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Wilmington Trust 10-K 2007 Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 2006
For the transition period from to
Commission file number: 1-14659
WILMINGTON TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Securities registered pursuant to
Section 12(b) of the Act:
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 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 report(s)), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
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 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates*
computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of June 30, 2006, the last business day of the registrant’s
most recently completed second fiscal quarter $2,896,101,915.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock,
as of the latest practicable date. Sixty-eight million four hundred eighty-six-thousand three
hundred ninety-seven shares of common stock per value $1 per share, were outstanding on January 31,
2007.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form
10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual
report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed
pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to security holders for fiscal
year ended December 24, 1980).
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
General
Wilmington Trust Corporation, a Delaware corporation and a financial holding company under the Bank
Holding Company Act (“Wilmington Trust”), owns Wilmington Trust Company, a Delaware-chartered bank
and trust company and Wilmington Trust’s principal subsidiary (“WTC”). WTC was formed in 1903 and
is the largest full-service bank in Delaware, with 47 branch offices at December 31, 2006.
Wilmington Trust also owns two other depository institutions, Wilmington Trust of Pennsylvania, a
Pennsylvania-chartered bank and trust company with four branches (“WTPA”), and Wilmington Trust
FSB, a federally-chartered savings bank with one branch and a sales office in Maryland; one branch
and four sales offices in Florida; and two trust agency offices in California and one in each of
Georgia, Nevada, New Jersey, and New York (“WTFSB”). (WTC, WTPA, and WTFSB sometimes are referred
to herein as the “Banks”). Wilmington Trust also owns Rodney Square Management Corporation, a
registered investment adviser (“RSMC”); Wilmington Brokerage Services Company, a broker-dealer and
a registered investment adviser; WT Investments, Inc., an investment holding company with interests
in five asset management firms (“WTI”); GTBA Holdings, Inc. (“GTBAH”), an investment holding
company with interests in three asset management firms; Wilmington Trust Investment Management,
LLC, an investment advisory firm (“WTIM”); Wilmington Trust (UK) Limited, an investment holding
company with interests in four international firms providing entity management services (“WTUK”);
and Wilmington Trust CI Holdings Limited, a holding company with six subsidiaries.
Wilmington Trust’s principal place of business is Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890. Its principal role is to supervise and coordinate the Banks’, RSMC’s,
WTI’s, WTIM’s, GTBAH’s, and WTUK’s activities and provide them with capital and services.
Virtually all of Wilmington Trust’s income historically has been from dividends from its
subsidiaries. Wilmington Trust’s current staff principally consists of its management, who are
executive officers generally serving in similar capacities for WTC. Wilmington Trust utilizes
WTC’s support staff.
As of December 31, 2006, Wilmington Trust had total assets of $11.16 billion and total
shareholders’ equity of $1.1 billion. On that date, 68,459,514 shares of Wilmington Trust’s common
stock were issued and outstanding, and the company had 7,962 shareholders of record. Wilmington
Trust’s total loans outstanding were approximately $8.09 billion on that date.
Business Segments
We have four business segments that we monitor and report on to manage our business operations. We
identify these segments as Regional Banking, Wealth Advisory Services, Corporate Client Services,
and Affiliate Money Managers. The Wealth Advisory Services business serves clients throughout the
United States and in many foreign countries. The Corporate Client Services business
1
also serves
clients throughout the United States and in many foreign countries.
The Regional Banking business targets commercial clients throughout the Mid-Atlantic region and consumer clients in the State of
Delaware. We use a funds transfer pricing methodology to credit and charge segments for funds
provided and funds used. We use activity-based costing principles to assign corporate overhead
expenses to each segment. We generally record sales and transfers among segments as if the sales
or transfers were to third parties (e.g., at current market prices). We report profit or
loss from infrequent events, such as the sale of a business, separately for each segment. For
financial information on our four segments, see Note 21 to the Consolidated Financial Statements
contained in our Annual Report to Shareholders for 2006.
Wealth Advisory Services Activities
The Banks’ Wealth Advisory Services activities encompass a variety of sophisticated financial
planning, investment management, fiduciary, and custom lending services for individuals and
families. These services include estate, retirement, tax, philanthropic, business succession, and
executive benefits planning. The Banks also offer trust creation and administration, estate
settlement, and private banking services. The Banks receive fees for providing these services.
The Banks specialize in trusts that offer the legal and tax advantages available in Delaware and
other favorable jurisdictions. WTC is one of the largest personal trust institutions in the United
States.
Wilmington Trust’s investment management capabilities utilize proprietary and nonproprietary
products to offer a full spectrum of asset classes and investment styles, including fixed-income
instruments, mutual funds, domestic and international equities, real estate investment trusts, and
alternative investments such as private equity and hedge funds.
Investment management services are provided to institutional as well as individual clients,
including endowment and foundation funds, tax-qualified defined benefit and defined contribution
plans, and taxable and tax-exempt cash portfolios.
Wilmington Trust also offers business management and family office services to high net worth
individuals. These services include financial advice, bookkeeping, tax return preparation,
investment management, and courier services.
Corporate Client Services Activities
Wilmington Trust’s Corporate Client Services business provides a variety of trustee, agency, and
administrative services in jurisdictions in the United States, the Caribbean, and Europe with
advantageous legal, tax, and creditor protections. The business is focused on three areas: 1)
services for clients who use a variety of capital markets financing structures; 2) services for
clients who seek to establish and maintain legal residency requirements for special
purpose/variable interest entities; and 3) services for clients who use an independent trustee to
hold retirement plan assets.
Wilmington Trust serves as owner trustee, indenture trustee, and specialized service provider for a
variety of capital markets transactions, including those secured by mortgage-backed collateral,
residential and commercial mortgage loans, leases, credit card receivables, corporate loans,
2
municipal securities, and other assets. Wilmington Trust provides owner trustee, indenture
trustee, and specialized services for equipment financing transactions that involve aircraft, power
generating facilities, vessels, and other capital equipment. It also serves as indenture,
successor, collateral, or liquidating trustee in corporate debt issuances, reorganizations, debt
restructurings, mergers, and bankruptcies.
To establish and maintain legal residency requirements for special purpose/variable interest
entities, Wilmington Trust provides administrative services that demonstrate “nexus,” or substance.
These services typically include providing a physical location and independent directors for the
entity, and other administrative functions.
As trustee for retirement plan assets, Wilmington Trust provides administrative and custodial
services for pension, 401(k), and other retirement plans for clients who elect to use different
providers for the investment management, recordkeeping, and trustee services.
Wilmington Trust also provides fixed income investment and cash management services to Corporate
Client Services clients. These clients may use these services to manage residual cash or funds
held in escrow accounts, debt service reserve accounts, and other accounts associated with trusts
and special purpose entities. Some of Wilmington Trust’s retirement services clients also use
these services to manage retirement plan assets.
Regional Banking Activities
The Banks historically have concentrated the lending, deposit-taking, and other banking activities
described below in Delaware, Maryland, New Jersey, and Pennsylvania. Commercial banking activities
are conducted primarily in Delaware, Maryland, New Jersey, and Pennsylvania, and retail banking
activities are conducted primarily in Delaware. Banking activities conducted in other states
relate primarily to the Banks’ wealth advisory business.
The Banks’ commercial lending activities are targeted to owners of privately held businesses with
annual sales up to $250 million. The Banks seek to work with business owners who need wealth
advisory as well as lending services. The Banks generally do not pursue syndicated lending
opportunities.
The Banks generally receive fees for originating loans and for taking applications and committing
to originate loans. In addition, they receive fees for issuing letters of credit and lines of
credit, as well as for late charges and other fees in connection with lending activities.
Commercial Loans
The Banks also originate loans secured by mortgages on commercial real estate and multi-family
residential real estate. The Banks seek to minimize risks of this lending in a number of ways,
including:
3
The Banks also make other types of commercial loans to businesses located in their market areas.
The Banks offer lines of credit, term loans, and demand loans to finance working capital, accounts
receivable, inventory, and equipment purchases. Typically, these loans have terms of up to seven
years, and bear interest either at fixed rates or at rates fluctuating with a designated interest
rate. These loans frequently are secured by the borrower’s assets. In many cases, they also are
collateralized by guarantees of the borrower’s owners and their principal officers.
Construction Loans
The Banks make loans and participate in financing to construct residences and commercial buildings.
The Banks also originate loans for the purchase of unimproved property for residential and
commercial purposes. In these cases, the Banks frequently provide the construction funds to
improve the properties.
The Banks’ residential and commercial construction loans generally have terms of up to 24 months,
and interest rates that adjust from time to time in accordance with changes in a designated
interest rate. The Banks disburse loan proceeds in increments as construction progresses and
inspections warrant. The Banks
finance the construction of individual, owner-occupied houses only if qualified professional
contractors are involved and only on the basis of the Banks’ underwriting and construction loan
management guidelines. The Banks may underwrite and structure construction loans to convert to
permanent loans at the end of the construction period. Analyzing prospective construction loan
projects requires greater expertise than that required for residential mortgage lending on
completed structures. Accordingly, the Banks engage several staff members experienced in
underwriting in connection with their construction lending. Residential and commercial
construction loans afford the Banks the opportunity to increase the interest rate sensitivity of
their loan portfolios and receive yields higher than those obtainable on permanent residential
mortgage loans.
Residential Mortgage Loans
The Banks directly originate or purchase conventional residential first mortgage loans. The Banks
sell all new residential fixed-rate mortgage production into the secondary market. Existing
residential mortgage loans are serviced by a third-party provider. The Banks provide financing for
jumbo residential first mortgage loans through a third-party lender. The Banks may purchase
residential mortgage loans in support of Community Reinvestment Act activities.
4
The Banks foster public awareness of their residential mortgage loan products through newspaper
advertising and direct mail. The Banks offer both fixed and adjustable interest rates on
residential mortgage loans, with terms ranging up to 30 years.
Loans to Individuals
The Banks offer both secured and unsecured personal lines of credit, installment loans, home
improvement loans, direct and indirect automobile loans, and credit card facilities. The Banks
develop public awareness of their consumer loan products primarily through newspaper advertising
and direct mail. Consumer loans generally have shorter terms and higher interest rates than
residential first mortgage loans. Through their consumer lending, the Banks attempt to enhance the
spread between their average loan yields and their cost of funds, and their matching of assets and
liabilities expected to mature or reprice in the same periods.
Underwriting Standards
In determining whether to originate or purchase a residential mortgage loan, the Banks assess both
the borrower’s ability to repay the loan and the adequacy of the proposed information concerning
the applicant’s income, financial condition, employment, and credit history. The Banks require
title insurance insuring the priority of their liens on most loans secured by first mortgages on
real estate, as well as fire and extended coverage casualty insurance protecting the mortgaged
properties. Loans are approved by various levels of management depending on the amount of the
loan.
The Banks’ underwriting standards relating to commercial real estate and multi-family residential
loans are designed to ensure that the property securing the loan will generate sufficient cash flow
to cover operating expenses and debt service. The Banks review the property’s operating history
and projections, comparable properties, and the borrower’s financial condition and reputation. The
Banks’ general underwriting standards with respect to these loans include:
The Banks monitor the performance of these loans by inspecting the property securing each
loan.
The Banks limit commercial loans secured by real estate to individuals and organizations
with a demonstrated capacity to generate cash flow sufficient to repay indebtedness under varied
economic conditions. The Banks monitor the performance of these loans and other loans on a
continuous basis.
The Banks require first or junior mortgages to secure home equity loans. Although this security
influences the Banks’ underwriting decisions, their primary focus in underwriting these loans, as
well as their other loans to individuals, is on the borrower’s financial ability to repay. In the
underwriting process, the Banks obtain credit bureau reports and verify the borrower’s employment
5
and credit information. On home equity loans above a certain level, the Banks require an appraisal
of the property securing the loan and, in certain instances, title insurance insuring the priority
of their liens.
Deposit Activities
Deposit accounts are the primary source of the Banks’ funds for use in lending and investment
activities and general business purposes. The Banks also obtain funds from borrowings, the
amortization and repayment of outstanding loans, earnings, and maturities of investment securities.
The Banks’ deposit accounts include demand checking accounts, term certificates of deposit, money
market deposit accounts, negotiable order of withdrawal accounts, and regular savings accounts.
The Banks also offer retirement plan accounts (including individual retirement accounts, Keogh
accounts, and simplified employee pension plans) for investment in the Banks’ various deposit
accounts. The Banks attract consumer deposits principally from their primary market areas.
See also Item 1A – “Risk Factors.”
Other Activities
Interest and dividends on investments provide the Banks with a significant source of revenue. At
December 31, 2006, the Banks’ investment securities, including securities purchased under
agreements to resell, totaled $2.17 billion, or 19% of their total assets. The Banks’ investment
securities are used to meet federal liquidity requirements, among other purposes. Designated
members of the Bank’s management make investment decisions. The Banks have established limits on
the types and amounts of investments they may make.
Subsidiaries
WTC has 19 wholly owned subsidiaries, formed for various purposes. Those subsidiaries’ results of
operations are consolidated with Wilmington Trust for financial reporting purposes. They provide
additional services to Wilmington Trust’s customers, and include:
6
Affiliates
Through its subsidiaries, Wilmington Trust also has interests in the following asset management
firms whose results of operations are not consolidated with Wilmington Trust for financial
reporting purposes:
Staff Members
On January 31, 2007, Wilmington Trust and its subsidiaries had 2,562 full-time equivalent staff
members. Wilmington Trust considers its and its subsidiaries’ relationships with these staff
members to be good based on its ability to attract and retain high quality staff. Wilmington Trust
and the Banks provide a variety of benefit programs for these staff members, including pension,
incentive compensation, thrift savings, stock purchase, and group life, health, and accident plans.
7
A change in rate/volume (change in rate multiplied by change in volume) has been allocated to the
change in rate.
8
The maturity distribution of Wilmington Trust’s investment securities held to maturity
follows:
9
The
maturity distribution of Wilmington Trust’s Investment securities available for sale follows:
10
The following is a summary of period-end loan balances by loan category:
11
The following table sets forth the allocation of Wilmington Trust’s reserve for loan losses
for the last five years.
12
An analysis of loan maturities and interest rate sensitivity of Wilmington Trust’s
commercial and real estate construction loan portfolios follows:
The following table presents a comparative analysis of the risk elements in Wilmington
Trust’s loan portfolio at year-end(1)
13
The following table sets forth an analysis of Wilmington Trust’s provision for loan losses,
together with chargeoffs and reserves for the major portfolio classifications included in its
statement of condition (1)
14
The maturity of Wilmington Trust’s time deposits of $100,000 or more is as follows:
15
A summary of short-term borrowings at December 31, is as follows (in millions):
Federal
funds purchased and securities sold under agreements to repurchase generally mature within
365 days. U.S. Treasury demand notes mature overnight.
16
The following table presents the percentage of Wilmington Trust’s funding sources by deposit
type:
The following table presents an analysis of Wilmington Trust’s return on average and return
on average equity over the last three years:
17
Regulatory Matters
The following is a summary of laws and regulations applicable to Wilmington Trust and the Banks.
It does not purport to be complete, and is qualified by reference to those laws and regulations.
General
Wilmington Trust is a bank holding company and a thrift holding company, as well as a financial
holding company under the Bank Holding Company Act (the “BHCA”). The Banks are deposit-taking
institutions whose deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”).
Federal statutes that apply to Wilmington Trust and/or the Banks include the BHCA, the Federal
Reserve Act, the Federal Deposit Insurance Act, and the Home Owners’ Loan Act. Wilmington Trust is
regulated by the Delaware Department of Banking and the Federal Reserve Board (the “FRB”).
Wilmington Trust’s Delaware bank subsidiary, WTC, is regulated by the Delaware Department of
Banking and the FDIC; its Pennsylvania bank subsidiary, WTPA, is regulated by the Pennsylvania
Department of Banking and the FRB; and its federal savings bank subsidiary with branches in
Maryland and Florida, WTFSB, is regulated by the Office of Thrift Supervision (the “OTS”). In
addition, certain other of Wilmington Trust’s subsidiaries are regulated by federal and state
authorities as well as regulatory authorities of other countries in which those subsidiaries
conduct business.
BHCA
Under the BHCA and FRB regulations adopted under the BHCA, the FRB’s approval is required before a
bank holding company may acquire “control” of a bank or before any company may acquire “control” of
a bank holding company. The BHCA defines “control” of a bank to include ownership or the power to
vote 25% or more of any class of a bank’s voting stock, the ability to otherwise control the
election of a majority of a bank’s directors, or the power to exercise a controlling influence over
a bank’s management or policies. In addition, the FRB’s prior approval is required for:
Accordingly, before obtaining “control” of Wilmington Trust, a bank holding company or other
company would need to obtain the FRB’s prior approval. Since Wilmington Trust is a thrift holding
company, the entity also would need to obtain the OTS’s approval.
A bank holding company and its subsidiaries generally may not, with certain exceptions, engage in,
acquire, or control voting securities or assets of a company engaged in any activity other than (1)
banking or managing or controlling banks and other subsidiaries that are engaged in activities
authorized under the BHCA and (2) any activity the FRB determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. These include any
incidental activities necessary to carry on those activities. The FRB has approved a lengthy list
of activities permissible for bank holding companies and their non-banking subsidiaries.
18
In addition, under the BHCA, a bank holding company that meets certain qualifications can elect to
become a financial holding company. A financial holding company can engage in the activities
permitted generally for bank holding companies without
obtaining the FRB’s approval that would otherwise be required. A financial holding company also
may engage in additional activities not otherwise permitted for a bank holding company, generally
without obtaining the FRB’s prior approval. These additional permitted activities include engaging
in, acquiring, or controlling a company engaged in securities underwriting and distribution,
merchant banking, certain insurance agency, brokerage, and underwriting activities, and other
activities the FRB determines are financial in nature, incidental to a financial activity, or
complementary to a financial activity and do not pose a substantial risk to the company’s or the
financial system’s safety and soundness.
To qualify to become a financial holding company, a bank holding company’s subsidiary depository
institutions must all be “well-managed” and “well-capitalized” and have at least a “satisfactory”
rating under the Community Reinvestment Act (the “CRA”). In 2000, Wilmington Trust became a
financial holding company. Its status as a financial holding company provides flexibility in the
future growth of its fee businesses. If Wilmington Trust or one of the Banks fails to meet
applicable capital and management requirements, the FRB may impose limitations or conditions on
Wilmington Trust or its subsidiaries, and Wilmington Trust could not commence any additional
financial holding company activities without the FRB’s approval. If the problem were not corrected
within 180 days after notice from the FRB or such additional time as the FRB permits, Wilmington
Trust could be required to cease engaging in the financial holding company activity or divest
ownership of one or more of the Banks.
Interstate Banking Act
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate
Banking Act”), adequately capitalized and managed bank holding companies are permitted to acquire a
bank in any state, subject to regulatory approval and certain limitations, and regardless of
certain state law restrictions such as reciprocity requirements and regional compacts. States
cannot “opt out” of these interstate acquisition provisions.
In addition, under the Interstate Banking Act, banks located in different states are allowed to
merge, subject to regulatory approval and certain limitations, as long as neither bank is
headquartered in a state that “opted out” of those provisions.
Under the Interstate Banking Act, states may permit out-of-state banks to establish new branches
within their borders or acquire existing branches within their borders. Delaware exercised its
authority under the Interstate Banking Act to allow mergers between Delaware banks and out-of-state
banks, as well as the opening of new Delaware offices by the resulting institutions. However,
Delaware did not permit out-of-state banks to establish new branches in Delaware or acquire
Delaware branches of other institutions without merging with them.
Safety and Soundness Limitations
As a bank holding company, Wilmington Trust is required to conduct its operations in a safe and
sound manner. If the FRB believes an activity of a bank holding company or control of a nonbank
subsidiary, other than a nonbank subsidiary of a bank, presents a serious risk to the financial
safety, soundness, or stability of a subsidiary bank of the bank holding company and is
inconsistent with sound banking practices or the purposes of the BHCA or certain other federal
banking statutes, the
19
FRB may require the bank holding company to terminate the activity or the
holding company’s control of the subsidiary.
Under Regulation W promulgated under the Federal Reserve Act (“Regulation W”), each of the Banks
may engage in transactions with its non-bank affiliates only on an arms’-length basis. Under
Regulation W, each of the Banks is subject to dollar amount and collateral requirements with
respect to loans to and asset purchases from its non-bank affiliates. For these purposes,
Wilmington Trust and most of the companies it controls, including the Banks, are “affiliates” of
the Banks. In addition to their restrictions on transactions with affiliates, the Federal Reserve
Act and FRB regulations impose dollar amount, credit quality, and other limitations on loans by the
Banks to directors, officers, and principal shareholders of the Banks and their subsidiaries and to
related interests of those persons.
Capital Standards
The FRB and the other federal banking agencies have adopted “risk-based” capital standards to
assist in assessing the capital adequacy of bank holding companies and banks under those agencies’
jurisdiction. Those risk-based capital standards include both a definition of capital and a
framework for calculating “risk-weighted” assets. For this purpose, a bank’s risk-weighted assets
include both its assets and off-balance sheet items, such as loan commitments and standby letters
of credit, and each asset and off-balance sheet item is assigned a risk weight. An institution’s
risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted
assets. At least one-half of risk-based capital must consist of Tier 1 capital (generally
including common stockholders’ equity, qualifying cumulative and noncumulative perpetual preferred
stock, and minority interests in consolidated subsidiaries). The FRB also adopted minimum leverage
ratios of “Tier 1” capital to total assets. At December 31, 2006, Wilmington Trust and the Banks
were all well-capitalized, with capital levels in excess of applicable risk-based and leverage
thresholds.
FDIC Insurance and Bank Regulation
The FDIC insures deposits in the Banks up to applicable limits. None of the Banks is currently
required to pay premiums for FDIC insurance coverage.
The FDIC and the other federal banking agencies may impose a variety of sanctions if Wilmington
Trust or one of the Banks does not operate in accordance with applicable laws, regulations,
policies, or directives. These include instituting cease-and-desist proceedings, assessing civil
monetary penalties, and removing officers. In addition, the FDIC has the authority to terminate
deposit insurance coverage, after notice and hearing, if it determines that an insured
deposit-taking institution is engaged in an unsafe or unsound practice that has not been corrected,
is in an unsafe or unsound condition to continue operation, or has violated any law, regulation,
rule, or order of, or condition imposed by, the FDIC. Wilmington Trust is not aware of any past or
current practice, condition, or violation that might lead to termination of the deposit insurance
coverage of any of the Banks.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “Improvement Act”) requires
annual on-site examinations of insured depository institutions, and authorizes the appropriate
federal banking agency to take prompt corrective action to resolve an institution’s problems. The
nature and extent of the corrective action depends primarily on the institution’s capital level.
While the Banks are all well-capitalized, if any of them became undercapitalized, remedies
available to the appropriate federal banking agency would include:
20
In any such event, Wilmington Trust could be required to guarantee compliance with the Bank’s
capital restoration plan and provide assurance of performance under the plan.
Dividend Limitations
The FRB’s policy generally is that banks and 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. FRB policy also is that bank holding companies should be
a source of managerial and financial strength to their subsidiary banks. Accordingly, the FRB
believes that those subsidiary banks should not be compromised by a level of cash dividends that
places undue pressure on their capital.
The FDIC can prohibit a bank from paying dividends if it believes the dividend payment would
constitute an unsafe or unsound practice. Federal law also prohibits dividend payments that would
result in a bank failing to meet its applicable capital requirements. Delaware law restricts WTC
from declaring dividends that would impair its stated capital.
OTS regulations limit capital distributions by WTFSB. WTFSB must give notice to the OTS at least
30 days before a proposed capital distribution. If WTFSB has capital in excess of all of its
regulatory capital requirements before and after a proposed capital distribution and is not
otherwise restricted in making capital distributions, it may, after that prior notice but without
the OTS’s approval, make capital distributions during a calendar year equal to the greater of (1)
100% of its net income to date during the calendar year plus an amount that would reduce by
one-half its “surplus capital ratio” (i.e., its excess capital over its capital
requirements) at the beginning of the calendar year or (2) 75% of its net income for the previous
four quarters. Any additional capital distributions require prior OTS approval.
Securities Regulation
Wilmington Trust’s broker-dealer subsidiary, Wilmington Brokerage Services Company (“WBSC”), is
registered as a broker-dealer with the Securities and Exchange Commission (“SEC”) and in the states
in which it does business. WBSC also is a member of the National Association of Securities
Dealers, Inc. (“NASD”). WBSC is subject to regulation by the SEC, the NASD, and the securities
administrators of the states in which it is registered. WBSC is a member of the Securities
Investor Protection Corporation (“SIPC”), which, in the event of the liquidation of a
broker-dealer, provides protection for customers’ securities accounts held by WBSC of up to
$500,000 for each eligible customer, subject to a limitation of $100,000 for claims for cash
balances. Several Wilmington Trust subsidiaries, including WBSC, also are registered as investment
advisers with the SEC and in some states.
21
Bank Secrecy Act
Under the Bank Secrecy Act, the USA Patriot Act, and regulations issued by the Office of
Foreign Assets Control (collectively, the “BSA Laws”), United States financial institutions and
foreign financial institutions operating in the United States are required to establish policies,
procedures, and controls reasonably designed to detect and report money laundering and terrorist
financing activities. Significant criminal and civil penalties can be imposed if a financial
institution fails to comply with the BSA Laws. In addition, if a financial institution is
determined to have engaged in money laundering or violated the BSA Laws, its charter, license,
and/or deposit insurance can be revoked.
Privacy and Information Security
Federal laws and regulations require Wilmington Trust to respect the privacy of its customers and
to protect the security and confidentiality of those customers’ nonpublic personal information.
These laws and regulations limit the instances in which a financial institution may disclose
non-public customer information about a consumer to nonaffiliated third parties, and require a
financial institution to disclose to all of its customers its privacy policies and practices with
respect to information-sharing with affiliates and unaffiliated third parties. Financial
institutions also are required to have an information security program to safeguard the
confidentiality and security of customer information and ensure its proper disposal. In addition,
federal and various state laws require customers and regulators to be notified if there is an
unauthorized disclosure of sensitive customer information that may be misused.
Other Laws and Regulations
The lending and deposit-taking activities of the Banks are subject to a variety of federal and
state consumer protection laws, including:
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Under the CRA and the Fair Housing Act, depository institutions are prohibited from certain
discriminatory practices that limit or withhold services to individuals residing in economically
depressed areas. In addition, the CRA imposes certain affirmative obligations to provide lending
and other financial services to those individuals. CRA performance is considered by all of the
federal
banking agencies in reviewing applications to relocate an office, merge, acquire a financial
institution, or establish new branch or deposit facilities.
Federal legislation has permanently pre-empted all state usury laws on residential first mortgage
loans made by insured depository institutions in any state that did not override that preemption.
Although some states overrode that preemption, Delaware, Maryland, and Pennsylvania did not.
Accordingly, there is currently no limit on the interest rate the Banks can charge on such loans
governed by the laws of those states. In addition, the usury limitations of the Banks’ respective
home states apply to all other loans the Banks offer nationwide. In today’s interest rate
environment, those usury laws do not materially affect the Banks’ lending programs.
Delaware Law
The state of Delaware is generally regarded as a premier jurisdiction in the United States for
corporate and trust matters. This reputation stems from the favorable legal and tax environment
established by the Delaware legislature and the 210-year case law history of the state’s Chancery
Court system, which has jurisdiction over corporate and trust matters. While in recent years
several states have implemented advantageous legal and tax provisions similar to those available in
Delaware, in general, trusts governed by Delaware law can be administered more flexibly, more
economically, for longer periods of time, with a greater degree of protection from creditors, and
with a greater degree of confidentiality than is available in many other states.
Many Fortune 500 companies are headquartered in Delaware, especially those in the pharmaceutical,
life sciences, chemical, and financial services industries. The presence of these companies and
the favorable environment historically have contributed to Wilmington Trust’s and WTC’s operating
results.
Information
about Wilmington Trust’s reporting segments is contained in Note
21 of its Consolidated
Financial Statements in its Annual Report to Shareholders for 2006, which is incorporated by
reference herein.
Available Information
Wilmington Trust’s Website is www.wilmingtontrust.com. Wilmington Trust makes available
free of charge on its website under “About Us” its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after those materials are electronically filed with or furnished to the Securities and
Exchange Commission. Wilmington Trust’s Corporate Governance Guidelines, Code of Conduct and
Ethics, and the charters of its Audit, Compensation, and Nominating and Corporate Governance
Committees also are posted on www.wilmingtontrust.com under “About Us.” In addition, any
amendments to or waivers from the Code of Conduct and Ethics that apply to any of its directors or
executive officers also will be posted on that Website. Wilmington Trust will make available a
copy of any of its Code of Conduct and Ethics, Corporate Governance Guidelines, or the charter(s)
of its Audit, Compensation, or Nominating and Corporate Governance Committees in print to any
shareholder who requests one.
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ITEM 1A. RISK FACTORS
There are certain interest rate and credit risks associated with consumer and commercial
lending.
A certain degree of credit risk is inherent in the Banks’ various lending activities. The Banks
offer fixed and adjustable interest rates on loans, with terms of up to 30 years. Although the
majority of residential mortgage loans the Banks originate are fixed-rate, adjustable rate mortgage
(“ARM”) loans increase the responsiveness of the Banks’ loan portfolios to changes in market
interest rates. However, ARM loans generally carry lower initial interest rates than fixed-rate
loans. Accordingly, they may be less profitable than fixed-rate loans during the initial interest
rate period. In addition, since they are more responsive to changes in market interest rates than
fixed-rate loans, ARM loans can increase the possibility of delinquencies in periods of high
interest rates.
The Banks also originate loans secured by mortgages on commercial real estate and multi-family
residential real estate. Since these loans usually are larger than one-to-four family residential
mortgage loans, they generally involve greater risks than one-to-four family residential mortgage
loans. In addition, since customers’ ability to repay those loans often is dependent on operating
and managing those properties successfully, adverse conditions in the real estate market or the
economy generally can impact repayment more severely than loans secured by one-to-four family
residential properties. Moreover, the commercial real estate business is subject to downturns,
overbuilding and local economic conditions.
The Banks also make construction loans for residences and commercial buildings, as well as on
unimproved property. While these loans also enable the Banks to increase the interest rate
sensitivity of their loan portfolios and receive higher yields than those obtainable on permanent
residential mortgage loans, the higher yields correspond to the higher risks perceived to be
associated with construction lending. Those include risks associated generally with loans on the
type of property securing the loan. Consistent with industry practice, the Banks sometimes fund
the interest on a construction loan by including the interest as part of the total loan. Moreover,
commercial construction lending often involves disbursing substantial funds with repayment
dependent largely on the success of the ultimate project instead of the borrower’s or guarantor’s
ability to repay. Again, adverse conditions in the real estate market or the economy generally can
impact repayment more severely than loans secured by one-to-four family residential properties.
General economic conditions and real estate values can affect our earnings.
In the event of slow economic conditions or deterioration in commercial and real estate markets, we
would expect increased nonperforming assets, credit losses, and provisions for loan losses.
Conditions such as inflation, recession, unemployment, changes in interest rates, money supply, and
other factors beyond our control may adversely affect our asset quality, deposit levels, and loan
demand and, therefore, our earnings. Since we have a significant amount of real estate loans,
decreases in real estate values could adversely affect the value of property used as collateral for
loans. Adverse changes in the economy may also have a negative effect on our borrowers’ ability to
make timely repayment of their loans, which would have an adverse impact on our earnings. In
addition, the majority of our loans are to individuals and businesses in Delaware and Pennsylvania.
Consequently, any decline in the economy of this market area could have an adverse effect on our
earnings. See the “Asset Quality” section of “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our Annual Report to Shareholders for 2006 for further
24
discussion related to our process for determining the appropriate level of the allowance for loan
losses.
We face increasing competition for deposits, loans, and assets under management.
The Banks compete for deposits, loans, and assets under management. Many of the Banks’ competitors
are larger and have greater financial resources and larger lending limits than the Banks. These
disparities have been accelerated with increasing consolidation in the financial services industry.
Savings banks, savings and loan associations, and commercial banks located in the Banks’ principal
market areas historically have provided the most direct competition for deposits. Dealers in
government securities, deposit brokers, and credit card, direct, and internet-based financial
institutions outside of the Banks’ principal market areas also provide competition for deposits.
Savings banks, savings and loan associations, commercial banks, mortgage banking companies,
insurance companies, and other institutional lenders provide the principal competition for loans.
This competition can increase the rates the Banks pay to attract deposits and reduce the interest
rates they can charge on loans, and impact the Banks’ ability to retain existing customers and
attract new customers.
Banks, trust companies, investment advisers, mutual fund companies, multi-family offices, and
insurance companies provide the Banks’ principal competition for trust and asset management
business.
Our ability to compete effectively is attributable in part to the responsive, personalized, and
customized services we provide and our reputation resulting from our management’s knowledge and
awareness of our clients and market areas. We believe this relationship approach and knowledge
provide a business advantage in achieving high client satisfaction in serving the small to
mid-sized businesses, entrepreneurs, professionals, and other individuals that comprise our
Company’s customer base. Our ability to compete also is due in part to the competitive rates we
offer on our loan and deposit products, the breadth of services we provide, and our ability to
continue to attract and retain our highly qualified staff.
Our ability to compete for business also depends in part on our ability to develop and market new
and innovative products and services, and to adopt or develop new technologies that differentiate
our products and services or provide cost efficiencies. Rapid technological change in the
financial services industry, together with competitive pressures, require us to make ongoing
investments to bring new products and services to market in a timely fashion and at competitive
prices.
A portion of our income is subject to market valuation risks.
A significant portion of the fee income we earn in our wealth advisory, corporate retirement
services, and asset management businesses is based upon market valuations of securities we hold for
clients. Accordingly, downturns in these valuations can adversely affect that fee income.
If our goodwill or amortizable intangible assets become impaired, we may be required to record a
significant charge to earnings.
Under generally accepted accounting principles, we review our amortizable intangible assets for
impairment when events or changes in circumstances indicate that the carrying value of those assets
may not be recoverable. Goodwill is required to be tested for impairment at least annually. We
may be required to record a significant charge to earnings in our financial statements during the
period in
25
which any impairment of our goodwill or amortizable intangible assets
is determined. See the “Affiliate Managers” section of the
“Management’s Discussion and Analysis of Results of Operations”
and Notes 4 and 10 to the Consolidated Financial Statements contained in our Annual Report to
Shareholders for 2006.
New products and services could subject us to additional risks.
From time to time, we may offer new products or services. There can be significant risks and uncertainties associated with
these efforts. We may invest significant time and resources in
developing and marketing new products or services. Initial
timetables to introduce and develop new products or services may not be achieved, and our price and profitability
targets may not be achieved. External factors, such as compliance with regulations, competitive
alternatives, and shifting market preferences also may impact the successful implementation of new products or services. Any new product or service could
impact our system of internal controls. If we do not manage these risks successfully, our
business, results of operations, and financial condition could be effected adversely.
Our business could be impacted negatively by risks associated with acquisitions.
We acquire other companies from time to time. To the extent we acquire other companies in the
future, our business could be impacted negatively by certain risks associated with such
acquisitions. These include:
Negative public opinion could damage our reputation and affect our earnings adversely.
Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent
in our business. Negative public opinion can result from the actual or perceived manner in which
we conduct our business, including our fiduciary, investment, and private and commercial banking
activities; our management of actual or potential conflicts of interest and ethical issues; and our
26
protection of confidential customer information. Negative public opinion can affect adversely our
ability to keep and
attract customers, and can expose us to litigation and regulatory action. We strive to minimize
reputational risk in the way we conduct our business and deal with our customers and communities.
Changes in accounting may affect our reported earnings and operating income.
Generally accepted accounting principles and accompanying accounting pronouncements, implementation
guidelines, and interpretations for many aspects of our business, such as revenue recognition,
accounting for financial instruments, and treatment of goodwill or amortizable intangible assets,
are highly complex and involve subjective judgments. Changes in these rules or their
interpretation could significantly affect our earnings.
A failure in internal controls could impact our earnings and damage our reputation.
A failure in our internal controls could have a negative impact on our earnings and on the
perception that customers, shareholders, and regulators may have of us. We devote a significant
amount of effort, time, and resources to monitoring and improving our internal controls and
ensuring compliance with complex accounting standards and regulations.
We are subject to regulatory restrictions.
We and our subsidiaries are subject to a variety of regulatory restrictions in conducting business
by federal and state authorities. These include restrictions imposed by the Bank Holding Company
Act, the Federal Deposit Insurance Act, the Federal Reserve Act, the Home Owners’ Loan Act, and a
variety of federal and state consumer protection laws. See “Supervision and Regulation.”
Our certificate of incorporation and bylaws and Delaware law include certain anti-takeover
provisions.
In addition to the regulations described under “Supervision and Regulation” above, certain
provisions of our certificate of incorporation, bylaws, and Delaware’s General Corporation Law
could discourage potential acquisition proposals or delay or prevent a change in control of us.
Those provisions include a classified Board of Directors, special provisions for notice to us for
shareholders to nominate directors, and our ability to issue up to 1 million shares of preferred
stock and 150 million shares of common stock. These authorized but unissued shares provide us
desirable flexibility for possible acquisitions and other corporate purposes, but could also delay
or hinder an unsolicited acquisition of us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Wilmington Trust owns and/or leases buildings that are used in the normal course of business by the
Banks and its other subsidiaries. The main office of Wilmington Trust and WTC is located at Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890. Wilmington Trust and most of
its subsidiaries occupy 265,000 square feet of space at this location, known as the Wilmington
Trust Center. It is owned by Rodney Square Investors, L.P., which is a subsidiary of
27
WTC. WTC
carries the mortgage for this facility, which had an outstanding balance of $34,366,945 at December
31, 2006.
A separate, unencumbered, 300,000-square foot operations facility known as the Wilmington Trust
Plaza is owned by a subsidiary of WTC. This facility is located at 301 West Eleventh Street,
Wilmington, Delaware 19801.
As of December 31, 2006, the Banks had 53 branches in the following locations:
Twenty-nine of these branches are in facilities owned by the Banks or their subsidiaries and the
remainder are in leased facilities.
Through subsidiaries, Wilmington Trust also operates captive insurance management offices in leased
facilities in Charleston, South Carolina and Burlington, Vermont and sales offices in leased
facilities in Dublin, Ireland, and Frankfurt, Germany, and WTC operates trust offices in leased
facilities in the Cayman Islands and the Channel Islands. WTFSB operates trust agency offices in
leased facilities in Los Angeles, California, Palm Beach, Stuart, and Vero Beach, Florida, Atlanta,
Georgia, Las Vegas, Nevada, Princeton, New Jersey, and New York, New York, and a loan production
office in Bel Air, Maryland.
Three of Wilmington Trust’s reporting segments – Regional Banking, Wealth Advisory Services, and
Corporate Client Services – operate principally at Wilmington Trust Center; Wealth Advisory
Services and Corporate Client Services also lease a substantial portion of a facility across the
street from Wilmington Trust Center. These three segments operate Wilmington Trust’s branches, and
its Wealth Advisory Services and Corporate Client Services reporting segments operate its trust
agency offices. The Affiliate Managers segment operates leased offices in White Plains and New
York, New York, and in Santa Monica, California.
We believe the owned and leased properties used by each of our reporting segments are suitable and
adequate for our needs, and that we could accommodate further growth by utilizing capacity existing
in those facilities or by acquiring or renting additional facilities.
Financial information about Wilmington Trust’s reporting segments is contained in Note 21 to the
Consolidated Financial Statements contained in Wilmington Trust’s Annual Report to Shareholders for
2006.
ITEM 3. LEGAL PROCEEDINGS
Wilmington Trust and its subsidiaries are involved in various legal proceedings in the ordinary
course of business. While it is not feasible to predict the outcome of all pending suits and
claims, management does not believe that the ultimate resolution of any of these matters will have
a material adverse effect on Wilmington Trust’s consolidated financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of proxies or otherwise
during the fourth quarter of 2006.
PART II
ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Certain
information required by this item is contained on pages 106 and 107 of Wilmington Trust’s Annual
Report to Shareholders for 2006, which is incorporated by reference herein. See also “Item 1 -
Business,” including the discussion on limitations on the
payment of dividends on page 21 above.
The table set forth below contains information as of December 31, 2006, about the number of
securities to be issued upon exercise of outstanding options to purchase Wilmington Trust stock,
the weighted average exercise price of those options, and the number of securities remaining
available for issuance under Wilmington Trust’s 1996 Long-Term Incentive Plan, 1999 Long-Term
Incentive Plan, 2001 Non-Employee Director Stock Option Plan, 2002 Long-Term Incentive Plan, 2004
Employee Stock Purchase Plan, and 2005 Long-Term Incentive Plan:
Equity
Compensation Plan Information
29
ISSUER PURCHASES OF EQUITY SECURITIES
The following table shows our repurchases of Wilmington Trust Stock during the fourth quarter.
In April 2002, we announced a plan to repurchase up to 8 million shares of our stock.
The Federal Reserve Board’s policy is that bank holding companies should not pay dividends unless
the institution’s prospective earnings retention rate is consistent with its capital needs, asset
quality, and overall financial condition. We believe our payment of dividends during 2005 was
consistent with the Federal Reserve Board’s policy.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five years:
(in millions, except per share information) 30
31
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The
information required by this item is contained on pages
6 to 42 and 46 to 53 of Wilmington Trust’s Annual
Report to Shareholders for 2006, which are incorporated by reference herein.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The
information required by this item is contained on pages
43 to 46 Wilmington Trust’s Annual
Report to Shareholders for 2006, which are incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information required by this item is contained on the respective pages indicated of
Wilmington Trust’s Annual Report to Shareholders for 2006. Those pages are incorporated by
reference herein.
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The
information required by this item is contained on page 50 of Wilmington Trust’s Annual
Report to Shareholders for 2006 under the caption “Controls and
Procedures” and on page 102 of
Wilmington Trust’s Annual Report to Shareholders for 2006, which are incorporated by reference
herein.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
information required by Item 401 of Regulation S-K is
contained on pages 7, 9, and 10-12 of Wilmington
Trust’s proxy statement for its Annual Shareholders’ Meeting to be held on April 19, 2007 (the
“Proxy Statement”), which are incorporated by reference herein.
Information
required by Rule 405 of Regulation S-K is contained on page
27 of the Proxy Statement,
which is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The
information required by this item is contained on pages 14 to 27 of the Proxy Statement, which
are incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by this item is contained on pages 13 and 14 of the Proxy Statement, which
are incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
information required by this item is contained on page 19 of the Proxy Statement, which
is incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this item is contained on pages 9 and 10 of the Proxy Statement, which
are incorporated by reference herein.
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PART IV
ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Financial Statements. The following Consolidated Financial Statements and Report
of Independent Registered Public Accounting Firm of Wilmington Trust are incorporated by
reference in Item 8 above:
2. Financial Statement Schedules. No financial statement schedules are required to
be filed as part of this report.
3. Financial Statement Exhibits. The exhibits listed below have been filed or are
being filed as part of this report. Any exhibit will be made available to any shareholder
upon receipt of a written request therefor, together with payment of $.20 per page for
duplicating costs. Shareholders should contact Ellen J. Roberts, Vice President, Investor
Relations, (302) 651-8069.
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35
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
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Pursuant to the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant in the capacities and on the dates indicated.
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