and 16% higher for the first
nine months of 2007 than for the corresponding periods in 2006. On a
year-to-date basis, all four components of this business recorded double-digit
increases in revenue. In the 2007 third quarter, the pace of growth slowed, as
volatility and uncertainty in the world's capital markets limited business
development opportunities. These market conditions led to a decrease in CCS
revenue between the second and third quarters of 2007.
Capital markets revenue for the first nine months of 2007 reflected demand for
trust and administrative services that support tender option bonds, defeasance
of commercial mortgage-backed securitizations, and trust-preferred securities.
In addition, in the 2007 third quarter, fees from services that support
collateralized debt obligations (CDOs) and default administration contributed to
the revenue growth. These fees helped offset a slowdown in the market for
services that support asset-backed securitizations (ABS).
Some of the ABS transactions for which CCS provides trust and administrative
services hold a blend of prime and subprime residential mortgages. For us, the
risk associated with the subprime market is the risk that the pace of growth in
revenue will slow, which is what happened in the 2007 third quarter. As a
service provider, our involvement in these transactions is defined
contractually.
Fees for our ABS services are based on the complexity of the services provided,
regardless of the underlying collateral. The same is true for the majority of
CCS revenue. For the 2007 third quarter, ABS transactions backed by U.S.
residential mortgages accounted for approximately 5%, or $1.2 million, of total
CCS revenue. For the first nine months of 2007, the corresponding amount was 6%,
or $4.3 million of total CCS revenue.
In the entity management component of the CCS business, revenue rose 9% compared
to the year-ago third quarter, and 11% on a year-to-date basis. These increases
were due mainly to increased levels of corporate governance business in Ireland
and Germany. The growth in business from Germany reflected our expansion there
in August
49
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
2006, when we opened an office in Frankfurt. Our acquisition in May 2006 of PwC
Corporate Services (Cayman) from the accounting firm PricewaterhouseCoopers also
contributed to the growth.
In the 2007 third quarter, the entity management component also benefited from
our acquisition in June 2007 of a service provider in Luxembourg. The business
in Europe helped offset a slowdown in the demand for entity management services
elsewhere.
CDO SERVICES IN THE CCS BUSINESS
We do not issue or underwrite collateralized debt obligations (CDOs), establish
pricing or valuations of CDO assets or liabilities, take positions in CDOs, or
make loans or provide collateral to parties involved in CDO transactions. We
help clients who use CDOs by serving as collateral administrator, paying agent,
custodian, and/or trustee. These services are logical extentions of the trust
and administrative services we have been providing for other types of structured
finance transactions for many years now.
CDOs are complex structures that typically involve investment banks, equity
investors, asset managers, note holders, and a variety of other interested
parties. Each structure is governed by legal documents that clearly define the
nature and extent of our activities, and which specify the roles,
responsibilities, and administrative or trustee services that we are to perform.
In our role as trustee and/or administrator, we may implement operational
controls, provide compliance reporting, provide investment and regulatory
accounting services, and process transactions. We also may establish records
and procedures that are based on the structure's governing documents. In all
cases, our exposure is mitigated by the legal documents that govern the
transaction.
We launched our enhanced CDO services in November 2006. To date, revenue from
these services has been slower than we anticipated, but we are winning business
mandates and we believe the outlook for growth is positive. There are many
different types of CDOs, and we are capable of supporting the full range, which
gives us the diversification necessary to weather current market conditions.
More information about our CDO services is on www.wilmingtontrust.com under the
corporate and institutional link to structured finance services.
CORPORATE CLIENT SERVICES PROFITABILITY
CCS profitability for the 2007 third quarter was slightly less than for the
year-ago third quarter, mainly because the Luxembourg acquisition increased
expenses. Also contributing to expense growth was the small CCS office we opened
during the 2007 second quarter in Bloomington, Minnesota. This office provides
trust services for insurance premium financing structures.
---------------------------------------------------------------------------------
CORPORATE CLIENT SERVICES PROFITABILITY 2007 Q3 2006 Q3 2007 YTD 2006 YTD
---------------------------------------------------------------------------------
Segment net income (in millions) $ 4.2 $ 5.3 $ 15.4 $ 13.5
--------------------------------------------------------------------------------
Efficiency ratio 76.33% 69.29% 72.58% 72.19%
--------------------------------------------------------------------------------
50
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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, read the financial market risk discussion in this report.
--------------------------------------------------------------------------------------------------------
CLIENT ASSETS AT WILMINGTON TRUST (1) (in billions) AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
--------------------------------------------------------------------------------------------------------
Assets under management $ 33.2 $ 31.9 $ 31.3 $ 29.1
------------------------------------------------------------------------------------------------------
Assets under management at Boston office (2) $ 1.3 $ 1.3 $ -- $ --
------------------------------------------------------------------------------------------------------
Total assets under management $ 34.5 $ 33.2 $ 31.3 $ 29.1
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Assets under administration $ 86.2 $ 86.0 $ 76.2 $ 73.3
------------------------------------------------------------------------------------------------------
Assets under administration at Boston office (2) $ 0.9 $ 0.9 $ -- $ --
------------------------------------------------------------------------------------------------------
Total assets under administration $ 87.1 $ 86.9 $ 76.2 $ 73.3
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Total client assets (3) $121.6 $120.1 $107.5 $102.4
------------------------------------------------------------------------------------------------------
(1) Excludes CRM and RCM. Includes estimates of asset values that are not
readily available, such as those held in limited partnerships
(2) Wilmington Trust FSB, Massachusetts (formerly Bingham Legg Advisers)
(3) Includes assets under management and assets under administration
On a percentage basis, the investment mix of managed assets at Wilmington Trust
(excluding CRM and RCM) remained relatively unchanged.
----------------------------------------------------------------------------------------------------------
INVESTMENT MIX OF WILMINGTON TRUST MANAGED ASSETS (1) AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
----------------------------------------------------------------------------------------------------------
Equities 49% 49% 47% 48%
------------------------------------------------------------------------------------------------------
Fixed income 23% 22% 27% 28%
------------------------------------------------------------------------------------------------------
Cash and equivalents 16% 16% 16% 14%
------------------------------------------------------------------------------------------------------
Other assets 12% 13% 10% 10%
------------------------------------------------------------------------------------------------------
(1) Excludes CRM and RCM. Includes Wilmington Trust FSB, Massachusetts
(formerly Bingham Legg Advisers)
51
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
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 (in billions) AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
---------------------------------------------------------------------------------------------------
Wilmington Trust (1) $33.2 $31.9 $31.3 $29.1
-------------------------------------------------------------------------------------------------
Assets under management at Boston office (2) $ 1.3 $ 1.3 $ -- $ --
-------------------------------------------------------------------------------------------------
Cramer Rosenthal McGlynn $11.8 $11.9 $10.6 $ 9.8
-------------------------------------------------------------------------------------------------
Roxbury Capital Management $ 2.8 $ 3.0 $ 3.1 $ 3.1
-------------------------------------------------------------------------------------------------
Total assets under management $49.1 $48.1 $45.0 $42.0
-------------------------------------------------------------------------------------------------
(1) Includes estimates of asset values that are not readily available, such as
those held in limited partnerships
(2) Wilmington Trust FSB, Massachusetts (formerly Bingham Legg Advisers)
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, 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 Q3 2006 Q3 2007 YTD 2006 YTD
-------------------------------------------------------------------------------------------------------
Total revenue from affiliate money managers (net of expenses) $4.6 $4.6 $15.9 $15.2
------------------------------------------------------------------------------------------------------
CRAMER ROSENTHAL MCGLYNN (CRM)
At value-style manager CRM, managed assets at September 30, 2007, were more than
$2 billion higher than at September 30, 2006. This increase, due mainly to new
business inflows, raised management fees and generated revenue that was higher
for the first nine months of 2007 than for the corresponding year-ago amount.
In the third quarter of 2007, volatility in the equity markets decreased managed
asset levels and reduced year-to-date hedge fund performance fees. This, in
turn, lowered the revenue contribution from CRM.
------------------------------------------------------------------------------------------
REVENUE FROM CRAMER ROSENTHAL MCGLYNN 2007 Q3 2006 Q3 2007 YTD 2006 YTD
------------------------------------------------------------------------------------------
Revenue (in millions, net of expenses) $4.2 $4.6 $15.2 $14.1
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
CRAMER ROSENTHAL MCGLYNN AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
------------------------------------------------------------------------------------------
Assets under management (in millions) $11,785.2 $11,928.7 $10,623.8 $9,784.5
-----------------------------------------------------------------------------------------
Wilmington Trust's ownership position 82.41% 82.41% 81.73% 81.73%
-----------------------------------------------------------------------------------------
52
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
Our ownership position in CRM increased in the second quarter of 2007, as
permitted by the put (relinquishment of interests) provisions in our agreement
with CRM. This increase had a nominal effect on the revenue we receive from CRM.
ROXBURY CAPITAL MANAGEMENT (RCM)
At growth-style manager Roxbury Capital Management (RCM), the changes in managed
asset levels and the revenue contribution reflected the firm's termination of
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.
REVENUE FROM ROXBURY CAPITAL MANAGEMENT 2007 Q3 2006 Q3 2007 YTD 2006 YTD
--------------------------------------- ------- ------- -------- --------
Revenue (in millions, net of expenses) $0.4 $-- $0.7 $1.1
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
ROXBURY CAPITAL MANAGEMENT AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
--------------------------------------------------------------------------------------------
Assets under management (in millions) $2,858.0 $3,005.3 $3,138.1 $3,122.9
-------------------------------------------------------------------------------------------
Wilmington Trust's ownership position
-------------------------------------------------------------------------------------------
Ownership of preferred profits 30% 30% 30% 30%
-------------------------------------------------------------------------------------------
Ownership of common interests 41.23% 41.23% 41.23% 41.23%
-------------------------------------------------------------------------------------------
Our agreement with RCM includes provisions that permit some of that firm's
portfolio managers to put (relinquish) their ownership of certain free cash flow
interests (Class B interests) to us. These Class B interests are in addition to
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. Since
then, the revenue related to these puts totaled $881,672.
NONINTEREST EXPENSE
During the third quarter and first nine months of 2007, expenses rose at a
faster pace than revenue because many of the 2006 initiatives did not affect
staffing and operating expenses significantly until the latter part of last
year. In addition, we completed two acquisitions in 2007 that contributed to
expense growth. Staffing-related costs continued to account for the majority of
noninterest 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 (WAS) business.
53
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
- In October, we expanded the Corporate Client Services (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 our investment in technology and a team of capital markets
experts that added to services that support the administration of
collateralized debt obligations.
- In November, we introduced WTDirect, our Internet-only banking product,
with a high-yield savings account. WTDirect is off to a strong start, but
its launch involved considerable up-front development and advertising
expense.
We completed both of our 2007 acquisitions in June.
- We established a WAS presence in Boston with the acquisition of Bingham
Legg Advisers, LLC (BLA), a wealth management firm that specializes in
tax-sensitive investment strategies for high-net-worth clients. BLA took
the Wilmington Trust name at the end of June and this acquisition added 26
staff members.
- CCS expanded its presence in Europe by acquiring a corporate services
provider in Luxembourg that specializes in providing management,
accounting, director, and other services for international holding and
finance companies. This acquisition added 8 staff members.
These initiatives added to our expenses as we completed each one, but we expect
the corresponding increases in revenue to occur more gradually, as we develop
each of these initiatives more fully over time.
----------------------------------------------------------------------------------
OPERATING EXPENSES (dollars in millions) 2007 Q3 2006 Q3 2007 YTD 2006 YTD
----------------------------------------------------------------------------------
Full-time-equivalent staff members 2,590 2,520 2,590 2,520
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Salaries and wages expense $ 44.1 $ 39.5 $127.7 $114.1
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Stock option expense $ 1.6 $ 1.9 $ 6.2 $ 5.6
----------------------------------------------------------------------------------
Total incentives and bonuses expense (1) $ 10.0 $ 8.9 $ 35.4 $ 29.5
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Employment benefits expense $ 12.7 $ 11.4 $ 38.9 $ 36.8
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Total staffing-related expense $ 66.8 $ 59.8 $202.0 $180.4
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Total noninterest operating expenses (2) $110.8 $ 98.6 $327.2 $294.5
----------------------------------------------------------------------------------
(1) Includes stock option expense
(2) Excludes impairment charge
Incentives and bonuses expense for the first nine months of 2007 included an
adjustment that reduced stock-based compensation expense by approximately $0.5
million. We made this adjustment because stock option forfeitures were higher
than estimated, which lowered the expense associated with their award. Absent
this adjustment, stock option expense for the first nine months of 2007 would
have been approximately $6.7 million instead of $6.2 million. Total incentives
and bonuses expense would have been approximately $35.9 million instead of $35.4
million.
In addition, incentives and bonuses expense for the first nine months of 2007
included approximately $2.0 million that we do not expect to incur again in
2007. Approximately $1.0 million of this amount was for restricted stock grants.
The other large expense increases for the third quarter and first nine months of
2007 were in the category recorded as "other expense." The year-to-date amount
reflected higher legal expenses and costs associated with credit and debit card
transaction volumes. The third quarter amount included approximately $2.3
million in shares tax expense,
54
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
which resulted from a review of state tax obligations. Accounting rules require
us to record this type of expense in other expenses because it is not an income
tax. We do not expect to incur this expense again in 2007.
INCOME TAXES
Income tax expense and the effective tax rate were higher than for previous
periods because:
- New business development and our expansion initiatives increased state
income taxes, and
- The amounts reported for the third quarter and first nine months of 2006
reflect tax benefits that resulted from the non-cash write-down of our
investment in RCM.
---------------------------------------------------------------------------------
INCOME TAXES AND TAX RATE 2007 Q3 2006 Q3 2007 YTD 2006 YTD
---------------------------------------------------------------------------------
Pre-tax income (in millions) $ 69.2 $ 0.1 $214.7 $142.7
---------------------------------------------------------------------------------
Income tax expense (in millions) $ 22.9 $(5.0) $ 75.9 $ 46.3
---------------------------------------------------------------------------------
Effective tax rate 33.23% Not meaningful 35.50% 32.45%
---------------------------------------------------------------------------------
During the 2007 third quarter, an agreement with state taxing authorities
reduced a reserve for state income taxes and resulted in a credit to income tax
expense of approximately $2.7 million. We do not expect this to occur again in
2007. Absent this credit, the effective tax rate for the 2007 third quarter
would have been 37.18%.
We adopted the provisions of FIN 48, "Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement No. 109," on January 1, 2007. See Note 10,
"Income taxes," in this report.
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, although some of our trust agreements include specific capital
requirements.
Our capital position remained strong during the first nine months of 2007 and
our regulatory capital continued to exceed minimum requirements. This led the
Board of Directors to approve, on April 19, 2007, 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.
On October 19, 2007, the Board of Directors declared a regular quarterly
dividend of $0.335 per share. This dividend will be paid on November 15, 2007,
to stockholders of record on November 1, 2007.
--------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
CAPITAL STRENGTH (dollars in millions) 9/30/07 12/31/06 9/30/06
--------------------------------------------------------------------------------------------------------
Stockholders' equity (period end) $1,098.0 $1,059.3 $1,064.3
--------------------------------------------------------------------------------------------------------
Stockholders' equity (on average) $1,090.1 $1,059.1 $1,056.3
--------------------------------------------------------------------------------------------------------
Return on average stockholders' equity (annualized) 16.93% 13.58% 12.19%
--------------------------------------------------------------------------------------------------------
Return on average assets (annualized) 1.68% 1.37% 1.24%
--------------------------------------------------------------------------------------------------------
Capital generation ratio (annualized) 6.66% 5.77% 4.31%
--------------------------------------------------------------------------------------------------------
Dividend payout ratio 48.84% 59.18% 65.94%
--------------------------------------------------------------------------------------------------------
55
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
During the first nine months of 2007, we added $38.7 million to capital, which
consisted of:
- $70.6 million, which reflected earnings of $138.0 million net of $67.4
million in cash dividends;
- $22.4 million from the issue of common stock under employment benefit
plans;
- $6.2 million of stock-based compensation expense;
- $1.2 million in tax benefits from stock-based compensation costs;
- $1.2 million in adjustments to minimum pension, supplemental executive
retirement plan, and postretirement benefits plan liabilities, net of
taxes;
- $0.6 million in foreign currency exchange adjustments;
- $0.9 million of amortized derivative cost, net of taxes; and
- $3.8 million of derivative gains included in other comprehensive income,
net of taxes.
Offsetting these additions were $68.2 million of reductions in capital, which
consisted of:
- $65.1 million for the repurchase of shares;
- $1.5 million in unrealized losses on securities, net of taxes; and
- $1.6 million for the adoption of FIN 48. For more information about FIN 48,
read Note 10, "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, read the
capital resources discussion in our 2006 Annual Report to Shareholders.
Changes in our capital ratios from the end of 2006 reflected our use of capital
to repurchase shares and to fund acquisitions.
------------------------------------------------------------------------------------------
AT AT MINIMUM TO BE MINIMUM TO BE
REGULATORY CAPITAL RATIOS 9/30/07 12/31/06 ADEQUATELY CAPITALIZED WELL CAPITALIZED
------------------------------------------------------------------------------------------
Total risk-based capital 11.54% 12.10% 8% 10%
------------------------------------------------------------------------------------------
Tier 1 risk-based capital 7.96% 8.25% 4% 6%
------------------------------------------------------------------------------------------
Tier 1 leverage capital 7.31% 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.
56
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
-------------------------------------------------------------------------------------------------
SHARE REPURCHASES 2007 Q3 2006 Q3 2007 YTD 2006 YTD
-------------------------------------------------------------------------------------------------
Number of shares repurchased 530,015 504,515 1,580,090 661,832
-------------------------------------------------------------------------------------------------
Average price per share repurchased $ 39.14 $ 44.08 $ 41.19 $ 43.93
-------------------------------------------------------------------------------------------------
Total cost of shares repurchased $20,743,904 $22,239,675 $65,085,868 $29,076,426
-------------------------------------------------------------------------------------------------
Total shares purchased under current plan 2,931,331 1,350,077 2,931,331 1,350,077
-------------------------------------------------------------------------------------------------
Shares available for repurchase 5,068,669 6,649,923 5,068,669 6,649,923
-------------------------------------------------------------------------------------------------
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.
We believe our liquidity position is strong because we are well capitalized, as
evidenced by our capital ratios, and because we have diverse sources of funding.
These sources include deposits, short- and long-term borrowings, cash flow from
our loan and investment securities portfolios, stockholders' equity, and other
types of credit facilities, such as long-term debt.
Having access to a variety of funding sources gives us the ability to adjust the
mix and amount of funding as we deem appropriate. It also helps mitigate the
risk of having insufficient liquidity.
In managing liquidity, we follow a liquidity risk management policy that has
been established by our Asset/Liability Committee and approved by our Board of
Directors. We also use a funds-at-risk (FAR) ratio, which we calculate monthly.
The FAR ratio 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 Ratings - to guide their decisions. At September 30, 2007 all of our
credit ratings:
- Were investment grade.
- Substantiated our financial stability and the consistency, over time, of
our earnings.
On August 27, 2007, Fitch Ratings affirmed its ratings of Wilmington Trust
Corporation and Wilmington Trust Company. The Fitch report said, "Factors
supporting Wilmington's ratings include its balanced business mix, good asset
quality, and solid market niches in a number of asset management businesses."
On March 9, 2007, Moody's Investors Service upgraded its Bank Financial Strength
Rating of our primary banking subsidiary, Wilmington Trust Company, to B- from
C+. According to Moody's, the upgrade "reflects Wilmington's strong capital and
asset quality indicators, as well as its contained market risk appetite, and
strong control and risk management. It also considers Wilmington's limited
geographic diversification and material credit risk concentration."
57
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
The following tables summarize our current credit ratings and the dates of the
most recent opinions and/or affirmations.
----------------------------------------------------------------------------------------------------------------
WILMINGTON TRUST CORPORATION FITCH RATINGS (1) MOODY'S INVESTORS SERVICE (2) STANDARD & POOR'S (3)
----------------------------------------------------------------------------------------------------------------
Outlook Stable Stable Stable
----------------------------------------------------------------------------------------------------------------
Issuer rating (long-term/short-term) A+/F1 A2/ * A-/A-2
----------------------------------------------------------------------------------------------------------------
Subordinated debt A A3 BBB+
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
WILMINGTON TRUST COMPANY FITCH RATINGS (1) MOODY'S INVESTORS SERVICE (2) STANDARD & POOR'S (3)
----------------------------------------------------------------------------------------------------------------
Outlook Stable Stable Stable
----------------------------------------------------------------------------------------------------------------
Bank financial strength A/B B- *
----------------------------------------------------------------------------------------------------------------
Issuer rating (long-term/short-term) A+/F1 A1 A/A-1
----------------------------------------------------------------------------------------------------------------
Bank deposits (long-term/short-term) AA-/ F1+ A1/P-1 A/A-1
----------------------------------------------------------------------------------------------------------------
* No rating in this category
(1) As of August 2007
(2) As of March 2007
(3) As of August 2006
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 changes that might affect our liquidity adversely.
For more information about how we manage liquidity and about our credit ratings,
read the discussion on managing liquidity that begins on page 32 of our 2006
Annual Report to Shareholders.
LIQUIDITY IN THE FIRST NINE MONTHS OF 2007
At September 30, 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 September 30, 2007, our
sources of liquidity included:
- Core deposit balances of $5.00 billion.
- National money market deposits of $144.4 million.
- National CDs > or = $100,000 of $2.35 billion.
- Short-term borrowings of $1.97 billion.
- Long-term debt of $391.5 million.
- Stockholders' equity of $1.10 billion.
- Investment securities of $1.85 billion.
- Borrowing capacity of $90.0 million from lines of credit with U.S.
financial institutions.
- Borrowing capacity 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 June 30, 2007, our FHLB borrowing
capacity was $635.1 million. The FHLB adjusts our borrowing capacity on a
quarterly basis, but its adjustment calculations for September 30, 2007,
were not available as of the filing date of this report (November 9, 2007).
58
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
Our long-term debt currently consists of two issues of subordinated long-term
debt. As we assess future funding needs, we may elect to replace existing debt
issues as they mature. We also may elect to issue additional long-term debt.
Among the risks to our liquidity is a partial guaranty of a line of credit
obligation for Cramer Rosenthal McGlynn (CRM). At September 30, 2007, this line
of credit was $3.0 million, the balance was zero, and our guaranty was for
82.41%, an amount equal to our ownership interest in CRM. This line of credit is
scheduled to expire on December 3, 2007. We expect CRM to renew this line of
credit.
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
better than our peer average. For more information about this, 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 = $100,000 and short-term borrowings, depending on which has more
favorable terms. For more information on how we manage interest rate risk,
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 NINE MONTHS OF 2007
During the first nine 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 Q3 2007 Q2 2006 Q3
----------------------------------------------------------------------------
Core deposits 53% 53% 56%
----------------------------------------------------------------------------
National funding 32% 33% 32%
----------------------------------------------------------------------------
Short-term borrowings 15% 14% 12%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loan-to-deposit ratio 1.05% 1.03% 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
59
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
the funds, they do not reflect the associated staffing and other operating
expenses. For a comparison of core deposit and national funding rates, refer to
the interest rate risk discussion in the "Quantitative and Qualitative
Disclosures about Market Risk" section of this report.
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 this report, and loans. Loans accounted for 75% of
our assets at September 30, 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, read the credit risk discussion in our 2006 Annual Report to
Shareholders.
We regard net charge-offs as the primary indicator of credit quality.
CREDIT QUALITY IN THE THIRD QUARTER AND FIRST NINE MONTHS OF 2007
Net charge-offs and the net charge-off ratio remained at the low end of their
historical range during the third quarter and first nine months of 2007. During
the third quarter, however, some of our credit metrics returned to levels more
in line with what we have experienced historically. Nonperforming asset levels
rose and we downgraded the risk ratings of several loans, which increased the
provision and reserve for loan losses.
NET CHARGE-OFFS
At $4.8 million, net charge-offs for the 2007 third quarter were $2.5 million
less than for the year-ago third quarter. For the first nine months of 2007, net
charge-offs totaled $11.6 million, which was $1.0 million less than for the same
period in 2006.
Commercial construction/real estate and commercial mortgage loans accounted for
approximately 15% of the third quarter net charge-offs and approximately 6% of
the year-to-date net charge-offs.
The net charge-off ratio remained at the low end of our historical experience.
It was 6 basis points for the third quarter and 14 basis points for the first
nine months of 2007. Annualized, the third quarter net charge-off ratio was 24
basis points, which was 12 basis points lower than the corresponding 2006
figure. Since 1996, the annual net charge-off ratio has ranged from a low of 14
basis points for 2005 to a high of 44 basis points for 2000.
-----------------------------------------------------------------------------------------------
CHARGE-OFFS FOR THE THREE MONTHS ENDED
(dollars in millions) 9/30/07 12/31/06 9/30/06
-----------------------------------------------------------------------------------------------
Gross charge-offs for the quarter $6.4 $7.1 $8.6
-----------------------------------------------------------------------------------------------
Recoveries for the quarter $1.6 $1.2 $1.3
-----------------------------------------------------------------------------------------------
Net charge-offs for the quarter $4.8 $5.9 $7.3
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Net charge-off ratio for the quarter 6 basis points 7 basis points 9 basis points
-----------------------------------------------------------------------------------------------
Quarterly net charge-off ratio annualized 24 basis points 28 basis points 36 basis points
-----------------------------------------------------------------------------------------------
60
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
-------------------------------------------------------------------------------------
MIX OF NET CHARGE-OFFS FOR THE THREE MONTHS ENDED
(in millions) 9/30/07 12/31/06 9/30/06
-------------------------------------------------------------------------------------
Consumer loans $3.0 $2.7 $1.9
-------------------------------------------------------------------------------------
Commercial, financial, and agricultural loans $1.1 $3.2 $5.4
-------------------------------------------------------------------------------------
Commercial real estate/construction and mortgage loans $0.7 $ -- $ --
-------------------------------------------------------------------------------------
Total net charge-offs $4.8 $5.9 $7.3
-------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
YEAR-TO-DATE CHARGE-OFFS (dollars in millions) AS OF 9/30/07 AS OF 12/31/06 AS OF 9/30/06
----------------------------------------------------------------------------------------------------
Year-to-date gross charge-offs $16.9 $24.6 $17.5
----------------------------------------------------------------------------------------------------
Year-to-date recoveries $ 5.3 $ 6.1 $ 4.9
----------------------------------------------------------------------------------------------------
Year-to-date net charge-offs $11.6 $18.5 $12.6
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Year-to-date net charge-off ratio 14 basis points 24 basis points 16 basis points
----------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
MIX OF NET CHARGE-OFFS YEAR TO DATE (in millions) AS OF 9/30/07 AS OF 12/31/06 AS OF 9/30/06
-------------------------------------------------------------------------------------------------------
Consumer loans $ 8.5 $ 8.0 $ 5.3
-------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural loans $ 2.4 $10.2 $ 7.3
-------------------------------------------------------------------------------------------------------
Commercial real estate/construction and mortgage loans $ 0.7 $ 0.3 $ --
-------------------------------------------------------------------------------------------------------
Year-to-date net charge-offs $11.6 $18.5 $12.6
-------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonaccruing loans were higher than for prior periods largely because we
transferred $10.3 million in loans to the Elliott Building Group to nonaccruing
status in the 2007 second quarter. This borrower filed for bankruptcy in June
2007. Normally, we do not discuss clients by name, but this bankruptcy filing is
a matter of public record and news media stories about it have mentioned our
involvement.
There was no change to the status of the Elliott Building Group loans during the
2007 third quarter. These loans are for two housing developments under
construction in southern New Jersey. Both of these developments are successful
and our position is secured by a first lien mortgage on each. The Elliott
Building group has a number of other projects underway to which we have zero
credit exposure.
We currently are unable to predict how the status of these loans might change or
whether this client's bankruptcy filing might affect charge-offs. As our
historical record of charge-offs indicates, our loan work-out programs are very
successful. We remain confident in our work-out processes and in the rigor of
our loan underwriting standards, which we apply consistently.
The increase in nonaccruing loans also reflected CRE and C&I loans that we
transferred to nonaccruing status during the 2007 third quarter. Approximately
66% of the linked-quarter increase was related to one residential project in
Montgomery County, Pennsylvania.
61
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
-------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS (dollars in millions) AT 9/30/07 AT 12/31/06 AT 9/30/06
-------------------------------------------------------------------------------------------------------
Period-end loan balances $8,336.5 $8,094.9 $7,780.2
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Period-end nonperforming assets:
-------------------------------------------------------------------------------------------------------
Nonaccruing loans $ 54.1 $ 31.0 $ 32.0
-------------------------------------------------------------------------------------------------------
Other real estate owned (OREO) $ 0.2 $ 4.8 $ 4.8
-------------------------------------------------------------------------------------------------------
Renegotiated loans $ 19.2 $ -- $ --
-------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 73.5 $ 35.8 $ 36.8
-------------------------------------------------------------------------------------------------------
Ratio of nonperforming assets to loans 88 basis points 44 basis points 47 basis points
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Loans past due 90 days or more at period end $ 17.0 $ 5.8 $ 7.7
-------------------------------------------------------------------------------------------------------
Ratio of loans past due 90 days to total loans 20 basis points 7 basis points 10 basis points
-------------------------------------------------------------------------------------------------------
The decline in other real estate owned (OREO) from prior periods reflected the
sale during the 2007 second quarter of agricultural land in New Jersey that had
been classified as OREO since the second quarter of last year. The sale of this
property generated a gain of $1.4 million, which we recorded as other income for
the 2007 second quarter.
During the 2007 third quarter, we renegotiated approximately $19.0 million in
CRE loans to one Pennsylvania-based developer. These loans are for a large
single family and townhome development in Sussex County, Delaware. The remainder
of the renegotiated loan amount is associated with one personal loan to a
commercial banking client. This loan was renegotiated in the first quarter of
2007.
Loans past due 90 days or more were higher than for prior periods mainly because
of one loan for a hotel and retail project in Ocean City, Maryland.
INTERNAL RISK RATING ANALYSIS
During the 2007 third quarter, we shifted several commercial loans with pass
ratings to the watchlisted and substandard categories. All three categories of
commercial loans were represented in the rating downgrades and they were spread
throughout the Regional Banking geographic footprint.
----------------------------------------------------------------------------------
INTERNAL RISK RATING ANALYSIS AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
----------------------------------------------------------------------------------
Pass 96.01% 96.81% 97.39% 97.41%
----------------------------------------------------------------------------------
Watchlisted 2.62% 2.27% 1.82% 1.73%
----------------------------------------------------------------------------------
Substandard 1.36% 0.91% 0.79% 0.86%
----------------------------------------------------------------------------------
Doubtful 0.01% 0.01% -- --
----------------------------------------------------------------------------------
We apply the internal risk rating classifications consistently. For more
information about these classifications, read the credit risk discussion in our
2006 Annual Report to Shareholders.
SERIOUS-DOUBT LOANS
-------------------
Serious-doubt loans are loans that we do not think will be repaid in full, even
though they are performing in accordance with the contractual terms or are fewer
than 90 days past due. Most of our serious-doubt loans are commercial loans.
62
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
-----------------------------------------------------------------------------------------------------------
SERIOUS-DOUBT LOANS AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
-----------------------------------------------------------------------------------------------------------
Serious-doubt loans (in millions) $15.3 $15.7 $18.8 $24.5
-----------------------------------------------------------------------------------------------------------
Ratio of serious-doubt loans to total loan balances 0.18% 0.19% 0.23% 0.31%
-----------------------------------------------------------------------------------------------------------
Percent of serious-doubt loans in commercial portfolio 80% 81% 84% 81%
-----------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION
On a percentage basis, the composition of the loan portfolio remained well
diversified and relatively unchanged.
----------------------------------------------------------------------------------------
COMPOSITION OF THE LOAN PORTFOLIO AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
----------------------------------------------------------------------------------------
Commercial/financial/agricultural 30% 30% 31% 31%
----------------------------------------------------------------------------------------
Commercial real estate/construction 21% 21% 21% 21%
----------------------------------------------------------------------------------------
Commercial mortgage 16% 17% 16% 16%
----------------------------------------------------------------------------------------
Residential mortgage 7% 7% 7% 7%
----------------------------------------------------------------------------------------
Home equity 4% 4% 4% 4%
----------------------------------------------------------------------------------------
Indirect loans 9% 8% 8% 9%
----------------------------------------------------------------------------------------
Credit card 1% 1% 1% 1%
----------------------------------------------------------------------------------------
Other consumer 5% 5% 5% 4%
----------------------------------------------------------------------------------------
Secured with liquid collateral 7% 7% 7% 7%
----------------------------------------------------------------------------------------
LOAN LOSS RESERVE AND LOAN LOSS PROVISION
The increase in nonperforming assets and the risk rating downgrades in the 2007
third quarter caused the increases in the provision and reserve for loan losses.
------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 2007 Q3 2006 Q3 2007 YTD 2006 YTD
------------------------------------------------------------------------------------------
Provision for loan losses (in millions) $8.9 $6.6 $19.0 $14.8
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
RESERVE FOR LOAN LOSSES AT 9/30/07 AT 6/30/07 AT 12/31/06 AT 9/30/06
------------------------------------------------------------------------------------------
Reserve for loan losses (in millions) $101.6 $97.5 $94.2 $93.6
------------------------------------------------------------------------------------------
Loan loss reserve ratio 1.22% 1.18% 1.16% 1.20%
------------------------------------------------------------------------------------------
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, read Note 2, "Summary of significant accounting
policies," in our 2006 Annual Report to Shareholders.
The reserve and provision for loan losses do not necessarily increase in
conjunction with loan growth, because newly added loans do not automatically
carry the same or a higher degree of risk than loans already in the portfolio.
63
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
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, read the discussion
that begins on page 49 of the 2006 Annual Report to Shareholders.
The derivative instruments we use are primarily interest rate swap contracts and
interest rate floor contracts. These instruments help us hedge the risk to
interest income from fluctuations in floating interest rates on commercial loans
and subordinated long-term debt. As of September 30, 2007, we had a total of
$1,125.0 million hedged in derivative instruments, as follows:
- $1.0 billion of interest rate floor contracts in connection with floating
rate loans in our commercial loan portfolio, and
- $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.
We also use interest rate swap contracts to help loan clients manage their
interest rate risk. These swaps let loan clients convert floating rate loan
payments to fixed rate loan payments. When we enter into one of these contracts
with a client, we simultaneously enter into a "mirror" swap contract with a
third party (typically a financial institution) that exchanges the fixed rate
loan payments for floating rate loan payments.
As of September 30, 2007, we had client swap contracts of $378.1 million and an
equal amount of swap contracts with third parties to mirror the client swaps,
for a total of $756.2 million of swaps associated with loans to clients.
Our other contractual obligations as of September 30, 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
$69.3 million. In Delaware, we lease many of our branch offices. We lease
all of our branch and other offices outside of Delaware.
- An 82.41% 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 $3.75 billion.
- Letters of credit, unfunded loan commitments, and unadvanced lines of
credit amounting to $3.65 billion.
The following table summarizes our current contractual obligations and the
periods over which they extend.
64
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
-----------------------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 MORE THAN
PAYMENTS DUE (in millions) TOTAL 1 YEAR YEARS YEARS 5 YEARS
-----------------------------------------------------------------------------------
Certificates of deposit $3,745.1 $3,616.9 $ 90.4 $30.7 $ 7.1
-----------------------------------------------------------------------------------
Long-term debt obligations (1) 391.5 114.9 28.0 -- 248.6
-----------------------------------------------------------------------------------
Interest on long-term debt 79.9 20.2 28.0 24.5 7.2
-----------------------------------------------------------------------------------
Operating lease obligations 69.3 11.9 21.1 13.5 22.8
-----------------------------------------------------------------------------------
Guaranty obligations 2.5 2.5 -- -- --
-----------------------------------------------------------------------------------
Total $4,288.3 $3,766.4 $167.5 $68.7 $285.7
-----------------------------------------------------------------------------------
(1) Contractual obligations associated with long-term debt obligations include
future interest payments.
The long-term debt obligations referenced in the table above consist of two
outstanding subordinated debt issues and Federal Home Loan Bank advances. The
first debt issue, for $125.0 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, Grant Tani Barash & Altman, and Wilmington Trust
Conduit Services 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,
refer to Note 4, "Affiliates and acquisitions," which begins on page 75 of our
2006 Annual Report to Shareholders.
OTHER INFORMATION
ACCOUNTING PRONOUNCEMENTS
Refer to Note 12, "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, refer to:
- Note 2, "Summary of significant accounting policies," which begins on page
71 of our 2006 Annual Report to Shareholders;
- Note 1, "Accounting and reporting policies," in this report; and
- Note 12, "Accounting pronouncements," in this report.
65
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
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.
66
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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, 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, 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, read
the discussion that begins on page 43 of our 2006 Annual Report to Shareholders.
67
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
INTEREST RATE RISK IN THE FIRST NINE MONTHS OF 2007
Our interest rate position at September 30, 2007, reflected our ability to match
loan repricing characteristics closely with changes in the cost of funds.
----------------------------------------------------------------------------------------------------
AS A PERCENTAGE OF TOTAL BALANCES AT 9/30/07 AT 12/31/06 AT 9/30/06
----------------------------------------------------------------------------------------------------
Loans outstanding with floating rates 71% 74% 75%
----------------------------------------------------------------------------------------------------
Percentage of floating rates loans that are commercial loans 82% 82% 81%
----------------------------------------------------------------------------------------------------
Commercial floating rate loans repricing in < or = 30 days 99% 93% 93%
----------------------------------------------------------------------------------------------------
Commercial loans tied to a prime rate 60% 61% 62%
----------------------------------------------------------------------------------------------------
Commercial loans tied to the 30-day LIBOR 35% 35% 34%
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
National CDs maturing in < or = 90 days 74% 55% 74%
----------------------------------------------------------------------------------------------------
Short-term borrowings maturing in < or = 90 days 88% 92% 98%
----------------------------------------------------------------------------------------------------
Our commercial floating rate loans continued to reprice more quickly than
national funding. As of September 30, 2007, approximately $4.8
billion of commercial loans were repricing within 30 or fewer days, while
approximately $3.5 billion of national CDs and short-term borrowings were
repricing in 90 or fewer days.
----------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2007 (dollars in millions) BALANCES % REPRICING IN < or = 30 DAYS $ REPRICING IN < or = 30 DAYS
----------------------------------------------------------------------------------------------------------------------
Commercial floating rate loans $4,873.1 99% $4,824.4
----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
FUNDING BALANCES % REPRICING IN < or = 90 DAYS $ REPRICING IN < or = 90 DAYS
-----------------------------------------------------------------------------------------------------------------------
National CDs $2,353.1 74% $1,736.6
-----------------------------------------------------------------------------------------------------------------------
Short-term borrowings $1,966.4 88% $1,736.4
-----------------------------------------------------------------------------------------------------------------------
Total $4,319.5 -- $3,473.0
-----------------------------------------------------------------------------------------------------------------------
Our interest rate risk position at the end of the first nine months of 2007 also
reflected stability in market interest rates. (The Federal Reserve's decrease in
short-term rates on September 19, 2007, occurred too late in the quarter to have
any meaningful effect.) As shown in the comparison of yields and rates below,
the yield on earning assets increased 4 basis points during the first nine
months of 2007, while the cost of funds decreased 2 basis points.
Compared to June 30, 2006, however, the yield on earning assets was 26 basis
points higher, but the cost of funds was 37 basis points higher. This was a
function of actions the Federal Open Market Committee (FOMC) took in 2006.
Between January and June 2006, the FOMC raised short-term interest rates four
times, for a total of 100 basis points. After those increases, most of our
floating rate loans had repriced by August, but core deposits continued to
reprice throughout the second half of the year.
------------------------------------------------------------------------------------------------
SELECTED YIELDS AND RATES FOR THE THREE MONTHS ENDED (on average) 9/30/07 12/31/06 9/30/06
------------------------------------------------------------------------------------------------
YIELDS ON EARNING ASSETS
------------------------------------------------------------------------------------------------
Commercial loans 8.10% 8.24% 8.27%
------------------------------------------------------------------------------------------------
Consumer loans 7.48% 7.39% 7.33%
------------------------------------------------------------------------------------------------
Total loans 7.74% 7.82% 7.83%
------------------------------------------------------------------------------------------------
Total earning assets 7.23% 7.19% 7.21%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
RATES ON FUNDS TO SUPPORT EARNING ASSETS
------------------------------------------------------------------------------------------------
Core interest-bearing deposits 2.44% 2.35% 2.17%
------------------------------------------------------------------------------------------------
Total interest-bearing deposits 3.67% 3.68% 3.47%
------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3.97% 4.00% 3.82%
------------------------------------------------------------------------------------------------
Total funds to support earning assets 3.50% 3.52% 3.36%
------------------------------------------------------------------------------------------------
68
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
On September 19, 2007, we lowered our prime lending rate to 7.75%. This rate
serves as a point of reference for a substantial number of our commercial
floating rate loans.
---------------------------------------------------------------------------
WILMINGTON TRUST PRIME LENDING RATE AT 9/30/07 AT 12/31/06 AT 9/30/06
---------------------------------------------------------------------------
Prime lending rate (period end) 7.75% 8.25% 8.25%
---------------------------------------------------------------------------
Prime lending rate (on average) 8.23% 7.96% 7.86%
---------------------------------------------------------------------------
For information on how our interest rate risk management strategies affected the
net interest margin, read the net interest margin discussion in this report.
As of September 30, 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 4.39% over the 12 months beginning September 30, 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 2.24% over the 12 months beginning September 30, 2007.
-----------------------------------------------------------------------------
IMPACT OF INTEREST RATE CHANGES FOR THE 12 MONTHS FOR THE 12 MONTHS
ON NET INTEREST INCOME BEGINNING 9/30/07 BEGINNING 12/31/06
-----------------------------------------------------------------------------
Gradual increase of 250 basis points 4.39% 4.22%
-----------------------------------------------------------------------------
Gradual decrease of 250 basis points (2.24)% (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, 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
deposit 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, see the "Quarterly analysis of
earnings" in this report.
69
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
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.
-------------------------------------------------------------------------------------------
REVENUE SUBJECT TO FINANCIAL MARKET RISK 2007 Q3 2006 Q3 2007 YTD 2006 YTD
-------------------------------------------------------------------------------------------
WAS trust and investment advisory revenue $ 40.5 $ 33.0 $115.8 $100.4
-------------------------------------------------------------------------------------------
CCS retirement services revenue 3.0 2.9 9.6 8.6
-------------------------------------------------------------------------------------------
CCS investment/cash management revenue 3.0 2.7 9.4 7.3
-------------------------------------------------------------------------------------------
Affiliate money manager revenue 4.6 4.6 15.9 15.2
-------------------------------------------------------------------------------------------
Total revenue subject to financial market risk $ 51.1 $ 43.2 $150.7 $131.5
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Total noninterest income (after amortization) $ 94.8 $ 84.6 $283.2 $253.6
-------------------------------------------------------------------------------------------
Percent of total subject to financial market risk 54% 51% 53% 52%
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Total net interest and noninterest income $180.0 $171.0 $541.9 $509.5
-------------------------------------------------------------------------------------------
Percent of total subject to financial market risk 28% 25% 28% 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,
and most of that risk is tied to economic conditions within the Regional Banking
geographic footprint. We believe this exposure is mitigated by the region's
diversified economy, which 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.
For the third quarter and first nine months of 2007, economic indicators in the
region were positive. Unemployment rates for Delaware, Pennsylvania, and New
Jersey for September 2007 remained below the U.S. national average.
70
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
------------------------------------------------------------------
SEPTEMBER 2007 SEPTEMBER 2006
------------------------------------------------------------------
EMPLOYMENT UNEMPLOYMENT UNEMPLOYMENT
EMPLOYMENT INDICATORS GROWTH* RATE RATE
------------------------------------------------------------------
Delaware 1.3% 3.0% 3.6%
------------------------------------------------------------------
New Jersey 0.7% 4.3% 4.6%
------------------------------------------------------------------
Pennsylvania 0.8% 4.5% 4.7%
------------------------------------------------------------------
United States 1.2% 4.7% 4.6%
------------------------------------------------------------------
* Year-over-year percent change
Sources: U.S. Bureau of Labor Statistics and Federal Reserve Bank of
Philadelphia
In its leading index reports for September 2007, the Federal Reserve Bank of
Philadelphia projected that economic conditions through the second quarter of
2008 would generate:
- Moderate to strong growth in Delaware's economy;
- Some growth in New Jersey's economy; and
- Some contraction in Pennsylvania's economy.
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.
The parts of Maryland within our Regional Banking footprint are slated to grow
considerably due to the U.S. military's Base Realignment and Closing (BRAC)
initiative. One of the military bases slated to 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 spokesperson said that the
proving ground was expected to gain approximately 8,200 jobs 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 9/30/07 AT 12/31/06
----------------------------------------------------------------------------------------
Loans outstanding to poultry industry clients (approximately) $ 59.2 $ 70.8
----------------------------------------------------------------------------------------
Total loans outstanding $8,336.5 $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.
Beyond the Delaware Valley region, changes in economic conditions at the
national and international level that eliminate or slow demand for services
could affect all of our businesses, loan and deposit balances, revenue, net
income, and overall results.
Current conditions in the CDO market could affect CCS revenue. For more
information about this, see the CCS discussion in this report.
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
71
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
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 and other staff members 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, read the section
on regulatory matters in our 2006 Annual Report on Form 10-K.
LEGAL RISK
We and our subsidiaries are subject to various legal proceedings that arise from
time to time in the ordinary course of business. Some of these proceedings seek
relief or damages in amounts that may be substantial. Because of the complex
nature of some of these proceedings, it may be a number of years before they
ultimately are resolved. While it is not feasible to predict the outcome of
these proceedings, we do not believe that the ultimate resolution of any legal
matters outstanding as of September 30, 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.
72
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
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
September 30, 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 third quarter of 2007 that materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
73
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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
third quarter of 2007.
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
(b) Shares (or Units) Shares (or Units)
Average Price Purchased as Part that May Yet Be
(a) Total Number Paid per of Publicly Purchased Under
of Shares (or Share (or Announced Plans or the Plans or
Period Units) Purchased Unit) Programs Programs
-------------------------------------------------------------------------------------------------
Month #1 4,501 $39.10 4,501 5,594,183
July 1, 2007 -
July 31, 2007
-------------------------------------------------------------------------------------------------
Month #2 400,000 $38.86 400,000 5,194,183
August 1, 2007 -
August 31, 2007
-------------------------------------------------------------------------------------------------
Month #3 125,514 $40.03 125,514 5,068,669
September 1, 2007 -
September 30, 2007
-------------------------------------------------------------------------------------------------
Total 530,015 $39.14 530,015 5,068,669
-------------------------------------------------------------------------------------------------
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.
74
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
We believe our payment of dividends during the third quarter of 2007 was
consistent with the Federal Reserve Board's policy.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
Exhibit
Number Exhibit
------ -------
3.1 Amended and Restated Certificate of Incorporation of the Corporation
(Commission File Number 1-14659) (1)
3.2 Amended Certificate of Designation of Series A Junior Participating
Preferred Stock of the Corporation (Commission File Number 1-14659) (2)
3.3 Amended and Restated Bylaws of the Corporation (Commission File Number
1-14659) (3)
31 Rule 13a-14(a)/15d-14(a) Certifications (4)
32 Section 1350 Certifications (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.
75
WILMINGTON TRUST CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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: November 9, 2007 /s/ Ted T. Cecala
----------------------------------------
Name: Ted T. Cecala
Title: Chairman of the Board and Chief
Executive Officer
(Authorized Officer)
Date: November 9, 2007 /s/ David R. Gibson
----------------------------------------
Name: David R. Gibson
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
76