-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Juk28Y4GoAfk1/w3OTzfSHii0msnkSo7XW4fckpbLlJo+NWGMbPto0dUrsuiV4TD yz57tu64WsIGrqJ/3V8XBA== 0000893220-04-000456.txt : 20040315 0000893220-04-000456.hdr.sgml : 20040315 20040315142119 ACCESSION NUMBER: 0000893220-04-000456 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILMINGTON TRUST CORP CENTRAL INDEX KEY: 0000872821 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 510328154 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14659 FILM NUMBER: 04668940 BUSINESS ADDRESS: STREET 1: RODNEY SQUARE NORTH STREET 2: 1100 NORTH MARKET ST CITY: WILMINGTON STATE: DE ZIP: 19890-0001 BUSINESS PHONE: 3026518378 MAIL ADDRESS: STREET 1: 1100 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19890-0001 10-K 1 w94679e10vk.txt FORM 10-K WILMINGTON TRUST CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission file number: 1-14659 WILMINGTON TRUST CORPORATION (Exact name of registrant as specified in its charter) Delaware 51-0328154 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890 ------------------------------------------------------------------------- (Address of principal executive offices)(Zip Code) (302)651-1000 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Name of each exchange on which registered: Section 12(b) of the Act: Title of each class Common Stock, $1.00 Par Value New York Stock Exchange - ------------------------------ ----------------------- (Title of class) Securities registered pursuant to Section 12 (g) of the Act: None 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 [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the 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. [ ] As of June 30, 2003, the aggregate market value of voting and non-voting stock held by non-affiliates* of the registrant was $1,910,480,607. Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Act). Yes [X] No [ ] Indicate the number of shares outstanding of the registrant's class of common stock, as of the latest practicable date. Class Outstanding at January 31, 2004 - -------------------------- ------------------------------- Common Stock, $1 Par Value 66,171,175 Documents Incorporated Part of Form 10-K in which by Reference Incorporated - -------------------------- ------------------------------- (1) Portions of Proxy Statement for 2004 Part III Annual Shareholders' Meeting of Wilmington Trust Corporation (2) Portions of Annual Report to Parts I, II, and IV Shareholders for fiscal year ended December 31, 2003 *For purposes of this calculation, Wilmington Trust's subsidiaries and its directors and executive officers are deemed to be "affiliates." TABLE OF CONTENTS PART I Item 1 Business.......................................................... 1 Item 2 Properties........................................................ 24 Item 3 Legal Proceedings................................................. 25 Item 4 Submission of Matters to a Vote of Security Holders............... 25 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters........................................................... 25 Item 6 Selected Financial Data........................................... 27 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation.............................................. 28 Item 7A Qualitative and Quantitative Disclosure About Market Risk......... 28 Item 8 Financial Statements and Supplementary Data....................... 28 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 29 PART III Item 10 Directors and Executive Officers of the Registrant................ 29 Item 11 Executive Compensation............................................ 29 Item 12 Security Ownership of Certain Beneficial Owners and Management.... 29 Item 13 Certain Relationships and Related Transactions.................... 29 Item 14 Controls and Procedures........................................... 30 Item 15 Principal Accountant Fees and Services............................ 30 PART IV Item 16 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 30
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 43 branch offices at December 31, 2003. 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 in Maryland, one branch and three sales offices in Florida and trust agency offices in California, Georgia, Nevada, 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"), WT Investments, Inc., an investment holding company with interests in six asset management firms ("WTI"), Balentine Holdings, Inc., an investment holding company with interests in three asset management firms ("BHI"), and Wilmington Trust (UK) Limited, an investment holding company with interests in six international firms providing entity management services ("WTUK"). Wilmington Trust's principal place of business is Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890. Its telephone number is (302) 651-1000. Its principal role is to supervise and coordinate the Banks', RSMC's, WTI's, BHI'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 WTC. 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, 2003, Wilmington Trust had total assets of $8.8 billion and total shareholders' equity of $800.8 million. On that date, 66,063,332 shares of Wilmington Trust's common stock were issued and outstanding, which were held by 8,666 shareholders of record. Wilmington Trust's total loans outstanding were approximately $6.2 billion on that date. Wilmington Trust's businesses comprise Wealth Advisory Services, Corporate Client Services, and Regional Banking Services. The Wealth Advisory business serves clients throughout the United States and in many foreign countries. The Corporate Client Services business provides specialty trust services for national and multinational institutions. The Regional Banking business targets commercial and consumer clients throughout the Delaware Valley region. Wealth Advisory Services Activities The Banks' Wealth Advisory 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 1 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. Corporate Client Services Activities Wilmington Trust's Corporate Client Services business provides a variety of trustee, fiduciary, 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 utilize trusts in 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 or indenture trustee for a variety of capital markets transactions, including those secured by mortgage-backed collateral, residential and commercial mortgage loans, leases, credit card receivables, franchises, timeshares, and other assets. Wilmington Trust provides owner trustee or indenture trustee services for equipment leasing trusts that hold aircraft, power generating facilities, communication lines, satellites, vessels, and other capital equipment. It serves as indenture, successor, collateral, or liquidating trustee in corporate 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, accounting, and other administrative tasks. 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, record keeping, and trustee services. Lending Activities The Banks historically have concentrated the lending, deposit-taking, and other banking activities described below in Delaware, Florida, Maryland, New York, and Pennsylvania. Retail and 2 commercial banking activities are conducted primarily in Delaware, Maryland, and Pennsylvania. 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 between $5 million and $250 million. The Banks seek to work with business owners who need wealth advisory as well as lending services. Most of the Banks' commercial lending is concentrated in Delaware, southeastern Pennsylvania, and Maryland's Eastern Shore. 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, as well as for late charges and other fees in connection with lending activities. Residential Mortgage Loans The Banks directly originate or purchase conventional residential first mortgage loans. The Banks sell all new residential mortgage production into the secondary market. Existing residential mortgage loans are served by a third-party provider. The Banks provide financing for jumbo residential first mortgage loans through a third-party lender. 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. 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: - Limiting the size of their individual commercial and multi-family real estate loans; - Monitoring the aggregate size of their commercial and multi-family housing loan portfolios; - Generally requiring equity in the property securing the loan equal to a certain percentage of the appraised value or selling price; - Requiring in most instances that the financed project generates cash flow adequate to meet required debt service payments; and - Requiring that the Banks have recourse to the borrower and guarantees from the borrower's principals in most instances. 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 3 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 individuals 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. 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 4 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: - Inspecting each property before issuing a loan commitment and before each disbursement; - Requiring an appraisal of the property; - Requiring recourse to the borrower; and - Requiring the personal guaranty of the borrower's principal(s). 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 by reviewing each one at least annually. 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 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, NOW 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. Other Activities Interest and dividends on investments provide the Banks with a significant source of revenue. At December 31, 2003, the Banks' investment securities, including securities purchased under agreements to resell, totaled $1.9 billion, or 21.6% 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. 5 Financial information about Wilmington Trust's reporting segments is contained in Note 18 to the Consolidated Financial Statements contained in Wilmington Trust's Annual Report to Shareholders for 2003. Subsidiaries WTC has 12 active 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: - Brandywine Finance Corporation, a finance company; - Brandywine Insurance Agency, Inc., a licensed insurance agent and broker for life, casualty, and property insurance; - Brandywine Life Insurance Company, Inc., a reinsurer of credit life insurance written in connection with closed-end consumer loans WTC makes; - Special Services Delaware, Inc., which provides services for special purpose entities; - Wilmington Trust SP Services, Inc. and Wilmington Trust SP Services (Delaware), Inc., which provide services for special purpose entities using Delaware's favorable tax and legal environment; - Wilmington Trust SP Services (Nevada), Inc., which provides services for special purpose entities using Nevada's favorable tax and legal environment; - Wilmington Trust SP Services (New York), Inc., a sales production company for corporate trust customers; - Wilmington Brokerage Services Company, a registered broker-dealer and a registered investment adviser; - Wilmington Trust Global Services, Ltd., a sales production company for corporate trust customers; - Wilmington Trust (Cayman), Ltd., a trust company; and - Wilmington Trust (Channel Islands), Ltd., a trust company. 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: - A 69.14% interest in Cramer Rosenthal McGlynn, LLC, an investment advisory firm specializing in equity investments in small- to middle-capitalization stocks; - A 30% preferred profits interest and a 41.23% common membership interest in Roxbury Capital Management, LLC, an investment management firm specializing in large capitalization stocks for institutional and individual clients; and - A 31.25% interest in Canada Partners Holdings, LLC, a Baltimore-based private equity firm. Staff Members On December 31, 2003, Wilmington Trust and its subsidiaries had 2,307 full-time equivalent employees. Wilmington Trust considers its and its subsidiaries' relationships with these employees to be good. Wilmington Trust and the Banks provide a variety of benefit programs for these employees, including pension, incentive compensation, thrift savings, stock purchase, and group life, health, and accident plans. Risk Factors - Principal 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 6 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. 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. - Market Valuation Risks. A significant portion of the fee income Wilmington Trust earns in its wealth advisory, corporate client, and asset management businesses is based upon market valuations of securities Wilmington Trust holds for clients. Accordingly, downturns in these valuations can adversely effect that fee income. - 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 than Wilmington Trust. 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 and deposit brokers also provide competition for deposits. Savings banks, savings and 7 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, and insurance companies provide the Banks' principal competition for trust and asset management business. - Regulatory Restrictions. Wilmington Trust and its 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 "Regulatory Matters." - Certain Anti-Takeover Provisions. Certain provisions of Wilmington Trust's certificate of incorporation, bylaws, and Delaware's General Corporation Law could discourage potential acquisition proposals or delay or prevent a change in control of Wilmington Trust. Those provisions include a classified Board of Directors, special provisions for notice to Wilmington Trust for shareholders to make nominations for director and Wilmington Trust's authorization to issue up to 1 million shares of preferred stock and 150 million shares of common stock. These authorized but unissued shares provide Wilmington Trust desirable flexibility for possible acquisitions and other corporate purposes, but could also delay or hinder an unsolicited acquisition of Wilmington Trust. 8
2003/2002 2002/2001 Increase (Decrease) Increase (Decrease) due to change in due to change in -------------------------------------------------------------------------- (in millions) Volume(1) Rate(2) Total Volume(1) Rate(2) Total - --------------------------------------------------------------------------------------------------------------------------------- Interest income: Time deposits in other banks $ -- $ -- $ -- $ -- $ -- $ -- Federal funds sold and securities purchased under agreements to resell -- (0.2) (0.2) -- (0.4) (0.4) -------------------------------------------------------------------------- Total short-term investments -- (0.2) (0.2) -- (0.4) (0.4) -------------------------------------------------------------------------- U.S. Treasury and government agencies (3.6) (4.5) (8.1) -- (7.3) (7.3) State and municipal * (0.1) -- (0.1) (0.2) (1.2) (1.4) Preferred stock * 2.3 (0.9) 1.4 (0.2) (0.1) (0.3) Mortgage-backed securities 25.4 (13.0) 12.4 (4.7) (1.4) (6.1) Other * 2.4 (1.6) 0.8 1.5 (4.0) (2.5) -------------------------------------------------------------------------- Total investment securities 26.4 (20.0) 6.4 (3.6) (14.0) (17.6) -------------------------------------------------------------------------- Commercial, financial, and agricultural * 10.6 (17.8) (7.2) 26.5 (39.6) (13.1) Real estate-construction 8.4 (3.7) 4.7 3.1 (10.2) (7.1) Mortgage - commercial * 2.9 (10.8) (7.9) (0.6) (16.4) (17.0) -------------------------------------------------------------------------- Total commercial loans 21.9 (32.3) (10.4) 29.0 (66.2) (37.2) -------------------------------------------------------------------------- Mortgage - residential (13.3) (1.4) (14.7) (9.2) (1.5) (10.7) Installment loans to individuals 2.1 (7.4) (5.3) 4.6 (13.5) (8.9) Loans secured by liquid collateral 4.0 (4.1) (0.1) 7.1 (9.8) (2.7) -------------------------------------------------------------------------- Total retail loans (7.2) (12.9) (20.1) 2.5 (24.8) (22.3) -------------------------------------------------------------------------- Total loans net of unearned income 14.7 (45.2) (30.5) 31.5 (91.0) (59.5) -------------------------------------------------------------------------- Total interest income $ 41.1 $ (65.4) $ (24.3) $ 27.9 $ (105.4) $ (77.5) ========================================================================== Interest expense: Savings $ -- $ (0.3) $ (0.3) $ 0.1 $ (1.9) $ (1.8) Interest-bearing demand 2.6 (3.5) (0.9) 6.2 (14.4) (8.2) Certificates under $100,000 (2.0) (6.9) (8.9) (1.1) (12.0) (13.1) Local certificates $100,000 and over (0.8) (1.2) (2.0) (0.8) (3.0) (3.8) -------------------------------------------------------------------------- Total core interest-bearing deposits (0.2) (11.9) (12.1) 4.4 (31.3) (26.9) National certificates $100,000 and over 2.1 (14.3) (12.2) 12.9 (49.9) (37.0) -------------------------------------------------------------------------- Total interest-bearing deposits 1.9 (26.2) (24.3) 17.3 (81.2) (63.9) -------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 3.8 (6.7) (2.9) (8.8) (19.4) (28.2) U.S. Treasury demand (0.3) -- (0.3) (0.5) (0.6) (1.1) -------------------------------------------------------------------------- Total short-term borrowings 3.5 (6.7) (3.2) (9.3) (20.0) (29.3) -------------------------------------------------------------------------- Long-term debt 12.2 (9.3) 2.9 (0.4) -- (0.4) -------------------------------------------------------------------------- Total interest expense $ 17.6 $ (42.2) $ (24.6) $ 7.6 $ (101.2) $ (93.6) ========================================================================== Changes in net interest income $ 23.5 (23.2) $ (0.3) 20.3 (4.2) $ 16.1 ==========================================================================
- ---------- * Variances are calculated on a fully tax-equivalent basis, which includes the effects of any disallowed interest expense deduction. (1) Changes attributable to volume are defined as a change in average balance multiplied by the prior year's rate. (2) Changes attributable to rate are defined as a change in rate multiplied by the average balance in the applicable period for the prior year. A change in rate/volume (change in rate multiplied by change in volume) has been allocated to the change in rate. 9 The maturity distribution of Wilmington Trust's investment securities held to maturity follows:
Weighted Market Amortized average December 31, 2003 (in millions) value cost yield - -------------------------------------------------------------------------------------------- State and municipals: After 1 but within 5 years $ 1.5 $ 1.4 5.81% After 5 but within 10 years 1.9 1.7 6.21 - -------------------------------------------------------------------------------------------- Total 3.4 3.1 6.03 - -------------------------------------------------------------------------------------------- Mortgage-backed securities: After 10 years 0.3 0.3 3.52 - -------------------------------------------------------------------------------------------- Total 0.3 0.3 3.52 - -------------------------------------------------------------------------------------------- Other: After 10 years 0.8 0.8 3.85 - -------------------------------------------------------------------------------------------- Total 0.8 0.8 3.85 - -------------------------------------------------------------------------------------------- Total investment securities held to maturity $ 4.5 $ 4.2 5.45% ============================================================================================
Note: Weighted average yields are not on a tax-equivalent basis. Time categories not shown above indicate there are no investment securities maturing in that respective timeframe. -10- The maturity distribution of Wilmington Trust's investment securities available for sale follows:
Weighted Market Amortized average December 31, 2003 (in millions) value cost yield - ------------------------------------------------------------------------------------------------ U.S. Treasury and government agencies: Within 1 year $ 206.3 $ 203.5 3.40% After 1 but within 5 years 248.7 245.5 3.30 After 5 but within 10 years 15.0 15.0 4.09 - ------------------------------------------------------------------------------------------------ Total 470.0 464.0 3.37 - ------------------------------------------------------------------------------------------------ State and municipals: After 5 but within 10 years 0.5 0.3 13.57 After 10 years 12.4 11.9 6.17 - ------------------------------------------------------------------------------------------------ Total 12.9 12.2 6.35 - ------------------------------------------------------------------------------------------------ Preferred stock: Within 1 year 38.4 38.8 5.96 After 1 but within 5 years 71.1 70.1 6.66 After 5 but within 10 years 10.6 10.3 8.21 - ------------------------------------------------------------------------------------------------ Total 120.1 119.2 6.57 - ------------------------------------------------------------------------------------------------ Mortgage-backed securities: Within 1 year 0.3 0.3 6.25 After 1 but within 5 years 7.9 7.5 5.96 After 5 but within 10 years 91.5 89.9 4.61 After 10 years 879.0 886.7 4.06 - ------------------------------------------------------------------------------------------------ Total 978.7 984.4 4.12 - ------------------------------------------------------------------------------------------------ Other: Within 1 year 34.8 33.9 5.29 After 1 but within 5 years 20.9 20.3 2.55 After 10 years 237.8 239.5 2.43 - ------------------------------------------------------------------------------------------------ Total 293.5 293.7 2.77 - ------------------------------------------------------------------------------------------------ Total investment securities available for sale $1,875.2 $ 1,873.5 3.89% ================================================================================================
Note: Weighted average yields are not on a tax-equivalent basis. Time categories not shown above indicate there are no investment securities maturing in that respective timeframe. -11- The following is a summary of period-end loan balances by loan category:
December 31 (in millions) 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $2,275.3 $2,137.5 $1,861.8 $1,622.7 $1,521.3 Real estate-construction 699.8 591.9 400.5 372.7 303.7 Mortgage-commercial 1,078.2 1,065.9 1,009.4 990.4 919.3 Mortgage-residential 489.6 677.2 865.3 925.9 968.3 Installment loans to individuals 1,077.1 1,046.7 981.7 960.6 871.5 Secured by liquid collateral 605.4 506.3 370.1 316.7 237.5 - ------------------------------------------------------------------------------------------- Total loans, gross 6,225.4 6,025.5 5,488.8 5,189.0 4,821.6 Less: unearned income (0.1) (0.4) (0.8) (0.6) (1.5) - ------------------------------------------------------------------------------------------- Total loans $6,225.3 $6,025.1 $5,488.0 $5,188.4 $4,820.1 ===========================================================================================
-12- The following table sets forth the allocation of Wilmington Trust's reserve for loan losses for the past five years:
2003 2002 2001 2000 1999 ------------------- ------------------- ------------------- ------------------- ------------------- % of loans % of loans % of loans % of loans % of loans in each in each in each in each in each category of category of category of category of category of December 31 (in millions) Amount net loans Amount net loans Amount net loans Amount net loans Amount net loans - ------------------------------------------------------------------------------------------------------------------------------------ Commercial, financial, and agricultural $ 45.2 37% $ 43.9 36% $ 38.8 34% $ 34.7 31% $ 27.5 32% Real estate-construction 7.2 11 5.3 10 4.2 7 3.9 7 3.3 6 Mortgage-commercial 14.3 17 13.5 18 14.8 18 15.3 19 15.9 19 Mortgage-residential 1.2 8 1.5 11 1.4 16 1.0 18 1.2 20 Installment loans to individuals 9.8 17 9.8 17 11.6 18 13.6 19 13.2 18 Secured by liquid collateral 6.1 10 5.1 8 3.7 7 3.1 6 2.3 5 Unallocated 6.1 -- 6.1 -- 6.3 -- 5.1 -- 13.5 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 89.9 100% $ 85.2 100% $ 80.8 100% $ 76.7 100% $ 76.9 100% ====================================================================================================================================
-13- An analysis of loan maturities and interest rate sensitivity of Wilmington Trust's commercial and real estate construction loan portfolios follows:
Less than One through Over Total December 31, 2003 (in millions) one year five years five years gross loans - ----------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 941.8 $ 624.1 $ 709.3 $ 2,275.2 Real estate-construction 51.1 535.1 113.6 699.8 - ----------------------------------------------------------------------------------------- Total $ 992.9 $ 1,159.2 $ 822.9 $ 2,975.0 ========================================================================================= Loans with predetermined rate $ 26.6 $ 34.3 $ 106.3 $ 167.2 Loans with variable rate 966.3 1,124.9 716.6 2,807.8 - ----------------------------------------------------------------------------------------- Total $ 992.9 $ 1,159.2 $ 822.9 $ 2,975.0 =========================================================================================
The following table presents a comparative analysis of the risk elements contained in Wilmington Trust's loan portfolio at year-end(1)
December 31 (in millions) 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------- Nonaccruing $ 45.4 $ 42.4 $ 38.0 $ 37.6 $ 29.2 Restructured -- -- 0.4 2.6 * 0.1 Past due 90 days or more 5.6 12.5 13.5 13.5 16.5 - ----------------------------------------------------------------------------------- Total $ 51.0 $ 54.9 $ 51.9 $ 53.7 $ 45.8 =================================================================================== Percent of total loans at year-end 0.82% 0.91% 0.95% 1.04% 0.95% =================================================================================== Other real estate owned $ 1.4 $ 3.1 $ 0.4 $ 0.7 $ 0.6 ===================================================================================
(1) The Corporation's policy for placing loans in nonaccrual status is discussed in footnote 1 to the Consolidated Financial Statements contained in the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2003, which is incorporated by reference herein. * Restructured as nonaccrual, but not included in nonaccrual amount of $37.6. -14- The following table sets forth an analysis of Wilmington Trust's provision for loan losses, together with chargeoffs and reserves for the five major portfolio classifications included in its statement of condition(1):
For the year ended December 31 (in millions) 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- Reserve for loan losses at beginning of period $ 85.2 $ 80.8 $ 76.7 $ 76.9 $ 71.9 - ----------------------------------------------------------------------------------------------------- Loans charged off: Commercial, financial, and agricultural 10.9 12.3 9.4 15.3 3.7 Real estate-construction -- -- -- 0.1 0.1 Mortgage - commercial -- 0.1 0.2 0.8 0.4 Mortgage - residential 0.1 -- 0.1 0.3 0.5 Installment loans to individuals 10.0 10.0 9.6 9.9 11.8 Secured with liquid collateral -- -- -- -- -- - ----------------------------------------------------------------------------------------------------- Total loans charged off 21.0 22.4 19.3 26.4 16.5 - ----------------------------------------------------------------------------------------------------- Recoveries on amounts previously charged off: Commercial, financial, and agricultural 1.1 0.7 0.8 1.3 0.8 Real estate-construction -- -- -- -- -- Mortgage-commercial -- 1.5 0.1 0.2 0.1 Mortgage-residential 0.1 0.1 0.2 -- 0.1 Installment loans to individuals 2.9 2.5 2.4 2.8 3.0 Secured with liquid collateral -- -- -- -- -- - ----------------------------------------------------------------------------------------------------- Total recoveries 4.1 4.8 3.5 4.3 4.0 - ----------------------------------------------------------------------------------------------------- Net loans charged off 16.9 17.6 15.8 22.1 12.5 - ----------------------------------------------------------------------------------------------------- Current year's provision for loan losses 21.6 22.0 19.9 21.9 17.5 - ----------------------------------------------------------------------------------------------------- Reserve for loan losses at end of period $ 89.9 $ 85.2 $ 80.8 $ 76.7 $ 76.9 ===================================================================================================== Ratio of net loans charged-off to average loans 0.28% 0.31% 0.30% 0.44% 0.28%
(1) The factors the Corporation considers in determining the amount of additions to its allowance for loan losses are discussed in footnote 1 to the Consolidated Financial Statements contained in the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2003, which is incorporated by reference herein. -15- The following table presents a summary of Wilmington Trust's deposits based on average daily balances over the last three years:
----------------------------------------------------------------------- 2003 2002 2001 ----------------------------------------------------------------------- Average Average Average Average Average Average For the year ended December 31 (in millions) amount rate amount rate amount rate - ------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing demand $ 833.3 -- $ 831.3 -- $ 927.9 -- Interest-bearing deposits: Savings 366.0 0.16% 353.9 0.25% 346.8 0.78% Interest-bearing demand 2,183.9 0.42 1,735.2 0.58 1,297.1 1.41 Certificates under $100,000 834.4 2.67 891.2 3.51 914.4 4.85 Local certificates $100,000 and over 138.6 1.74 169.5 2.60 188.8 4.34 National certificates $100,000 and over 1,937.7 1.50 1,846.5 2.24 1,588.1 4.94 - ------------------------------------------------------------------------------------------------------------------------- Total $ 6,293.9 $ 5,827.6 $ 5,263.1 =========================================================================================================================
The maturity of Wilmington Trust's time deposits of $100,000 or more is as follows:
Certificates All other interest- December 31, 2003 (in millions) of deposit bearing deposits - ------------------------------------------------------------------- Three months or less $1,530.8 $1,922.7 Over three through six months 381.7 -- Over six through twelve months 85.9 -- Over twelve months 31.9 -- - ------------------------------------------------------------------- Total $2,030.3 $1,922.7 ===================================================================
-16- A summary of short-term borrowings at December 31, is as follows (in millions):
Securities sold Federal funds under agreements U.S. Treasury purchased to repurchase demand notes Lines of credit - ----------------------------------------------------------------------------------------------------------------------------- 2003 Balance at December 31 $ 490.4 $ 330.1 $ 48.3 $ 8.0 Weighted average interest rate at balance sheet date 2.0% 0.5% 1.0% 1.5% Maximum amount outstanding at any month-end $ 921.0 $ 337.7 $ 71.3 $ 34.0 Approximate average amount outstanding during the period $ 673.0 $ 271.5 $ 11.6 $ 19.6 Weighted average interest rate for average amounts outstanding during the period 1.9% 0.6% 0.9% 1.7% - ----------------------------------------------------------------------------------------------------------------------------- 2002 Balance at December 31 $ 432.3 $ 226.5 $ 41.9 $ 34.0 Weighted average interest rate at balance sheet date 2.3% 0.6% 1.2% 1.7% Maximum amount outstanding at any month-end $ 745.1 $ 287.2 $ 96.1 $ 37.1 Approximate average amount outstanding during the period $ 532.2 $ 232.0 $ 29.0 $ 27.9 Weighted average interest rate for average amounts outstanding during the period 2.7% 1.0% 1.5% 2.2% - ----------------------------------------------------------------------------------------------------------------------------- 2001 Balance at December 31 $ 556.9 $ 271.4 $ 94.9 $ 33.5 Weighted average interest rate at balance sheet date 3.4% 1.2% 1.6% 2.5% Maximum amount outstanding at any month-end $1,186.5 $ 290.6 $ 94.9 $ 34.0 Approximate average amount outstanding during the period $ 727.4 $ 235.6 $ 44.5 $ 20.2 Weighted average interest rate for average amounts outstanding during the period 5.1% 3.1% 3.5% 4.2% - -----------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase generally mature within 365 days. U.S. Treasury demand notes mature overnight. -17- The following table presents the percentage of Wilmington Trust's funding sources by deposit type:
------------------------- (Based on daily average balances) 2003 2002 2001 - ------------------------------------------------------------- Savings 5.04% 5.32% 5.51% Interest-bearing demand 30.04 26.10 20.62 Certificates of deposit 40.04 43.73 42.78 Short-term borrowings 13.42 12.35 16.34 Demand deposits 11.46 12.50 14.75 - ------------------------------------------------------------- Total 100.00% 100.00% 100.00% =============================================================
The following table presents an analysis of Wilmington Trust's return on average assets and return on average equity over the last three years:
2003 2002 2001 - ------------------------------------------------------------------- Return on average assets 1.58% 1.74% 1.73% Return on average stockholders' equity 17.46 18.51 19.54 Dividend payout 52.21 49.51 49.22 Average equity to average asset 9.02 9.39 8.86 ===================================================================
-18- 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. 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: - The acquisition by a bank holding company of ownership or control of more than five percent of the outstanding shares of any class of voting securities of a bank or a bank holding company; - The acquisition by a bank holding company, or any nonbanking subsidiary of a bank holding company, of all or substantially all of a bank's assets; or - The merger or consolidation of bank holding companies. 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 savings and loan 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. Those include: -19- - Making, acquiring, and servicing loans and other extensions of credit; - Performing functions a trust company can perform; - Acting as an investment or financial adviser; - Performing certain insurance agency and underwriting activities directly related to extensions of credit by the holding company or its subsidiaries and engaging in insurance agency activities in towns of 5,000 or less; - Performing appraisals of real estate and tangible and intangible personal property; - Acting as an intermediary for the financing of commercial and industrial income-producing real estate; - Providing certain securities brokerage services; - Underwriting and dealing in government obligations and money market instruments; and - Providing tax planning and preparation services. 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, including the activities listed above, 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 should permit greater 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 was 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. -20- 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 FRB may require the bank holding company to terminate the activity or the holding company's control of the subsidiary. Under Section 23B of the Federal Reserve Act, each of the Banks may engage in transactions with its affiliates only on an arms'-length basis. Under Section 23A of the Federal Reserve Act, each of the Banks is subject to dollar amount and collateral requirements with respect to loans to its affiliates and asset purchases from its affiliates. For these purposes, Wilmington Trust and 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, 2003, 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. -21- 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 or any proceeding against Wilmington Trust, any of the Banks, or any of their respective directors, officers, or staff members. 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: - Requiring recapitalization or a capital restoration plan; - Restricting transactions with affiliates; - Restricting interest rates, asset growth, activities, and investments in subsidiaries; and - Ordering a new election of directors, dismissing directors or senior executive officers, and requiring the employment of qualified senior executive officers. 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 -22- calendar year or (2) 75% of its net income for the previous four quarters. Any additional capital distributions require prior OTS approval. 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: - The Truth-in-Lending Act (which principally mandates certain disclosures in connection with loans made for personal, family, or household purposes and imposes substantive restrictions with respect to home equity lines of credit); - The Truth-in-Savings Act (which principally mandates certain disclosures in connection with deposit-taking activities); - The Equal Credit Opportunity Act (which prohibits discrimination in all aspects of credit-granting and requires notice of adverse action to persons denied credit); - The Fair Credit Reporting Act (which requires a lender to disclose the name and address of a credit bureau that has provided a report that resulted in a denial of credit and imposes requirements in connection with pre-screened offers of credit and the sharing of information with affiliates and third parties); - The Real Estate Settlement Procedures Act (which requires residential mortgage lenders to provide loan applicants with closing cost information and prohibits referral fees in connection with loans and other real estate settlement services); - The Electronic Funds Transfer Act (which requires certain disclosures in connection with electronic funds transactions); and - The Expedited Funds Availability Act (which requires that deposited funds be made available for withdrawal in accordance with a prescribed schedule that must be disclosed to customers). 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, Florida, 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 200-year case law history of the state's Chancery Court system, which has jurisdiction over corporate and trust matters. In general, trusts governed by Delaware law can be administered more flexibly, more economically, for longer periods -23- 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. While in recent years, several states, including Nevada and Alaska, have implemented advantageous legal and tax provisions similar to those available in Delaware, Delaware continues to provide a spectrum of advantages for corporate and trust matters that is widely regarded as unparalleled in any other state. Information about Wilmington Trust's reporting segments is contained in Note 18 of its Consolidated Financial Statements in its Annual Report to Shareholders for 2003, 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 in 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. 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 WTC. WTC carries the mortgage for this facility, which had an outstanding balance of $35.6 million at December 31, 2003. 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, 2003, the Banks had 49 branches in the following locations: - Twenty-two are in New Castle County, 6 are in Kent County, and 15 are in Sussex County, Delaware; - One each is in Bucks, Chester, Delaware, and Philadelphia Counties, Pennsylvania; -24- - One is in Baltimore, Maryland; and - One is in Palm Beach County, Florida. Thirty-three of these branches are in facilities owned by the Banks or their subsidiaries and the remainder are in leased facilities. WTC also operates a sales office in a leased facility in London, England, and, through its subsidiaries, 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, Atlanta, Georgia, Las Vegas, Nevada, and New York City, New York. Three of Wilmington Trust's reporting segments - Regional Banking, Wealth Advisory Services, and Corporate Client Services - operate at 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 Advisors segment operates leased offices in White Plains and New York, New York and in Santa Monica, California. 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. 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 2003. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Certain information required by this item is contained on page 29 of the Management's Discussion and Analysis portion of Wilmington Trust's Annual Report to Shareholders, which is incorporated by reference herein. See also "Item 1 - Business." -25- The table set forth below contains information as of December 31, 2003 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 1991 Long-Term Incentive Plan, 1996 Long-Term Incentive Plan, 1999 Long-Term Incentive Plan, 2000 Employee Stock Purchase Plan, 2001 Non-Employee Director Stock Option Plan, and 2002 Long-Term Incentive Plan: EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE NUMBER OF SECURITIES UNDER EQUITY TO BE ISSUED UPON WEIGHTED-AVERAGE COMPENSATION PLANS EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN COLUMN WARRANTS AND RIGHTS WARRANTS AND RIGHTS (a)) PLAN CATEGORY (a) (b) (c) - ----------------------------------------------------------------------------------------- EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS 5,620,806 $ 27.83 3,001,263 - ----------------------------------------------------------------------------------------- EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS --- --- --- ========================================================================================= TOTAL 5,620,806 $ 27.83 3,001,263 =========================================================================================
-26- ITEM 6 - SELECTED FINANCIAL DATA The following table sets forth selected financial data for the last five years: (in millions, except per share information)
2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- Interest income $ 368.8 $ 392.8 $ 468.8 $ 530.4 $ 462.2 Net interest income 277.1 276.5 258.9 255.1 245.9 Provision for loan losses 21.6 22.0 19.9 21.9 17.5 Net income 134.4 133.2 125.2 120.9 107.3 Per share data: Net income-basic 2.04 2.03 1.92 1.87 1.63 Net income-diluted 2.02 2.01 1.90 1.85 1.61 Cash dividends declared 1.065 1.005 .945 .885 .825 Balance sheet at year-end: Assets $ 8,820.2 $ 8,131.3 $ 7,518.5 $ 7,321.6 $ 7,201.9 Long-term debt 407.1 160.5 160.5 168.0 168.0
-27- ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information required by this item is contained on pages 12 to 31 of Wilmington Trust's Annual Report to Shareholders for 2003, which are incorporated by reference herein, except as modified by the following: ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The information required by this item is contained on pages 26 and 27 of Wilmington Trust's Annual Report to Shareholders for 2003, 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 2003. Those pages are incorporated by reference herein.
Annual Report to Shareholders Page Number Consolidated Statements of Condition as of December 31, 2003, and 2002 41 Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001 42 Consolidated Statements of Changes in Stock- holders' Equity for the years ended December 31, 2003, 2002, and 2001 44 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001 46 Notes to Consolidated Financial Statements - December 31, 2003, 2002, and 2001 48 - 68 Report of Independent Auditors 70 Unaudited Selected Quarterly Financial Data 40
-28- ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 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 9 to 12 of Wilmington Trust's proxy statement for its Annual Shareholders' Meeting to be held on April 15, 2004 (the "Proxy Statement"), which are incorporated by reference herein. Information required by Rule 405 of Regulation S-K is contained on page 22 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 22 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 22 of the Proxy Statement, which is incorporated by reference herein. -29- ITEM 14 - CONTROLS AND PROCEDURES The Chairman of the Board and Chief Executive Officer of Wilmington Trust and its Chief Financial Officer conducted an evaluation of the effectiveness of Wilmington Trust's disclosure controls and procedures as of December 31, 2003, pursuant to Securities Exchange Act Rule 13a-14. Based on that evaluation, the Chairman of the Board and Chief Executive Officer and the Chief Financial Officer concluded that Wilmington Trust's disclosure controls and procedures are effective in timely alerting them to material information relating to Wilmington Trust (including its consolidated subsidiaries) required to be included in the periodic filings it makes with the Securities and Exchange Commission. There have been no significant changes in Wilmington Trust's internal controls or in other factors that could significantly affect those controls subsequent to the date of that evaluation. ITEM 15 - PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is contained on pages 8 and 9 of the Proxy Statement, which is incorporated by reference herein. PART IV ITEM 16 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this report: 1. Financial Statements. The following Consolidated Financial Statements and Report of Independent Auditors of Wilmington Trust are incorporated by reference in Item 8 above:
Annual Report to Shareholders Page Number Consolidated Statements of Condition as of December 31, 2003, and 2002 41 Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001 42 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2003, 2002, and 2001 44 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001 46 Notes to Consolidated Financial Statements - December 31, 2003, 2002, and 2001 48 - 68 Report of Independent Auditors 70
-30- 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 therefore, together with payment of $.20 per page for duplicating costs. Shareholders should contact Ellen J. Roberts, Vice President, Investor Relations, (302) 651-8069. -31-
EXHIBIT NUMBER EXHIBIT - ------- ----------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of the Corporation (Commission File Number 1-14659)(8) 3.2 Amended and Restated Bylaws of the Corporation(16) 10.1 Purchase and Assumption Agreement dated June 18, 1991 by and between Wilmington Trust Company and Wilmington Savings Fund Society (Commission File Number 1-14659)(2) 10.2 Agreement of Reorganization and Merger dated as of April 8, 1991 by and among Wilmington Trust Company, Wilmington Trust Corporation and The Sussex Trust Company (Commission File Number 1-14659)(3) 10.3 Deposit Insurance and Transfer and Asset Purchase Agreement among the Federal Deposit Insurance Corporation in its capacity as receiver for The Bank of the Brandywine Valley, the Federal Deposit Insurance Corporation, and Wilmington Trust Company dated as of February 21, 1992 (Commission File Number 1-14659)(4) 10.4 Agreement of Reorganization and Merger dated as of March 18, 1993 between Wilmington Trust Corporation and Freedom Valley Bank (Commission File Number 1-14659)(5) 10.5 Rights Agreement dated as of January 19, 1996 between Wilmington Trust Corporation and Harris Trust and Savings Bank (Commission File Number 1-14659)(7) 10.6 Supplemental Executive Retirement Plan (Commission File Number 1-14659)(8) 10.7 Amended and Restated Supplemental Executive Retirement Plan (Commission File Number 1-14659)(11) 10.8 Severance Agreement dated as of February 29, 1996 between Wilmington Trust Company and Ted T. Cecala (Commission File Number 1-14659)(8) 10.9 Severance Agreement dated as of February 29, 1996 between Wilmington Trust Company and Robert J. Christian (Commission File Number 1-14659) (8) 10.10 Severance Agreement dated as of February 29, 1996 between Wilmington Trust Company and Howard K. Cohen (Commission File Number 1-14659)(8) 10.11 Severance Agreement dated as of February 29, 1996 between Wilmington Trust Company and William J. Farrell II (Commission File Number 1-14659)(8) 10.12 Severance Agreement dated as of February 29, 1996 between Wilmington Trust Company and David R. Gibson (Commission File Number 1-14659)(8) 10.13 Severance Agreement dated as of February 29, 1996 between Wilmington Trust Company and Robert V.A. Harra Jr. (Commission File Number 1-14659)(8) 10.14 Severance Agreement dated as of February 29, 1996 between Wilmington Trust Company and Hugh D. Leahy Jr. (Commission File Number 1-14659)(8) 10.15 Severance Agreement dated as of February 29, 1996 between Wilmington Trust Company and Robert A. Matarese (Commission File Number 1-14659) (8) 10.16 Severance Agreement dated as of July 18, 1996 between Wilmington Trust Company and Rita C. Turner (Commission File Number 1-14659)(9) 10.17 Severance Agreement dated as of June 28, 1999 between Wilmington Trust Company and Rodney P. Wood (Commission File Number 1-14659)(11)
-32- 10.18 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and Ted T. Cecala (Commission File Number 1-14659)(12) 10.19 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and Robert J. Christian (Commission File Number 1-14659)(12) 10.20 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and Howard K. Cohen (Commission File Number 1-14659)(12) 10.21 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and William J. Farrell, II (Commission File Number 1-14659)(12) 10.22 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and David R. Gibson (Commission File Number 1-14659)(12) 10.23 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and Robert V.A. Harra, Jr. (Commission File Number 1-14659)(12) 10.24 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and Hugh D. Leahy, Jr. (Commission File Number 1-14659)(12) 10.25 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and Robert A. Matarese (Commission File Number 1-14659)(12) 10.26 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and Rita C. Turner (Commission File Number 1-14659)(12) 10.27 Amendment No. 1 to Severance Agreement dated as of December 19, 2000 between Wilmington Trust Company and Rodney P. Wood (Commission File Number 1-14659)(12) 10.28 1991 Employee Stock Purchase Plan (Commission File Number 1-14659)(1) 10.29 1996 Employee Stock Purchase Plan (Commission File Number 1-14659)(8) 10.30 2000 Employee Stock Purchase Plan (Commission File Number 1-14659)(11) 10.31 1983 Employee Stock Option Plan (Commission File Number 1-14659)(1) 10.32 1988 Long-Term Incentive Stock Option Plan (Commission File Number 1-14659)(1) 10.33 1991 Long-Term Incentive Stock Option Plan (Commission File Number 1-14659)(1) 10.34 1996 Long-Term Incentive Plan (Commission File Number 1-14659)(8) 10.35 1999 Long-Term Incentive Plan (Commission File Number 1-14659)(10) 10.36 2001 Non-Employee Directors' Stock Option Plan (Commission File Number 1-14659)(12) 10.37 Thrift Savings Plan (Commission File Number 1-14659)(1) 10.38 Amended and Restated Thrift Savings Plan (Commission File Number 1-14659)(12) 10.39 First Amendment to the Wilmington Trust Thrift Savings Plan (Commission File Number 1-14659)(12) 10.40 Amended and Restated Thrift Savings Plan (Commission File Number 1-14659)(13)
-33- 10.41 Amendment to Amended and Restated Thrift Savings Plan (Commission File Number 1-14659)(17) 10.42 Employee Stock Ownership Plan (Commission File Number 1-14659)(1) 10.43 Senior Executive Incentive Compensation Plan (Commission File Number 1-14659)(6) 10.44 Executive Incentive Plan (Commission File Number 1-14659)(10) 10.45 Amended Executive Incentive Plan(17) 10.46 Amended and Restated Limited Liability Company Agreement of Cramer Rosenthal McGlynn, LLC dated as of January 1, 2001 (Commission File Number 1-14659)(15) 10.47 Amendment to the Amended and Restated Limited Liability Company Agreement of Cramer Rosenthal McGlynn, LLC dated March 15, 2003 (Commission File Number 1-14659)(14) 10.48 Amendment to the Amended and Restated Limited Liability Company Agreement of Cramer Rosenthal McGlynn, LLC dated June 29, 2003 (Commission File Number 1-14659)(14) 10.49 Amended and Restated Limited Liability Company Agreement of Roxbury Capital Management, LLC dated as of July 31, 1998 (Commission File Number 1-14659)(15) 10.50 First Amendment to the Amended and Restated Limited Liability Company Agreement of Roxbury Capital Management, LLC (Commission File Number 1-14659)(15) 10.51 Second Amendment to the Amended and Restated Limited Liability Company Agreement of Roxbury Capital Management, LLC dated as of March 10, 2001 (Commission File Number 1-14659)(14) 10.52 Third Amendment to the Amended and Restated Limited Liability Company Agreement of Roxbury Capital Management, LLC (Commission File Number 1-14659)(15) 10.53 Second Amended and Restated Limited Liability Company Agreement of Roxbury Capital Management, LLC dated as of August 1, 2003(17) 10.54 Merger Agreement among Balentine Holdings, Inc., Robert M. Balentine, B. Clayton Rolader, Jeffrey P. Adams, Robert E. Reiser, Jr., Gary B. Martin, Wesley A French, Michael E. Wolf, The 1999 Balentine Family Trust, The Robert M. Balentine Insurance Trust, WTC Merger Subsidiary, Inc., WT Investments, Inc. and Wilmington Trust Corporation dated as of October 23, 2001 (Commission File Number 1-14659)(15) 10.55 Amended and Restated Limited Liability Company Agreement of Balentine Delaware Holding Company, LLC dated as of January 2, 2003 (Commission File Number 1-14659)(15) 10.56 Agreement for the Sale and Purchase of SPV Management Limited dated January 1, 2003 by and among Anthony Francis Raikes and Piers Minoprio and Wilmington Trust (UK) Limited and Wilmington Trust Corporation (Commission File Number 1-14659)(15) 10.57 2002 Long-Term Incentive Plan (Commission File Number 1-14659)(16) 10.58 Amended 2002 Long-Term Incentive Plan(17) 13 2003 Annual Report to Shareholders of Wilmington Trust Corporation(17) 21 Subsidiaries of Wilmington Trust Corporation(17) 23 Consent of KPMG LLP(17)
-34- - -------- (1) Incorporated by reference to the corresponding exhibit to Amendment No. to the Report on Form S-8 of Wilmington Trust Corporation filed on October 31, 1991. (2) Incorporated by reference to the exhibit to the Current Report on Form 8-K of Wilmington Trust Corporation filed on January 2, 1992. (3) Incorporated by reference to the exhibit to the Current Report on Form 8-K of Wilmington Trust Corporation filed on February 3, 1992. (4) Incorporated by reference to the exhibit to the Current Report on Form 8-K of Wilmington Trust Corporation filed on February 25, 1992. (5) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 23, 1993. (6) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 31, 1993. (7) Incorporated by reference to the exhibit to the Report on Form 8-A of Wilmington Trust Corporation filed on January 31, 1995. (8) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 30, 1996. (9) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 28, 1997. (10) Incorporated by reference to Exhibit A to the proxy statement of Wilmington Trust Corporation dated March 22, 1999 filed on March 31, 1999. (11) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 30, 2000. (12) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on April 2, 2001. (13) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 29, 2003. (14) Incorporated by reference to the corresponding exhibit to the Quarterly Report on Form 10-Q of Wilmington Trust Corporation filed on August 14, 2003. (15) Incorporated by reference to the corresponding exhibit to the Quarterly Report on Form 10-Q/A of Wilmington Trust Corporation filed on March 25, 2004. (16) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 27, 2003. (17) Filed herewith. -35- 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. WILMINGTON TRUST CORPORATION By: /s/ Ted T. Cecala --------------------------------- Ted T. Cecala Director, Chairman of the Board, and Chief Executive Officer (Date) February 26, 2004 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. /s/ Ted T. Cecala ------------------------------------- Ted T. Cecala Director, Chairman of the Board, and Chief Executive Officer (Date) February 26, 2004 /s/ Robert V.A. Harra, Jr. ------------------------------------- Robert V.A. Harra, Jr. Director, President, and Chief Operating Officer (Date) February 26, 2004 /s/ David R. Gibson ------------------------------------- David R. Gibson Executive Vice President and Chief Financial Officer (Date) February 26, 2004 -36- /s/ Gerald F. Sopp ------------------------------------- Gerald F. Sopp Controller (Date) February 26, 2004 /s/ Carolyn S. Burger ------------------------------------- Carolyn S. Burger Director (Date) February 26, 2004 /s/ Richard R. Collins ------------------------------------- Richard R. Collins Director (Date) February 26, 2004 /s/ Charles S. Crompton, Jr. ------------------------------------- Charles S. Crompton, Jr. Director (Date) February 26, 2004 ------------------------------------- Edward B. du Pont Director (Date) February 26, 2004 /s/ R. Keith Elliott ------------------------------------- R. Keith Elliott Director (Date) February 26, 2004 /s/ Rex L. Mears ------------------------------------- Rex L. Mears Director (Date) February 26, 2004 -37- /s/ Hugh E. Miller ------------------------------------- Hugh E. Miller Director (Date) February 26, 2004 /s/ Stacey J. Mobley ------------------------------------- Stacey J. Mobley Director (Date) February 26, 2004 /s/ David P. Roselle ------------------------------------- David P. Roselle Director (Date) February 26, 2004 /s/ H. Rodney Sharp, III ------------------------------------- H. Rodney Sharp, III Director (Date) February 26, 2004 /s/ Thomas P. Sweeney ------------------------------------- Thomas P. Sweeney Director (Date) February 26, 2004 /s/ Robert W. Tunnell, Jr. ------------------------------------- Robert W. Tunnell, Jr. Director (Date) February 26, 2004 -38- EX-10.41 4 w94679exv10w41.txt AMEND. TO AMENDED & RESTATED THRIFT SAVINGS PLAN AMENDMENT TO AMENDED AND RESTATED THRIFT SAVINGS PLAN EXHIBIT 10.41 MODEL AMENDMENT TO COMPLY WITH THE 401 (a)(9) FINAL AND TEMPORARY REGULATIONS Plan Name WILMINGTON TRUST THRIFT SAVINGS PLAN The Plan named above gives the Employer the right to amend it at any time. According to that right, the Plan is amended by adopting the model amendment set forth below. The plan's existing minimum distribution provisions are superseded to the extent they are inconsistent with the provisions of this model amendment, but those provisions that are not inconsistent (such as the plan's definition of required beginning date) shall be retained. The plan's minimum distribution provisions are amended as follows: ARTICLE VII. MINIMUM DISTRIBUTION REQUIREMENTS. Section 1 General Rules 1 Effective Date. The provisions of this article will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year. 1.2. Coordination with Minimum Distribution Requirements Previously in Effect. This amendment is not effective until calendar years beginning with the 2003 calendar year, therefore, no coordination is required. 1.3 Precedence. The requirements of this article will take precedence over any inconsistent provisions of the plan. 1.4. Requirements of Treasury Regulations Incorporated. All distributions required under this article will be determined and made in accordance with the Treasury regulations under section 401 (a)(9) of the Internal Revenue Code. 1.5 TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this article, distributions may be made under a designation made before January 1, 1984, in accordance with section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the plan that relate to section 242(b)(2) of TEFRA. Section 2. Time and Manner of Distribution. 2.1 Required Beginning Date. The participant's entire interest will be distributed, or begin to be distributed, to the participant no later than the participant's required beginning date. 2.2. Death of Participant Before Distributions Begin. If the participant dies before distributions begin, the participant's entire interest will be distributed, or begin to be distributed, no later than as follows: (a) If the participant's surviving spouse is the participant's sole designated beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the participant died, or by December 31 of the calendar year in which the participant would have attained age 70 1/2 if later, except to the extent that an election is made to receive distributions in accordance with the 5-year rule. Under the 5-year rule, the participant's entire interest will be distributed to the designated beneficiary by December 31 of the calendar year containing the fifth anniversary of the participant's death. Subtype 101006 Minimum Required Distribution (b) If the participant's surviving spouse is not the participant's sole designated beneficiary, then distributions to the designated beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the participant died, except to the extent that an election is made to receive distributions in accordance with the 5-year rule. Under the 5-year rule, the participant's entire interest will be distributed to the designated beneficiary by December 31 of the calendar year containing the fifth anniversary of the participant's death. (c) If there is no designated beneficiary as of September 30 of the year following the year of the participant's death, the participant's entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the participant's death. (d) If the participant's surviving spouse is the participant's sole designated beneficiary and the surviving spouse dies after the participant but before distributions to the surviving spouse begin, this section 2.2, other than section 2.2(a), will apply as if the surviving spouse were the participant. For purposes of this section 2.2 and section 4, unless section 2.2(d) applies, distributions are considered to begin on the participant's required beginning date. If section 2.2(d) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under section 2.2(a). If distributions under an annuity purchased from an insurance company irrevocably commence to the participant before the participant's required beginning date (or to the participant's surviving spouse before the date distributions are required to begin to the surviving spouse under section 2.2(a)), the date distributions are considered to begin is the date distributions actually commence. 2.3. Forms of Distribution. Unless the participant's interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the required beginning date, as of the first distribution calendar year distributions will be made in accordance with sections 3 and 4 of this article. If the participant's interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of section 401 (a)(9) of the Code and the Treasury regulations. Section 3. Required Minimum Distributions During Participant's Lifetime. 3.1 Amount of Required Minimum Distribution For Each Distribution Calendar Year. During the participant's lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of: (a) the quotient obtained by dividing the participant's account balance by the distribution period in the Uniform Lifetime Table set forth in section 1.401 (a)(9)-9 of the Treasury regulations, using the participant's age as of the participant's birthday in the distribution calendar year; or (b) the participant's sole designated beneficiary for the distribution calendar year is the participant's spouse, the quotient obtained by dividing the participant's account balance by the number in the Joint and Last Survivor Table set forth in section 1.401 (a)(9)-9 of the Treasury regulations, using the participant's and spouse's attained ages as of the participant's and spouse's birthdays in the distribution calendar year. Subtype 101006 Minimum Required Distribution 2 3.2. Lifetime Required Minimum Distributions Continue Through Year of Participant's Death. Required minimum distributions will be determined under this section 3 beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the participant's date of death. Section 4. Required Minimum Distributions After Participant's Death. 4. Death On or After Date Distributions Begin. (a) Participant Survived by Designated Beneficiary. If the participant dies on or after the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the participant's death is the quotient obtained by dividing the participant's account balance by the longer of the remaining life expectancy of the participant or the remaining life expectancy of the participant's designated beneficiary, determined as follows: (1) The participant's remaining life expectancy is calculated using the age of the participant in the year of death, reduced by one for each subsequent year. (2) If the participant's surviving spouse is the participant's sole designated beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the participant's death using the surviving spouse's age as of the spouse's birthday in that year. For distribution calendar years after the year of the surviving spouse's death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse's birthday in the calendar year of the spouse's death, reduced by one for each subsequent calendar year. (3) If the participant's surviving spouse is not the participant's sole designated beneficiary, the designated beneficiary's remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the participant's death, reduced by one for each subsequent year. (b) No Designated Beneficiary. If the participant dies on or after the date distributions begin and there is no designated beneficiary as of September 30 of the year after the year of the participant's death, the minimum amount that will be distributed for each distribution calendar year after the year of the participant's death is the quotient obtained by dividing the participant's account balance by the participant's remaining life expectancy calculated using the age of the participant in the year of death, reduced by one for each subsequent year. 4.2. Death Before Date Distributions Begin. (a) Participant Survived by Designated Beneficiary. If the participant dies before the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the participant's death is the quotient obtained by dividing the participant's account balance by the remaining life expectancy of the participant's designated beneficiary, determined as provided in section 4.1, except to the extent that an election is made to receive distributions in accordance with the 5-year rule. Under the 5-year rule, the participant's entire interest will be distributed to the designated beneficiary by December 31 of the calendar year containing the fifth anniversary of the participant's death. Subtype 101006 Minimum Required Distribution (b) No Designated Beneficiary. If the participant dies before the date distributions begin and there is no designated beneficiary as of September 30 of the year following the year of the participant's death, distribution of the participant's entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the participant's death. (c) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the participant dies before the date distributions begin, the participant's surviving spouse is the participant's sole designated beneficiary, and the surviving spouse dies before the distributions are required to begin to the surviving spouse under section 2.2(a), this section 4.2 will apply as if the surviving spouse were the participant. Section 5 Definitions. 5. Designated Beneficiary. The individual who is designated as the beneficiary under the BENEFICIARY SECTION of Article X of the plan and is the designated beneficiary under section 401 (a)(9) of the Internal Revenue Code and section 1.401 (a)(9)-1, Q&A-4, of the Treasury regulations. 5.2. Distribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the participant's required beginning date. For distributions beginning after the participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin under section 2.2. The required minimum distribution for the participant's first distribution calendar year will be made on or before the participant's required beginning date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution year in which the participant's required beginning date occurs, will be made on or before December 31 of that distribution calendar year. 5.3 Life Expectancy. Life expectancy as computed by use of the Single Life Table in section 1.401 (a)(g)-9 of the Treasury regulations. 5.4. Participant's Account Balance. The account balance as of the last valuation date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year. 5.5. Required Beginning Date. The date specified in the DEFINITIONS SECTION of Article VII of the plan. Section 6. Election to Allow Participants or Beneficiaries to Elect 5-Year Rule. Participants or beneficiaries may elect on an individual basis whether the 5-year rule or the life expectancy rule in sections 2.2 and 4.2 of Article VII of the plan applies to distributions after the death of a participant who has a designated beneficiary. The election must be made no later than the earlier of September 30 of the calendar year in which distribution would be required to begin under section 2.2 of Article VII of the plan, or by September 30 of the calendar year which contains the fifth anniversary of Subtype 101006 Minimum ReQuired Distribution 4 the participant's (or, if applicable, surviving spouse's) death. If neither the participant nor beneficiary makes an election under this paragraph, distributions will be made in accordance with the life expectancy rule under sections 2.2 and 4.2 of Article VII of the plan. Section 7. Election to Allow Designated Beneficiary Receiving Distributions Under 5-Year Rule to Elect Life Expectancy Distributions. A designated beneficiary who is receiving payments under the 5-year rule may make a new election to receive payments under the life expectancy rule until December 31, 2003, provided that all amounts that would have been required to be distributed under the life expectancy rule for all distribution calendar years before 2004 are distributed by the earlier of December 31, 2003 or the end of the 5-year period. This amendment is made an integral part of the aforesaid Plan and is controlling over the terms of said Plan with respect to the particular items addressed expressly therein. All other provisions of the Plan remain unchanged and controlling. Unless otherwise stated on any page of this amendment, eligibility for benefits and the amount of any benefits payable to or on behalf of an individual who is an inactive participant on the effective date(s) stated above, shall be determined according to the provisions of the aforesaid Plan as in effect on the day before he became an inactive participant. Signing this amendment, the Employer, as plan sponsor, has made the decision to adopt this plan amendment. The Employer is acting in reliance on its own discretion and on the legal and tax advice of its own advisors, and not that of any member of the Principal Financial Group or any representative of a member company of the Principal Financial Group. Signed this 30th day of December, 2003. For the Employer, By /s/ Michael A. DiGregorio --------------------------------- S.V.P. --------------------------------- Business Title Subtype 101006 Minimum Required Distribution (4-47951) 5 GOOD FAITH COMPLIANCE AMENDMENT FOR THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 (EGTRRA) This amendment of the Plan is adopted to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This amendment is intended as good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder. Except as otherwise provided, this amendment shall be effective as of the first day of the first Plan Year beginning after December 31, 2001. This amendment shall continue to apply to the Plan, including the Plan as later amended, until such provisions are integrated into the Plan or the good faith compliance EGTRRA amendment provisions are specifically amended. This amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this amendment. WILMINGTON TRUST THRIFT SAVINGS PLAN The Plan named above gives the Employer the right to amend it at any time. According to that right, the Plan is amended as follows: INCREASE IN COMPENSATION LIMIT For Plan Years beginning on and after January 1, 2002, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any determination period shall not exceed $200,000, as adjusted for increases in the cost-of-living in accordance with Code Section 401 (a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning in such calendar year. If Compensation for any prior determination period is taken into account in determining a Participant's contributions or benefits for the current Plan Year, the Compensation for such prior determination period is subject to the applicable annual compensation limit in effect for that determination period. For this purpose, in determining contributions or benefits in Plan Years beginning on or after January 1, 2002, the annual Compensation limit in effect for determination periods beginning before that date is $200,000. LIMITATIONS ON CONTRIBUTIONS Effective date. This section shall be effective for Limitation Years beginning after December 31,2001. Maximum Annual Addition. Except to the extent permitted in the Catch-up Contributions section of this amendment that provides for catch-up contributions under EGTRRA section 631 and Code Section 414(v), if applicable, the Annual Addition that may be contributed or allocated to a Participant's Account under the Plan for any Limitation Year shall not exceed the lesser of: a) $40,000, as adjusted for increases in the cost-of-living under Code Section 415(d), or b) 100 percent of the Participant's Compensation, for the Limitation Year. Subtype 101006 EGTRRA 1 1 (4-47951) The compensation limitation referred to in (b) shall not apply to any contribution for medical benefits after separation from service (within the meaning of Code Section 401 (h) or 419A(f)(2)) which is otherwise treated as an Annual Addition. ELECTIVE DEFERRALS - CONTRIBUTION LIMITATION No Participant shall be permitted to have Elective Deferral Contributions, as defined in the EXCESS AMOUNTS Section, made under this Plan, or any other qualified plan maintained by the Employer, during any taxable year in excess of the dollar limitation contained in Code Section 402(g) in effect for such taxable year, except to the extent permitted in the Catch-up Contributions section of this amendment that provides for catch-up contributions under EGTRRA section 631 and Code Section 414(v), if applicable. CATCH-UP CONTRIBUTIONS Effective Date. This section shall apply to Contributions received after December 31, 2001 Catch-up Contributions. All employees who are eligible to make Elective Deferral Contributions under this Plan and who have attained age 50 before the close of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Code Section 414(v). Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Code Sections 402(g) and 415. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Code Section 401 (k)(3), 401(k)(11), 401(k)(12), 410(b), or 416, as applicable, by reason of the making of such catch-up contributions. DIRECT ROLLOVERS OF PLAN DISTRIBUTIONS Effective date. This section shall apply to distributions made after December 31, 2001. The provisions of the second modification of this section shall not apply if the Plan does not provide for hardship distributions. The provisions of the third modification of this section shall not apply if the Plan does not have after-tax employee contributions. Modification of definition of Eligible Retirement Plan. For purposes of the DIRECT ROLLOVER Section, an Eligible Retirement Plan shall also mean an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan. The definition of Eligible Retirement Plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p). Modification of definition of Eligible Rollover Distribution to exclude hardship distributions. For purposes of the DIRECT ROLLOVER Section, any amount that is distributed on account of hardship shall not be an Eligible Rollover Distribution and the Distributee may not elect to have any portion of such a distribution paid directly to an Eligible Retirement Plan. Modification of definition of Eligible Rollover Distribution to include after-tax employee contributions. For purposes of the DIRECT ROLLOVER Section, a portion of a distribution shall not fail to be an Eligible Rollover Distribution merely because the portion consists of Subtype 101006 EGTRRA 2 (4-47951) after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or individual retirement annuity described in Code Section 408(a) or (b), or to a qualified defined contribution plan described in Code Section 401 (a) or 403(a) that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible. ROLLOVERS FROM OTHER PLANS The Plan will accept Participant Rollover Contributions and/or direct rollovers of distributions made after December 31, 2001 from the types of plans specified below beginning January 1, 2002. Direct Rollovers The Plan will accept a direct rollover of an Eligible Rollover Distribution from: a) a qualified plan described in Code Section 401 (a) or 403(a), including after-tax employee contributions. b) an annuity contract described in Code Section 403(b), excluding after-tax employee contributions. c) an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state. Participant Rollover Contributions from Other Plans The Plan will accept a Participant contribution of an Eligible Rollover Distribution from: a) a qualified plan described in Code Section 401 (a) or 403(a). b) an annuity contract described in Code Section 403(b) c) an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state. Participant Rollover Contributions from IRAs The Plan will accept a Participant Rollover Contribution of the portion of a distribution from an individual retirement account or individual retirement annuity described in Code Section 408(a) or (b) that is eligible to be rolled over and would otherwise be includible in gross income. REPEAL OF MULTIPLE USE TEST The multiple use test described in Treasury Regulation section 1.401 (m)-2 and the EXCESS AMOUNTS Section shall not apply for Plan Years beginning after December 31,2001. DISTRIBUTION UPON SEVERANCE FROM EMPLOYMENT Effective date. This section shall apply for distributions due to severance from employment occurring after December 31, 2001 and distributions that are processed after December 31 , 2001 regardless of when the severance from employment occurred. Subtype 101006 EGTRRA - 1 3 (4-47951) New distributable event - Distribution Upon Severance From Employment. A Participant's Elective Deferral Contributions, Qualified Nonelective Contributions, if any, Qualified Matching Contributions, if any, and earnings attributable to these Contributions shall be distributed on account of the Participant's severance from employment. However, such a distribution shall be subject to the other provisions of the Plan regarding distributions, other than provisions that require a separation from service before such amounts may be distributed. SUSPENSION PERIOD FOLLOWING HARDSHIP DISTRIBUTION The suspension period following a hardship distribution will be decreased. A Participant who receives a distribution of elective deferrals after December 31, 2001, on account of hardship shall be prohibited from making elective deferrals and participant contributions under this and all other plans of the Employer for six months after receipt of the distribution. A Participant who receives a distribution of elective deferrals in calendar year 2001 on account of hardship shall be prohibited from making elective deferrals and participant contributions under this and all other plans of the Employer for six months after receipt of the distribution or until January 1, 2002, if later. MODIFICATION OF TOP-HEAVY RULES Effective date. This section shall apply for purposes of determining whether the Plan is a Top-heavy Plan for Plan Years beginning after December 31, 2001, and whether the Plan satisfies the minimum benefits requirements of Code Section 416(c) for such years. This section amends the Top-heavy Plan Requirements Article of the Plan. Determination of top-heavy status. Key Employee means any Employee or former Employee {and the Beneficiaries of such Employee) who at any time during the determination period was: a) an officer of the Employer if such individual's annual Compensation is more than $130,000 (as adjusted under Code Section 416(i)(1) for Plan Years beginning after December 31, 2002), b) a 5-percent owner of the Employer, or c) a 1-percent owner of the Employer who has annual Compensation of more than $150,000. The determination period is the Plan Year containing the Determination Date. The determination of who is a Key Employee shall be made according to Code Section 416(i)(1) and the applicable regulations and other guidance of general applicability issued thereunder. Determination of present values and amounts. This section shall apply for purposes of determining the present values of accrued benefits and the amounts of account balances of Employees as of the Determination Date. Distributions during year ending on the Determination Date. The present values of accrued benefits and the amounts of account balances of an Employee as of the Determination Date shall be increased by the distributions made with respect to the Employee under the Plan Subtype 101006 EGTRRA 1 4 (4-47951) and any plan aggregated with the Plan under Code Section 416(g)(2) during the one-year period ending on the Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Code Section 416(g)(2)(A)(i). In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting "five-year period" for "one-year period." Employees not performing services during year ending on the Determination Date. The accrued benefits and accounts of any individual who has not performed services for the Employer during the one-year period ending on the Determination Date shall not be taken into account. Minimum benefits. Matching contributions. Employer matching contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of Code Section 416(c)(2) and the Plan. The preceding sentence shall apply with respect to Matching Contributions under the Plan or, if the Plan provides that the minimum contribution requirement shall be met in another plan, such other plan. Employer matching contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the actual contribution percentage test and other requirements of Code Section 401(m). Contributions under other plans. The Employer may provide in the Plan that the minimum benefit requirement shall be met in another plan (including another plan that consists solely of a cash or deferred arrangement which meets the requirements of Code Section 401(k)(12) and matching contributions with respect to which the requirements of Code Section 401(m)(11) are met). PLAN LOANS FOR OWNER-EMPLOYEES AND SHAREHOLDER EMPLOYEES Effective for plan loans made after December 31, 2001, plan provisions prohibiting loans to any shareholder-employee or Owner-employee shall cease to apply. This amendment is made an integral part of the aforesaid Plan and is controlling over the terms of said Plan with respect to the particular items addressed expressly therein. All other provisions of the Plan remain unchanged and controlling. Unless otherwise stated on any page of this amendment, eligibility for benefits and the amount of any benefits payable to or on behalf of an individual who is an Inactive Participant on the effective date(s) stated above, shall be determined according to the provisions of the aforesaid Plan as in effect on the day before he became an Inactive Participant. Subtype 101006 EGTRRA - 1 5 (4-47951) Signing this amendment, the Employer, as plan sponsor, has made the decision to adopt this plan amendment. The Employer is acting in reliance on its own discretion and on the legal and tax advice of its own advisors, and not that of any member of the Principal Financial Group or any representative of a member company of the Principal Financial Group. Signed this 30th day of December, 2003. For the Employer By /s/ Michael A. DiGregorio --------------------------------- S.V.P. --------------------------------- Title Subtype 101006 EGTRRA - 1 6 (4-47951) Your plan is an important legal document. This sample plan has been prepared based on our understanding of the desired provisions. It may not fit your situation. You should consult with your lawyer on the plan's legal and tax implications. Neither Principal Life Insurance Company nor its agents can be responsible for the legal or tax aspects of the plan nor its appropriateness for your situation. If you wish to change the provisions of this sample plan, you may ask us to prepare new sample wording for you and your lawyer to review. WILMINGTON TRUST THRIFT SAVINGS PLAN Defined Contribution Plan 8.0 Restated January 1, 2004 TABLE OF CONTENTS INTRODUCTION ARTICLE FORMAT AND DEFINITIONS Section 1.01 ... Format Section 1.02 ... Definitions ARTICLE II PARTICIPATION Section 2.01 ... Active Participant Section 2.02 ... Inactive Participant Section 2.03 ... Cessation of Participation Section 2.04 ... Adopting Employers - Single Plan ARTICLE III CONTRIBUTIONS Section 3.01 ... Employer Contributions Section 3.01 A ... Voluntary Contributions by Participants Section 3.01 B ... Rollover Contributions Section 3.02 ... Forfeitures Section 3.03 ... Allocation Section 3.04 ... Contribution Limitation Section 3.05 ... Excess Amounts Section 3.06 ... Prohibited Allocations of Qualifying Employer Securities ARTICLE IV INVESTMENT OF CONTRIBUTIONS Section 4.01 ... Investment and Timing of Contributions Section 4.01 A ... Investment in Qualifying Employer Securities ARTICLE V BENEFITS Section 5.01 ... Retirement Benefits Section 5.02 ... Death Benefits Section 5.03 ... Vested Benefits Section 5.04 ... When Benefits Start Section 5.05 ... Withdrawal Benefits Section 5.06 ... Loans to Participants Section 5.07 ... Distributions Under Qualified Domestic Relations Orders
RESTATEMENT JANUARY 1, 2004 3 TABLE OF CONTENTS (4-47951) ARTICLE VI DISTRIBUTION OF BENEFITS Section 6.01 ... Automatic Forms of Distribution Section 6.02 ... Optional Forms of Distribution Section 6.03 ... Election Procedures Section 6.04 ... Notice Requirements Section 6.05 ... Form of Distribution from ESOP Contribution Account Section 6.06 ... Put Option ARTICLE VII DISTRIBUTION REQUIREMENTS Section 7.01 ... Application Section 7.02 ... Definitions Section 7.03 ... Distribution Requirements ARTICLE VIII TERMINATION OF THE PLAN ARTICLE IX ADMINISTRATION OF THE PLAN Section 9.01 ... Administration Section 9.02 ... Expenses Section 9.03 ... Records Section 9.04 ... Information Available Section 9.05 ... Claim and Appeal Procedures Section 9.06 ... Delegation of Authority Section 9.07 ... Exercise of Discretionary Authority Section 9.08 ... Transaction Processing Section 9.09 ... Voting and Tender of Qualifying Employer Securities ARTICLE X GENERAL PROVISIONS Section 10.01 ... Amendments Section 10.02 ... Direct Rollovers Section 10.03 ... Mergers and Direct Transfers Section 10.04 ... Provisions Relating to the Insurer and Other Parties Section 10.05 ... Employment Status Section 10.06 ... Rights to Plan Assets Section 10.07 ... Beneficiary Section 10.08 ... Nonalienation of Benefits Section 10.09 ... Construction Section 10.10 ... Legal Actions Section 10.11 ... Small Amounts Section 10.12 ... Word Usage Section 10.13 ... Change in Service Method Section 10.14 ... Military Service
RESTATEMENT JANUARY 1, 2004 4 TABLE OF CONTENTS (4-47951) ARTICLE XI TOP-HEAVY PLAN REQUIREMENTS Section 11.01 ... Application Section 11.02 ... Definitions Section 11.03 ... Modification of Vesting Requirements Section 11.04 ... Modification of Contributions
PLAN EXECUTION RESTATEMENT JANUARY 1, 2004 5 TABLE OF CONTENTS (4-47951) INTRODUCTION The Primary Employer previously established a savings plan on January 1, 1985 The Primary Employer is of the opinion that the plan should be changed. It believes that the best means to accomplish these changes is to completely restate the plan's terms, provisions and conditions. The restatement, effective January 1, 2004, is set forth in this document and is substituted in lieu of the prior document. The restated plan continues to be for the exclusive benefit of employees of the Employer. All persons covered under the plan on December 31 , 2003, shall continue to be covered under the restated plan with no loss of benefits. It is intended that the plan, as restated, shall qualify as a profit sharing plan under the Internal Revenue Code of 1986, including any later amendments to the Code; except that, the portion of the Plan that consists of the Qualifying Employer Securities Fund and ESOP Subaccounts is designed to qualify as a stock bonus plan and employee stock ownership plan under Code Section 4975(e)(7). RESTATEMENT JANUARY 1, 2004 6 INTRODUCTION (4-47951) ARTICLE FORMAT AND DEFINITIONS SECTION 1.01--FORMAT. Words and phrases defined in the DEFINITIONS SECTION of Article shall have that defined meaning when used in this Plan, unless the context clearly indicates otherwise. These words and phrases have an initial capital letter to aid in identifying them as defined terms. SECTION 1.02--DEFINITIONS. Account means, for a Participant, his share of the Plan Fund. Separate accounting records are kept for those parts of his Account that result from: (a) Voluntary Contributions (b) Elective Deferral Contributions (c) Matching Contributions (other than cash dividends paid on Qualifying Employer Securities and initially reinvested in Qualifying Employer Securities at the election of the Participant) (d) ESOP Contributions (other than cash dividends paid on Qualifying Employer Securities and initially reinvested in Qualifying Employer Securities at the election of the Participant) (e) Cash dividends paid on shares of Qualifying Employer Securities credited to the account maintained to reflect Matching and ESOP Contributions (with a separate dividend source account for each such type of Contribution) that are initially reinvested in Qualifying Employer Securities at the election of the Participant (f) Rollover Contributions If the Participant's Vesting Percentage is less than 100% as to any of the Employer Contributions, a separate accounting record will be kept for any part of his Account resulting from such Employer Contributions and, if there has been a prior Forfeiture Date, from such Contributions made before a prior Forfeiture Date. A Participant's Account shall be reduced by any distribution of his Vested Account and by any Forfeitures. A Participant's Account shall participate in the earnings credited, expenses charged, and any appreciation or depreciation of the Investment Fund. His Account is subject to any minimum guarantees applicable under the Annuity Contract or other investment arrangement and to any expenses associated therewith. An ESOP Subaccount shall be maintained for each of the separate recordkeeping accounts specified above to reflect the portion thereof that is invested in the Qualifying Employer Securities Fund, and a Non-ESOP Subaccount will be maintained to reflect the portion thereof that is otherwise invested within RESTATEMENT JANUARY 1, 2004 7 ARTICLE (4-47951) the Plan Fund. The ESOP Subaccounts are for bookkeeping purposes only and the maintenance of ESOP Subaccounts will not, by itself, require any segregation of assets within the Qualifying Employer Securities Fund or the Trust Fund. Accounts and Subaccounts in addition to those specified above may also be maintained if considered appropriate in the administration of the Plan. ACP TEST means the nondiscrimination test described in Code Section 401(m)(2) as provided for in subparagraph (d) of the EXCESS AMOUNTS SECTION of Article III. Active Participant means an Eligible Employee who is actively participating in the Plan according to the provisions in the ACTIVE PARTICIPANT SECTION of Article II. Adopting Employer means an employer which is a Controlled Group member and which is listed in the ADOPTING EMPLOYERS - SINGLE PLAN SECTION of Article II. ADP Test means the nondiscrimination test described in Code Section 401(k)(3) as provided for in subparagraph (c) of the EXCESS AMOUNTS SECTION of Article III. Affiliated Service Group means any group of corporations, partnerships or other organizations of which the Employer is a part and which is affiliated within the meaning of Code Section 414(m) and regulations thereunder. Such a group includes at least two organizations one of which is either a service organization (that is, an organization the principal business of which is performing services), or an organization the principal business of which is performing management functions on a regular and continuing basis. Such service is of a type historically performed by employees. In the case of a management organization, the Affiliated Service Group shall include organizations related, within the meaning of Code Section 144(a)(3), to either the management organization or the organization for which it performs management functions. The term Controlled Group, as it is used in this Plan, shall include the term Affiliated Service Group. Alternate Payee means any spouse, former spouse, child, or other dependent of a Participant who is recognized by a qualified domestic relations order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such Participant. Annual Compensation means, for a Plan Year, the Employee's Compensation for the Compensation Year ending with or within the consecutive 12-month period ending on the last day of the Plan Year. Annual Compensation shall only include Compensation received while an Active Participant. Annuity Contract means the annuity contract or contracts into which the Trustee enters with the Insurer for guaranteed benefits, for the investment of Contributions in separate accounts, and for the payment of benefits under this Plan. The term Annuity Contract as it is used in this Plan shall include the plural unless the context clearly indicates the singular is meant. Annuity Starting Date means, for a Participant, the first day of the first period for which an amount is payable as an annuity or any other form. RESTATEMENT JANUARY 1, 2004 8 ARTICLE (4-47951) Beneficiary means the person or persons named by a Participant to receive any benefits under the Plan when the Participant dies. See the BENEFICIARY SECTION of Article X. Claimant means any person who makes a claim for benefits under this Plan. See the CLAIM AND APPEAL PROCEDURES SECTION of Article IX. Code means the Internal Revenue Code of 1986, as amended. Compensation means, except for purposes of the CONTRIBUTION LIMITATION SECTION of Article III and Article XI, the total earnings, except as modified in this definition, paid or made available to an Employee by the Employer during any specified period. "Earnings" in this definition means wages within the meaning of Code Section 3401 (a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). For any Self-employed Individual, Compensation means Earned Income. Compensation shall exclude reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation (other than elective contributions), and welfare benefits. For purposes of determining the allocation or amount of Elective Deferral Contributions Matching Contributions Compensation shall exclude the following Imputed compensation Compensation shall also include elective contributions. For this purpose, elective contributions are amounts contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Employee under Code Section 125, 402(e)(3), 402(h)(1)(B), or 403(b). Elective contributions also include compensation deferred under a Code Section 457 plan maintained by the Employer and employee contributions "picked up" by a governmental entity and, pursuant to Code Section 414(h)(2), treated as Employer contributions. For years beginning after December 31, 1997, elective contributions shall also include amounts contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Employee under Code Section 132(f)(4). For purposes of the EXCESS AMOUNTS SECTION of Article III, the Employer may elect to use an alternative nondiscriminatory definition of Compensation in accordance with the regulations under Code Section 414(s). For Plan Years beginning on or after January 1, 1994, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any determination period shall RESTATEMENT JANUARY 1, 2004 9 ARTICLE (4-47951) not exceed $150,000, as adjusted for increases in the cost-of-living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning in such calendar year. If a determination period consists of fewer than 12 months, the annual limit is an amount equal to the otherwise applicable annual limit multiplied by a fraction. The numerator of the fraction is the number of months in the short determination period, and the denominator of the fraction is 12. If Compensation for any prior determination period is taken into account in determining a Participant's contributions or benefits for the current Plan Year, the Compensation for such prior determination period is subject to the applicable annual compensation limit in effect for that determination period. For this purpose, in determining contributions or benefits in Plan Years beginning on or after January 1, 1994, the annual compensation limit in effect for determination periods beginning before that date is $150,000. Compensation means, for a Leased Employee, Compensation for the services the Leased Employee performs for the Employer, determined in the same manner as the Compensation of Employees who are not Leased Employees, regardless of whether such Compensation is received directly from the Employer or from the leasing organization. Compensation YEAR means the consecutive 12-month period ending on the last day of each Plan Year, including corresponding periods before January 1, 1985. Contingent ANNUITANT means an individual named by the Participant to receive a lifetime benefit after the Participant's death in accordance with a survivorship life annuity. Contributions means Elective Deferral Contributions Matching Contributions Voluntary Contributions Rollover Contributions ESOP Contributions as set out in Article III, unless the context clearly indicates only specific contributions are meant. Controlled Group means any group of corporations, trades, or businesses of which the Employer is a part that are under common control. A Controlled Group includes any group of corporations, trades, or businesses, whether or not incorporated, which is either a parent-subsidiary group, a brother-sister group, or a combined group within the meaning of Code Section 414(b), Code Section 414(c) and regulations thereunder and, for purposes of determining contribution limitations under the CONTRIBUTION LIMITATION SECTION of Article III, as modified by Code Section 415(h) and, for the purpose of identifying Leased Employees, as modified by Code Section 144(a)(3). The term Controlled Group, as it is used in this Plan, shall include the term Affiliated Service Group and any other employer required to be aggregated with the Employer under Code Section 414(o) and the regulations thereunder. Direct Rollover means a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. RESTATEMENT JANUARY 1, 2004 10 ARTICLE (4-47951) Distributee means an Employee or former Employee. In addition, the Employee's (or former Employee's) surviving spouse and the Employee's (or former Employee's) spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are Distributees with regard to the interest of the spouse or former spouse. Early Retirement Age means a Participant's age on the date he meets the following requirement(s): (a) He has attained age 55 (b) He has completed 5 years of Vesting Service. Early Retirement Date means the first day of any month before a Participant's Normal Retirement Date which the Participant selects for the start of his retirement benefits. This day may be on or after the date on which he ceases to be an Employee and reaches Early Retirement Age. If a Participant ceases to be an Employee before satisfying any age requirement for Early Retirement Age, but after satisfying any other requirements, the Participant shall be entitled to elect an early retirement benefit upon satisfying such age requirement. Earned Income means, for a Self-employed Individual, net earnings from self-employment in the trade or business for which this Plan is established if such Self-employed Individual's personal services are a material income producing factor for that trade or business. Net earnings shall be determined without regard to items not included in gross income and the deductions properly allocable to or chargeable against such items. Net earnings shall be reduced for the employer contributions to the Employer's qualified retirement plan(s) to the extent deductible under Code Section 404. Net earnings shall be determined with regard to the deduction allowed to the Employer by Code Section 164(f) for taxable years beginning after December 31, 1989. Elective Deferral Contributions means contributions made by the Employer to fund this Plan in accordance with elective deferral agreements between Eligible Employees and the Employer. Elective deferral agreements shall be made, changed, or terminated according to the provisions of the EMPLOYER CONTRIBUTIONS SECTION of Article III. Elective Deferral Contributions shall be 100% vested and subject to the distribution restrictions of Code Section 401 (k) when made. See the WHEN BENEFITS START SECTION of Article V. Eligible Employee means any Employee of the Employer who meets the following requirement. His employment classification with the Employer is the following: Salaried class (paid on a salaried basis) Hourly class (paid on an hourly rate basis) Salary Roll Employee Scheduled Wage Roll Employee RESTATEMENT JANUARY 1, 2004 ARTICLE (4-47951) Nonbargaining class. Not represented for collective bargaining purposes by any collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining and if two percent or less of the Employees who are covered pursuant to that agreement are professionals as defined in section 1.410(b)-9 of the regulations. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. Not a nonresident alien, within the meaning of Code Section 7701(b)(1)(B), who receives no earned income, within the meaning of Code Section 911(d)(2), from the Employer which constitutes income from sources within the United States, within the meaning of Code Section 861(a)(3), or who receives such earned income but it is all exempt from income tax in the United States under the terms of an income tax convention. Not a Leased Employee Eligible Retirement Plan means an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a) or a qualified trust described in Code Section 401(a), that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. Eligible Rollover Distribution means any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: (i) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of ten years or more; (ii) any distribution to the extent such distribution is required under Code Section 401(a)(9); (iii) any hardship distribution described in Code Section 401 (k)(2)(B)(i)(IV) received after December 31, 1998; (iv) the portion of any other distribution(s) that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and (v) any other distribution(s) that is reasonably expected to total less than $200 during a year. Employee means an individual who is employed by the Employer or any other employer required to be aggregated with the Employer under Code Sections 414(b), (c), (m), or (o). A Controlled Group member is required to be aggregated with the Employer. The term Employee shall include any Self-employed Individual treated as an employee of any employer described in the preceding paragraph as provided in Code Section 401(c)(1). The term Employee shall also include any Leased Employee deemed to be an employee of any employer described in the preceding paragraph as provided in Code Section 414(n) or (o). Employer means, except for purposes of the CONTRIBUTION LIMITATION SECTION of Article III, the Primary Employer. This will also include any successor corporation or firm of the Employer which shall, by written agreement, assume the obligations of this Plan or any Predecessor Employer which maintained this Plan. RESTATEMENT JANUARY 1, 2004 12 ARTICLE (4-47951) EMPLOYER Contributions means Elective Deferral Contributions Matching Contributions ESOP Contributions as set out in Article III and contributions made by the Employer to fund this Plan in accordance with the provisions of the MODIFICATION OF CONTRIBUTIONS SECTION of Article XI, unless the context clearly indicates only specific contributions are meant. Employment Commencement Date means the date an Employee first performs an Hour-of-Service. Entry Date means the date an Employee first enters the Plan as an Active Participant. See the ACTIVE PARTICIPANT SECTION of Article II. ERISA means the Employee Retirement Income Security Act of 1974, as amended. ESOP Contributions means contributions made by the Employer or an Adopting Employer to repay any outstanding exempt loan. See the EMPLOYER CONTRIBUTIONS SECTION of Article III. ESOP Subaccount means that portion of an Account invested in the Qualifying Employer Securities Fund, with its balance expressed in shares of Qualifying Employer Securities. The value of an ESOP Subaccount as of any Valuation Date will equal the number of shares of Qualifying Employer Securities credited to the Subaccount multiplied by the value of a share of Qualifying Employer Securities on such Valuation Date. FISCAL YEAR means the Primary Employer's taxable year. The last day of the Fiscal Year is December 31 Forfeiture means the part, if any, of a Participant's Account that is forfeited. See the FORFEITURES SECTION of Article III. Forfeiture Date means, as to a Participant, the last day of five consecutive one-year Periods of Severance. Highly Compensated Employee means any Employee who: (a) was a 5-percent owner at any time during the year or the preceding year, or (b) for the preceding year had compensation from the Employer in excess of $80,000 and, if the Employer so elects, was in the top-paid group for the preceding year. The $80,000 amount is adjusted at the same time and in the same manner as under Code Section 415(d), except that the base period is the calendar quarter ending September 30, 1996. For this purpose the applicable year of the plan for which a determination is being made is called a determination year and the preceding 12-month period is called a look-back year. If the Employer makes a calendar year data election, the look-back year shall be the calendar year beginning with or within the look-back year. The Plan may not use such election to determine whether Employees are Highly Compensated Employees on account of being a 5-percent owner. RESTATEMENT JANUARY 1, 2004 13 ARTICLE (4-47951) In determining who is a Highly Compensated Employee, the Employer does not make a top-paid group election. In determining who is a Highly Compensated Employee, the Employer does not make a calendar year data election. Calendar year data elections and top-paid group elections, once made, apply for all subsequent years unless changed by the Employer. If the Employer makes one election, the Employer is not required to make the other. If both elections are made, the look-back year in determining the top-paid group must be the calendar year beginning with or within the look-back year. These elections must apply consistently to the determination years of all plans maintained by the Employer which reference the highly compensated employee definition in Code Section 414(q), except as provided in Internal Revenue Service Notice 97-45 (or superseding guidance). The consistency requirement will not apply to determination years beginning with or within the 1997 calendar year, and for determination years beginning on or after January 1, 1998 and before January 1, 2000, satisfaction of the consistency requirement is determined without regard to any nonretirement plans of the Employer. The determination of who is a highly compensated former Employee is based on the rules applicable to determining Highly Compensated Employee status as in effect for that determination year, in accordance with section 1.414(q)-1T, A-4 of the temporary Income Tax Regulations and Internal Revenue Service Notice 97-45. In determining whether an Employee is a Highly Compensated Employee for years beginning in 1997, the amendments to Code Section 414(q) stated above are treated as having been in effect for years beginning in 1996. The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, the compensation that is considered, and the identity of the 5-percent owners, shall be made in accordance with Code Section 414(q) and the regulations thereunder. Hour-of-Service means, for an Employee, each hour for which he is paid, or entitled to payment, for performing duties for the Employer. Hours-of-Service shall be credited for employment with any other employer required to be aggregated with the Employer under Code Sections 414(b), (c), (m) or (o) and the regulations thereunder for purposes of eligibility and vesting. Hours-of-Service shall also be credited for any individual who is considered an employee for purposes of this Plan pursuant to Code Section 414(n) or Code Section 414(o) and the regulations thereunder. Inactive Participant means a former Active Participant who has an Account. See the INACTIVE PARTICIPANT SECTION of Article II. Insurer means Principal Life Insurance Company and any other insurance company or companies named by the Trustee or Primary Employer . Investment Fund means the total of Plan assets, excluding the guaranteed benefit policy portion of any Annuity Contract. All or a portion of these assets may be held under the Trust Agreement. RESTATEMENT JANUARY 1, 2004 14 ARTICLE (4-47951) The Investment Fund shall be valued at current fair market value as of the Valuation Date. The valuation shall take into consideration investment earnings credited, expenses charged, payments made, and changes in the values of the assets held in the Investment Fund. The Investment Fund shall be allocated at all times to Participants, except as otherwise expressly provided in the Plan. The Account of a Participant shall be credited with its share of the gains and losses of the Investment Fund. That part of a Participant's Account invested in a funding arrangement which establishes one or more accounts or investment vehicles for such Participant thereunder shall be credited with the gain or loss from such accounts or investment vehicles. The part of a Participant's Account which is invested in other funding arrangements shall be credited with a proportionate share of the gain or loss of such investments. The share shall be determined by multiplying the gain or loss of the investment by the ratio of the part of the Participant's Account invested in such funding arrangement to the total of the Investment Fund invested in such funding arrangement. Investment Manager means any fiduciary (other than a trustee or Named Fiduciary) (a) who has the power to manage, acquire, or dispose of any assets of the Plan. (b) who (i) is registered as an investment adviser under the Investment Advisers Act of 1940; (ii) is not registered as an investment adviser under such Act by reason of paragraph (1) of section 203A(a) of such Act, is registered as an investment adviser under the laws of the state (referred to in such paragraph (1)) in which it maintains its principal office and place of business, and, at the time it last filed the registration form most recently filed by it with such state in order to maintain its registration under the laws of such state, also filed a copy of such form with the Secretary of Labor, (iii) is a bank, as defined in that Act; or (iv) is an insurance company qualified to perform services described in subparagraph (a) above under the laws of more than one state; and (c) who has acknowledged in writing being a fiduciary with respect to the Plan. Late Retirement Date means the first day of any month which is after a Participant's Normal Retirement Date and on which retirement benefits begin. If a Participant continues to work for the Employer after his Normal Retirement Date, his Late Retirement Date shall be the earliest first day of the month on or after the date he ceases to be an Employee. A later Retirement Date may apply if the Participant so elects. An earlier Retirement Date may apply if the Participant is age 70 1/2. See the WHEN BENEFITS START SECTION of Article V. Leased Employee means any person (other than an employee of the recipient) who, pursuant to an agreement between the recipient and any other person ("leasing organization"), has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n)(6)) on a substantially full time basis for a period of at least one year, and such services are performed under primary direction or control by the recipient. Contributions or benefits provided by the leasing organization to a Leased Employee, which are attributable to service performed for the recipient employer, shall be treated as provided by the recipient employer. RESTATEMENT JANUARY 1, 2004 15 ARTICLE (4-47951) A Leased Employee shall not be considered an employee of the recipient if: (a) such employee is covered by a money purchase pension plan providing (i) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in Code Section 415(c)(3), but for years beginning before January 1, 1998, including amounts contributed pursuant to a salary reduction agreement which are excludible from the employee's gross income under Code Sections 125, 402(e)(3), 402(h)(1)(B), or 403(b), (ii) immediate participation, and (iii) full and immediate vesting, and (b) Leased Employees do not constitute more than 20 percent of the recipient's nonhighly compensated work force. Loan Administrator means the person(s) or position(s) authorized to administer the Participant loan program. The Loan Administrator is Dawn Davis. Matching Contributions means contributions made by the Employer to fund this plan which are contingent on a Participant's Elective Deferral Contributions. See the EMPLOYER CONTRIBUTIONS SECTION of Article III. Monthly Date means each Yearly Date and the same day of each following month during the Plan Year beginning on such Yearly Date. Named Fiduciary means the person or persons who have authority to control and manage the operation and administration of the Plan. The Named Fiduciary is the Employer. Nonhighly Compensated Employee means an Employee of the Employer who is not a Highly Compensated Employee. Nonvested Account means the excess, if any, of a Participant's Account over his Vested Account. Normal Form means a single life annuity with installment refund. Normal Retirement Age means the age at which the Participant's normal retirement benefit becomes nonforfeitable if he is an Employee. A Participant's Normal Retirement Age is the older of (a) or (b) below: (a) Age 65. (b) His age on the date 5 years after his Employment Commencement Date but not older than his age on the date 5 years after the first day of the Plan Year in which his Entry Date occurred. Normal Retirement Date means the earliest first day of the month on or after the date the Participant reaches his Normal Retirement Age. Unless otherwise provided in this Plan, a Participant's retirement benefits shall begin on a Participant's Normal Retirement Date if he has ceased to be an Employee on RESTATEMENT JANUARY 1, 2004 16 ARTICLE (4-47951) such date and has a Vested Account. An earlier Retirement Date may apply if the Participant is age 70 1/2. See the WHEN BENEFITS START SECTION of Article V. Owner-employee means a Self-employed Individual who, in the case of a sole proprietorship, owns the entire interest in the unincorporated trade or business for which this Plan is established. If this Plan is established for a partnership, an Owner-employee means a Self-employed Individual who owns more than 10 percent of either the capital interest or profits interest in such partnership. Parental Absence means an Employee's absence from work: (a) by reason of pregnancy of the Employee, (b) by reason of birth of a child of the Employee, (c) by reason of the placement of a child with the Employee in connection with adoption of such child by such Employee, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. Participant means either an Active Participant or an Inactive Participant. Participant Contributions means Voluntary Contributions as set out in Article III. Period of Military Duty means, for an Employee (a) who served as a member of the armed forces of the United States, and (b) who was reemployed by the Employer at a time when the Employee had a right to reemployment in accordance with seniority rights as protected under Chapter 43 of Title 38 of the U. S. Code, the period of time from the date the Employee was first absent from active work for the Employer because of such military duty to the date the Employee was reemployed. Period of Service means a period of time beginning on an Employee's Employment Commencement Date or Reemployment Commencement Date (whichever applies) and ending on his Severance Date. Period of Severance means a period of time beginning on an Employee's Severance Date and ending on the date he again performs an Hour-of-Service. A one-year Period of Severance means a Period of Severance of 12 consecutive months. Solely for purposes of determining whether a one-year Period of Severance has occurred for eligibility or vesting purposes, the consecutive 12-month period beginning on the first anniversary of the first date of a Parental Absence shall not be a one-year Period of Severance. Plan means the savings plan of the Employer set forth in this document, including any later amendments to it. RESTATEMENT JANUARY 1, 2004 17 ARTICLE (4-47951) Plan Administrator means the person or persons who administer the Plan. The Plan Administrator is the Employer. Plan Fund means the total of the Investment Fund and the guaranteed benefit policy portion of any Annuity Contract. The Investment Fund shall be valued as stated in its definition. The guaranteed benefit policy portion of any Annuity Contract shall be determined in accordance with the terms of the Annuity Contract and, to the extent that such Annuity Contract allocates contract values to Participants, allocated to Participants in accordance with its terms. The total value of all amounts held under the Plan Fund shall equal the value of the aggregate Participants' Accounts under the Plan. Plan Year means a period beginning on a Yearly Date and ending on the day before the next Yearly Date. Predecessor Employer means a firm of which the Employer was once a part (e.g., due to a spinoff or change of corporate status) or a firm absorbed by the Employer because of a merger or acquisition (stock or asset, including a division or an operation of such company) which maintained this Plan or which is named below: Balentine & Company Primary Employer means Wilmington Trust Company. Qualified Joint and Survivor Annuity means, for a Participant who has a spouse, an immediate survivorship life annuity with installment refund, where the survivorship percentage is 50% and the Contingent Annuitant is the Participant's spouse. A former spouse will be treated as the spouse to the extent provided under a qualified domestic relations order as described in Code Section 414(p). The amount of benefit payable under the Qualified Joint and Survivor Annuity shall be the amount of benefit which may be provided by the Participant's Vested Account. Qualified Preretirement Survivor Annuity means a single life annuity with installment refund payable to the surviving spouse of a Participant who dies before his Annuity Starting Date. A former spouse will be treated as the surviving spouse to the extent provided under a qualified domestic relations order as described in Code Section 414(p). Qualifying Employer Securities means any security which is issued by the Employer or any Controlled Group member and which meets the requirements of Code Section 409(I) and ERISA Section 407(d)(5). This shall also include any securities that satisfied the requirements of the definition when these securities were assigned to the Plan. Qualifying Employer Securities Fund means that part of the assets of the Trust Fund that are designated to be held primarily or exclusively in Qualifying Employer Securities for the purpose of providing benefits for Participants. Quarterly Date means each Yearly Date and the third, sixth, and ninth Monthly Date after each Yearly Date which is within the same Plan Year. RESTATEMENT JANUARY 1, 2004 18 ARTICLE (4-47951) Reemployment Commencement Date means the date an Employee first performs an Hour-of-Service following a Period of Severance. Reentry Date means the date a former Active Participant reenters the Plan. See the ACTIVE PARTICIPANT SECTION of Article II. Retirement Date means the date a retirement benefit will begin and is a Participant's Early, Normal, or Late Retirement Date, as the case may be. Rollover Contributions means the Rollover Contributions which are made by an Eligible Employee or an Inactive Participant according to the provisions of the ROLLOVER CONTRIBUTIONS SECTION of Article III. Self-employed Individual means, with respect to any Fiscal Year, an individual who has Earned Income for the Fiscal Year (or who would have Earned Income but for the fact the trade or business for which this Plan is established did not have net profits for such Fiscal Year). Severance Date means the earlier of: (a) the date on which an Employee quits, retires, dies, or is discharged, or (b) the first anniversary of the date an Employee begins a one-year absence from service (with or without pay). This absence may be the result of any combination of vacation, holiday, sickness, disability, leave of absence or layoff. Solely to determine whether a one-year Period of Severance has occurred for eligibility or vesting purposes for an Employee who is absent from service beyond the first anniversary of the first day of a Parental Absence, Severance Date is the second anniversary of the first day of the Parental Absence. The period between the first and second anniversaries of the first day of the Parental Absence is not a Period of Service and is not a Period of Severance. Totally and Permanently Disabled means that a Participant is disabled, as a result of sickness or injury, to the extent that he is prevented from engaging in any substantial gainful activity, and is eligible for and receives a disability benefit under Title II of the Federal Social Security Act. Trust Agreement means an agreement or agreements of trust between the Primary Employer and Trustee established for the purpose of holding and distributing the Trust Fund under the provisions of the Plan. The Trust Agreement may provide for the investment of all or any portion of the Trust Fund in the Annuity Contract or any other investment arrangement. Trust Fund means the total funds held under an applicable Trust Agreement. The term Trust Fund when used within a Trust Agreement shall mean only the funds held under that Trust Agreement. Trustee means the party or parties named in the applicable Trust Agreement. The term Trustee as it is used in this Plan is deemed to include the plural unless the context clearly indicates the singular is meant. RESTATEMENT JANUARY 1, 2004 19 ARTICLE (4-47951) Valuation Date means the date on which the value of the assets of the Investment Fund is determined. The value of each Account which is maintained under this Plan shall be determined on the Valuation Date. In each Plan Year, the Valuation Date shall be the last day of the Plan Year. At the discretion of the Plan Administrator, Trustee, or Insurer (whichever applies), assets of the Investment Fund may be valued more frequently. These dates shall also be Valuation Dates. Vested Account means the vested part of a Participant's Account. The Participant's Vested Account is determined as follows. If the Participant's Vesting Percentage is 100%, his Vested Account equals his Account. If the Participant's Vesting Percentage is less than 100%, his Vested Account equals the sum of (a), (b), and (c) below: (a) The part of the Participant's Account that results from Employer Contributions made before a prior Forfeiture Date and all other Contributions which were 100% vested when made. (b) The part of the Participant's Account that results from cash dividends paid on shares of Employer Stock credited to the source account for Matching Contributions or ESOP Contributions that are initially reinvested in Qualifying Employer Securities at the election of the Participant. (c) The balance of the Participant's Account in excess of the sum of (a) and (b) above multiplied by his Vesting Percentage. If the Participant has withdrawn any part of his Account resulting from Employer Contributions, other than the vested Employer Contributions included in (a) above, the amount determined under this subparagraph (c) shall be equal to P(AB + D) -D as defined below: p The Participant's Vesting Percentage. AB The balance of the Participant's Account in excess of the sum of (a) and (b) above. D The amount of the withdrawal resulting from Employer Contributions, other than the vested Employer Contributions included in (a) above. The Participant's Vested Account is nonforfeitable Vesting Percentage means the percentage used to determine the nonforfeitable portion of a Participant's Account attributable to Employer Contributions which were not 100% vested when made. RESTATEMENT JANUARY 1, 2004 20 ARTICLE (4-47951) A Participant's Vesting Percentage is shown in the following schedule opposite the number of whole years of his Vesting Service.
VESTING SERVICE VESTING (whole years) PERCENTAGE Less than 1 0 1 20 2 40 3 60 4 80 5 or more 100
The Vesting Percentage for a Participant who is an Employee on or after the date he reaches Normal Retirement Age or Early Retirement Age shall be 100%. The Vesting Percentage for a Participant who is an Employee on the date he becomes Totally and Permanently Disabled or dies shall be 100%. If the schedule used to determine a Participant's Vesting Percentage is changed, the new schedule shall not apply to a Participant unless he is credited with an Hour-of-Service on or after the date of the change and the Participant's nonforfeitable percentage on the day before the date of the change is not reduced under this Plan. The amendment provisions of the AMENDMENTS SECTION of Article X regarding changes in the computation of the Vesting Percentage shall apply. Vesting Service means an Employee's Period of Service. An Employee's Period of Service shall be measured from his Employment Commencement Date to his most recent Severance Date. This Period of Service shall be reduced by any Period of Severance that occurred prior to his most recent Severance Date, unless such Period of Severance is included under the service spanning rule below. This Period of Service shall be expressed as years and fractional parts of a year (to four decimal places) on the basis that 365 days equal one year . However, Vesting Service is modified as follows: Service with a Predecessor Employer which did not maintain this Plan included: An Employee's service with a Predecessor Employer which did not maintain this Plan shall be included as service with the Employer. This service excludes service performed while a proprietor or partner . Period of Military Duty included: A Period of Military Duty shall be included as service with the Employer to the extent it has not already been credited. RESTATEMENT JANUARY 1, 2004 21 ARTICLE (4-47951) Period of Severance included (service spanning rule): A Period of Severance shall be deemed to be a Period of Service under either of the following conditions: (a) the Period of Severance immediately follows a period during which an Employee is not absent from work and ends within 12 months; or (b) the Period of Severance immediately follows a period during which an Employee is absent from work for any reason other than quitting, being discharged, or retiring (such as a leave of absence or layoff) and ends within 12 months of the date he was first absent. Controlled Group service included: An Employee's service with a member firm of a Controlled Group while both that firm and the Employer were members of the Controlled Group shall be included as service with the Employer. VOLUNTARY CONTRIBUTIONS means contributions by a Participant that are not required as a condition of employment, of participation, or for obtaining additional benefits from the Employer Contributions. See the VOLUNTARY CONTRIBUTIONS BY PARTICIPANTS SECTION of Article III. YEARLY DATE means January 1, 1985, and the same day of each following year. YEARS OF SERVICE means an Employee's Vesting Service disregarding any modifications which exclude service. RESTATEMENT JANUARY 1, 2004 22 ARTICLE (4-47951) ARTICLE II PARTICIPATION SECTION 2.01--ACTIVE PARTICIPANT. (a) An Employee shall first become an Active Participant (begin active participation in the Plan) on the earliest Quarterly Date on which he is an Eligible Employee. This date is his Entry Date. Each Employee who was an Active Participant under the Plan on December 31, 2003, shall continue to be an Active Participant if he is still an Eligible Employee on January 1, 2004, and his Entry Date shall not change. If a person has been an Eligible Employee who has met all of the eligibility requirements above, but is not an Eligible Employee on the date which would have been his Entry Date, he shall become an Active Participant on the date he again becomes an Eligible Employee. This date is his Entry Date. In the event an Employee who is not an Eligible Employee becomes an Eligible Employee, such Eligible Employee shall become an Active Participant immediately if such Eligible Employee has satisfied the eligibility requirements above and would have otherwise previously become an Active Participant had he met the definition of Eligible Employee. This date is his Entry Date. (b) An Inactive Participant shall again become an Active Participant (resume active participation in the Plan) on the date he again performs an Hour-of-Service as an Eligible Employee. This date is his Reentry Date. Upon again becoming an Active Participant, he shall cease to be an Inactive Participant. (c) A former Participant shall again become an Active Participant (resume active participation in the Plan) on the date he again performs an Hour-of-Service as an Eligible Employee. This date is his Reentry Date. There shall be no duplication of benefits for a Participant under this Plan because of more than one period as an Active Participant. SECTION 2.02--INACTIVE PARTICIPANT. An Active Participant shall become an Inactive Participant (stop accruing benefits under the Plan) on the earlier of the following: (a) the date the Participant ceases to be an Eligible Employee, or (b) the effective date of complete termination of the Plan under Article VIII. An Employee or former Employee who was an Inactive Participant under the Plan on December 31, 2003, shall continue to be an Inactive Participant on January 1, 2004. Eligibility for any benefits payable to RESTATEMENT JANUARY 1, 2004 23 ARTICLE II (4-47951) the Participant or on his behalf and the amount of the benefits shall be determined according to the provisions of the prior document, unless otherwise stated in this document. SECTION 2.03--CESSATION OF PARTICIPATION. A Participant shall cease to be a Participant on the date he is no longer an Eligible Employee and his Account is zero. SECTION 2.04--ADOPTING EMPLOYERS-SINGLE PLAN. Each of the Controlled Group members listed below is an Adopting Employer. Each Adopting Employer listed below participates with the Employer in this Plan. An Adopting Employer's agreement to participate in this Plan shall be in writing. The Employer has the right to amend the Plan. An Adopting Employer does not have the right to amend the Plan. If the Adopting Employer did not maintain its plan before its date of adoption specified below, its date of adoption shall be the Entry Date for any of its Employees who have met the requirements in the ACTIVE PARTICIPANT SECTION of Article II as of that date. Service with and Compensation from an Adopting Employer shall be included as service with and Compensation from the Employer. Transfer of employment, without interruption, between an Adopting Employer and another Adopting Employer or the Employer shall not be considered an interruption of service. The Employer's Fiscal Year defined in the DEFINITIONS SECTION of Article I shall be the Fiscal Year used in interpreting this Plan for Adopting Employers. Contributions made by an Adopting Employer shall be treated as Contributions made by the Employer. Forfeitures arising from those Contributions shall be used for the benefit of all Participants. An employer shall not be an Adopting Employer if it ceases to be a Controlled Group member. Such an employer may continue a retirement plan for its Employees in the form of a separate document. This Plan shall be amended to delete a former Adopting Employer from the list below. If (i) an employer ceases to be an Adopting Employer or the Plan is amended to delete an Adopting Employer and (ii) the Adopting Employer does not continue a retirement plan for the benefit of its Employees, partial termination may result and the provisions of Article VIII shall apply. ADOPTING EMPLOYERS
NAME DATE OF ADOPTION 100 West 10th Street January 1, 1985 Brandywine Insurance Agency, Inc. January 1, 1985 Rodney Square Management January 1, 1985 Wilmington Brokerage Services Company January 1, 1985
RESTATEMENT JANUARY 1, 2004 24 ARTICLE II (4-47951) Delaware Corporate Management January 18, 1990 WTC Corporate Services, Inc. September 2, 1993 Wilmington Trust of Pennsylvania January 1994 Wilmington Trust FSB July 22, 1994 Organization Services, Inc. January 1, 1999 Nevada Corporate Management, Inc. February 3, 1999 RESTATEMENT JANUARY 1, 2004 25 ARTICLE II (4-47951) ARTICLE III CONTRIBUTIONS SECTION 3.01--EMPLOYER CONTRIBUTIONS Employer Contributions shall be made without regard to current or accumulated net income, earnings or profits of the Employer. Notwithstanding the foregoing, the Plan shall continue to be designed to qualify as a profit sharing plan for purposes of Code Sections 401(a), 402, 412, and 417; except that, the portion of the Plan that consists of the Qualifying Employer Securities Fund and ESOP Subaccounts is designed to qualify as a stock bonus plan and employee stock ownership plan under Code Section 4975(e)(7). Such Contributions shall be equal to the Employer Contributions as described below: (a) The amount of each Elective Deferral Contribution for a Participant shall be equal to a portion of Compensation as specified in the elective deferral agreement. An Employee who is eligible to participate in the Plan may file an elective deferral agreement with the Employer. The Participant shall modify or terminate the elective deferral agreement by filing a new elective deferral agreement. The elective deferral agreement may not be made retroactively and shall remain in effect until modified or terminated. The elective deferral agreement to start or modify Elective Deferral Contributions shall be effective on the first day that pay is paid or made available following the date on which the Participant's Entry Date (Reentry Date, if applicable) or any following Quarterly Date occurs. The elective deferral agreement must be entered into on or before the date it is effective. The elective deferral agreement to stop Elective Deferral Contributions may be entered into on any date. Such elective deferral agreement shall be effective on the first day that pay is paid or made available after the elective deferral agreement is entered into. Elective Deferral Contributions must be a whole percentage of Compensation and cannot be more than 25% of Compensation. Elective Deferral Contributions are fully (100%) vested and nonforfeitable. (b) The Employer shall make Matching Contributions in an amount equal to 50% of Elective Deferral Contributions. Elective Deferral Contributions which are over 6% of Compensation won't be matched. Matching Contributions are calculated based on Elective Deferral Contributions and Compensation for the pay period. Matching Contributions are made for all persons who were Active Participants at any time during that pay period. Matching Contributions are subject to the Vesting Percentage. No Participant shall be permitted to have Elective Deferral Contributions, as defined in the EXCESS AMOUNTS SECTION of this article, made under this Plan, or any other qualified plan maintained by the RESTATEMENT JANUARY 1, 2004 26 ARTICLE III (4-47951) Employer, during any taxable year, in excess of the dollar limitation contained in Code Section 402(g) in effect at the beginning of such taxable year. An elective deferral agreement (or change thereto) must be made in such manner and in accordance with such rules as the Employer may prescribe (including by means of voice response or other electronic system under circumstances the Employer permits) and may not be made retroactively. Employer Contributions are allocated according to the provisions of the ALLOCATION SECTION of the article. The Employer may make all or any portion of the following Contributions, which are to be invested in Qualifying Employer Securities, to the Trustee in the form of Qualifying Employer Securities: Matching Contributions ESOP Contributions Employer Contributions for any Plan Year made for or allocated to a person shall not be more than 28% of his Annual Compensation for the Plan Year. A portion of the Plan assets resulting from Employer Contributions (but not more than the original amount of those Contributions) may be returned if the Employer Contributions are made because of a mistake of fact or are more than the amount deductible under Code Section 404 (excluding any amount which is not deductible because the Plan is disqualified). The amount involved must be returned to the Employer within one year after the date the Employer Contributions are made by mistake of fact or the date the deduction is disallowed, whichever applies. Except as provided under this paragraph and Article VIII, the assets of the Plan shall never be used for the benefit of the Employer and are held for the exclusive purpose of providing benefits to Participants and their Beneficiaries and for defraying reasonable expenses of administering the Plan. SECTION 3.01A--VOLUNTARY CONTRIBUTIONS BY PARTICIPANTS. An Active Participant may make Voluntary Contributions in accordance with nondiscriminatory procedures set up by the Plan Administrator. Voluntary Contributions must be a whole percentage of Compensation. A Participant's participation in the Plan is not affected by stopping or changing Voluntary Contributions. An Active Participant's request to start, change or stop his Voluntary Contributions must be made in a manner and in accordance with such rules as the Employer may prescribe (including by means of voice response or other electronic system under circumstances the Employer permits). Voluntary Contributions shall be credited to the Participant's Account when made. The part of the Participant's Account resulting from Voluntary Contributions is fully (100%) vested and nonforfeitable at all times. RESTATEMENT JANUARY 1, 2004 27 ARTICLE III (4-47951) SECTION 3.01B--ROLLOVER CONTRIBUTIONS. A Rollover Contribution may be made by an Eligible Employee or an Inactive Participant if the following conditions are met: (a) The Contribution is of amounts distributed from a plan that satisfies the requirements of Code Section 401(a) or from a "conduit" individual retirement account described in Code Section 408(d)(3)(A). In the case of an Inactive Participant, the Contribution must be of an amount distributed from another plan of the Employer, or a plan of a Controlled Group member, that satisfies the requirements of Code Section 401(a). (b) The Contribution is of amounts that the Code permits to be transferred to a plan that meets the requirements of Code Section 401(a). (c) The Contribution is made in the form of a direct rollover under Code Section 401(a)(31) or is a rollover made under Code Section 402(c) or 408(d)(3)(A) within 60 days after the Eligible Employee or Inactive Participant receives the distribution. (d) The Eligible Employee or Inactive Participant furnishes evidence satisfactory to the Plan Administrator that the proposed rollover meets conditions (a), (b), and (c) above. A Rollover Contribution shall be allowed in cash only and must be made according to procedures set up by the Plan Administrator. If the Eligible Employee is not an Active Participant when the Rollover Contribution is made, he shall be deemed to be an Active Participant only for the purpose of investment and distribution of the Rollover Contribution. Employer Contributions shall not be made for or allocated to the Eligible Employee and he may not make Participant Contributions until the time he meets all of the requirements to become an Active Participant. Rollover Contributions made by an Eligible Employee or an Inactive Participant shall be credited to his Account. The part of the Participant's Account resulting from Rollover Contributions is fully (100%) vested and nonforfeitable at all times. A separate accounting record shall be maintained for that part of his Rollover Contributions consisting of voluntary contributions which were deducted from the Participant's gross income for Federal income tax purposes. SECTION 3.02--FORFEITURES. The Nonvested Account of a Participant shall be forfeited as of the earlier of the following: (a) the date the Participant dies (if prior to such date he had ceased to be an Employee), or (b) the Participant's Forfeiture Date. All or a portion of a Participant's Nonvested Account shall be forfeited before such earlier date if, after he ceases to be an Employee, he receives, or is deemed to receive, a distribution of his entire Vested Account or a distribution of his Vested Account derived from Employer Contributions which were not 100% vested when made, under the RETIREMENT BENEFITS SECTION of Article V, the VESTED BENEFITS SECTION of RESTATEMENT JANUARY 1, 2004 28 ARTICLE III (4-47951) Article V, or the SMALL AMOUNTS SECTION of Article X. The forfeiture shall occur as of the date the Participant receives, or is deemed to receive, the distribution. If a Participant receives, or is deemed to receive, his entire Vested Account, his entire Nonvested Account shall be forfeited. If a Participant receives a distribution of his Vested Account from Employer Contributions which were not 100% vested when made, but less than his entire Vested Account from such Contributions, the amount to be forfeited shall be determined by multiplying his Nonvested Account from such Contributions by a fraction. The numerator of the fraction is the amount of the distribution derived from Employer Contributions which were not 100% vested when made and the denominator of the fraction is his entire Vested Account derived from such Contributions on the date of distribution. A Forfeiture shall also occur as provided in the EXCESS AMOUNTS SECTION of this article. Forfeitures shall be determined at least once during each Plan Year. Forfeitures may first be used to pay administrative expenses. Forfeitures of Matching Contributions which relate to excess amounts as provided in the EXCESS AMOUNTS SECTION of this article, which have not been used to pay administrative expenses, shall be applied to reduce the earliest Matching Contributions made after the Forfeitures are determined. Any other Forfeitures which have not been used to pay administrative expenses shall be applied to reduce the earliest Matching Contributions made after the Forfeitures are determined. Upon their application to reduce Matching Contributions, Forfeitures shall be deemed to be Matching Contributions. If a Participant again becomes an Eligible Employee after receiving a distribution which caused all or a portion of his Nonvested Account to be forfeited, he shall have the right to repay to the Plan the entire amount of the distribution he received (excluding any amount of such distribution resulting from Contributions which were 100% vested when made). The repayment must be made in a single sum (repayment in installments is not permitted) before the earlier of the date five years after the date he again becomes an Eligible Employee or the end of the first period of five consecutive one-year Periods of Severance which begin after the date of the distribution. If the Participant makes the repayment above, the Plan Administrator shall restore to his Account an amount equal to his Nonvested Account which was forfeited on the date of distribution, unadjusted for any investment gains or losses. If no amount is to be repaid because the Participant was deemed to have received a distribution, or only received a distribution of Contributions which were 100% vested when made, and he again performs an Hour-of-Service as an Eligible Employee within the repayment period, the Plan Administrator shall restore the Participant's Account as if he had made a required repayment on the date he performed such Hour-of-Service. Restoration of the Participant's Account shall include restoration of all Code Section 411(d)(6) protected benefits with respect to that restored Account, according to applicable Treasury regulations. Provided, however, the Plan Administrator shall not restore the Nonvested Account if (i) a Forfeiture Date has occurred after the date of the distribution and on or before the date of repayment and (ii) that Forfeiture Date would result in a complete forfeiture of the amount the Plan Administrator would otherwise restore. The Plan Administrator shall restore the Participant's Account by the close of the Plan Year following the Plan Year in which repayment is made. Permissible sources for the restoration of the Participant's Account are Forfeitures or special Employer Contributions. Such special Employer Contributions shall be made without regard to profits. The repaid and restored amounts are not included in the Participant's Annual Additions, as defined in the CONTRIBUTION LIMITATION SECTION of this article. RESTATEMENT JANUARY 1, 2004 29 ARTICLE III (4-47951) SECTION 3.03--AllOCATION Elective Deferral Contributions shall be allocated to Participants for whom such Contributions are made under the EMPLOYER CONTRIBUTIONS SECTION of this article. Such Contributions shall be allocated when made and credited to the Participant's Account. Matching Contributions shall be allocated to the persons for whom such Contributions are made under the EMPLOYER CONTRIBUTIONS SECTION of this article. Such Contributions shall be allocated when made and credited to the person's Account. If Leased Employees are Eligible Employees, in determining the amount of Employer Contributions allocated to a person who is a Leased Employee, contributions provided by the leasing organization which are attributable to services such Leased Employee performs for the Employer shall be treated as provided by the Employer. Those contributions shall not be duplicated under this Plan. SECTION 3.04--CONTRIBUTION LIMITATION (a) Definitions. For the purpose of determining the contribution limitation set forth in this section, the following terms are defined. Annual Additions means the sum of the following amounts credited to a Participant's account for the Limitation Year: (1) employer contributions; provided that, ESOP Contributions under this Plan that are applied to pay interest on an exempt loan will not be an Annual Addition if no more than one-third (1/3rd) of the ESOP Contribution that is applied to pay principal or interest on an exempt loan for the Plan Year is allocated to Highly Compensated Employees; (2) employee contributions; and (3) forfeitures. Annual Additions to a defined contribution plan shall also include the following: (4) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Code Section 415(1)(2), which are part of a pension or annuity plan maintained by the Employer, (5) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits, allocated to the separate account of a key employee, as defined in Code Section 419A(d)(3), under a welfare benefit fund, as defined in Code Section 419(e), maintained by the Employer; and (6) allocations under a simplified employee pension, For this purpose, any Excess Amount applied under (e) and (k) below in the Limitation Year to reduce Employer Contributions shall be considered Annual Additions for such Limitation Year. RESTATEMENT JANUARY 1, 2004 30 ARTICLE III (4-47951) Compensation means wages within the meaning of Code Section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). For any Self-employed Individual, Compensation shall mean Earned Income. For purposes of applying the limitations of this section, Compensation for a Limitation Year is the Compensation actually paid or made available in gross income during such Limitation Year. For Limitation Years beginning after December 31, 1997, for purposes of applying the limitations of this section, Compensation paid or made available during such Limitation Year shall include any elective deferral (as defined in Code Section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reason of Code Section 125, 132(f)(4), or 457. Defined Contribution Dollar Limitation means, for Limitation Years beginning after December 31 1994, $30,000, as adjusted under Code Section 415(d). Employer means the employer that adopts this Plan, and all members of a controlled group of corporations (as defined in Code Section 414(b) as modified by Code Section 415(h)), all commonly controlled trades or businesses (as defined in Code Section 415(c) as modified by Code Section 415(h)) or affiliated service groups (as defined in Code Section 414(m)) of which the adopting employer is a part, and any other entity required to be aggregated with the employer pursuant to regulations under Code Section 414(o). Excess Amount means the excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. Limitation Year means the consecutive 12-month period ending on the last day of each Plan Year, including corresponding consecutive 12-month periods before January 1, 1985. If the Limitation Year is other than the calendar year, execution of this Plan (or any amendment to this Plan changing the Limitation Year) constitutes the Employer's adoption of a written resolution electing the Limitation Year. If the Limitation Year is amended to a different consecutive 12-month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. Maximum Permissible Amount means the maximum Annual Addition that may be contributed or allocated to a Participant's Account under the Plan for any Limitation Year. This amount shall not exceed the lesser of: (1) The Defined Contribution Dollar Limitation, or (2) 25 percent of the Participant's Compensation for the Limitation Year. The compensation limitation referred to in (2) shall not apply to any contribution for medical benefits (within the meaning of Code Section 401 (h) or 419A(f)(2)) which is otherwise treated as an Annual Addition under Code Section 415(1)(1) or 419A(d)(2). RESTATEMENT JANUARY 1, 2004 31 ARTICLE III (4-47951) If a short Limitation Year is created because of an amendment changing the Limitation Year to a different consecutive 12-month period, the Maximum Permissible Amount will not exceed the Defined Contribution Dollar Limitation multiplied by the following fraction: Number of months in the short Limitation Year --------------------------------------------- 12 (b) If the Participant does not participate in, and has never participated in, another qualified plan maintained by the Employer or a welfare benefit fund, as defined in Code Section 419(e), maintained by the Employer, or an individual medical account, as defined in Code Section 415(1)(2), maintained by the Employer, or a simplified employee pension, as defined in Code Section 408(k), maintained by the Employer, which provides an Annual Addition, the amount of Annual Additions which may be credited to the Participant's Account for any Limitation Year shall not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer Contribution that would otherwise be contributed or allocated to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated shall be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. (c) Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participant's Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. (d) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. (e) If a reasonable error in estimating a Participant's Compensation for the Limitation Year, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402(g)(3)) that may be made with respect to any individual under the limits of Code Section 415, or under other facts and circumstances allowed by the Internal Revenue Service, there is an Excess Amount, the excess will be disposed of as follows: (1) Any nondeductible Voluntary Contributions (plus attributable earnings), to the extent they would reduce the Excess Amount, will be returned (distributed, in the case of earnings) to the Participant. (2) If after the application of (1) above an Excess Amount still exists, any Elective Deferral Contributions that are not the basis for Matching Contributions (plus attributable earnings), to the extent they would reduce the Excess Amount, will be distributed to the Participant. (3) If after the application of (2) above an Excess Amount still exists, any Elective Deferral Contributions that are the basis for Matching Contributions (plus attributable earnings), to the extent they would reduce the Excess Amount, will be distributed to the Participant. Concurrently with the distribution of such Elective Deferral Contributions, any Matching Contributions which relate to any Elective Deferral Contributions distributed in the RESTATEMENT JANUARY 1, 2004 32 ARTICLE III (4-47951) preceding sentence, to the extent such application would reduce the Excess Amount, will be applied as provided in (4) or (5) below: (4) If after the application of (3) above an Excess Amount still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant's Account will be used to reduce Employer Contributions for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary. (5) If after the application of (3) above an Excess Amount still exists, and the Participant is not covered by the Plan at the end of the Limitation Year, the Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer Contributions for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary. (6) If a suspense account is in existence at any time during a Limitation Year pursuant to this (e), it will participate in the allocation of investment gains or losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participant's Accounts before any Employer Contributions or any Participant Contributions may be made to the Plan for that Limitation Year. Excess Amounts held in a suspense account may not be distributed to Participants or former Participants. (f) This (f) applies if, in addition to this Plan, the Participant is covered under another qualified defined contribution plan maintained by the Employer, a welfare benefit fund maintained by the Employer, an individual medical account maintained by the Employer, or a simplified employee pension maintained by the Employer which provides an Annual Addition during any Limitation Year. The Annual Additions which may be credited to a Participant's Account under this Plan for any such Limitation Year will not exceed the Maximum Permissible Amount, reduced by the Annual Additions credited to a Participant's account under the other qualified defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pensions for the same Limitation Year. If the Annual Additions with respect to the Participant under other qualified defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pensions maintained by the Employer are less than the Maximum Permissible Amount, and the Employer Contribution that would otherwise be contributed or allocated to the Participant's Account under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under all such plans and funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other qualified defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pensions in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant's Account under this Plan for the Limitation Year. (g) Prior to determining the Particidant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant in the manner described in (c) above. RESTATEMENT JANUARY 1, 2004 33 ARTICLE III (4-47951) (h) As soon as administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. (i) If pursuant to (h) above or as a result of the allocation of forfeitures or as a result of a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402(g)(3)) that may be made with respect to any individual under the limits of Code Section 415, a Participant's Annual Additions under this Plan and such other plans would result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a simplified employee pension will be deemed to have been allocated first, followed by Annual Additions to a welfare benefit fund or individual medical account, regardless of the actual allocation date. (j) If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of: (1) the total Excess Amount allocated as of such date, times (2) the ratio of (i) the Annual Addition allocated to the Participant for the Limitation Year as of such date under this Plan to (ii) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all other qualified defined contribution plans. (k) Any Excess Amount attributed to this Plan will be disposed of in the manner described in (e) above. SECTION 3.05--EXCESS AMOUNTS. (a) Definitions. For the purposes of this section, the following terms are defined: ACP means the average (expressed as a percentage) of the Contribution Percentages of the Eligible Participants in a group. ADP means the average (expressed as a percentage) of the Deferral Percentages of the Eligible Participants in a group. Aggregate Limit means the greater of: (1) The sum of: (i) 125 percent of the greater of the ADP of the Nonhighly Compensated Employees for the prior Plan Year or the ACP of the Nonhighly Compensated Employees under the plan subject to Code Section 401 (m) for the Plan Year beginning with or within the prior Plan Year of the cash or deferred arrangement, and (ii) the lesser of 200 percent or 2 percent plus the lesser of such ADP or ACP. RESTATEMENT JANUARY 1, 2004 34 ARTICLE III (4-47951) (2) The sum of: (i) 125 percent of the lesser of the ADP of the Nonhighly Compensated Employees for the prior Plan Year or the ACP of the Nonhighly Compensated Employees under the plan subject to Code Section 401(m) for the Plan Year beginning with or within the prior Plan Year of the cash or deferred arrangement, and (ii) the lesser of 200 percent or 2 percent plus the greater of such ADP or ACP. If the Employer has elected to use the current year testing method, then, in calculating the Aggregate Limit for a particular Plan Year, the Nonhighly Compensated Employees' ADP and ACP for that Plan Year, instead of the prior Plan Year, is used. Contribution Percentage means the ratio (expressed as a percentage) of the Eligible Participant's Contribution Percentage Amounts to the Eligible Participant's Compensation for the Plan Year (whether or not the Eligible Participant was an Eligible Participant for the entire Plan Year). For an Eligible Participant for whom such Contribution Percentage Amounts for the Plan Year are zero, the percentage is zero. Contribution Percentage Amounts means the sum of the Participant Contributions and Matching Contributions (that are not Qualified Matching Contributions taken into account for purposes of the ADP Test) made under the Plan on behalf of the Eligible Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Matching Contributions that are forfeited either to correct Excess Aggregate Contributions or because the Contributions to which they relate are Excess Elective Deferrals, Excess Contributions, or Excess Aggregate Contributions. Under such rules as the Secretary of the Treasury shall prescribe, in determining the Contribution Percentage the Employer may elect to include Qualified Nonelective Contributions under this Plan which were not used in computing the Deferral Percentage. The Employer may also elect to use Elective Deferral Contributions in computing the Contribution Percentage so long as the ADP Test is met before the Elective Deferral Contributions are used in the ACP Test and continues to be met following the exclusion of those Elective Deferral Contributions that are used to meet the ACP Test. Deferral Percentage means the ratio (expressed as a percentage) of Elective Deferral Contributions under this Plan on behalf of the Eligible Participant for the Plan Year to the Eligible Participant's Compensation for the Plan Year (whether or not the Eligible Participant was an Eligible Participant for the entire Plan Year). The Elective Deferral Contributions used to determine the Deferral Percentage shall include Excess Elective Deferrals (other than Excess Elective Deferrals of Nonhighly Compensated Employees that arise solely from Elective Deferral Contributions made under this Plan or any other plans of the Employer or a Controlled Group member), but shall exclude Elective Deferral Contributions that are used in computing the Contribution Percentage (provided the ADP Test is satisfied both with and without exclusion of these Elective Deferral Contributions). Under such rules as the Secretary of the Treasury shall prescribe, the Employer may elect to include Qualified Nonelective Contributions and Qualified Matching Contributions under this Plan in computing the Deferral Percentage. For an Eligible Participant for whom such contributions on his behalf for the Plan Year are zero, the percentage is zero. RESTATEMENT JANUARY 1, 2004 35 ARTICLE III (4-47951) Elective Deferral Contributions means any employer contributions made to a plan at the election of a participant, in lieu of cash compensation, and shall include contributions made pursuant to a salary reduction agreement or other deferral mechanism. With respect to any taxable year, a participant's Elective Deferral Contributions are the sum of all employer contributions made on behalf of such participant pursuant to an election to defer under any qualified cash or deferred arrangement described in Code Section 401 (k), any salary reduction simplified employee pension plan described in Code Section 408(k)(6), any SIMPLE IRA plan described in Code Section 408(p), any eligible deferred compensation plan under Code Section 457, any plan described under Code Section 501(c)(18), and any employer contributions made on behalf of a participant for the purchase of an annuity contract under Code Section 403(b) pursuant to a salary reduction agreement. Elective Deferral Contributions shall not include any deferrals properly distributed as excess annual additions. Eligible Participant means, for purposes of determining the Deferral Percentage, any Employee who is otherwise entitled to make Elective Deferral Contributions under the terms of the Plan for the Plan Year. Eligible Participant means, for purposes of determining the Contribution Percentage, any Employee who is eligible (i) to make a Participant Contribution or an Elective Deferral Contribution (if the Employer takes such contributions into account in the calculation of the Contribution Percentage), or (ii) to receive a Matching Contribution (including forfeitures) or a Qualified Matching Contribution. If a Participant Contribution is required as a condition of participation in the Plan, any Employee who would be a Participant in the Plan if such Employee made such a contribution shall be treated as an Eligible Participant on behalf of whom no Participant Contributions are made. Excess Aggregate Contributions means, with respect to any Plan Year, the excess of: (1) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over (2) The maximum Contribution Percentage Amounts permitted by the ACP Test (determined by hypothetically reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages). Such determination shall be made after first determining Excess Elective Deferrals and then determining Excess Contributions. Excess Contributions means, with respect to any Plan Year, the excess of: (1) The aggregate amount of employer contributions actually taken into account in computing the Deferral Percentage of Highly Compensated Employees for such Plan Year, over (2) The maximum amount of such contributions permitted by the ADP Test {determined by hypothetically reducing contributions made on behalf of Highly Compensated Employees in the order of the Deferral Percentages, beginning with the highest of such percentages). Such determination shall be made after first determining Excess Elective Deferrals. RESTATEMENT JANUARY 1, 2004 36 ARTICLE III (4-47951) Excess Elective Deferrals means those Elective Deferral Contributions that are includible in a Participant's gross income under Code Section 402(g) to the extent such Participant's Elective Deferral Contributions for a taxable year exceed the dollar limitation under such Code section. Excess Elective Deferrals shall be treated as Annual Additions, as defined in the CONTRIBUTION LIMITATION SECTION of this article, under the Plan, unless such amounts are distributed no later than the first April 15 following the close of the Participant's taxable year. Matching Contributions means employer contributions made to this or any other defined contribution plan, or to a contract described in Code Section 403(b), on behalf of a participant on account of a Participant Contribution made by such participant, or on account of a participant's Elective Deferral Contributions, under a plan maintained by the Employer or a Controlled Group member. Participant Contributions means contributions made to the plan by or on behalf of a participant that are included in the participant's gross income in the year in which made and that are maintained under a separate account to which the earnings and losses are allocated. Qualified Matching Contributions means Matching Contributions which are subject to the distribution and nonforfeitability requirements under Code Section 401(k) when made. Qualified Nonelective Contributions means any employer contributions (other than Matching Contributions) which an employee may not elect to have paid to him in cash instead of being contributed to the plan and which are subject to the distribution and nonforfeitability requirements under Code Section 401(k) when made. (b) Excess Elective Deferrals. A Participant may assign to this Plan any Excess Elective Deferrals made during a taxable year of the Participant by notifying the Plan Administrator in writing on or before the first following March 1 of the amount of the Excess Elective Deferrals to be assigned to the Plan. A Participant is deemed to notify the Plan Administrator of any Excess Elective Deferrals that arise by taking into account only those Elective Deferral Contributions made to this Plan and any other plan of the Employer or a Controlled Group member. The Participant's claim for Excess Elective Deferrals shall be accompanied by the Participant's written statement that if such amounts are not distributed, such Excess Elective Deferrals will exceed the limit imposed on the Participant by Code Section 402(g) for the year in which the deferral occurred. The Excess Elective Deferrals assigned to this Plan cannot exceed the Elective Deferral Contributions allocated under this Plan for such taxable year. Notwithstanding any other provisions of the Plan, Elective Deferral Contributions in an amount equal to the Excess Elective Deferrals assigned to this Plan, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 to any Participant to whose Account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. The Excess Elective Deferrals shall be adjusted for income or loss. The income or loss allocable to such Excess Elective Deferrals shall be equal to the income or loss allocable to the Participant's Elective Deferral Contributions for the taxable year in which the excess occurred multiplied by a fraction. The numerator of the fraction is the Excess Elective Deferrals. The denominator of the fraction is the closing balance without regard to any income or loss occurring during such taxable RESTATEMENT JANUARY 1, 2004 37 ARTICLE III (4-47951) year (as of the end of such taxable year) of the Participant's Account resulting from Elective Deferral Contributions. Any Matching Contributions which were based on the Elective Deferral Contributions which are distributed as Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be forfeited. (c) ADP Test. As of the end of each Plan Year after Excess Elective Deferrals have been determined, the Plan must satisfy the ADP Test. The ADP Test shall be satisfied using the prior year testing method, unless the Employer has elected to use the current year testing method. (1) Prior Year Testing Method. The ADP for a Plan Year for Eligible Participants who are Highly Compensated Employees for each Plan Year and the prior year's ADP for Eligible Participants who were Nonhighly Compensated Employees for the prior Plan Year must satisfy one of the following tests: (i) The ADP for a Plan Year for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior year's ADP for Eligible Participants who were Nonhighly Compensated Employees for the prior Plan Year multiplied by 1.25; or (ii) The ADP for a Plan Year for Eligible Participants who are Highly Compensated Employees for the Plan Year: A. shall not exceed the prior year's ADP for Eligible Participants who were Nonhighly Compensated Employees for the prior Plan Year multiplied by 2, and B. the difference between such ADPs is not more than 2. If this is not a successor plan, for the first Plan Year the Plan permits any Participant to make Elective Deferral Contributions, for purposes of the foregoing tests, the prior year's Nonhighly Compensated Employees' ADP shall be 3 percent, unless the Employer has elected to use the Plan Year's ADP for these Eligible Participants. (2) Current Year Testing Method. The ADP for a Plan Year for Eligible Participants who are Highly Compensated Employees for each Plan Year and the ADP for Eligible Participants who are Nonhighly Compensated Employees for the Plan Year must satisfy one of the following tests: (i) The ADP for a Plan Year for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Eligible Participants who are Nonhighly Compensated Employees for the Plan Year multiplied by 1.25; or RESTATEMENT JANUARY 1, 2004 38 ARTICLE III (4-47951) (ii) The ADP for a Plan Year for Eligible Participants who are Highly Compensated Employees for the Plan Year: A. shall not exceed the ADP for Eligible Participants who are Nonhighly Compensated Employees for the Plan Year multiplied by 2, and B. the difference between such ADP's is not more than 2. If the Employer has elected to use the current year testing method, that election cannot be changed unless (i) the Plan has been using the current year testing method for the preceding five Plan Years, or if less, the number of Plan Years the Plan has been in existence; or (ii) the Plan otherwise meets one of the conditions specified in Internal Revenue Service Notice 98-1 (or superseding guidance) for changing from the current year testing method. A Participant is a Highly Compensated Employee for a particular Plan Year if he meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Nonhighly Compensated Employee for a particular Plan Year if he does not meet the definition of a Highly Compensated Employee in affect for that Plan Year. The Deferral Percentage for any Eligible Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferral Contributions (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferral Contributions for purposes of the ADP Test) allocated to his account under two or more arrangements described in Code Section 401(k) that are maintained by the Employer or a Controlled Group member shall be determined as if such Elective Deferral Contributions (and, if applicable, such Qualified Nonelective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. The foregoing notwithstanding, certain plans shall be treated as separate if mandatorily disaggregated under the regulations of Code Section 401(k). In the event this Plan satisfies the requirements of Code Section 401(k), 401(a)(4), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Code sections only if aggregated with this Plan, then this section shall be applied by determining the Deferral Percentage of Employees as if all such plans were a single plan. Any adjustments to the Nonhighly Compensated Employee ADP for the prior year shall be made in accordance with Internal Revenue Service Notice 98-1 (or superseding guidance), unless the Employer has elected to use the current year testing method. Plans may be aggregated in order to satisfy Code Section 401(k) only if they have the same plan year and use the same testing method for the ADP Test. For purposes of the ADP Test, Elective Deferral Contributions, Qualified Nonelective Contributions, and Qualified Matching Contributions must be made before the end of the 12-month period immediately following the Plan Year to which the contributions relate. RESTATEMENT JANUARY 1, 2004 39 ARTICLE III (4-47951) The Employer shall maintain records sufficient to demonstrate satisfaction of the ADP Test and the amount of Qualified Nonelective Contributions or Qualified Matching Contributions, or both, used in such test. If the Plan Administrator should determine during the Plan Year that the ADP Test is not being met, the Plan Administrator may limit the amount of future Elective Deferral Contributions of the Highly Compensated Employees. Notwithstanding any other provisions of this Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose Accounts such Excess Contributions were allocated for the preceding Plan Year. Excess Contributions are allocated to the Highly Compensated Employees with the largest amounts of employer contributions taken into account in calculating the ADP Test for the year in which the excess arose, beginning with the Highly Compensated Employee with the largest amount of such employer contributions and continuing in descending order until all of the Excess Contributions have been allocated. For purposes of the preceding sentence, the "largest amount" is determined after distribution of any Excess Contributions. If such excess amounts are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, a 10 percent excise tax shall be imposed on the employer maintaining the plan with respect to such amounts. Excess Contributions shall be treated as Annual Additions, as defined in the CONTRIBUTION LIMITATION SECTION of this article. The Excess Contributions shall be adjusted for income or loss. The income or loss allocable to such Excess Contributions allocated to each Participant shall be equal to the income or loss allocable to the Participant's Elective Deferral Contributions (and, if applicable, Qualified Nonelective Contributions or Qualified Matching Contributions, or both) for the Plan Year in which the excess occurred multiplied by a fraction. The numerator of the fraction is the Excess Contributions. The denominator of the fraction is the closing balance without regard to any income or loss occurring during such Plan Year (as of the end of such Plan Year) of the Participant's Account resulting from Elective Deferral Contributions (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if such contributions are included in the ADP Test). Excess Contributions allocated to a Participant shall be distributed from the Participant's Account resulting from Elective Deferral Contributions. If such Excess Contributions exceed the balance in the Participant's Account resulting from Elective Deferral Contributions, the balance shall be distributed from the Participant's Account resulting from Qualified Matching Contributions (if applicable) and Qualified Nonelective Contributions, respectively. Any Matching Contributions which were based on the Elective Deferral Contributions which are distributed as Excess Contributions, plus any income and minus any loss allocable thereto, shall be forfeited. (d) ACP Test. As of the end of each Plan Year, the Plan must satisfy the ACP Test. The ACP Test shall be satisfied using the prior year testing method, unless the Employer has elected to use the current year testing method. RESTATEMENT JANUARY 1, 2004 40 ARTICLE III (4-47951) (1) Prior Year Testing Method. The ACP for a Plan Year for Eligible Participants who are Highly Compensated Employees for each Plan Year and the prior year's ACP for Eligible Participants who were Nonhighly Compensated Employees for the prior Plan Year must satisfy one of the following tests: (i) The ACP for the Plan Year for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior year's ACP for Eligible Participants who were Nonhighly Compensated Employees for the prior Plan Year multiplied by 1.25; or (ii) The ACP for a Plan Year for Eligible Participants who are Highly Compensated Employees for the Plan Year: A. shall not exceed the prior year's ACP for Eligible Participants who were Nonhighly Compensated Employees for the prior Plan Year multiplied by 2, and B. the difference between such ACPs is not more than 2. If this is not a successor plan, for the first Plan Year the Plan permits any Participant to make Participant Contributions, provides for Matching Contributions, or both, for purposes of the foregoing tests, the prior year's Nonhighly Compensated Employees' ACP shall be 3 percent, unless the Employer has elected to use the Plan Year's ACP for these Eligible Participants. (2) Current Year Testing Method. The ACP for a Plan Year for Eligible Participants who are Highly Compensated Employees for each Plan Year and the ACP for Eligible Participants who are Nonhighly Compensated Employees for the Plan Year must satisfy one of the following tests: (i) The ACP for a Plan Year for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Eligible Participants who are Nonhighly Compensated Employees for the Plan Year multiplied by 1.25; or (ii) The ACP for a Plan Year for Eligible Participants who are Highly Compensated Employees for the Plan Year: A. shall not exceed the ACP for Eligible Participants who are Nonhighly Compensated Employees for the Plan Year multiplied by 2, and B. the difference between such ACPs is not more than 2. If the Employer has elected to use the current year testing method, that election cannot be changed unless (i) the Plan has been using the current year testing method for the preceding five Plan Years, or if less, the number of Plan Years the Plan has been in existence; or (ii) the Plan otherwise meets one of the conditions specified in Internal Revenue Service Notice 98-1 (or superseding guidance) for changing from the current year testing method. RESTATEMENT JANUARY 1, 2004 41 ARTICLE III (4-47951) A Participant is a Highly Compensated Employee for a particular Plan Year if he meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Nonhighly Compensated Employee for a particular Plan Year if he does not meet the definition of a Highly Compensated Employee in effect for that Plan Year. Multiple Use. If one or more Highly Compensated Employees participate in both a cash or deferred arrangement and a plan subject to the ACP Test maintained by the Employer or a Controlled Group member, and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the Contribution Percentage of those Highly Compensated Employees who also participate in a cash or deferred arrangement will be reduced in the manner described below for allocating Excess Aggregate Contributions so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP Test and ACP Test and are deemed to be the maximum permitted under such tests for the Plan Year. Multiple use does not occur if either the ADP or ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP, respectively, of the Nonhighly Compensated Employees. The Contribution Percentage for any Eligible Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Contribution Percentage Amounts allocated to his account under two or more plans described in Code Section 401(a) or arrangements described in Code Section 401(k) that are maintained by the Employer or a Controlled Group member shall be determined as if the total of such Contribution Percentage Amounts was made under each plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. The foregoing notwithstanding, certain plans shall be treated as separate if mandatorily disaggregated under the regulations of Code Section 401(m). In the event this Plan satisfies the requirements of Code Section 401(m), 401(a)(4), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Code sections only if aggregated with this Plan, then this section shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. Any adjustments to the Nonhighly Compensated Employee ACP for the prior year shall be made in accordance with Internal Revenue Service Notice 98-1 (or superseding guidance), unless the Employer has elected to use the current year testing method. Plans may be aggregated in order to satisfy Code Section 401(m) only if they have the same plan year and use the same testing method for the ACP Test. For purposes of the ACP Test, Participant Contributions are considered to have been made in the Plan Year in which contributed to the Plan. Matching Contributions and Qualified Nonelective Contributions will be considered to have been made for a Plan Year if made no later than the end of the 12-month period beginning on the day after the close of the Plan Year. The Employer shall maintain records sufficient to demonstrate satisfaction of the ACP Test and the amount of Qualified Nonelective Contributions or Qualified Matching Contributions, or both, used in such test. RESTATEMENT JANUARY 1, 2004 42 ARTICLE III (4-47951) Notwithstanding any other provisions of this Plan. Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if not vested, or distributed, if vested, no later than the last day of each Plan Year to Participants to whose Accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. Excess Aggregate Contributions are allocated to the Highly Compensated Employees with the largest Contribution Percentage Amounts taken into account in calculating the ACP Test for the year in which the excess arose, beginning with the Highly Compensated Employee with the largest amount of such Contribution Percentage Amounts and continuing in descending order until all of the Excess Aggregate Contributions have been allocated. For purposes of the preceding sentence, the "largest amount" is determined after distribution of any Excess Aggregate Contributions. If such Excess Aggregate Contributions are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, a 10 percent excise tax shall be imposed on the employer maintaining the plan with respect to such amounts. Excess Aggregate Contributions shall be treated as Annual Additions, as defined in the CONTRIBUTION LIMITATION SECTION of this article. The Excess Aggregate Contributions shall be adjusted for income or loss. The income or loss allocable to such Excess Aggregate Contributions allocated to each Participant shall be equal to the income or loss allocable to the Participant's Contribution Percentage Amounts for the Plan Year in which the excess occurred multiplied by a fraction. The numerator of the fraction is the Excess Aggregate Contributions. The denominator of the fraction is the closing balance without regard to any income or loss occurring during such Plan Year (as of the end of such Plan Year) of the Participant's Account resulting from Contribution Percentage Amounts. Excess Aggregate Contributions allocated to a Participant shall be distributed from the Participant's Account resulting from Participant Contributions that are not required as a condition of employment or participation or for obtaining additional benefits from Employer Contributions. If such Excess Aggregate Contributions exceed the balance in the Participant's Account resulting from such Participant's Contributions, the balance shall be forfeited, if not vested, or distributed, if vested, on a pro-rata basis from the Participant's Account resulting from Contribution Percentage Amounts. (e) Employer Elections. The Employer has not made an election to use the current year testing method. SECTION 3.06--PROHIBITED ALLOCATIONS OF QUALIFYING EMPLOYER SECURITIES. Notwithstanding any contrary provision of the Plan, Qualifying Employer Securities will not be allocated under the following circumstances. (a) Sale under Code Section 1042. If Qualifying Employer Securities that have been acquired by the Plan in a sale to which Code Section 1042 applies shall not be allocated during the non-allocation period directly or indirectly under the Plan (or any qualified plan of any Employer) to the Accounts of: (1) The individual who makes the election under Code Section 1042 RESTATEMENT JANUARY 1, 2004 43 ARTICLE III (4-47951) (2) Any individual who is related (within the meaning of Code Section 267(b)) to the individual who makes the election under Code Section 1042. However, this paragraph shall not apply to lineal descendents of the individual who makes the election under Code Section 1042, provided that the aggregate amount allocated to the benefit of such lineal descendents during the non-allocation period does not exceed more than five percent (5%) of the Qualifying Employer Securities (or amounts allocated in lieu thereof) held by the Plan which are attributable to a sale to the Plan by any person related to such descendents (within the meaning of Code Section 267(c)(4)) in a transaction subject to Code Section 1042. The "non-allocation period" is the period for this purpose beginning on the date of the sale of the Qualifying Employer Securities to the Plan and ending on the later of the date which is ten (10) years after the date of sale or the date of the allocation attributable to the final payment of an exempt loan incurred in connection with such sale to the Plan. Further, notwithstanding any contrary provision of the Plan. Qualifying Employer Securities that have been acquired by the Plan in a sale to which Code Section 1042 applies shall not be allocated, during or after the non-allocation period, directly or indirectly under the Plan (or any qualified plan of any Employer) to the Account of any individual who owns (after application of the aggregation rules of Code Section 318(a) applied without regard to the employee trust exception in Code Section 318(a)(2)(B)(1)) more than twenty-five percent (25%) of any class of outstanding stock of any Employer, or the total value of any class of outstanding stock of the Employer. (b) S-Corporation Shareholders. For Plan Years beginning after December 31, 2004, if the Plan holds Qualifying Employer Securities of an S Corporation, no allocations on such Qualifying Employer Securities shall be made to disqualified persons during any nonallocation year. The terms "disqualified person" and "nonallocation year" shall have the meaning set forth under Code Section 409(p). RESTATEMENT JANUARY 1, 2004 44 ARTICLE III (4-47951) ARTICLE IV INVESTMENT OF CONTRIBUTIONS SECTION 4.01--INVESTMENT AND TIMING OF CONTRIBUTIONS. The handling of Contributions is governed by the provisions of the Trust Agreement, the Annuity Contract, and any other funding arrangement in which the Plan Fund is or may be held or invested. To the extent permitted by the Trust Agreement, Annuity Contract, or other funding arrangement, the parties named below shall direct the Contributions to the guaranteed benefit policy portion of the Annuity Contract, any of the investment options available under the Annuity Contract, or any of the investment vehicles available under the Trust Agreement and may request the transfer of amounts resulting from those Contributions between such investment options and investment vehicles or the transfer of amounts between the guaranteed benefit policy portion of the Annuity Contract and such investment options and investment vehicles. A Participant may not direct the Trustee or Insurer to invest the Participant's Account in collectibles. Collectibles mean any work of art, rug or antique, metal or gem, stamp or coin, alcoholic beverage, or other tangible personal property specified by the Secretary of the Treasury. However, for tax years beginning after December 31, 1997, certain coins and bullion as provided in Code Section 408(m)(3) shall not be considered collectibles. To the extent that a Participant who has investment direction fails to give timely direction, the Primary Employer shall direct the investment of his Account. If the Primary Employer has investment direction, such Account shall be invested ratably in the guaranteed benefit policy portion of the Annuity Contract, the investment options available under the Annuity Contract, or the investment vehicles available under the Trust Agreement in the same manner as the Accounts of all other Participants who do not direct their investments. The Primary Employer shall have investment direction for amounts which have not been allocated to Participants. To the extent an investment is no longer available, the Primary Employer may require that amounts currently held in such investment be reinvested in other investments. At least annually, the Named Fiduciary shall review all pertinent Employee information and Plan data in order to establish the funding policy of the Plan and to determine appropriate methods of carrying out the Plan's objectives. The Named Fiduciary shall inform the Trustee and any Investment Manager of the Plan's short-term and long-term financial needs so the investment policy can be coordinated with the Plan's financial requirements. (a) Employer Contributions other than Elective Deferral Contributions: The Participant shall direct the investment of such Employer Contributions and transfer of amounts resulting from those Contributions. (b) Elective Deferral Contributions: The Participant shall direct the investment of Elective Deferral Contributions and transfer of amounts resulting from those Contributions. (c) Participant Contributions: The Participant shall direct the investment of Participant Contributions and transfer of amounts resulting from those Contributions. (d) Rollover Contributions: The Participant shall direct the investment of Rollover Contributions and transfer of amounts resulting from those Contributions. RESTATEMENT JANUARY 1, 2004 45 ARTICLE IV (4-47951) However, the Named Fiduciary may delegate to the Investment Manager investment discretion for Contributions and amounts which are not subject to Participant direction. The Employer shall pay to the Insurer or Trustee, as applicable, the Elective Deferral Contributions for each Plan Year not later than the end of the 12-month period immediately following the Plan Year for which they are deemed to be paid. All Contributions are forwarded by the Employer to the Trustee to be deposited in the Trust Fund or to the Insurer to be deposited under the Annuity Contract, as applicable. Contributions that are accumulated through payroll deduction shall be paid to the Trustee or Insurer, as applicable, by the earlier of (i) the date the Contributions can reasonably be segregated from the Employer's assets, or (ii) the 15th business day of the month following the month in which the Contributions would otherwise have been paid in cash to the Participant. SECTION 4.01A--INVESTMENT IN QUALIFYING EMPLOYER SECURITIES. (a) ESOP Designation. The portion of the Plan that consists of the Qualifying Employer Securities Fund, and the ESOP Subaccounts is a stock bonus plan and an employee stock ownership plan (within the meaning of Code Section 4975(e)(7)) and is designed to invest primarily in Qualifying Employer Securities. All shares of Qualifying Employer Securities held under the Plan will be held in the Trust Fund in the name of the Trustee or the nominee of the Trustee. (b) Investment Elections and Diversification. A Participant, Beneficiary or Alternate Payee may direct that all or any portion of his Account be invested in the Qualifying Employer Securities Fund. Because investment in the Qualifying Employer Securities Fund of amounts attributable to Elective Deferral Contributions can occur only at the direction of a Participant, Beneficiary or Alternate Payee, the Plan is exempt from the ten percent (10%) limit under ERISA Section 407. Up to one hundred percent of the Investment Fund may be invested in the Qualifying Employer Securities Fund if so directed by the Participant, Beneficiaries and Alternate Payees. The following rules will apply: (1) Investments in Employer Stock. A Participant. Beneficiary or Alternate Payee may direct any account balance resulting from Contributions to be invested in the Qualifying Employer Securities Fund. Any such direction with respect to the existing balance of his Account shall be drawn from the Non-ESOP Subaccounts of the various source accounts prorata based on the balance of such Non-ESOP Subaccounts. Any such direction given by a Participant with respect to his Contributions will be deemed to be an election to have such Contributions deposited into the Non-ESOP Subaccounts and immediately transferred to the ESOP Subaccounts {that is, Contributions will not be directly deposited into the ESOP Subaccounts, but instead shall be immediately drawn from the Non-ESOP Subaccounts into which they are deemed to be deposited), and shall be drawn from the Non-ESOP Subaccounts of the various source accounts prorata based on the Contributions being credited to such Non-ESOP Subaccounts. (2) Diversification of Employer Stock Investments into Other Investment Options. A Participant, Beneficiary or Alternate Payee may direct that all or any number of the shares of Qualifying Employer Securities credited to his ESOP Subaccounts be converted to cash and reinvested in the other investment options then available under the Plan. Any such reinvestment shall be drawn from the ESOP Subaccounts of the various source accounts prorata based on the balance of such ESOP Subaccounts. Any direction to convert shares of Qualifying Employer Securities to cash RESTATEMENT JANUARY 1, 2004 46 ARTICLE IV (4-47951) and reinvest the proceeds in the other investment options then available under the Plan will be effectuated as soon as administratively practicable after the direction is received, taking into account the time necessary to receive cash upon settlement of a securities trade (current T+3). Investment and reinvestment directions may be given with such frequency as is deemed appropriate by the Plan Administrator and must be made in such percentage or dollar increments, in such manner and in accordance with such rules as may be prescribed for this purpose by the Plan Administrator (including by means of a voice response or other electronic system under circumstances so authorized by the Plan Administrator). Investment and reinvestment directions will be processed in accordance with the then current procedures of the Plan and shall be subject to the provisions of Section 4.01. (c) Dividends. Cash dividends paid on shares of Qualifying Employer Securities credited to an ESOP Subaccount of a Participant, Beneficiary or Alternate Payee as of the record date of such dividend will be: (1) Paid to the Participant, Beneficiary or Alternate Payee if so elected under the procedure outlined below; or (2) Otherwise, added to balance of his Account as soon as administratively practicable after such dividends are paid into the Trust Fund. A Participant, Beneficiary or Alternate Payee may elect to have cash dividends on shares of Qualifying Employer Securities credited to his ESOP Subaccounts either paid to him in cash or added to the balance of his Account and reinvested in Qualifying Employer Securities. Cash dividends that the Participant, Beneficiary or Alternate Payee elects to receive in cash will be paid on or as soon as administratively practicable following the payable date of such dividend. Cash dividends that the Participant, Beneficiary or Alternate Payee elects to have reinvested in Qualifying Employer Securities will be credited to the source Account to which the shares of Qualifying Employer Securities were credited as of the record date, or, in the case of the source account reflecting Matching Contributions or ESOP Contributions, the dividends will be credited to a separate source account that reflects only such cash dividends, and shall be reinvested in additional shares of Qualifying Employer Securities on or as soon as administratively practicable following the payable date of such dividend (regardless of the election otherwise then in effect with respect to investment in Qualifying Employer Securities). Shares of Qualifying Employer Securities shall be deemed to be credited to the ESOP Subaccount of a Participant, Beneficiary or Alternate Payee as of the record date of a dividend if they are credited to his ESOP Subaccount as of the close of the day prior to the ex-date of such dividend (or, if the ex-date is after the record date, as of the close of the day prior to the record date). An election hereunder must be made in such manner and in accordance with such rules as may be prescribed for this purpose by the Plan Administrator (including by means of a voice response or other electronic system under circumstances so authorized by the Plan Administrator). In the absence of an affirmation election received by the deadline established for this purpose by the Plan Administrator, a Participant, Beneficiary or Alternate Payee will be deemed to have elected to have cash dividends added to his Account and reinvested in Qualifying Employer Securities. To the extent so prescribed by the Plan Administrator, an election hereunder will be "evergreen" - that is, it will continue to apply until changed by the Participant, Beneficiary or Alternate Payee. Under the rules prescribed by the Plan Administrator, RESTATEMENT JANUARY 1, 2004 47 ARTICLE IV (4-47951) a Participant, Beneficiary or Alternate Payee shall be allowed to revise his election no less than once a year, and if there is a change in the terms of the Plan governing the manner in which dividends are paid or distributed, a Participant, Beneficiary or Alternate Payee shall be allowed a reasonable opportunity to make a new election. The Account of a Participant, Beneficiary or Alternate Payee may be charged with the distribution costs (for example, the actual check-writing fee) of any distribution made at his election under this subsection (c). (d) Valuation of Qualifying Employer Securities. For purposes of determining the annual valuation of the Plan, and for reporting to Participants and regulatory authorities, the assets of the Plan shall be valued at least annually on the Valuation Date which corresponds to the last day of the Plan Year. The fair market value of Qualifying Employer Securities shall be determined on such Valuation Date. The prices of Qualifying Employer Securities as of the date of the transaction shall apply for purposes of valuing distributions and other transactions of the Plan to the extent such value is representative of the fair market value of such securities in the opinion of the Plan Administrator. The value of a Participant's Account held in the Qualifying Employer Securities Fund may be expressed in units. If the Qualifying Employer Securities are not publicly traded, or if an extremely thin market exists for such securities so that reasonable valuation may not be obtained from the market place, then such securities must be valued at least annually by an independent appraiser who is not associated with the Employer, the Plan Administrator, the Trustee, or any person related to any fiduciary under the Plan. The independent appraiser may be associated with a person who is merely a contract administrator with respect to the Plan, but who exercises no discretionary authority and is not a plan fiduciary. If there is a public market for Qualifying Employer Securities of the type held by the Plan, then the Plan Administrator may use as the value of the securities the price at which such securities trade in such market. If the Qualifying Employer Securities do not trade on the relevant date, or if the market is very thin on such date, then the Plan Administrator may use for the valuation the next preceding trading day on which the trading prices are representative of the fair market value of such securities in the opinion of the Plan Administrator. (e) Purchases or Sales of Qualifying Employer Securities. The Plan Administrator may direct the Trustee to sell, resell, or otherwise dispose of Qualifying Employer Securities to any person, including the Employer, provided that any such sales to any disqualified person or party-in-interest, including the Employer, will be made at not less than the fair market value and no commission will be charged. Any such sale shall be made in conformance with ERISA Section 408(e). If it is necessary to purchase Qualifying Employer Securities for the Trust Fund, such purchase may be on the open market or from the Employer or any member of the Controlled Group. All purchases of Qualifying Employer Securities shall be made at a price, or prices, which, in the judgement of the Plan Administrator, do not exceed the fair market value of such securities. If shares are purchased from or sold to the Employer or a member of the Controlled Group, the purchase or sale will be made at the price determined under paragraph (e) above. In the event that the Trustee acquires Qualifying Employer Securities by purchase from a "disqualified person" as defined in Code Section 4975(e)(2) or from a "party-in-interest" as defined in ERISA Section 3(14), the terms of such purchase shall contain the provision that in the event there is a final determination by the Internal Revenue Service, the Department of Labor, or court of competent jurisdiction that the fair market value of such securities as of the date of purchase was less than the purchase price paid by the Trustee, then the seller shall pay or transfer, as the case may be, to the Trustee an amount of cash or RESTATEMENT JANUARY 1, 2004 48 ARTICLE IV (4-47951) shares of Qualifying Employer Securities equal in value to the difference between the purchase price and such fair market value for all such shares. In the event that cash or shares of Qualifying Employer Securities are paid or transferred to the Trustee under this provision, such securities shall be valued at their fair market value as of the date of such purchase, and interest at a reasonable rate from the date of purchase to the date of payment or transfer shall be paid by the seller on the amount of cash paid. (f) Compliance with Securities Laws. The Employer is responsible for compliance with any applicable Federal or state securities law with respect to all aspects of the Plan except for the Trustee's obligation to report its ownership of Qualifying Employer Securities. If the Qualifying Employer Securities or interest in this Plan are required to be registered in order to permit investment in the Qualifying Employer Securities Fund as provided in this section, then such investment will not be effective until the later of the effective date of the Plan or the date such registration or qualification is effective. The Employer, at its own expense, will take or cause to be taken any and all such actions as may be necessary or appropriate to effect such registration or qualification. Further, if the Trustee is directed to dispose of any Qualifying Employer Securities held under the Plan under circumstances which require registration or qualification of the securities under applicable Federal or state securities laws, then the Employer will, at its own expense, take or cause to be taken any and all such action as may be necessary or appropriate to effect such registration or qualification. The Employer is responsible for all compliance requirements under Section 16 of the Securities Act. RESTATEMENT JANUARY 1, 2004 49 ARTICLE IV (4-47951) ARTICLE V BENEFITS SECTION 5.01--RETIREMENT BENEFITS. On a Participant's Retirement Date, his Vested Account shall be distributed to him according to the distribution of benefits provisions of Article VI and the provisions of the SMALL AMOUNTS SECTION of Article X. SECTION 5.02--DEATH BENEFITS. If a Participant dies before his Annuity Starting Date, his Vested Account shall be distributed according to the distribution of benefits provisions of Article VI and the provisions of the SMALL AMOUNTS SECTION of Article X. SECTION 5.03--VESTED BENEFITS. If an Inactive Participant's Vested Account is not payable under the SMALL AMOUNTS SECTION of Article X, he may elect, but is not required, to receive a distribution of his Vested Account after he ceases to be an Employee. The Participant's election shall be subject to his spouse's consent as provided in the ELECTION PROCEDURES SECTION of Article VI. A distribution under this paragraph shall be a retirement benefit and shall be distributed to the Participant according to the distribution of benefits provisions of Article VI. A Participant may not elect to receive a distribution under the provisions of this section after he again becomes an Employee until he subsequently ceases to be an Employee and meets the requirements of this section. If an Inactive Participant does not receive an earlier distribution, upon his Retirement Date or death, his Vested Account shall be distributed according to the provisions of the RETIREMENT BENEFITS SECTION or the DEATH BENEFITS SECTION of Article V. The Nonvested Account of an Inactive Participant who has ceased to be an Employee shall remain a part of his Account until it becomes a Forfeiture. However, if he again becomes an Employee so that his Vesting Percentage can increase, the Nonvested Account may become a part of his Vested Account. SECTION 5.04--WHEN BENEFITS START (a) Unless otherwise elected, benefits shall begin before the 60th day following the close of the Plan Year in which the latest date below occurs: (1) The date the Participant attains age 65 (or Normal Retirement Age, if earlier) (2) The 10th anniversary of the Participant's Entry Date RESTATEMENT JANUARY 1, 2004 50 ARTICLE V (4-47951) (3) The date the Participant ceases to be an Employee Notwithstanding the foregoing, the failure of a Participant and spouse to consent to a distribution while a benefit is immediately distributable, within the meaning of the ELECTION PROCEDURES SECTION of Article VI, shall be deemed to be an election to defer the start of benefits sufficient to satisfy this section. The Participant may elect to have his benefits begin after the latest date for beginning benefits described above, subject to the following provisions of this section. The Participant shall make the election in writing. Such election must be made before his Normal Retirement Date or the date he ceases to be an Employee, if later. The election must describe the form of distribution and the date benefits will begin. The Participant shall not elect a date for beginning benefits or a form of distribution that would result in a benefit payable when he dies which would be more than incidental within the meaning of governmental regulations. Benefits shall begin on an earlier date if otherwise provided in the Plan. For example, the Participant's Retirement Date or Required Beginning Date, as defined in the DEFINITIONS SECTION of Article VII. (b) The Participant's Vested Account which results from Elective Deferral Contributions may not be distributed to a Participant or to his Beneficiary (or Beneficiaries) in accordance with the Participant's or Beneficiary's (or Beneficiaries') election, earlier than separation from service, death, or disability. Such amount may also be distributed upon: (1) Termination of the Plan, as permitted in Article VIII (2) The disposition by the Employer, if the Employer is a corporation, to an unrelated corporation of substantially all of the assets, within the meaning of Code Section 409(d)(2), used in a trade or business of the Employer if the Employer continues to maintain the Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets. (3) The disposition by the Employer, if the Employer is a corporation, to an unrelated entity of the Employer's interest in a subsidiary, within the meaning of Code Section 409(d)(3), if the Employer continues to maintain the Plan, but only with respect to Employees who continue employment with such subsidiary. (4) The hardship of the Participant as permitted in the WITHDRAWAL BENEFITS SECTION of this article. All distributions that may be made pursuant to one or more of the foregoing distributable events will be a retirement benefit and shall be distributed to the Participant according to the distribution of benefit provisions of Article VI. In addition, distributions that are triggered by (1), (2) and (3) above must be made in a lump sum. A lump sum shall include a distribution of an annuity contract. RESTATEMENT JANUARY 1, 2004 51 ARTICLE V (4-47951) SECTION 5.05--WITHDRAWAL BENEFITS. A Participant may withdraw any part of his Vested Account resulting from Voluntary Contributions. A Participant may make such a withdrawal at any time. A Participant may withdraw any part of his Vested Account resulting from Rollover Contributions. A Participant may make only one such withdrawal in any 12-month period. A Participant may withdraw any part of his Vested Account which results from the following Contributions: Elective Deferral Contributions Matching Contributions in the event of hardship due to an immediate and heavy financiaj need. Withdrawals from the Participant's Account resulting from Elective Deferral Contributions shall be limited to the amount of the Participant's Elective Deferral Contributions plus income allocable thereto credited to his Account as of December 31, 1988. Immediate and heavy financial need shall be limited to: (i) expenses incurred or necessary for medical care, described in Code Section 213(d), of the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Code Section 152); (ii) purchase (excluding mortgage payments) of a principal residence for the Participant; (iii) payment of tuition, related educational fees, and room and board expenses, for the next 12 months of post-secondary education for the Participant, his spouse, children, or dependents; (iv) the need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence; or (v) any other distribution which is deemed by the Commissioner of Internal Revenue to be made on account of immediate and heavy financial need as provided in Treasury regulations. No withdrawal shall be allowed which is not necessary to satisfy such immediate and heavy financial need. Such withdrawal shall be deemed necessary only if all of the following requirements are met: (i) the distribution is not in excess of the amount of the immediate and heavy financial need (including amounts necessary to pay any Federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution); (ii) the Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Employer; (iii) the Plan, and all other plans maintained by the Employer, provide that the Participant's elective contributions and participant contributions will be suspended for at least 12 months after receipt of the hardship distribution; and (iv) the Plan, and all other plans maintained by the Employer, provide that the Participant may not make elective contributions for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code Section 402(g) for such next taxable year less the amount of such Participant's elective contributions for the taxable year of the hardship distribution. The Plan will suspend elective contributions and participant contributions for 12 months and limit elective deferrals as provided in the preceding sentence. A Participant shall not cease to be an Eligible Participant, as defined in the EXCESS AMOUNTS SECTION of Article III, merely because his elective contributions or participant contributions are suspended. A request for withdrawal shall be made in such manner and in accordance with such rules as the Employer will prescribe for this purpose (including by means of voice response or other electronic means under circumstances the Employer permits). Withdrawals shall be a retirement benefit and shall be distributed to the RESTATEMENT JANUARY 1, 2004 52 ARTICLE V (4-47951) Participant according to the distribution of benefits provisions of Article VI A forfeiture shall not occur solely as a result of a withdrawal. SECTION 5.06--LOANS TO PARTICIPANTS Loans shall be made available to all Participants on a reasonably equivalent basis. For purposes of this section, and unless otherwise specified, Participant means any Participant or Beneficiary who is a party-in-interest as defined in ERISA. Loans shall not be made to Highly Compensated Employees in an amount greater than the amount made available to other Participants. No loans will be made to any shareholder-employee or Owner-employee. For purposes of this requirement, a shareholder-employee means an employee or officer of an electing small business (Subchapter S) corporation who owns (or is considered as owning within the meaning of Code Section 318(a)(1)), on any day during the taxable year of such corporation, more than 5 percent of the outstanding stock of the corporation. A loan to a Participant shall be a Participant-directed investment of his Account. The portion of the Participant's Account held in the Qualifying Employer Securities Fund may be redeemed for purposes of a loan only after the amount held in other investment options has been depleted. The loan is a Trust Fund investment but no Account other than the borrowing Participant's Account shall share in the interest paid on the loan or bear any expense or loss incurred because of the loan. The number of outstanding loans shall be limited to one. No more than five loans shall be approved for any Participant in any 12-month period. The minimum amount of any loan shall be $500. Loans must be adequately secured and bear a reasonable rate of interest. The amount of the loan shall not exceed the maximum amount that may be treated as a loan under Code Section 72(p) (rather than a distribution) to the Participant and shall be equal to the lesser of (a) or (b) below: (a) $50,000, reduced by the highest outstanding loan balance of loans during the one-year period ending on the day before the new loan is made. (b) The greater of (1) or (2) , reduced by (3) below: (1) One-half of the Participant's Vested Account. (2) $10,000. (3) Any outstanding loan balance on the date the new loan is made. For purposes of this maximum, a Participant's Vested Account does not include any accumulated deductible employee contributions, as defined in Code Section 72(o)(5)(B), and all qualified employer plans, as defined in Code Section 72(p)(4), of the Employer and any Controlled Group member shall be treated as one plan. The foregoing notwithstanding, the amount of such loan shall not exceed 50 percent of the amount of the Participant's Vested Account. For purposes of this maximum, a Participant's Vested Account does not include any accumulated deductible employee contributions, as defined in Code Section 72(o)(5)(B). No RESTATEMENT JANUARY 1, 2004 53 ARTICLE V (4-47951) collateral other than a portion of the Participant's Vested Account (as limited above) shall be accepted. The Loan Administrator shall determine if the collateral is adequate for the amount of the loan requested. A Participant must obtain the consent of his spouse, if any, to the use of the Vested Account as security for the loan. Spousal consent shall be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan to be so secured is made. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a plan representative or a notary public. Such consent shall thereafter be binding with respect to the consenting spouse or any subsequent spouse with respect to that loan. A new consent shall be required if the Vested Account is used for collateral upon renegotiation, extension, renewal, or other revision of the loan. No consent shall be required if subparagraph (d) of the ELECTION PROCEDURES SECTION of Article VI applies. If a valid spousal consent has been obtained in accordance with the above, or spousal consent is not required, then, notwithstanding any other provision of this Plan, the portion of the Participant's Vested Account used as a security interest held by the Plan by reason of a loan outstanding to the Participant shall be taken into account for purposes of determining the amount of the Vested Account payable at the time of the death or distribution, but only if the reduction is used as repayment of the loan. If spousal consent is required and less than 100 percent of the Participant's Vested Account (determined without regard to the preceding sentence) is payable to the surviving spouse, then the Vested Account shall be adjusted by first reducing the Vested Account by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving spouse. Each loan shall bear a reasonable fixed rate of interest to be determined by the Loan Administrator. In determining the interest rate, the Loan Administrator shall take into consideration fixed interest rates currently being charged by commercial lenders for loans of comparable risk on similar terms and for similar durations, so that the interest will provide for a return commensurate with rates currently charged by commercial lenders for loans made under similar circumstances. The Loan Administrator shall not discriminate among Participants in the matter of interest rates; but loans granted at different times may bear different interest rates in accordance with the current appropriate standards. The loan shall by its terms require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly, over a period not extending beyond five years from the date of the loan. If the loan is used to acquire a dwelling unit, which within a reasonable time (determined at the time the loan is made) will be used as the principal residence of the Participant, the repayment period may extend beyond five years from the date of the loan. The period of repayment for any loan shall be arrived at by mutual agreement between the Loan Administrator and the Participant and if the loan is for a principal residence, shall not be made for a period longer than the repayment period consistent with commercial practices. The Participant shall make an application for a loan in such manner and in accordance with such rules as the Employer shall prescribe for this purpose (including by means of voice response or other electronic means under circumstances the Employer permits). The application must specify the amount and duration requested. Information contained in the application for the loan concerning the income, liabilities, and assets of the Participant will be evaluated to determine whether there is a reasonable expectation that the Participant will be able to satisfy payments on the loan as due. Additionally, the Loan Administrator will pursue any appropriate further investigations concerning the creditworthiness and credit history of the Participant to determine whether a loan should be approved. RESTATEMENT JANUARY 1, 2004 54 ARTICLE V (4-47951) Each loan shall be fully documented in the form of a promissory note signed by the Participant for the face amount of the loan, together with interest determined as specified above. There will be an assignment of collateral to the Plan executed at the time the loan is made. In those cases where repayment through payroll deduction is available, installments are so payable, and a payroll deduction agreement shall be executed by the Participant at the time the loan is made. Loan repayments that are accumulated through payroll deduction shall be paid to the Trustee by the earlier of (i) the date the loan repayments can reasonably be segregated from the Employer's assets, or (ii) the 15th business day of the month following the month in which such amounts would otherwise have been paid in cash to the Participant. Where payroll deduction is not available, payments in cash are to be timely made. Any payment that is not by payroll deduction shall be made payable to the Employer or the Trustee, as specified in the promissory note, and delivered to the Loan Administrator, including prepayments, service fees and penalties, if any, and other amounts due under the note. The Loan Administrator shall deposit such amounts into the Plan as soon as administratively practicable after they are received, but in no event later than the 15th business day of the month after they are received. The promissory note may provide for reasonable late payment penalties and service fees. Any penalties or service fees shall be applied to all Participants in a nondiscriminatory manner. If the promissory note so provides, such amounts may be assessed and collected from the Account of the Participant as part of the loan balance. Each loan may be paid prior to maturity, in part or in full, without penalty or service fee, except as may be set out in the promissory note. The Plan shall suspend loan payments for a period not exceeding one year during which an approved unpaid leave of absence occurs other than a military leave of absence. The Loan Administrator shall provide the Participant a written explanation of the effect of the suspension of payments upon his loan. If a Participant separates from service (or takes a leave of absence) from the Employer because of service in the military and does not receive a distribution of his Vested Account, the Plan shall suspend loan payments until the Participant's completion of military service or until the Participant's fifth anniversary of commencement of military service, if earlier, as permitted under Code Section 414(u). The Loan Administrator shall provide the Participant a written explanation of the effect of his military service upon his loan. If any payment of principal and interest, or any portion thereof, remains unpaid for more than 90 days after due, the loan shall be in default. For purposes of Code Section 72(p), the Participant shall then be treated as having received a deemed distribution regardless of whether or not a distributable event has occurred. Upon default, the Plan has the right to pursue any remedy available by law to satisfy the amount due, along with accrued interest, including the right to enforce its claim against the security pledged and execute upon the collateral as allowed by law. The entire principal balance whether or not otherwise then due, along with accrued interest, shall become immediately due and payable without demand or notice, and subject to collection or satisfaction by any lawful means, including specifically, but not limited to, the right to enforce the claim against the security pledged and to execute upon the collateral as allowed by law. RESTATEMENT JANUARY 1, 2004 55 ARTICLE V (4-47951) In the event of default. foreclosure on the note and attachment of security or use of amounts pledged to satisfy the amount then due shall not occur until a distributable event occurs in accordance with the Plan, and shall not occur to an extent greater than the amount then available upon any distributable event which has occurred under the Plan. All reasonable costs and expenses, including but not limited to attorney's fees, incurred by the Plan in connection with any default or in any proceeding to enforce any provision of a promissory note or instrument by which a promissory note for a Participant loan is secured, shall be assessed and collected from the Account of the Participant as part of the loan balance. If payroll deduction is being utilized, in the event that a Participant's available payroll deduction amounts in any given month are insufficient to satisfy the total amount due, there will be an increase in the amount taken subsequently, sufficient to make up the amount that is then due. If any amount remains past due more than 90 days, the entire principal amount, whether or not otherwise then due, along with interest then accrued, shall become due and payable, as above. If no distributable event has occurred under the Plan at the time that the Participant's Vested Account would otherwise be used under this provision to pay any amount due under the outstanding loan, this will not occur until the time, or in excess of the extent to which, a distributable event occurs under the Plan. An outstanding loan will become due and payable in full 60 days after a Participant ceases to be an Employee and a party-in-interest as defined in ERISA or after complete termination of the Plan. SECTION 5.07--DISTRIBUTIONS UNDER QUALIFIED DOMESTIC RELATIONS ORDERS. The Plan specifically permits distributions to an Alternate Payee under a qualified domestic relations order as defined in Code Section 414(p) , at any time, irrespective of whether the Participant has attained his earliest retirement age, as defined in Code Section 414(p), under the Plan. A distribution to an Alternate Payee before the Participant has attained his earliest retirement age is available only if the order specifies that distribution shall be made prior to the earliest retirement age or allows the Alternate Payee to elect a distribution prior to the earliest retirement age. Nothing in this section shall permit a Participant to receive a distribution at a time otherwise not permitted under the Plan nor shall it permit the Alternate Payee to receive a form of payment not permitted under the Plan. The benefit payable to an Alternate Payee shall be subject to the provisions of the SMALL AMOUNTS SECTION of Article X if the value of the benefit does not exceed $5,000. The Plan Administrator shall establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Plan Administrator shall promptly notify the Participant and the Alternate Payee named in the order, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Plan Administrator shall determine the qualified status of the order and shall notify the Participant and each Alternate Payee, in writing, of its determination. The Plan Administrator shall provide notice under this paragraph by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with Department of Labor regulations. The Plan Administrator may treat as qualified any domestic relations order entered into before January 1, 1985, irrespective of whether it satisfies all the requirements described in Code Section 414(p). RESTATEMENT JANUARY 1, 2004 56 ARTICLE V (4-47951) If any portion of the Participant's Vested Account is payable during the period the Plan Administrator is making its determination of the qualified status of the domestic relations order, a separate accounting shall be made of the amount payable. If the Plan Administrator determines the order is a qualified domestic relations order within 18 months of the date amounts are first payable following receipt of the order, the payable amounts shall be distributed in accordance with the order. If the Plan Administrator does not make its determination of the qualified status of the order within the 18-month determination period, the payable amounts shall be distributed in the manner the Plan would distribute if the order did not exist and the order shall apply prospectively if the Plan Administrator later determines the order is a qualified domestic relations order. The Plan shall make payments or distributions required under this section by separate benefit checks or other separate distribution to the Alternate Payee(s). If a domestic relations order divides an Account that is invested in the Qualifying Employer Securities Fund, and a cash dividend on Qualifying Employer Securities becomes payable during the period the Plan Administrator is making its determination of the qualified status of the domestic relations order then the following will apply: (a) If the division date specified in the order is prior to the ex-date of such dividend, then so much of the dividend that is attributable to the Alternate Payee's share of the investment in the Qualifying Employer Securities Fund shall be deemed to be earnings on the Alternate Payee share. If the Participant has elected to receive the dividend in cash, the Alternate Payee's portion of the dividend shall be drawn from the remaining portion of the Account after payment of the dividend to the Participant. (b) If the division date specified in the order is on or after the ex-date of such dividend, then no portion of the dividend shall be attributed to the Alternate Payee. RESTATEMENT JANUARY 1, 2004 57 ARTICLE V (4-47951) ARTICLE VI DISTRIBUTION OF BENEFITS SECTION 6.01--AUTOMATIC FORMS OF DISTRIBUTION. Unless an optional form of benefit is selected pursuant to a qualified election within the election period (see the ELECTION PROCEDURES SECTION of this article), the automatic form of benefit payable to or on behalf of a Participant is determined as follows: (a) Retirement Benefits. The automatic form of retirement benefit for a Participant who does not die before his Annuity Starting Date shall be: (1) The Qualified Joint and Survivor Annuity for a Participant who has a spouse. (2) The Normal Form for a Participant who does not have a spouse. (b) Death Benefits. The automatic form of death benefit for a Participant who dies before his Annuity Starting Date shall be: (1) A Qualified Preretirement Survivor Annuity for a Participant who has a spouse to whom he has been continuously married throughout the one-year period ending on the date of his death. The spouse may elect to start receiving the death benefit on any first day of the month on or after the Participant dies and by the date the Participant would have been age 70 1/2. If the spouse dies before benefits start, the Participant's Vested Account, determined as of the date of the spouse's death, shall be paid to the spouse's Beneficiary. (2) A single-sum payment to the Participant's Beneficiary for a Participant who does not have a spouse who is entitled to a Qualified Preretirement Survivor Annuity. Before a death benefit will be paid on account of the death of a Participant who does not have a spouse who is entitled to a Qualified Preretirement Survivor Annuity, it must be established to the satisfaction of a plan representative that the Participant does not have such a spouse. SECTION 6.02--OPTIONAL FORMS OF DISTRIBUTION. (a) Retirement Benefits. The optional forms of retirement benefit shall be the following: (i) a straight life annuity; (ii) single life annuities with certain periods of 5, 10 or 15 years; (iii) a single life annuity with installment refund; (iv) survivorship life annuities with installment refund and survivorship percentages of 50%, 662/3% or 100%; (v) fixed period annuities for any period of whole months which is not less than 60 and does not exceed the Life Expectancy, as defined in Article VII, of the Participant where the Life Expectancy is not recalculated; and (vi) a full flexibility option. A single sum payment is also available. That portion of a Participant's Account which is held in the Qualifying Employer Securities Fund may be distributed in kind. The full flexibility option is an optional form of benefit under which the Participant receives a distribution each calendar year, beginning with the calendar year in which his Annuity Starting RESTATEMENT JANUARY 1, 2004 58 ARTICLE VI (4-47951) Date occurs. The Participant may elect the amount to be distributed each year (not less than $1,000). The amount payable in his first Distribution Calendar Year, as defined in Article VII, must satisfy the minimum distribution requirements of Article VII for such year. Distributions for later Distribution Calendar Years, as defined in Article VII, must satisfy the minimum distribution requirements of Article VII for such years. If the Participant's Annuity Starting Date does not occur until his second Distribution Calendar Year, as defined in Article VII, the amount payable for such year must satisfy the minimum distribution requirements of Article VII for both the first and second Distribution Calendar Years, as defined in Article VII. If the Plan is amended to eliminate or restrict an optional form of distribution and the Plan provides a single sum distribution form that is otherwise identical to the optional form of distribution eliminated or restricted, the amendment shall not apply to any distribution with an Annuity Starting Date earlier than the first day of the second Plan Year following the Plan Year in which the amendment is adopted. Election of an optional form is subject to the qualified election provisions of the ELECTION PROCEDURES SECTION of this article and the distribution requirements of Article VII. Any annuity contract distributed shall be nontransferable. The terms of any annuity contract purchased and distributed by the Plan to a Participant or spouse shall comply with the requirements of this Plan. (b) Death Benefits. The optional forms of death benefit are a single-sum payment and any annuity that is an optional form of retirement benefit. However. the full flexibility option shall not be available if the Beneficiary is not the spouse of the deceased Participant. Election of an optional form is subject to the qualified election provisions of the ELECTION PROCEDURES SECTION of this article and the distribution requirements of Article VII. SECTION 6.03--ELECTION PROCEDURES. The Participant, Beneficiary, or spouse shall make any election under this section in writing. The Plan Administrator may require such individual to complete and sign any necessary documents as to the provisions to be made. Any election permitted under (a) and (b) below shall be subject to the qualified election provisions of (c) below. (a) Retirement Benefits. A Participant may elect his Beneficiary or Contingent Annuitant and may elect to have retirement benefits distributed under any of the optional forms of retirement benefit available in the OPTIONAL FORMS OF DISTRIBUTIONS SECTION of this article. (b) Death Benefits. A Participant may elect his Beneficiary and may elect to have death benefits distributed under any of the optional forms of death benefit available in the OPTIONAL FORMS OF DISTRIBUTION SECTION of this article. If the Participant has not elected an optional form of distribution for the death benefit payable to his Beneficiary, the Beneficiary may, for his own benefit, elect the form of distribution, in like manner as a Participant. RESTATEMENT JANUARY 1, 2004 59 ARTICLE VI (4-47951) The Participant may waive the Qualified Preretirement Survivor Annuity by naming someone other than his spouse as Beneficiary. In lieu of the Qualified Preretirement Survivor Annuity described in the AUTOMATIC FORMS OF DISTRIBUTION SECTION of this article, the spouse may, for his own benefit, waive the Qualified Preretirement Survivor Annuity by electing to have the benefit distributed under any of the optional forms of death benefit available in the OPTIONAL FORMS OF DISTRIBUTION SECTION of this article. (c) QUALIFIED ELECTION. The Participant, Beneficiary or spouse may make an election at any time during the election period. The Participant, Beneficiary, or spouse may revoke the election made (or make a new election) at any time and any number of times during the election period. An election is effective only if it meets the consent requirements below. (1) ELECTION PERIOD FOR RETIREMENT BENEFITS. The election period as to retirement benefits is the 90-day period ending on the Annuity Starting Date. An election to waive the Qualified Joint and Survivor Annuity may not be made before the date the Participant is provided with the notice of the ability to waive the Qualified Joint and Survivor Annuity. If the Participant elects a full flexibility option, he may revoke his election at any time before his first Distribution Calendar Year, as defined in Article VII. When he elects to have benefits begin again, he shall have a new Annuity Starting Date. His election period for this election is the 90-day period ending on the Annuity Starting Date for the optional form of retirement benefit elected. (2) ELECTION PERIOD FOR DEATH BENEFITS. A Participant may make an election as to death benefits at any time before he dies. The spouse's election period begins on the date the Participant dies and ends on the date benefits begin. The Beneficiary's election period begins on the date the Participant dies and ends on the date benefits begin. An election to waive the Qualified Preretirement Survivor Annuity may not be made by the Participant before the date he is provided with the notice of the ability to waive the Qualified Preretirement Survivor Annuity. A Participant's election to waive the Qualified Preretirement Survivor Annuity which is made before the first day of the Plan Year in which he reaches age 35 shall become invalid on such date. An election made by a Participant after he ceases to be an Employee will not become invalid on the first day of the Plan Year in which he reaches age 35 with respect to death benefits from that part of his Account resulting from Contributions made before he ceased to be an Employee. (3) CONSENT TO ELECTION. If the Participant's Vested Account exceeds $5,000, any benefit which is (i) immediately distributable or (ii) payable in a form other than a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity, requires the consent of the Participant and the Participant's spouse (or where either the Participant or the spouse has died, the survivor). Such consent shall also be required if the Participant had previously had an Annuity Starting Date with respect to any portion of such Vested Account. The consent of the Participant or spouse to a benefit which is immediately distributable must not be made before the date the Participant or spouse is provided with the notice of the ability to defer the distribution. Such consent shall be made in writing. RESTATEMENT JANUARY 1, 2004 60 ARTICLE VI (4-47951) The consent shall not be made more than 90 days before the Annuity Starting Date. Spousal consent is not required for a benefit which is immediately distributable in a Qualified Joint and Survivor Annuity. Furthermore, if spousal consent is not required because the Participant is electing an optional form of retirement benefit that is not a life annuity pursuant to (d) below, only the Participant need consent to the distribution of a benefit payable in a form that is not a life annuity and which is immediately distributable. Neither the consent of the Participant nor the Participant's spouse shall be required to the extent that a distribution is required to satisfy Code Section 401 (a)(9) or Code Section 415. In addition, upon termination of this Plan, if the Plan does not offer an annuity option (purchased from a commercial provider), and if the Employer (or any entity within the same Controlled Group) does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)), the Participant's Account balance will, without the Participant's consent, be distributed to the Participant. However, if any entity within the same Controlled Group maintains another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)) then the Participant's Account will be transferred, without the Participant's consent, to the other plan if the Participant does not consent to an immediate distribution. A benefit is immediately distributable if any part of the benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the older of Normal Retirement Age or age 62. If the Qualified Joint and Survivor Annuity is waived, the spouse has the right to limit consent only to a specific Beneficiary or a specific form of benefit. The spouse can relinquish one or both such rights. Such consent shall be made in writing. The consent shall not be made more than 90 days before the Annuity Starting Date. If the Qualified Preretirement Survivor Annuity is waived, the spouse has the right to limit consent only to a specific Beneficiary. Such consent shall be in writing. The spouse's consent shall be witnessed by a plan representative or notary public. The spouse's consent must acknowledge the effect of the election, including that the spouse had the right to limit consent only to a specific Beneficiary or a specific form of benefit, if applicable, and that the relinquishment of one or both such rights was voluntary. Unless the consent of the spouse expressly permits designations by the Participant without a requirement of further consent by the spouse, the spouse's consent must be limited to the form of benefit, if applicable, and the Beneficiary (including any Contingent Annuitant), class of Beneficiaries, or contingent Beneficiary named in the election. Spousal consent is not required, however, if the Participant establishes to the satisfaction of the plan representative that the consent of the spouse cannot be obtained because there is no spouse or the spouse cannot be located. A spouse's consent under this paragraph shall not be valid with respect to any other spouse. A Participant may revoke a prior election without the consent of the spouse. Any new election will require a new spousal consent, unless the consent of the spouse expressly permits such election by the Participant without further consent by the spouse. A spouse's consent may be revoked at any time within the Participant's election period. RESTATEMENT JANUARY 1, 2004 61 ARTICLE VI (4-47951) (d) Special Rule for Profit Sharing Plans. This subparagraph (d) applies if the Plan is not a direct or indirect transferee after December 31, 1984, of a defined benefit plan, money purchase plan, target benefit plan, stock bonus plan, or profit sharing plan which is subject to the survivor annuity requirements of Code Sections 401(a)(11) and 417. If the above condition is met, spousal consent is not required for electing an optional form of retirement benefit that is not a life annuity. If such condition is not met, such consent requirements shall be operative. (e) Dividend Distributions. Cash dividends that are available to a Participant, Beneficiary or Alternate Payee shall not be subject to the distribution form and notice requirements of this Article. If a Participant, Beneficiary or Alternate Payee elects to receive such dividends, such dividends shall be payable in a lump-sum (and only a lump-sum) in cash, and are payable without regard to any notice and consent otherwise required under the Plan. SECTION 6.04--NOTICE REQUIREMENTS. (a) Optional Forms of Retirement Benefit and Right to Defer. The Plan Administrator shall furnish to the Participant and the Participant's spouse a written explanation of the optional forms of retirement benefit in the OPTIONAL FORMS OF DISTRIBUTION SECTION of this article, including the material features and relative values of these options, in a manner that would satisfy the notice requirements of Code Section 417(a)(3) and the right of the Participant and the Participant's spouse to defer distribution until the benefit is no longer immediately distributable. The Plan Administrator shall furnish the written explanation by a method reasonably calculated to reach the attention of the Participant and the Participant's spouse no less than 30 days, and no more than 90 days, before the Annuity Starting Date. The Participant (and spouse, if applicable) may waive the 30-day election period if the distribution of the elected form of retirement benefit begins more than 7 days after the Plan Administrator provides the Participant (and spouse, if applicable) the written explanation provided that: (i) the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider the decision of whether or not to elect a distribution and a particular distribution option, (ii) the Participant is permitted to revoke any affirmative distribution election at least until the Annuity Starting Date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation is provided to the Participant, and (iii) the Annuity Starting Date is a date after the date that the written explanation was provided to the Participant. (b) Qualified Joint and Survivor Annuity. The Plan Administrator shall furnish to the Participant a written explanation of the following: the terms and conditions of the Qualified Joint and Survivor Annuity; the Participant's right to make, and the effect of, an election to waive the Qualified Joint and Survivor Annuity; the rights of the Participant's spouse; and the right to revoke an election and the effect of such a revocation. The Plan Administrator shall furnish the written explanation by a method reasonably calculated to reach the attention of the Participant no less than 30 days, and no more than 90 days, before the Annuity Starting Date. The Participant (and spouse, if applicable) may waive the 3O-day election period if the distribution of the elected form of retirement benefit begins more than 7 days after the Plan Administrator RESTATEMENT JANUARY 1, 2004 62 ARTICLE VI (4-47951) provides the Participant (and spouse, if applicable) the written explanation provided that: (i) the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider whether to waive the Qualified Joint and Survivor Annuity and elect (with spousal consent, if applicable) a form of distribution other than a Qualified Joint and Survivor Annuity, (ii) the Participant is permitted to revoke any affirmative distribution election at least until the Annuity Starting Date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant, and (iii) the Annuity Starting Date is a date after the date that the written explanation was provided to the Participant. After the written explanation is given, a Participant or spouse may make a written request for additional information. The written explanation must be personally delivered or mailed (first class mail, postage prepaid) to the Participant or spouse within 30 days from the date of the written request. The Plan Administrator does not need to comply with more than one such request by a Participant or spouse. The Plan Administrator's explanation shall be written in nontechnical language and will explain the terms and conditions of the Qualified Joint and Survivor Annuity and the financial effect upon the Participant's benefit (in terms of dollars per benefit payment) of electing not to have benefits distributed in accordance with the Qualified Joint and Survivor Annuity. (c) Qualified Preretirement Survivor Annuity. The Plan Administrator shall furnish to the Participant a written explanation of the following: the terms and conditions of the Qualified Preretirement Survivor Annuity; the Participant's right to make, and the effect of, an election to waive the Qualified Preretirement Survivor Annuity; the rights of the Participant's spouse; and the right to revoke an election and the effect of such a revocation. The Plan Administrator shall furnish the written explanation by a method reasonably calculated to reach the attention of the Participant within the applicable period. The applicable period for a Participant is whichever of the following periods ends last: (1) the period beginning one year before the date the individual becomes a Participant and ending one year after such date; or (2) the period beginning one year before the date the Participant's spouse is first entitled to a Qualified Preretirement Survivor Annuity and ending one year after such date. If such notice is given before the period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35, an additional notice shall be given within such period. If a Participant ceases to be an Employee before attaining age 35, an additional notice shall be given within the period beginning one year before the date he ceases to be an Employee and ending one year after such date. After the written explanation is given, a Participant or spouse may make a written request for additional information. The written explanation must be personally delivered or mailed (first class mail, postage prepaid) to the Participant or spouse within 30 days from the date of the written RESTATEMENT JANUARY 1, 2004 63 ARTICLE VI (4-47951) request. The Plan Administrator does not need to comply with more than one such request by a Participant or spouse. The Plan Administrator's explanation shall be written in nontechnical language and will explain the terms and conditions of the Qualified Preretirement Survivor Annuity and the financial effect upon the spouse's benefit (in terms of dollars per benefit payment) of electing not to have benefits distributed in accordance with the Qualified Preretirement Survivor Annuity. SECTION 6.05--FORM OF DISTRIBUTION FROM ESOP CONTRIBUTION ACCOUNT. Notwithstanding any provision of this Article VI to the contrary, distributions from a Participant's Vested Account that is then invested in the Qualifying Employer Securities Fund shall be governed by this Section 6.05 and Section 6.06. (a) Distribution in Cash. The part of a Participant's Vested Account invested in the Qualifying Employer Securities Fund will be distributed in cash unless the Participant affirmatively elects under paragraph (b) below to receive the distribution in the form of Qualifying Employer Securities with cash in lieu of fractional shares. The cash value of Qualifying Employer Securities shall be equal to the fair market value of such stock determined as of the last Valuation Date prior to the date of distribution. (b) Distribution in Qualifying Employer Securities. A Participant may elect to have the part of the Participant's Vested Account that is invested in the Qualifying Employer Securities Fund distributed in the form of Qualifying Employer Securities with cash in lieu of fractional shares. A Participant, Beneficiary or Alternate Payee can elect to receive all of his Vested Account in the form of Qualifying Employer Securities by electing to transfer amounts to the Qualifying Employer Securities Fund prior to distribution from the Plan. SECTION 6.06--PUT OPTION. If shares of Qualifying Employer Securities are distributed from the fund, and if such shares are not publicly traded when distributed or are subject to a trading limitation when distributed, then such shares shall be subject to an initial and second put option as follows: (a) The put option shall be exercisable by the distributee (whether the Participant or a Beneficiary), any person to whom shares of Qualifying Employer Securities have passed by gift from the distributee, or any person (including an estate or the distributee from an estate) to whom the shares of Qualifying Employer Securities passed upon the death of the distributee (hereinafter referred to as the "holder"). (b) The initial put option must be exercised during the 60-day period which begins on the date the shares of Qualifying Employer Securities are distributed from the fund. If not exercised during that period, the initial put option shall lapse. (c) As soon as is reasonably practicable following the last day of the Plan Year in which the initial 60-day period expires, the Employer shall notify all of the non-electing holders of the valuation of such Qualifying Employer Securities as of the most recent Valuation Date. During the 60-day RESTATEMENT JANUARY 1, 2004 64 ARTICLE VI (4-47951) period following the receipt of such valuation notice, any such non-electing holder shall have a second put option. (d) The period during which the put option is exercisable shall not include any time when a holder is unable to exercise the put option because the Employer is prohibited from honoring the put option by federal or state law. If the shares of Qualifying Employer Securities are publicly traded without restriction when distributed but cease to be traded within either of the 60-day periods described herein after distribution, the Employer must notify each holder in writing on or before the tenth day after the date the shares cease to be so traded that for the remainder of the applicable 60-day period the shares are subject to a put option. The number of days between such tenth day and the date on which notice is actually given, if later than the tenth day, must be added to the duration of the put option. The notice must inform the holders of the terms of the put option. (e) The put option may be exercised by written notice of exercise to the Employer or its designee made on such form and in accordance with such rules as may be prescribed for this purpose by the Plan Administrator. (f) Upon receipt of such notice, the Employer shall tender to the holder the fair market value of (f) Qualifying Employer Securities (as determined under Sections 4.01 A(e) and (f)) for such shares. (i) If the Qualifying Employer Securities were distributed in a total distribution then the Employer may pay either in a lump sum or substantially equal installments (bearing a reasonable rate of interest and providing adequate security to the holder) over a period beginning within 30 days following the date the put option is exercised and ending not more than five years after the date the put option is exercised. (ii) If the Qualifying Employer Securities were not distributed in a total distribution then the Employer must pay the holder in a single lump sum payment. (iii) If payment is made in installments, the Employer shall, within 30 days of the date the holder exercises the put option, give the holder a promissory note for the full unpaid balance of the options price. Such note shall, at a minimum, provide adequate security, state a rate of interest reasonable under the circumstances (but at least equal to the imputed compound rate in effect as of the exercise date pursuant to the regulations promulgated under Code Sections 483 or 1274, whichever shall be applicable) and provide that the full amount of such note shall accelerate and become due immediately in the event that the Employer defaults in the payment of a scheduled payment. (g) The Plan Fund is not bound to purchase shares of Qualifying Employer Securities pursuant to the put option, but the Employer may direct the Trustee to cause the Plan Fund to assume the Employer's rights and obligations to acquire shares of Qualifying Employer Securities under the put option. (h) A "trading limitation" for this purpose means a restriction under any federal or state securities law or under any agreement affecting the shares that would make the shares not as freely tradable as shares not subject to such restriction. RESTATEMENT JANUARY 1, 2004 65 ARTICLE VI (4-47951) (i) A "total distribution" for this purpose means a distribution to a Participant or Beneficiary within one taxable year of such recipient to the entire balance to the credit of the Participant. RESTATEMENT JANUARY 1, 2004 66 ARTICLE VI (4-47951) ARTICLE VII DISTRIBUTION REQUIREMENTS SECTION 7.01--APPLICATION The optional forms of distribution are only those provided in Article VI. An optional form of distribution shall not be permitted unless it meets the requirements of this article. The timing of any distribution must meet the requirements of this article. SECTION 7.02--DEFINITIONS. For purposes of this article, the following terms are defined: Applicable Life Expectancy means Life Expectancy (or Joint and Last Survivor Expectancy) calculated using the attained age of the Participant (or Designated Beneficiary) as of the Participant's (or Designated Beneficiary's) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date Life Expectancy was first calculated. If Life Expectancy is being recalculated, the Applicable Life Expectancy shall be the Life Expectancy so recalculated. The applicable calendar year shall be the first Distribution Calendar Year, and if Life Expectancy is being recalculated, such succeeding calendar year. Designated Beneficiary means the individual who is designated as the beneficiary under the Plan in accordance with Code Section 401(a)(9) and the regulations thereunder. Distribution Calendar Year means a calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant's Required Beginning Date. For distributions beginning after the Participant's death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to (e) of the DISTRIBUTION REQUIREMENTS SECTION of this article. 5-percent Owner means a 5-percent owner as defined in Code Section 416. A Participant is treated as a 5-percent Owner for purposes of this article if such Participant is a 5-percent Owner at any time during the Plan Year ending with or within the calendar year in which such owner attains age 70 1/2. In addition, a Participant is treated as a 5-percent Owner for purposes of this article if such Participant becomes a 5-percent Owner In a later Man Year. Such Participant's Required Beginning Date shall not be later than the April 1 of the calendar year following the calendar year in which such later Plan Year ends. Once distributions have begun to a 5-percent Owner under this article, they must continue to be distributed, even if the Participant ceases to be a 5-percent Owner in a subsequent year. Joint and Last Survivor Expectancy means joint and last survivor expectancy computed using the expected return multiples in Table VI of section 1.72-9 of the Income Tax Regulations. RESTATEMENT JANUARY 1, 2004 67 ARTICLE VII (4-47951) Unless otherwise elected by the Participant by the time distributions are required to begin, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Participant and shall apply to all subsequent years. The life expectancy of a nonspouse Beneficiary may not be recalculated. Life Expectancy means life expectancy computed using the expected return multiples in Table V of section 1.72-9 of the Income Tax Regulations. Unless otherwise elected by the Participant (or spouse, in the case of distributions described in (e)(2)(ii) of the DISTRIBUTION REQUIREMENTS SECTION of this article) by the time distributions are required to begin, life expectancy shall be recalculated annually. Such election shall be irrevocable as to the Participant (or spouse) and shall apply to all subsequent years. The life expectancy of a nonspouse Beneficiary may not be recalculated. Participant's Benefit means' (a) The Account balance as of the last Valuation Date in the calendar year immediately preceding the Distribution Calendar Year (valuation calendar year) increased by the amount of any contributions or forfeitures allocated to the Account balance as of the dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. (b) Exception for Second Distribution Calendar Year. For purposes of (a) above, if any portion of the minimum distribution for the first Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second Distribution Calendar Year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year. Required Beginning Date means, for a Participant who is a 5-percent Owner, the April 1 of the calendar year following the calendar year in which he attains age 70 1/2. Required Beginning Date means, for any Participant who is not a 5-percent Owner, the April 1 of the calendar year following the later of the calendar year in which he attains age 70 1/2 or the calendar year in which he retires. The preretirement age 70 1/2 distribution option is only eliminated with respect to Participants who reach age 70 1/2 in or after a calendar year that begins after the later of December 31, 1998, or the adoption date of the amendment which eliminated such option. The preretirement age 70 1/2 distribution is an optional form of benefit under which benefits payable in a particular distribution form (including any modifications that may be elected after benefits begin) begin at a time during the period that begins on or after January 1 of the calendar year in which the Participant attains age 70 1/2 and ends April 1 of the immediately following calendar year. The options available for Participants who are not 5-percent Owners and attained age 70 1/2 in calendar years before the calendar year that begins after the later of December 31, 1998, or the adoption date of the amendment which eliminated the preretirement age 70 1/2 distribution shall be the following. Any such Participant attaining age 70 1/2 in years after 1995 may elect by April 1 of the calendar year following the calendar year in which he attained age 70 1/2 (or by December 31, RESTATEMENT JANUARY 1, 2004 68 ARTICLE VII (4-47951) 1997 in the case of a Participant attaining age 70 1/2 in 1996) to defer distributions until the calendar year following the calendar year in which he retires. Any such Participant attaining age 70 1/2 in years prior to 1997 may elect to stop distributions which are not purchased annuities and recommence by the April 1 of the calendar year following the year in which he retires. There shall be a new Annuity Starting Date upon recommencement. SECTION 7.03--DISTRIBUTION REQUIREMENTS. (a) General Rules. (1) Subject to the AUTOMATIC FORMS OF DISTRIBUTION SECTION of Article VI, joint and survivor annuity requirements, the requirements of this article shall apply to any distribution of a Participant's interest and shall take precedence over any inconsistent provisions of this Plan. Unless otherwise specified, the provisions of this article apply to calendar years beginning after December 31, 1984. (2) All distributions required under this article shall be determined and made in accordance with the proposed regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirement of section 1.401(a)(9)-2 of the proposed regulations. (3) With respect to distributions under the Plan made on or after June 14, 2001, for calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Code Section 401 (a)(9) in accordance with the regulations under Code Section 401(a)(9) that were proposed on January 17, 2001 (the 2001 Proposed Regulations), notwithstanding any provision of the Plan to the contrary. If the total amount of required minimum distributions made to a Participant for 2001 prior to June 14, 2001, are equal to or greater than the amount of required minimum distributions determined under the 2001 Proposed Regulations, then no additional distributions are required for such Participant for 2001 on or after such date. If the total amount of required minimum distributions made to a Participant for 2001 prior to June 14, 2001 , are less than the amount determined under the 2001 Proposed Regulations, then the amount of required minimum distributions for 2001 on or after such date will be determined so that the total amount of required minimum distributions for 2001 is the amount determined under the 2001 Proposed Regulations. These provisions shall continue in effect until the last calendar year beginning before the effective date of final regulations under Code Section 401(a)(9) or such other date as may be published by the Internal Revenue Service. (b) Required Beginning Date. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant's Required Beginning Date. (c) Limits on Distribution Periods. As of the first Distribution Calendar Year, distributions, if not made in a single sum, may only be made over one of the following periods (or combination thereof: (1) the life of the Participant. (2) the life of the Participant and a Designated Beneficiary, RESTATEMENT JANUARY 1, 2004 69 ARTICLE VII (4-47951) (3) a period certain not extending beyond the Life Expectancy of the Participant, or (4) a period certain not extending beyond the Joint and Last Survivor Expectancy of the Participant and a Designated Beneficiary. (d) Determination of Amount to be Distributed Each Year .If the Participant's interest is to be distributed in other than a single sum, the following minimum distribution rules shall apply on or after the Required Beginning Date: (1) Individual Account: (i) If a Participant's Benefit is to be distributed over A. a period not extending beyond the Life Expectancy of the Participant or the Joint Life and Last Survivor Expectancy of the Participant and the Participant's Designated Beneficiary, or B. a period not extending beyond the Life Expectancy of the Designated Beneficiary, the amount required to be distributed for each calendar year beginning with the distributions for the first Distribution Calendar Year, must be at least equal to the quotient obtained by dividing the Participant's Benefit by the Applicable Life Expectancy. (ii) For calendar years beginning before January 1, 1989, if the Participant's spouse is not the Designated Beneficiary, the method of distribution selected must assure that at least 50 percent of the present value of the amount available for distribution is paid within the Life Expectancy of the Participant. (iii) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first Distribution Calendar Year shall not be less than the quotient obtained by dividing the Participant's Benefit by the lesser of: A. the Applicable Life Expectancy, or B. if the Participant's spouse is not the Designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of section 1.401(a)(9)-2 of the proposed regulations. Distributions after the death of the Participant shall be distributed using the Applicable Life Expectancy in (1)(i) above as the relevant divisor without regard to section 1.401(a)(9)-2 of the proposed regulations. (iv) The minimum distribution required for the Participant's first Distribution Calendar Year must be made on or before the Participant's Required Beginning Date. The minimum distribution for other calendar years, including the minimum distribution for RESTATEMENT JANUARY 1, 2004 70 ARTICLE VII (4-47951) the Distribution Calendar Year in which the Participant's Required Beginning Date occurs, must be made on or before December 31 of that Distribution Calendar Year. (2) Other Forms. If the Participant's Benefit is distributed in the form of an annuity purchased from an insurance company, distributions thereunder shall be made in accordance with the requirements of Code Section 401(a)(9) and the proposed regulations thereunder. (e) Death Distribution Provisions (1) Distribution Beginning Before Death. If the Participant dies after distribution of his interest has begun, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. (2) Distribution Beginning After Death. (i) If the Participant dies before distribution of his interest begins, distribution of the Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death except to the extent that an election is made to receive distributions in accordance with A or B below: A. if any portion of the Participant's interest is payable to a Designated Beneficiary, distributions may be made over the life or over a period certain not greater than the Life Expectancy of the Designated Beneficiary beginning on or before December 31 of the calendar year immediately following the calendar year in which the Participant died; B. if the Designated Beneficiary is the Participant's surviving spouse, the date distributions are required to begin in accordance with A above shall not be earlier than the later of: 1. December 31 of the calendar year immediately following the calendar year in which the Participant died, or 2. December 31 of the calendar year in which the Participant would have attained age 70 1/2. (ii) If the Participant has not made an election pursuant to this (e)(2) by the time of his death, the Participant's Designated Beneficiary must elect the method of distribution no later than the earlier of: A. December 31 of the calendar year in which distributions would be required to begin under this subparagraph, or B. December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. (iii) If the Participant has no Designated Beneficiary, or if the Designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire interest RESTATEMENT JANUARY 1, 2004 71 ARTICLE VII (4-47951) must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. (3) For purposes of (e)(2) above, if the surviving spouse dies after the Participant, but before payments to such spouse begin, the provisions of (e)(2) above, with the exception of (e)(2)(i)(B) therein, shall be applied as if the surviving spouse were the Participant. (4) For purposes of this (e), distribution of a Participant's interest is considered to begin on the Participant's Required Beginning Date (or if (e)(3) above is applicable, the date distribution is required to begin to the surviving spouse pursuant to (e)(2) above). If distribution in the form of an annuity irrevocably begins to the Participant before the Required Beginning Date, the date distribution is considered to begin is the date distribution actually begins. RESTATEMENT JANUARY 1, 2004 72 ARTICLE VII (4-47951) ARTICLE VIII TERMINATION OF THE PLAN The Employer expects to continue the Plan indefinitely but reserves the right to terminate the Plan in whole or in part at any time upon giving written notice to all parties concerned. Complete discontinuance of Contributions constitutes complete termination of the Plan. The Account of each Participant shall be fully (100%) vested and nonforfeitable as of the effective date of complete termination of the Plan. The Account of each Participant who is included in the group of Participants deemed to be affected by the partial termination of the Plan shall be fully (100%) vested and nonforfeitable as of the effective date of the partial termination of the Plan. The Participant's Account shall continue to participate in the earnings credited, expenses charged, and any appreciation or depreciation of the Investment Fund until his Vested Account is distributed. A Participant's Account which does not result from the Contributions listed below may be distributed to the Participant after the effective date of the complete termination of the Plan: Elective Deferral Contributions A Participant's Account resulting from such Contributions may be distributed upon complete termination of the Plan, but only if neither the Employer nor any Controlled Group member maintain or establish a successor defined contribution plan (other than an employer stock ownership plan as defined in Code Section 4975(e)(7), a simplified employee pension plan as defined in Code Section 408(k) or a SIMPLE IRA plan as defined in Code Section 408(p)) and such distribution is made in a lump sum. A distribution under this article shall be a retirement benefit and shall be distributed to the Participant according to the provisions of Article VI. The Participant's entire Vested Account shall be paid in a single sum to the Participant as of the effective date of complete termination of the Plan if (i) the requirements for distribution of Elective Deferral Contributions in the above paragraph are met and (ii) consent of the Participant is not required in the ELECTION PROCEDURES SECTION of Article VI to distribute a benefit which is immediately distributable. This is a small amounts payment. The small amounts payment is in full settlement of all benefits otherwise payable. Upon complete termination of the Plan, no more Employees shall become Participants and no more Contributions shall be made. The assets of this Plan shall not be paid to the Employer at any time, except that, after the satisfaction of all liabilities under the Plan, any assets remaining may be paid to the Employer. The payment may not be made if it would contravene any provision of law. RESTATEMENT JANUARY 1, 2004 73 ARTICLE VIII (4-47951) ARTICLE IX ADMINISTRATION OF THE PLAN SECTION 9.01--ADMINISTRATION. Subject to the provisions of this article, the Plan Administrator has complete control of the administration of the Plan. The Plan Administrator has all the powers necessary for it to properly carry out its administrative duties. Not in limitation, but in amplification of the foregoing, the Plan Administrator has complete discretion to construe or interpret the provisions of the Plan, including ambiguous provisions, if any, and to determine all questions that may arise under the Plan, including all questions relating to the eligibility of Employees to participate in the Plan and the amount of benefit to which any Participant, Beneficiary, spouse or Contingent Annuitant may become entitled. The Plan Administrator's decisions upon all matters within the scope of its authority shall be final. Unless otherwise set out in the Plan or Annuity Contract, the Plan Administrator may delegate recordkeeping and other duties which are necessary for the administration of the Plan to any person or firm which agrees to accept such duties. The Plan Administrator shall be entitled to rely upon all tables, valuations, certificates and reports furnished by the consultant or actuary appointed by the Plan Administrator and upon all opinions given by any counsel selected or approved by the Plan Administrator. The Plan Administrator shall receive all claims for benefits by Participants, former Participants, Beneficiaries, spouses, and Contingent Annuitants. The Plan Administrator shall determine all facts necessary to establish the right of any Claimant to benefits and the amount of those benefits under the provisions of the Plan. The Plan Administrator may establish rules and procedures to be followed by Claimants in filing claims for benefits, in furnishing and verifying proofs necessary to determine age, and in any other matters required to administer the Plan. SECTION 9.02--EXPENSES. Expenses of the Plan, to the extent that the Employer does not pay such expenses, may be paid out of the assets of the Plan provided that such payment is consistent with ERISA. Such expenses include, but are not limited to, expenses for bonding required by ERISA; expenses for recordkeeping and other administrative services; fees and expenses of the Trustee or Annuity Contract; expenses for investment education service; and direct costs that the Employer incurs with respect to the Plan. SECTION 9.03--RECORDS. All acts and determinations of the Plan Administrator shall be duly recorded. All these records, together with other documents necessary for the administration of the Plan, shall be preserved in the Plan Administrator's custody. Writing (handwriting, typing, printing), photostating, photographing, microfilming, magnetic impulse, mechanical or electrical recording, or other forms of data compilation shall be acceptable means of keeping records. RESTATEMENT JANUARY 1, 2004 74 ARTICLE IX (4-47951) SECTION 9.04--INFORMATION AVAILABLE. Any Participant in the Plan or any Beneficiary may examine copies of the Plan description, latest annual report, any bargaining agreement, this Plan, the Annuity Contract or any other instrument under which the Plan was established or is operated. The Plan Administrator shall maintain all of the items listed in this section in its office, or in such other place or places as it may designate in order to comply with governmental regulations. These items may be examined during reasonable business hours. Upon the written request of a Participant or Beneficiary receiving benefits under the Plan, the Plan Administrator shall furnish him with a copy of any of these items. The Plan Administrator may make a reasonable charge to the requesting person for the copy. SECTION 9.05--CLAIM AND APPEAL PROCEDURES. A Claimant must submit any required forms and pertinent information when making a claim for benefits under the Plan. If a claim for benefits under the Plan is denied, the Plan Administrator shall provide adequate written notice to the Claimant whose claim for benefits under the Plan has been denied. The notice must be furnished within 90 days of the date that the claim is received by the Plan Administrator. The Claimant shall be notified in writing within this initial 90-day period if special circumstances require an extension of time needed to process the claim and the date by which the Plan Administrator's decision is expected to be rendered. The written notice shall be furnished no later than 180 days after the date the claim was received by the Plan Administrator. The Plan Administrator's notice to the Claimant shall specify the reason for the denial; specify references to pertinent Plan provisions on which denial is based; describe any additional material and information needed for the Claimant to perfect his claim for benefits; explain why the material and information is needed; inform the Claimant that any appeal he wishes to make must be in writing to the Plan Administrator within 60 days after receipt of the Plan Administrator's notice of denial of benefits and that failure to make the written appeal within such 60-day period renders the Plan Administrator's determination of such denial final, binding and conclusive. If the Claimant appeals to the Plan Administrator, the Claimant (or his authorized representative) may submit in writing whatever issues and comments the Claimant (or his authorized representative) feels are pertinent. The Claimant (or his authorized representative) may review pertinent Plan documents. The Plan Administrator shall reexamine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Plan Administrator shall advise the Claimant of its decision within 60 days of his written request for review, unless special circumstances (such as a hearing) would make rendering a decision within the 60-day limit unfeasible. The Claimant must be notified within the 60-day limit if an extension is necessary. The Plan Administrator shall render a decision on a claim for benefits no later than 120 days after the request for review is received. SECTION 9.06--DELEGATION OF AUTHORITY. All or any part of the administrative duties and responsibilities under this article may be delegated by the Plan Administrator to a retirement committee. The duties and responsibilities of the retirement committee shall be set out in a separate written agreement. RESTATEMENT JANUARY 1, 2004 75 ARTICLE IX (4-47951) SECTION 9.07--EXERCISE OF DISCRETIONARY AUTHORITY. The Employer, Plan Administrator, and any other person or entity who has authority with respect to the management, administration, or investment of the Plan may exercise that authority in its/his full discretion, subject only to the duties imposed under ERISA. This discretionary authority includes, but is not limited to, the authority to make any and all factual determinations and interpret all terms and provisions of the Plan documents relevant to the issue under consideration. The exercise of authority will be binding upon all persons; will be given deference in all courts of law; and will not be overturned or set aside by any court of law unless found to be arbitrary and capricious or made in bad faith. SECTION 9.08--TRANSACTION PROCESSING. Transactions (including, but not limited to, investment directions, trades, loans, and distributions) shall be processed as soon as administratively practicable after proper directions are received from the Participant or such other parties. No guarantee is made by the Plan, Plan Administrator, Trustee, Insurer, or Employer that such transactions will be processed on a daily or other basis, and no guarantee is made in any respect regarding the processing time of such transactions. Notwithstanding any other provision of the Plan, the Employer, the Plan Administrator, or the Trustee reserves the right to not value an investment option on any given Valuation Date for any reason deemed appropriate by the Employer, the Plan Administrator, or the Trustee. Administrative practicality will be determined by legitimate business factors (including, but not limited to, failure of systems or computer programs, failure of the means of the transmission of data, force majeure, the failure of a service provider to timely receive values or prices, and correction for errors or omissions or the errors or omissions of any service provider) and in no event will be deemed to be less than 14 days. The processing date of a transaction shall be binding for all purposes of the Plan and considered the applicable Valuation Date for any transaction. SECTION 9.09--VOTING AND TENDER OF QUALIFYING EMPLOYER SECURITIES. Voting rights with respect to Qualifying Employer Securities will be passed through to Participants. Participants will be allowed to direct the voting rights of Qualifying Employer Securities for any matter put to the vote of shareholders. Before each meeting of shareholders, the Employer shall cause to be sent to each person with power to control such voting rights a copy of any notice and any other information provided to shareholders and, if applicable, a form for instructing the Trustee how to vote at such meeting (or any adjournment thereof) the number of full and fractional shares subject to such person's voting control. The Trustee may establish a deadline in advance of the meeting by which such forms must be received in order to be effective. Each Participant shall be entitled to one vote for each share credited to his Account. If some or all of the Participants have not directed or have not timely directed the Trustee on how to vote or if there are unallocated shares of Qualifying Employer Securities, then the Trustee shall vote such Qualifying Employer Securities in the same proportion as those shares of Qualifying Employer Securities for which the Trustee has received proper direction for such matter. RESTATEMENT JANUARY 1, 2004 76 ARTICLE IX (4-47951) Tender rights or exchange offers for Qualifying Employer Securities will be passed through to Participants. As soon as practicable after the commencement of a tender or exchange offer for Qualifying Employer Securities, the Employer shall cause each person with power to control the response to such tender or exchange offer to be advised in writing the terms of the offer and, if applicable, to be provided with a form for instructing the Trustee, or for revoking such instruction, to tender or exchange shares of Qualifying Employer Securities, to the extent permitted under the terms of such offer. In advising such persons of the terms of the offer, the Employer may include statements from the board of directors setting forth its position with respect to the offer. If some or all of the Participants have not directed or have not timely directed the Trustee on how to tender or if there are unallocated shares of Qualifying Employer Securities, then the Trustee shall tender such Qualifying Employer Securities in the same proportion as those shares of Qualifying Employer Securities for which the Trustee has received proper direction for such matter. If the tender or exchange offer is limited so that all of the shares that the Trustee has been directed to tender or exchange cannot be sold or exchanged, the shares that each Participant directed to be tendered or exchanged shall be deemed to have been sold or exchanged in the same ratio that the number of shares actually sold or exchanged bears to the total number of shares that the Trustee was directed to tender or exchange. The Trustee shall hold the Participant's individual directions with respect to voting rights or tender decisions in confidence and, except as required by law, shall not divulge or release such individual directions to anyone associated with the Employer. The Employer may require verification of the Trustee's compliance with the directions received from Participants by any independent auditor selected by the Employer, provided that such auditor agrees to maintain the confidentiality of such individual directions. The Employer may develop procedures to facilitate the exercise of votes or tender rights, such as the use of facsimile transmissions for the Participants located in physically remote areas. RESTATEMENT JANUARY 1, 2004 77 ARTICLE IX (4-47951) ARTICLE X GENERAL PROVISIONS SECTION 10.01--AMENDMENTS. The Employer may amend this Plan at any time, including any remedial retroactive changes (within the time specified by Internal Revenue Service regulations), to comply with any law or regulation issued by any governmental agency to which the Plan is subject. An amendment may not diminish or adversely affect any accrued interest or benefit of Participants or their Beneficiaries nor allow reversion or diversion of Plan assets to the Employer at any time, except as may be required to comply with any law or regulation issued by any governmental agency to which the Plan is subject. No amendment to this Plan shall be effective to the extent that it has the effect of decreasing a Participant's accrued benefit. However, a Participant's Account may be reduced to the extent permitted under Code Section 412(c)(8). For purposes of this paragraph, a Plan amendment which has the effect of decreasing a Participant's Account with respect to benefits attributable to service before the amendment shall be treated as reducing an accrued benefit. Furthermore, if the vesting schedule of the Plan is amended, in the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such Employee's right to his employer-derived accrued benefit shall not be less than his percentage computed under the Plan without regard to such amendment. No amendment to the Plan shall be effective to eliminate or restrict an optional form of benefit with respect to benefits attributable to service before the amendment except as provided in the MERGERS AND DIRECT TRANSFERS SECTION of this article and below: (a) The Plan is amended to eliminate or restrict the ability of a Participant to receive payment of his (a) Account balance under a particular optional form of benefit and the amendment satisfies the condition in ( 1) and the Plan satisfies the condition in (2) below: (1) The amendment provides a single sum distribution form that is otherwise identical to the optional form of benefit eliminated or restricted. For purposes of this condition (1), a single sum distribution form is otherwise identical only if it is identical in all respects to the eliminated or restricted optional form of benefit (or would be identical except that it provides greater rights to the Participant) except with respect to the timing of payments after commencement. (2) The Plan provides that the amendment shall not apply to any distribution with an Annuity (2) Starting Date earlier than the earlier of: the 90th day after the date the Participant receiving the distribution has been (i) furnished a summary that reflects the amendment and that satisfies the ERISA requirements at 29 CFR 2520.104b-3 relating to a summary of material modifications, or RESTATEMENT JANUARY 1, 2004 78 ARTICLE X (4-47951) (ii) the first day of the second Plan Year following the Plan Year in which the amendment is adopted. (b) The Plan is amended to eliminate or restrict in-kind distributions and the conditions in Q&A 2(b)(2)(iii) in section 1.411(d)-4 of the regulations are met. If, as a result of an amendment, an Employer Contribution is removed that is not 100% immediately vested when made, the applicable vesting schedule shall remain in effect after the date of such amendment. The Participant shall not become immediately 100% vested in such Contributions as a result of the elimination of such Contribution except as otherwise specifically provided in the Plan. An amendment shall not decrease a Participant's vested interest in the Plan. If an amendment to the Plan, or a deemed amendment in the case of a change in top-heavy status of the Plan as provided in the MODIFICATION OF VESTING REQUIREMENTS SECTION of Article XI, changes the computation of the percentage used to determine that portion of a Participant's Account attributable to Employer Contributions which is nonforfeitable (whether directly or indirectly), each Participant or former Participant (c) who has completed at least three Years of Service on the date the election period described below ends (five Years of Service if the Participant does not have at least one Hour-of-Service in a Plan Year beginning after December 31, 1988) and (d) whose nonforfeitable percentage will be determined on any date after the date of the change may elect, during the election period, to have the nonforfeitable percentage of his Account that results from Employer Contributions determined without regard to the amendment. This election may not be revoked. If after the Plan is changed, the Participant's nonforfeitable percentage will at all times be as great as it would have been if the change had not been made, no election needs to be provided. The election period shall begin no later than the date the Plan amendment is adopted, or deemed adopted in the case of a change in the top-heavy status of the Plan, and end no earlier than the 60th day after the latest of the date the amendment is adopted (deemed adopted) or becomes effective, or the date the Participant is issued written notice of the amendment (deemed amendment) by the Employer or the Plan Administrator. SECTION 10.02--DIRECT ROLLOVERS. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this section, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. Any distributions made under the SMALL AMOUNTS SECTION of this article (or which are small amounts payments made under Article VIII at complete termination of the Plan) which are Eligible Rollover Distributions and for which the Distributee has not elected to either have such distribution paid to him or to an Eligible Retirement Plan shall be paid to the Distributee. RESTATEMENT JANUARY 1, 2004 79 ARTICLE X (4-47951) SECTION 1O.O3--MERGERS AND DIRECT TRANSFERS The Plan may not be merged or consolidated with, nor have its assets or liabilities transferred to, any other retirement plan, unless each Participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit the Participant would have been entitled to receive immediately before the merger, consolidation, or transfer (if this Plan had then terminated). The Employer may enter into merger agreements or direct transfer of assets agreements with the employers under other retirement plans which are qualifiable under Code Section 401(a), including an elective transfer, and may accept the direct transfer of plan assets, or may transfer plan assets, as a party to any such agreement. The Employer shall not consent to, or be a party to a merger, consolidation, or transfer of assets with a defined benefit plan if such action would result in a defined benefit feature being maintained under this Plan. Notwithstanding any provision of the Plan to the contrary, to the extent any optional form of benefit under the Plan permits a distribution prior to the Employee's retirement, death, disability, or severance from employment, and prior to plan termination, the optional form of benefit is not available with respect to benefits attributable to assets (including the post-transfer earnings thereon) and liabilities that are transferred, within the meaning of Code Section 414(l), to this Plan from a money purchase pension plan qualified under Code Section 401(a) (other than any portion of those assets and liabilities attributable to voluntary employee contributions). The Plan may accept a direct transfer of plan assets on behalf of an Eligible Employee. If the Eligible Employee is not an Active Participant when the transfer is made, the Eligible Employee shall be deemed to be an Active Participant only for the purpose of investment and distribution of the transferred assets. Employer Contributions shall not be made for or allocated to the Eligible Employee and he may not make Participant Contributions, until the time he meets all of the requirements to become an Active Participant. The Plan shall hold, administer, and distribute the transferred assets as a part of the Plan. The Plan shall maintain a separate account for the benefit of the Employee on whose behalf the Plan accepted the transfer in order to reflect the value of the transferred assets. Unless a transfer of assets to the Plan is an elective transfer as described below, the Plan shall apply the optional forms of benefit protections described in the AMENDMENTS SECTION of this article to all transferred assets. A Participant's protected benefits may be eliminated upon transfer between qualified defined contribution plans if the conditions in Q&A 3(b)(1) in section 1.411(d)-4 of the regulations are met. The transfer must meet all of the other applicable qualification requirements. A Participant's protected benefits may be eliminated upon transfer between qualified plans (both defined benefit and defined contribution) if the conditions in Q&A 3(c)(1) in section 1.411(d)-4 of the regulations are met. Beginning January 1, 2002, if the Participant is eligible to receive an immediate distribution of his entire nonforfeitable accrued benefit in a single sum distribution that would consist entirely of an eligible rollover distribution under Code Section 401(a)(31), such transfer will be accomplished as a direct rollover under Code Section 401(a)(31). The rules applicable to distributions under the plan would apply to the transfer, but the transfer would not be treated as a distribution for purposes of the minimum distribution requirements of Code Section 401(a)(9). RESTATEMENT JANUARY l, 2004 80 ARTICLE X (4-47951) SECTION 10.04--PROVISIONS RELATING TO THE INSURER AND OTHER PARTIES. The obligations of an Insurer shall be governed solely by the provisions of the Annuity Contract. The Insurer shall not be required to perform any act not provided in or contrary to the provisions of the Annuity Contract. Each Annuity Contract when purchased shall comply with the Plan. See the CONSTRUCTION SECTION of this article. Any issuer or distributor of investment contracts or securities is governed solely by the terms of its policies, written investment contract, prospectuses, security instruments, and any other written agreements entered into with the Trustee with regard to such investment contracts or securities. Such Insurer, issuer or distributor is not a party to the Plan, nor bound in any way by the Plan provisions. Such parties shall not be required to look to the terms of this Plan, nor to determine whether the Employer, the Plan Administrator, the Trustee, or the Named Fiduciary have the authority to act in any particular manner or to make any contract or agreement. Until notice of any amendment or termination of this Plan or a change in Trustee has been received by the Insurer at its home office or an issuer or distributor at their principal address, they are and shall be fully protected in assuming that the Plan has not been amended or terminated and in dealing with any party acting as Trustee according to the latest information which they have received at their home office or principal address. SECTION 10.05--EMPLOYMENT STATUS. Nothing contained in this Plan gives an Employee the right to be retained in the Employer's employ or to interfere with the Employer's right to discharge any Employee. SECTION 10.06--RIGHTS TO PLAN ASSETS. An Employee shall not have any right to or interest in any assets of the Plan upon termination of employment or otherwise except as specifically provided under this Plan, and then only to the extent of the benefits payable to such Employee according to the Plan provisions. Any final payment or distribution to a Participant or his legal representative or to any Beneficiaries, spouse or Contingent Annuitant of such Participant under the Plan provisions shall be in full satisfaction of all claims against the Plan, the Named Fiduciary, the Plan Administrator, the Insurer, the Trustee, and the Employer arising under or by virtue of the Plan. SECTION 10.07--BENEFICIARY. Each Participant may name a Beneficiary to receive any death benefit (other than any income payable to a Contingent Annuitant) that may arise out of his participation in the Plan. The Participant may change his Beneficiary from time to time. Unless a qualified election has been made, for purposes of distributing any death benefits before the Participant's Retirement Date, the Beneficiary of a Participant who has a spouse who is entitled to a Qualified Preretirement Survivor Annuity shall be the Participant's spouse. The Participant's Beneficiary designation and any change of Beneficiary shall be subject to the provisions of the ELECTION RESTATEMENT JANUARY 1, 2004 81 ARTICLE X (4-47951) PROCEDURES SECTION of Article VI. It is the responsibility of the Participant to give written notice to the Insurer of the name of the Beneficiary on a form furnished for that purpose. With the Employer's consent, the Plan Administrator may maintain records of Beneficiary designations for Participants before their Retirement Dates. In that event, the written designations made by Participants shall be filed with the Plan Administrator. If a Participant dies before his Retirement Date, the Plan Administrator shall certify to the Insurer the Beneficiary designation on its records for the Participant. If there is no Beneficiary named or surviving when a Participant dies, the Participant's Beneficiary shall be the Participant's surviving spouse, or where there is no surviving spouse, the executor or administrator of the Participant's estate. SECTION 10.08--NONALIENATION OF BENEFITS. Benefits payable under the Plan are not subject to the claims of any creditor of any Participant, Beneficiary, spouse or Contingent Annuitant. A Participant, Beneficiary, spouse or Contingent Annuitant does not have any rights to alienate, anticipate, commute, pledge, encumber, or assign any of such benefits, except in the case of a loan as provided in the LOANS TO PARTICIPANTS SECTION of Article V. The preceding sentences shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant according to a domestic relations order, unless such order is determined by the Plan Administrator to be a qualified domestic relations order, as defined in Code Section 414(p), or any domestic relations order entered before January 1, 1985. The preceding sentences shall not apply to any offset of a Participant's benefits provided under the Plan against an amount the Participant is required to pay the Plan with respect to a judgement, order, or decree issued, or a settlement entered into, on or after August 5, 1997, which meets the requirements of Code Sections 401 (a)(13)(C) or (D). SECTION 10.09--CONSTRUCTION. The validity of the Plan or any of its provisions is determined under and construed according to Federal law and, to the extent permissible, according to the laws of the state in which the Employer has its principal office. In case any provision of this Plan is held illegal or invalid for any reason, such determination shall not affect the remaining provisions of this Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included. In the event of any conflict between the provisions of the Plan and the terms of any Annuity Contract issued hereunder, the provisions of the Plan control. SECTION 10.10--LEGAL ACTIONS. No person employed by the Employer; no Participant, former Participant, or their Beneficiaries; nor any other person having or claiming to have an interest in the Plan is entitled to any notice of process. A final judgment entered in any such action or proceeding shall be binding and conclusive on all persons having or claiming to have an interest in the Plan. RESTATEMENT JANUARY 1, 2004 82 ARTICLE X (4-47951) SECTION 10.11--SMALL AMOUNTS. If consent of the Participant is not required for a benefit which is immediately distributable in the ELECTION PROCEDURES SECTION of Article VI, a Participant's entire Vested Account shall be paid in a single sum as of the earliest of his Retirement Date, the date he dies, or the date he ceases to be an Employee for any other reason (the date the Employer provides notice to the record keeper of the Plan of such event, if later). For purposes of this section, if the Participant's Vested Account is zero, the Participant shall be deemed to have received a distribution of such Vested Account. If a Participant would have received a distribution under the first sentence of this paragraph but for the fact that the Participant's consent was needed to distribute a benefit which is immediately distributable, and if at a later time consent would not be needed to distribute a benefit which is immediately distributable and such Participant has not again become an Employee, such Vested Account shall be paid in a single sum. This is a small amounts payment. If a small amounts payment is made as of the date the Participant dies, the small amounts payment shall be made to the Participant's Beneficiary (spouse if the death benefit is payable to the spouse). If a small amounts payment is made while the Participant is living, the small amounts payment shall be made to the Participant. The small amounts payment is in full settlement of benefits otherwise payable. No other small amounts payments shall be made. SECTION 10.12--WORD USAGE. The masculine gender, where used in this Plan, shall include the feminine gender and the singular words, as used in this Plan, may include the plural, unless the context indicates otherwise. The words "in writing" and "written," where used in this Plan, shall include any other forms, such as voice response or other electronic system, as permitted by any governmental agency to which the Plan is subject. SECTION 10.13--CHANGE IN SERVICE METHOD. (a) Change of Service Method Under This Plan. If this Plan is amended to change the method of crediting service from the elapsed time method to the hours method for any purpose under this Plan, the Employee's service shall be equal to the sum of (1), (2), and (3) below: (1) The number of whole years of service credited to the Employee under the Plan as of the date the change is effective. (2) One year of service for the applicable computation period in which the change is effective if he is credited with the required number of Hours-of-Service. If the Employer does not have sufficient records to determine the Employee's actual Hours-of-Service in that part of the service period before the effective date of the change, the Hours-of-Service shall be determined using an equivalency. For any month in which he would be required to be credited with one Hour-of-Service, the Employee shall be deemed for purposes of this section to be credited with 190 Hours-of-Service. RESTATEMENT JANUARY 1, 2004 83 ARTICLE X (4-47951) (3) The Employee's service determined under this Plan using the hours method after the end of the computation period in which the change in service method was effective. If this Plan is amended to change the method of crediting service from the hours method to the elapsed time method for any purpose under this Plan, the Employee's service shall be equal to the sum of (4), (5), and (6) below: (4) The number of whole years of service credited to the Employee under the Plan as of the beginning of the computation period in which the change in service method is effective. (5) the greater of (i) the service that would be credited to the Employee for that entire computation period using the elapsed time method or (ii) the service credited to him under the Plan as of the date the change is effective. (6) The Employee's service determined under this Plan using the elapsed time method after the end of the applicable computation period in which the change in service method was effective . (b) Transfers Between Plans with Different Service Methods. If an Employee has been a participant in another plan of the Employer which credited service under the elapsed time method for any purpose which under this Plan is determined using the hours method, then the Employee's service shall be equal to the sum of (1 ), (2), and (3) below: (1) The number of whole years of service credited to the Employee under the plan as of the date he became an Eligible Employee under this Plan. (2) One year of service for the applicable computation period in which he became an Eligible Employee if he is credited with the required number of Hours-of-Service. If the Employer does not have sufficient records to determine the Employee's actual Hours-of-Service in that part of the service period before the date he became an Eligible Employee, the Hours-of-Service shall be determined using an equivalency. For any month in which he would be required to be credited with one Hour-of-Service, the Employee shall be deemed for purposes of this section to be credited with 190 Hours-of-Service. (3) The Employee's service determined under this Plan using the hours method after the end of the computation period in which he became an Eligible Employee. If an Employee has been a participant in another plan of the Employer which credited service under the hours method for any purpose which under this plan is determined using the elapsed time method, then the Employee's service shall be equal to the sum of (4), (5), and (6) below: (4) The number of whole years of service credited to the Employee under the other plan as of the beginning of the computation period under that plan in which he became an Eligible Employee under this Plan. (5) The greater of (i) the service that would be credited to the Employee for that entire computation period using the elapsed time method or (ii) the service credited to him under the other plan as of the date he became an Eligible Employee under this Plan. RESTATEMENT JANUARY 1, 2004 84 ARTICLE X (4-47951) (6) The Employee's service determined under this Plan using the elapsed time method after the end of the applicable computation period under the other plan in which he became an Eligible Employee. If an Employee has been a participant in a Controlled Group member's plan which credited service under a different method than is used in this Plan, in order to determine entry and vesting, the provisions in (b) above shall apply as though the Controlled Group member's plan were a plan of the Employer. Any modification of service contained in this Plan shall be applicable to the service determined pursuant to this section. SECTION 10.14--MILITARY SERVICE. Notwithstanding any provision of this Plan to the contrary, the Plan shall provide contributions, benefits, and service credit with respect to qualified military service in accordance with Code Section 414(u). Loan repayments shall be suspended under this Plan as permitted under Code Section 414(u). RESTATEMENT JANUARY 1, 2004 85 ARTICLE X (4-47951) ARTICLE XI TOP-HEAVY PLAN REQUIREMENTS SECTION 11.01--APPLICATION The provisions of this article shall supersede all other provisions in the Plan to the contrary. For the purpose of applying the Top-heavy Plan requirements of this article, all members of the Controlled Group shall be treated as one Employer. The term Employer, as used in this article, shall be deemed to include all members of the Controlled Group, unless the term as used clearly indicates only the Employer is meant. The accrued benefit or account of a participant which results from deductible employee contributions shall not be included for any purpose under this article. The minimum vesting and contribution provisions of the MODIFICATION OF VESTING REQUIREMENTS and MODIFICATION OF CONTRIBUTIONS SECTIONS of this article shall not apply to any Employee who is included in a group of Employees covered by a collective bargaining agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, including the Employer, if there is evidence that retirement benefits were the subject of good faith bargaining between such representatives. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are employees who are owners, officers, or executives. SECTION 11.02--DEFINITIONS. For purposes of this article the following terms are defined: Aggregation Group means: (a) each of the Employer's qualified plans in which a Key Employee is a participant during the Plan Year containing the Determination Date (regardless of whether the plan was terminated) or one of the four preceding Plan Years, (b) each of the Employer's other qualified plans which allows the plan(s) described in (a) above to meet the nondiscrimination requirement of Code Section 401(a)(4) or the minimum coverage requirement of Code Section 410, and (c) any of the Employer's other qualified plans not included in (a) or (b) above which the Employer desires to include as part of the Aggregation Group. Such a qualified plan shall be included only if the Aggregation Group would continue to satisfy the requirements of Code Section 401(a)(4) and Code Section 410. The plans in (a) and (b) above constitute the "required" Aggregation Group. The plans in (a), (b), and (c) above constitute the "permissive" Aggregation Group. RESTATEMENT JANUARY 1, 2004 86 ARTICLE XI (4-47951) Compensation means compensation as defined in the CONTRIBUTION LIMITATION SECTION of Article III. For purposes of determining who is a Key Employee in years beginning before January 1, 1998, Compensation shall include, in addition to compensation as defined in the CONTRIBUTION LIMITATION SECTION of Article III elective contributions. Elective contributions are amounts excludible from the gross income of the Employee under Code Sections 125, 402(e)(3), 402(h)(1)(B), or 403(b), and contributed by the Employer, at the Employee's election, to a Code Section 401(k) arrangement, a simplified employee pension, cafeteria plan, or tax-sheltered annuity. Elective contributions also include amounts deferred under a Code Section 457 plan maintained by the Employer. Determination Date means as to any plan, for any plan year subsequent to the first plan year, the last day of the preceding plan year. For the first plan year of the plan, the last day of that year. Key Employee means any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the determination period was: (a) an officer of the Employer if such individual's annual Compensation exceeds 50 percent of the dollar limitation under Code Section 415(b)(1)(A), (b) an owner (or considered an owner under Code Section 318) of one of the ten largest interests in the Employer if such individual's annual Compensation exceeds 100 percent of the dollar limitation under Code Section 415(c)(1)(A), (c) a 5-percent owner of the Employer, or (d) a 1-percent owner of the Employer who has annual Compensation of more than $150,000. The determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. The determination of who is a Key Employee shall be made according to Code Section 416(i)(1) and the regulations thereunder. Non-key Employee means any Employee who is not a Key Employee. Present Value means the present value of a participant's accrued benefit under a defined benefit plan. For purposes of establishing Present Value to compute the Top-heavy Ratio, any benefit shall be discounted only for 7.5% interest and mortality according to the 1971 Group Annuity Table (Male) without the 7% margin but with projection by Scale E from 1971 to the later of (a) 1974, or (b) the year determined by adding the age to 1920, and wherein for females the male age six years younger is used. Top-heavy Plan means a plan which is top-heavy for any plan year beginning after December 31, 1983 This Plan shall be top-heavy if any of the following conditions exist: (a) The Top-heavy Ratio for this Plan exceeds 60 percent and this Plan is not part of any required Aggregation Group or permissive Aggregation Group. (b) This Plan is a part of a required Aggregation Group, but not part of a permissive Aggregation Group, and the Top-heavy Ratio for the required Aggregation Group exceeds 60 percent. RESTATEMENT JANUARY 1, 2004 87 ARTICLE XI (4-47951) (c) This Plan is a part of a required Aggregation Group and part of a permissive Aggregation Group and the Top-heavy Ratio for the permissive Aggregation Group exceeds 60 percent. Top-heavy Ratio means: (a) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer has not maintained any defined benefit plan which during the five-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-heavy Ratio for this Plan alone or for the required or permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) (including any part of any account balance distributed in the five-year period ending on the Determination Date(s)), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the five-year period ending on the Distribution Date(s)), both computed in accordance with Code Section 416 and the regulations thereunder. Both the numerator and denominator of the Top-heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Code Section 416 and the regulations thereunder. (b) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer maintains or has maintained one or more defined benefit plans which during the five-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-heavy Ratio for any required or permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of the account balances under the aggregated defined contribution plan or plans of all Key Employees determined in accordance with (a) above, and the Present Value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all participants, determined in accordance with (a) above, and the Present Value of accrued benefits under the defined benefit plan or plans for all participants as of the Determination Date(s), all determined in accordance with Code Section 416 and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-heavy Ratio are increased for any distribution of an accrued benefit made in the five-year period ending on the Determination Date. (c) For purposes of (a) and (b) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Code Section 416 and the regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a participant (i) who is not a Key Employee but who was a Key Employee in a prior year or (ii) who has not been credited with at least an hour of service with any employer maintaining the plan at any time during the five-year period ending on the Determination Date will be disregarded. The calculation of the Top-heavy Ratio and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code Section 416 and the regulations thereunder. Deductible employee contributions will not be taken into account for purposes of computing the Top-heavy Ratio. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. RESTATEMENT JANUARY 1, 2004 88 ARTICLE XI (4-47951) The accrued benefit of a participant other than a Key Employee shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code Section 411(b)(1)(C). SECTION 11.03--MODIFICATION OF VESTING REQUIREMENTS. If a Participant's Vesting Percentage determined under Article I is not at least as great as his Vesting Percentage would be if it were determined under a schedule permitted in Code Section 416, the following shall apply. During any Plan Year in which the Plan is a Top-heavy Plan, the Participant's Vesting Percentage shall be the greater of the Vesting Percentage determined under Article I or the schedule below.
VESTING SERVICE NONFORFEITABLE (whole years) PERCENTAGE Less than 2 0 2 20 3 40 4 60 5 80 6 or more 100
The schedule above shall not apply to Participants who are not credited with an Hour-of-Service after the Plan first becomes a Top-heavy Plan. The Vesting Percentage determined above applies to the portion of the Participant's Account which is multiplied by a Vesting Percentage to determine his Vested Account, including benefits accrued before the effective date of Code Section 416 and benefits accrued before this Plan became a Top-heavy Plan. If, in a later Plan Year, this Plan is not a Top-heavy Plan, a Participant's Vesting Percentage shall be determined under Article I. A Participant's Vesting Percentage determined under either Article I or the schedule above shall never be reduced and the election procedures of the AMENDMENTS SECTION of Article X shall apply when changing to or from the schedule as though the automatic change were the result of an amendment. The part of the Participant's Vested Account resulting from the minimum contributions required pursuant to the MODIFICATION OF CONTRIBUTIONS SECTION of this article (to the extent required to be nonforfeitable under Code Section 416(b)) may not be forfeited under Code Section 411(a)(3)(B) or (D). SECTION 11.04--MODIFICATION OF CONTRIBUTIONS. During any Plan Year in which this Plan is a Top-heavy Plan, the Employer shall make a minimum contribution as of the last day of the Plan Year for each Non-key Employee who is an Employee on the last day of the Plan Year and who was an Active Participant at any time during the Plan Year. A Non-key Employee is not required to have a minimum number of Hours-of-Service or minimum amount of Compensation in order to be entitled to this minimum. A Non-key Employee who fails to be an Active Participant merely because his Compensation is less than a stated amount or merely because of a failure to make mandatory participant RESTATEMENT JANUARY 1, 2004 89 ARTICLE XI (4-47951) contributions or, in the case of a cash or deferred arrangement, elective contributions shall be treated as if he were an Active Participant. The minimum is the lesser of (a) or (b) below: (a) 3 percent of such person's Compensation for such Plan Year. (b) The "highest percentage" of Compensation for such Plan Year at which the Employer's contributions are made for or allocated to any Key Employee. The highest percentage shall be determined by dividing the Employer Contributions made for or allocated to each Key Employee during the Plan Year by the amount of his Compensation for such Plan Year, and selecting the greatest quotient (expressed as a percentage). To determine the highest percentage, all of the Employer's defined contribution plans within the Aggregation Group shall be treated as one plan. The minimum shall be the amount in (a) above if this Plan and a defined benefit plan of the Employer are required to be included in the Aggregation Group and this Plan enables the defined benefit plan to meet the requirements of Code Section 401(a)(4) or 410. For purposes of (a) and (b) above, Compensation shall be limited by Code Section 401(a)(17). If the Employer's contributions and allocations otherwise required under the defined contribution plan(s) are at least equal to the minimum above, no additional contribution shall be required. If the Employer's total contributions and allocations are less than the minimum above, the Employer shall contribute the difference for the Plan Year. The minimum contribution applies to all of the Employer's defined contribution plans in the aggregate which are Top-heavy Plans. A minimum contribution under a profit sharing plan shall be made without regard to whether or not the Employer has profits. If a person who is otherwise entitled to a minimum contribution above is also covered under another defined contribution plan of the Employer's which is a Top-heavy Plan during that same Plan Year, any additional contribution required to meet the minimum above shall be provided in this Plan. If a person who is otherwise entitled to a minimum contribution above is also covered under a defined benefit plan of the Employer's which is a Top-heavy Plan during that same Plan Year, the minimum benefits for him shall not be duplicated. The defined benefit plan shall provide an annual benefit for him on, or adjusted to, a straight life basis equal to the lesser of: (c) 2 percent of his average compensation multiplied by his years of service, or (d) 20 percent of his average compensation. Average compensation and years of service shall have the meaning set forth in such defined benefit plan for this purpose. For purposes of this section, any employer contribution made according to a salary reduction or similar arrangement and employer contributions which are matching contributions, as defined in Code Section 401(m), shall not apply in determining if the minimum contribution requirement has been met, but shall apply in determining the minimum contribution required. The requirements of this section shall be met without regard to any Social Security contribution. RESTATEMENT JANUARY 1, 2004 90 ARTICLE XI (4-47951) By executing this Plan, the Primary Employer acknowledges having counseled to the extent necessary with selected legal and tax advisors regarding the Plan's legal and tax implications. Executed this 30th day of December, 2003. WILMINGTON TRUST COMPANY BY: /s/ Michael A. DiGregorio ------------------------------ S.V.P ---------------------------- Title Defined Contribution Plan 8.0 [X] By my signature above, I hereby execute this Plan on behalf of each Adopting Employer identified in the ADOPTING EMPLOYERS-SINGLE PLAN SECTION of Article II. RESTATEMENT JANUARY 1, 2004 91 PLAN EXECUTION (4-47951) EX-10.45 5 w94679exv10w45.txt AMENDED EXECUTIVE INCENTIVE PLAN AMENDED EXECUTIVE INCENTIVE PLAN EXHIBIT 10.45 WILMINGTON TRUST CORPORATION AMENDED EXECUTIVE INCENTIVE PLAN 1. Purpose. The purpose of the Wilmington Trust Corporation ("Wilmington Trust") Executive Incentive Plan (the "Incentive Plan") is to provide senior management annual cash awards to that recognize and reward the achievement of performance goals. 2. Effective Date of Plan. The Incentive Plan shall be effective as of January 1, 1999, but any payments under the Incentive Plan to individuals a portion of whose compensation would be subject to Section 162(m) of the Internal Revenue Code and the related regulations ("Section 162(m)") and that Wilmington Trust deserves to deduct ("Section 162(m) Participants") shall be made contingent on the Incentive Plan's approval by Wilmington Trust's shareholders. 3. Plan Administrator. Wilmington Trust's Compensation Committee shall administer the Incentive Plan. The Compensation Committee consists of members appointed by the Board of Directors from time to time. Each member of the Compensation Committee shall be an "outside director" within the meaning of Section 162 (m). The Compensation Committee shall have full power and authority, subject to the provisions of the plan and applicable law, to (a) establish, amend, suspend, or waive rules and regulations and appoint agents it deems necessary or advisable for the plan's proper administration, (b) construe, interpret, and administer the plan and any instrument or agreement relating to the plan, and (c) make all other determinations and take all other actions necessary or advisable for the plan's administration. Unless the Incentive Plan expressly provides otherwise, each determination the Compensation Committee makes and each action it takes pursuant to the plan or any instrument or agreement relating to the plan (x) shall be within the Compensation Committee's sole discretion, (y) may be made at any time, and (z) shall be final, binding, and conclusive for all purposes on all persons, including participants in the plan, their legal representatives, and beneficiaries and employees of Wilmington Trust and its subsidiaries. 4. Eligibility. The Chief Executive Officer, the President, and other senior officers of Wilmington Trust and its subsidiaries are eligible to participate in the Incentive Plan if the Compensation Committee designates them. 5. Awards. 5.1. For each calendar year (a "Plan Year"), at such times as the Compensation Committee determines, it shall establish the basis and terms of participation of participants who are not Section 162(m) Participants. In doing so, the Compensation Committee may establish one or more quantitative or qualitative performance or other goals or criteria as the basis for awarding executives bonuses under the Incentive Plan. 5.1 For Section 162(m) Participants, within 90 days after the commencement of each Plan Year, the Compensation Committee shall designate: a. The officers who will be deemed Section 162(m) Participants for that Plan Year; b. The Financial Criteria that will apply to awards to Section 162(m) Participants for the Plan Year; and -1- c. The Performance Goals the Corporation must meet for Section 162(m) Participants to earn awards for the Plan Year and a payout matrix or formula for those Financial Criteria and Performance Goals. After the 90th day of a Plan Year, the Compensation Committee may designate additional officers as participants in the Plan for that Plan Year. However, any award a participant who also is a Section 162(m) Participant earns for that partial Plan Year will be pro-rated based on the number of days during the Plan Year in which the participant participates in the Plan. The Performance Goals for those additional Section 162(m) Participants will be established before 25% of the days remaining in that partial Plan Year have expired. Any participant who terminates employment, either voluntarily or involuntarily, before awards are paid for a Plan Year will be ineligible for an award under the Plan. However, the Compensation Committee may, in its sole and complete discretion, determine to pay an award if termination was due to death, disability, retirement, or a Change in Control of the Corporation, but: x. No such payment shall be made to any participant for a Plan Year before awards for that Plan Year are payable generally; and y. No such payment shall be made to any Section 162(m) Participant unless the Performance Goals established for that participant have been attained. For purposes hereof, the term "Change in Control" means any of the events described below, directly or indirectly or in one or more series of transactions: (1) Approval by Wilmington Trust Company's ("WTC's") or Wilmington Trust's stockholders of a consolidation or merger of WTC or Wilmington Trust with any third party (including a single person or entity or a group of persons or entities acting in concert) not wholly-owned, directly or indirectly, by WTC or Wilmington Trust (a "Third Party"), unless WTC or Wilmington Trust is the entity surviving that merger or consolidation; (2) Approval by WTC's or Wilmington Trust's stockholders of a transfer of all or substantially all of the assets of WTC or Wilmington Trust to a Third Party or of a complete liquidation or dissolution of WTC or Wilmington Trust; (3) Any person, entity, or group which is a Third Party, without prior approval of WTC's or Wilmington Trust's Board of Directors, by itself or through one or more subsidiaries: (a) Acquires beneficial ownership of 15% or more of any class of WTC's or Wilmington Trust's voting stock; (b) Acquires irrevocable proxies representing 15% or more of any class of WTC's or Wilmington Trust's voting stock; (c) Acquires any combination of beneficial ownership of voting stock and irrevocable proxies representing 15% or more of any class of WTC's or Wilmington Trust's voting stock; (d) Acquires the ability to control in any manner the election of a majority of WTC's or Wilmington Trust's directors; or -2- (e) Acquires the ability to exercise a controlling influence over the management or policies of WTC or Wilmington Trust, directly or indirectly; or (4) Any election occurs of persons to Wilmington Trust's Board of Directors that causes a majority of that Board of Directors to consist of persons other than (x) persons who were members of that Board of Directors on February 29, 1996 (the "Effective Date") and/or (y) persons who were nominated for election as members of that Board of Directors by Wilmington Trust's Board of Directors (or a committee thereof) at a time when the majority of that Board of Directors (or that committee) consisted of persons who were members of Wilmington Trust's Board of Directors on the Effective Date. However, any person nominated for election by Wilmington Trust's Board of Directors (or a committee thereof), a majority of whom are persons described in clauses (x) and/or (y), or are persons who were themselves nominated by that Board of Directors (or a committee thereof), shall be deemed for this purpose to have been nominated by a Board of Directors composed of persons described in clause (x) above. However, a Change in Control shall not include any of the events described above if they (i) occur in connection with the appointment of a receiver or conservator for WTC or Wilmington Trust, provision of assistance under Section 13(c) of the Federal Deposit Insurance Act (the "FDI Act"), the approval of a supervisory merger, a determination that WTC is in default as defined in Section 3(x) of the FDI Act, insolvent or in an unsafe or unsound condition to transact business, or, with respect to any participant, the suspension, removal, and/or temporary or permanent prohibition by a regulatory agency of that participant from participating in WTC's or Wilmington Trust's business or (ii) are the result of a Third Party inadvertently acquiring beneficial ownership or irrevocable proxies or a combination of both for 15% or more of any class of WTC's or Wilmington Trust's voting stock, and that Third Party as promptly as practicable thereafter divests itself of the beneficial ownership or irrevocable proxies for a sufficient number of shares so that the Third Party no longer has beneficial ownership or irrevocable proxies or a combination of both for 15% or more of any class of WTC's or Wilmington Trust's voting stock. 6. Financial Criteria. For each Plan Year, the Compensation Committee shall designate one or more financial criteria (the "Financial Criteria") set forth in this Section 6 for use in determining awards for Section 162(m) Participants for that Plan Year. Financial Criteria shall consist of one or more of the following financial measures: earnings per share, return on equity, return on assets, income, fees, assets, stockholder return, expenses, chargeoffs, nonperforming assets, and overhead ratio. Any of the Financial Criteria may be company-wide or on a departmental, divisional, regional, or individual basis. In addition, any of the Financial Criteria may be measured in absolute terms, by reference to internal performance targets, or as compared to another company or companies, and may be measured by the change in that performance target compared to a previous period. The Compensation Committee retains the discretion to determine whether an award will be paid under any one or more of the Financial Criteria. 7. Performance Goals. For each Plan Year, the Compensation Committee shall establish specific, objective performance goals (the "Performance Goals"), the outcome of which is substantially uncertain at the time they are established, for each of the Financial Criteria the Compensation Committee designates for that Plan Year against which actual performance is to be measured to determine the amount of awards to Section 162(m) Participants. Performance Goals the -3- Compensation Committee establishes may be described by means of a matrix or formula providing for goals resulting in the payment of awards under the plan. 8. Form of Awards. 8.1. Form of Awards. The Compensation Committee may grant awards in the form of cash, stock, restricted stock, or other types of awards valued in whole or in part by reference to, or otherwise based on, shares of Wilmington Trust stock. Subject to the provisions hereof, the Committee shall have the sole and absolute discretion to determine the persons to whom and the time or times at which those awards are made, the number of shares to be granted pursuant thereto, if any, and all other conditions of those awards. Any award for restricted stock shall be confirmed by an award agreement. The award agreement shall contain provisions the Compensation Committee determines necessary or appropriate to carry out the intent hereof with respect to the award. Any such awards may be represented in whole or in part by certified shares or uncertified shares, at the Compensation Committee's sole discretion. 8.2. Terms of Awards. In addition to the terms and conditions specified in the award agreement, awards shall be subject to the following: a. Any shares subject to awards may not be sold, assigned, transferred, pledged, or otherwise encumbered before the date on which those shares are issued or, if later, the date on which any applicable restriction, performance, or deferral period lapses; b. If specified in the award agreement, the recipient of an award shall be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to the shares covered by that award, and the Compensation Committee may, in its sole and absolute discretion, provide in the award agreement that those amounts be reinvested in additional shares; c. The award agreement shall contain provisions dealing with the disposition of the award in the event of the termination of the participant's employment before the exercise, realization, or payment of the award. The Compensation Committee may, in its sole and absolute discretion, waive any of the restrictions imposed with respect to any award; and d. Shares issued as a bonus pursuant hereto shall be issued for the consideration the Compensation Committee determines is appropriate, in its sole and absolute discretion, but rights to purchase shares shall be priced at least 100% of the market value per share on the date the award is granted. 9. Determination and Payment of Awards. 9.1. As soon as practicable after the end of a Plan Year, the Compensation Committee will determine the amount of the award each participant has earned. For Section 162(m) Participants, that determination will be made based on application of the criteria specified in Section 6. However, the Compensation Committee may, in its sole and absolute discretion, reduce the amount which would otherwise be payable under the Incentive Plan. Payments will be made promptly after the Compensation Committee determines the amount of the awards unless payment of an award has been deferred pursuant to Section -4- 10.6. The Compensation Committee's determination with respect to Section 162(m) Participants must include its certification in writing that the Performance Goals and any other terms of the award were satisfied. Minutes of the Compensation Committee's meeting or any action by written consent shall satisfy the written certification requirement. 9.2. The Corporation shall pay awards under the Incentive Plan in cash, stock, or "phantom stock" units. The Compensation Committee may grant awards in respect of up to a total of 100,000 shares of stock under the Incentive Plan. 9.3. Notwithstanding anything to the contrary contained herein, the maximum dollar amount with respect to which awards may be granted under the Incentive Plan for any Plan Year to any participant may not exceed $2,000,000. 10. Taxes. If the Compensation Committee deems it necessary or desirable, Wilmington Trust shall be entitled to withhold (or secure payment from a participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or that Wilmington Trust pays (a) with respect to any amount payable and/or shares issuable under that participant's award, or (b) with respect to any income recognized upon the lapse of restrictions applicable to an award. Wilmington Trust may defer payment or issuance of the cash or shares upon the grant, exercise or vesting of an award unless indemnified to its satisfaction against any liability for that tax. The Compensation Committee or its delegate shall determine the amount of that withholding or tax payment. The participant shall make that payment at the time the Compensation Committee determines. In each award agreement, the Compensation Committee shall prescribe one or more methods by which the participant may satisfy his or her tax withholding obligation. This may include the participant's paying Wilmington Trust cash or shares of Wilmington Trust stock or Wilmington Trust's withholding from the award, at the appropriate time, a number of shares sufficient to satisfy those tax withholding requirements, based on the market value per share of those shares. In its sole and absolute discretion, the Compensation Committee may establish rules and procedures relating to any withholding methods it deems necessary or appropriate. These may include rules and procedures relating to elections by participants who are subject to Section 16 of the Securities Exchange Act to have shares withheld from an award to meet those withholding obligations. 11. Changes in Wilmington Trust's Capital Structure. The existence of outstanding awards shall not affect the right of Wilmington Trust or its shareholders to make or authorize any and all adjustments, recapitalizations, reclassifications, reorganizations, and other changes in Wilmington Trust's capital structure, Wilmington Trust's business, any merger or consolidation of Wilmington Trust, any issue of bonds, debentures, or preferred stock, Wilmington Trust's liquidation or dissolution, any sale or transfer of all or any part of Wilmington Trust's assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise. The number and kind of shares subject to outstanding awards, the purchase or exercise price of those awards, and the number and kind of shares available for awards subsequently granted shall be adjusted appropriately to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation, or other change in capitalization with a similar substantive effect on the Plan or awards granted hereunder. The Compensation Committee shall have the power and sole and absolute discretion to determine the nature and amount of the adjustment to be made in each case. However, in no event shall any adjustment be made under the provisions of this Section 11 to any outstanding award if an adjustment has been made or will be made to the shares of Wilmington Trust stock awarded to a participant in that person's capacity as a shareholder. If Wilmington Trust is merged or consolidated with another entity and Wilmington Trust is not the surviving entity, or if Wilmington Trust is liquidated or sells or otherwise disposes of all or -5- substantially all of its assets to another entity while unexercised awards remain outstanding, then (a) subject to the provisions of Section 11(b) below, after the effective date of that merger, consolidation, liquidation, or sale, each holder of an outstanding award hereunder shall be entitled to receive, upon exercise or vesting of that award in lieu of shares, other stock or other securities as the holders of shares of Wilmington Trust stock received in the merger, consolidation, liquidation, or sale; and (b) the Compensation Committee may cancel all outstanding awards as of the effective date of that merger, consolidation, liquidation, or sale, provided that (i) notice of that cancellation has been given to each holder of an award and (ii) in addition to any rights he or she may have under Section 5 above, each holder of an award hereunder shall have the right to that award or the exercise of that award in full, without regard to any limitations set forth in or imposed pursuant to the Incentive Plan, during a 30-day period preceding the effective date of the merger, consolidation, liquidation, or sale. The exercise and/or vesting of any award that was permissible solely because of this Section 11(b)(ii) shall be conditioned on consummation of the merger, consolidation, liquidation, or sale. Any Awards not exercised as of the date of the merger, consolidation, liquidation, or sale shall terminate as of that date. If Wilmington Trust is consolidated or merged with another entity under circumstances in which Wilmington Trust is the surviving entity, and its outstanding shares are converted into shares of a third entity, a condition to the merger or consolidation shall be that the third entity succeed to Wilmington Trust's rights and obligations hereunder, and that the Plan be administered by a committee of the Board of that entity. Comparable rights shall accrue to each participant in the event of successive reorganizations, mergers, consolidations, or other transactions similar to those described above. Except as expressly provided herein, Wilmington Trust's issuance of shares or any other securities for cash, property, labor, or services, either upon direct sale, the exercise of rights or warrants to subscribe therefor, or conversion of shares or obligations of Wilmington Trust convertible into shares or other securities shall not affect, and no adjustment by reason thereof shall be made with respect to, the number, class, or price of shares then subject to awards outstanding. After any reorganization, merger, or consolidation in which Wilmington Trust or one of its subsidiaries or affiliates is a surviving entity, the Compensation Committee may grant substituted awards replacing old awards granted under a plan of another party to the reorganization, merger, or consolidation whose stock subject to the old options or awards may no longer be issued following that reorganization, merger, or consolidation. The Compensation Committee shall determine the foregoing adjustments and the manner in which the foregoing provisions are applied in its sole and absolute discretion. Any of those adjustments may provide for eliminating any fractional shares of Wilmington Trust stock that might otherwise become subject to any awards. 12. Termination, Suspension, or Modification of the Incentive Plan. The Board of Directors may at any time, with or without notice, terminate, suspend, or modify the Incentive Plan in whole or in part. The Board of Directors shall not amend the Incentive Plan in violation of law or in contravention of Section 162(m). The Compensation Committee may make any amendments to the Incentive Plan not in violation of law required to conform the Incentive Plan to the requirements of Section 162(m). The Compensation Committee also may correct any defect, supply any omission, or reconcile any inconsistency in the Incentive Plan in the manner and to the extent it deems desirable to carry the Incentive Plan into effect. 13. Miscellaneous. 13.1. No Assignment. No award under the Incentive Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, including any liability which is for alimony or other payment for the support of a spouse or former spouse, or for any other relative of a participant, prior to actually being received by the participant or his or her designated beneficiary. Any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge, or otherwise dispose of any right to an award hereunder shall be void. 13.2 No Right of Employment. Neither the adoption of the Incentive Plan, the determination of eligibility to participate in the Incentive Plan, nor the granting of an award under the Incentive Plan shall confer upon any participant any right to continue in the employ of Wilmington Trust or any of its subsidiaries or interfere in any way with the right of Wilmington Trust or its subsidiaries to terminate that employment at any time. 13.3 Governing Law. The Incentive Plan and all determinations under it shall be governed by and construed in accordance with Delaware law, other than the conflict of law provisions of those laws, and except as that law is superseded by Federal law. 13.4 Other Plans. Nothing in the Incentive Plan shall be construed as limiting the authority of the Compensation Committee, the Board of Directors, Wilmington Trust, or any subsidiary of Wilmington Trust to establish any other compensation plan or as in any way limiting its or their authority to pay bonuses or supplemental compensation to any persons employed by Wilmington Trust or a subsidiary of Wilmington Trust, whether that person is a participant and regardless of how the amount of that compensation or bonus is determined. 13.5 Deferrals of Awards. A participant may elect to defer payment of his or her award under the Incentive Plan if deferral of the award under the Incentive Plan is permitted pursuant to the terms of a deferred compensation program of Wilmington Trust existing at the time the election to defer is permitted to be made and the participant complies with the terms of that program. 13.6 Section 162(m). It is Wilmington Trust's intention that all payments made under the Incentive Plan to Section 162(m) Participants shall constitute "performance-based compensation" as that term is defined for purposes of Section 162(m). Accordingly, unless the Board of Directors expressly determines otherwise, if any provision of the Incentive Plan is found not to be in compliance with that provision, that provision shall be deemed amended so that the provision does comply to the extent permitted by law. In every event, the Incentive Plan shall be construed in favor of those payments meeting the "performance-based compensation" exception contained in Section 162(m). Notwithstanding anything to the contrary contained herein, the Compensation Committee retains discretion to grant awards hereunder that do not comply with Section 162(m). -6- EX-10.53 6 w94679exv10w53.txt 2ND AMENDED & RESTATED LIMITED LIABILITY CO. AGMT. CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FILED WITH THE SEC AND IS MARKED BY AN ASTERISK [*] SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF ROXBURY CAPITAL MANAGEMENT, LLC DATED AS OF AUGUST 1, 2003 EXHIBIT 10.53 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FILED WITH THE SEC AND IS MARKED BY AN ASTERISK [*] SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF ROXBURY CAPITAL MANAGEMENT, LLC TABLE OF CONTENTS
Page ---- 1 DEFINED TERMS..........................................................................................2 2 GENERAL PROVISIONS....................................................................................14 2.1 Formation, Name and Continuation.............................................................14 2.2 Term.........................................................................................14 2.3 Registered Agent and Office; Principal Place of Business.....................................14 2.4 Fiscal Year..................................................................................15 3 PURPOSE AND POWERS OF THE LLC.........................................................................15 3.1 Purpose......................................................................................15 3.2 Powers of the LLC............................................................................15 3.3 Authorized Persons...........................................................................15 4 MEMBERS...............................................................................................15 4.1 Voting.......................................................................................15 4.2 Meetings of Members..........................................................................15 4.3 Quorum.......................................................................................16 4.4 Action by Consent............................................................................16 4.5 Telephonic Meetings..........................................................................16 4.6 Non-voting Members...........................................................................16 5 MANAGERS AND OFFICERS.................................................................................16 5.1 Managers.....................................................................................16 5.2 Designation of Managers......................................................................17 5.3 Term.........................................................................................17 5.4 Resignation or Removal of a Manager..........................................................17 5.5 Vacancies....................................................................................17 5.6 Meetings.....................................................................................17 5.7 Quorum.......................................................................................18 5.8 Action by Consent............................................................................18 5.9 Telephonic Meetings..........................................................................18 5.10 Managers as Agents; Limitation on Power of Members...........................................18 5.11 Board Action.................................................................................18 5.12 Approval of Annual Budget....................................................................19 5.13 Officers.....................................................................................19 5.14 Powers of the Board; Powers of Officers......................................................19 5.15 Reimbursement................................................................................20 5.16 Duties of Managers...........................................................................20 5.17 Fiduciary Duties.............................................................................20 6 CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; DISTRIBUTIONS; ALLOCATIONS..................................21 6.1 Capital Contributions........................................................................21 6.2 Capital Accounts.............................................................................21 6.3 Distributions................................................................................21 6.4 Allocation of Profits and Losses.............................................................23 6.5 Special Allocations..........................................................................24 6.6 Tax Allocations: Code Section 704(c).........................................................24
6.7 Proration for Partial Years..................................................................25 7 TRANSFER OF LLC INTERESTS, PUT AND CALL OPTIONS, MANDATORY PURCHASES AND ADMISSION OF ADDITIONAL MEMBERS........................................................................25 7.1 Assignability of Interests...................................................................25 7.2 Put Options..................................................................................26 7.3 Purchase on Occurrence of an Extraordinary Event or a Wilmington Call........................27 7.4 LLC Interests Subject to Option Rights.......................................................28 7.5 Substitute Members...........................................................................28 7.6 Recognition of Transfer by LLC...............................................................29 7.7 Effective Date of Transfer; Order of Puts, Calls and Purchases Under Section 7.3(b)..........29 7.8 Indemnification..............................................................................29 7.9 Issuance of Additional LLC Interests.........................................................30 7.10 Assignment of Wilmington's Rights and Obligations............................................30 8 BOOKS AND RECORDS.....................................................................................30 8.1 Books, Records and Financial Statements......................................................30 8.2 Accounting Method............................................................................31 9 TAX .............................................................................................31 9.1 Tax Matters Member...........................................................................31 9.2 Section 754 Election.........................................................................31 10 LIABILITY, EXCULPATION AND INDEMNIFICATION...........................................................32 10.1 Liability....................................................................................32 10.2 Exculpation..................................................................................32 10.3 Indemnification..............................................................................32 10.4 Expenses.....................................................................................33 11 CERTAIN COVENANTS....................................................................................33 11.1 Compliance with Laws; Maintenance............................................................33 12 DISSOLUTION, LIQUIDATION AND TERMINATION.............................................................34 12.1 Events Causing Dissolution...................................................................34 12.2 Notice of Dissolution........................................................................34 12.3 Liquidation..................................................................................34 12.4 Termination..................................................................................35 12.5 Claims of the Members........................................................................35 13 INTENTIONALLY DELETED................................................................................35 14 MISCELLANEOUS........................................................................................35 14.1 Amendments...................................................................................35 14.2 Notices......................................................................................35 14.3 Waivers......................................................................................36 14.4 Binding Effect...............................................................................36 14.5 Severability.................................................................................36 14.6 Counterparts.................................................................................37 14.7 Governing Law; Arbitration...................................................................37 14.8 Captions.....................................................................................37 14.9 Gender.......................................................................................37 14.10 Third Party Beneficiaries....................................................................37 14.11 Failure to Pursue Remedies...................................................................37
2 14.12 Cumulative Remedies..........................................................................37 14.13 Integration..................................................................................37 15 CLASS B INTERESTS....................................................................................38 15.1 Defined Terms................................................................................38 15.2 Distributions; Allocations; Proration........................................................40 15.3 Put Right....................................................................................41 15.4 Transfer.....................................................................................41 15.5 Reorganization...............................................................................41 15.6 Sale on Termination..........................................................................42 15.7 Execution of Agreement; Representations and Warranties.......................................43 15.8 Amendments...................................................................................43
3 SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF ROXBURY CAPITAL MANAGEMENT, LLC This Second Amended and Restated Limited Liability Company Agreement of Roxbury Capital Management, LLC (the "LLC") is made and is effective as of August 1, 2003 (this "Agreement"), by and among Roxbury Capital Management, a California corporation ("Roxbury"), WT Investments, Inc. ("WTI"), a Delaware corporation which is a wholly-owned subsidiary of Wilmington Trust Company, a Delaware-chartered bank and trust company ("WTC"), Wilmington Trust Corporation, a Delaware corporation ("Wilmington"), the Principals (as hereinafter defined) and the Class B Members (as hereinafter defined). A. WHEREAS, the LLC has heretofore been formed as a limited liability company pursuant to the Delaware Limited Liability Company Act, 6 Del. C. Section.18-101, et seq., as amended from time to time (the "Delaware Act"), by the filing of a Certificate of Formation of the LLC with the office of the Secretary of State of the State of Delaware on April 14, 1998, as amended by that certain Certificate of Amendment dated July 20, 1998 (as amended, the "Certificate"), and by the execution of the Limited Liability Company Agreement of the LLC by Roxbury and Anthony H. Browne as of April 14, 1998 (the "Original LLC Agreement"); B. WHEREAS, the Original LLC Agreement was subsequently amended and restated pursuant to that certain Amended and Restated Limited Liability Company Agreement dated as of July 31, 1998, which has been amended pursuant to that certain First Amendment to the Amended and Restated Limited Liability Company Agreement dated as of July 31, 1998, that certain Second Amendment to the Amended and Restated Limited Liability Company Agreement dated as of March 10, 2001, and that certain Third Amendment to the Amended and Restated Limited Liability Company Agreement dated as of June 30, 2002 (collectively, the "A/R LLC Agreement"); C. WHEREAS, pursuant to the LLC Interest Purchase Agreement (as hereinafter defined), WTI purchased 1,000,000 Preferred Membership Points (as hereinafter defined) in the LLC from Roxbury; D. WHEREAS, the Members desire to amend certain provisions of the A/R LLC Agreement, and to restate the A/R LLC Agreement in its entirety as set forth herein; and E. WHEREAS, the Members desire to continue to operate the LLC as a limited liability company under the Delaware Act on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, Roxbury, the Principals, Wilmington, WTI and the Class B Members, intending to be legally bound hereby, all agree as follows: 1 DEFINED TERMS Unless the context otherwise requires, the terms defined in this Article 1 shall, for the purposes of this Agreement, have the meanings herein specified. 1.1 "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year or other period, after giving effect to the following adjustments: (i) Credit to such Capital Account for any amounts that such Member is deemed to be obligated to restore with respect to any deficit balance in its Capital Account pursuant to Sections 1.704-1(b)(2)(ii)(b)(3) and 1.704-1(b)(2)(ii)(c) of the Treasury Regulations; (ii) Credit to such Capital Account for any amounts that such Member is (or would be) deemed to be obligated to restore with respect to any deficit balance in its Capital Account pursuant to Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Treasury Regulations; and (iii) Debit to such Capital Account the items described in Sections 1.704- 1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6) of the Treasury Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations and shall be interpreted consistently therewith. 1.2 "Adjusted Free Cash Flow" for a Fiscal Year means the Free Cash Flow for such Fiscal Year adjusted by subtracting [*]% of any revenue not attributable to Advisory Fees for such Fiscal Year. 1.3 "Adjusted LLC Value" is the LLC Value that shall be used to determine the Call Price. If a Wilmington Call is exercised prior to the third anniversary of the Commencement Date, the Adjusted LLC Value shall equal the Adjusted Free Cash Flow for the Fiscal Year ending on the Determination Date immediately preceding the year in which the Wilmington Call Notice is delivered. If a Wilmington Call is exercised after the third anniversary of the Commencement Date, but prior to the fourth anniversary of the Commencement Date, the Adjusted LLC Value shall be computed in the same manner as the LLC Value using a multiple that is reduced by two. If a Wilmington Call is exercised after the fourth anniversary of the Commencement Date, but prior to the fifth anniversary of the Commencement Date, the Adjusted LLC Value shall be computed in the same manner as the LLC Value using a multiple that is reduced by one. If a * CONFIDENTIAL TREATMENT REQUESTED 2 Wilmington Call is exercised after the fifth anniversary of the Commencement Date, the Adjusted LLC Value shall equal the LLC Value. 1.4 "Advance Payment" means, with respect to the purchase of LLC Interests under Section 7.3(b) hereof upon the occurrence of an Extraordinary Event, an amount equal to the product of (i) [*] and (ii) [ * ] times the Average Adjusted Free Cash Flow for the Fiscal Year immediately preceding the year in which such Extraordinary Event occurs. 1.5 "Advisory Fees" means the fees for investment advisory, sub-advisory, investment management, or administration services payable to the LLC pursuant to written agreements with Clients, with the following adjustments: (a) Advisory Fees shall exclude the Oregon Fees (as defined in Article 15 hereof), and (b) Advisory Fees shall include [*] of the Oregon Surplus FCF, as defined in Article 15. 1.6 "Affiliate" of a designated Person means a Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with the designated Person. As used in this definition, the term "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power (a) to vote 10% or more of the outstanding voting securities of the designated Person or (b) otherwise direct the management policies of the designated Person by contract or otherwise. An "Affiliate" of a Person also includes any officer, director, member or partner of the designated Person and, if the designated Person is an officer, director, member or partner, any company for which such Person acts in such capacity. 1.7 "Average Adjusted Free Cash Flow" has the meaning set forth in the definition of LLC Value. 1.8 "Board" has the meaning set forth in Section 4.2 hereof. 1.9 "Business Day" means a day when WTC is open for business. 1.10 "Call Price" means an amount equal to the Adjusted LLC Value multiplied by a fraction, the numerator of which is the number of Class A Common Membership Points included in the LLC Interests to be purchased by Wilmington or its designee from a Principal or Roxbury and the denominator of which is the sum of all of the Class A Common Membership Points outstanding on the Purchase Closing Date plus all Class A Common Membership Points relating to LLC Interests that have been issued or may be purchased from the LLC pursuant to an Incentive Plan or options issued thereunder that are outstanding, exercisable and unexercised in whole or in part on the Purchase Closing Date. 1.11 "Capital Account" means, with respect to any Member, the Capital Account established and maintained for such Member in accordance with the provisions of Section 1.704- 1(b)(2)(iv) of the Treasury Regulations. * CONFIDENTIAL TREATMENT REQUESTED 3 1.12 "Carrying Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Carrying Value of any asset contributed by a Member to the LLC shall be the gross fair market value of such asset, as determined by the contributing Member and the Board; (ii) The Carrying Value of all assets of the LLC shall be adjusted to equal their respective gross fair market values, as determined by the Board, as of the following times: (a) the acquisition of an additional interest in the LLC by any new or existing Member in exchange for a capital contribution; (b) the distribution by the LLC to a Member of property as consideration for an interest in the LLC; and (c) the liquidation of the LLC within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations; provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the Board reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the LLC; (iii) The Carrying Value of any asset distributed by the LLC to any Member shall be the gross fair market value of such asset on the date of distribution; and (iv) The Carrying Value of assets of the LLC shall be increased or decreased to reflect any adjustments to the adjusted bases of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations; provided, however, that Carrying Values shall not be adjusted pursuant to this clause (iv) to the extent the Board determines that an adjustment pursuant to clause (ii) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this clause (iv). If the Carrying Value of an asset has been determined or adjusted pursuant to clause (i), (ii) or (iv) hereof, such Carrying Value shall thereafter be adjusted by the Depreciation taken into account with respect to such assets for purposes of computing Profits and Losses. 1.13 "Cause" means: (i) a willful and intentional material breach of this Agreement by a Principal or an employee that is not remedied within twenty (20) Business Days after written notice thereof to the Principal or employee by the LLC; provided, however, that neither notice nor opportunity to cure need be given if there is a repeat of the same type of breach for which a prior notice has been given; (ii) an act of fraud, misappropriation, dishonesty, embezzlement or similar conduct by a Principal or an employee involving the business or assets of the LLC, a Client or a Wilmington Client; (iii) willful misconduct or gross negligence by a Principal or an employee in connection with the performance of his duties for the LLC; 4 (iv) any conduct on the part of a Principal or an employee that constitutes a willful breach of any statutory or common law duty of loyalty owed to the LLC, a Client or a Wilmington Client; (v) a Principal's or an employee's conviction of a felony; or (vi) a disqualification or revocation of a registration or license held by a Principal or an employee that would preclude the performance of the material duties by him or her for the LLC. 1.14 "Certificate" has the meaning set forth in the recitals hereof. 1.15 "Change of Control" means (i) the acquisition by any Person or group of Persons of beneficial ownership, as that term is defined in Rule 13d-3 promulgated under the Exchange Act, directly or indirectly, of 25% or more of the outstanding capital stock of WTI, Wilmington or WTC entitled to vote for the election of directors ("Voting Shares"); (ii) the acquisition by any Person or group of Persons (other than WTI, WTC or Wilmington) of "beneficial ownership," as that term is defined in Rule 13d-3 promulgated under the Exchange Act, of 50% or more of the total outstanding Preferred Membership Points or 50% or more of the total outstanding Class A Common Membership Points; (iii) the merger or consolidation of WTI, Wilmington or WTC with one or more other Persons as a result of which the holders of the outstanding Voting Shares of WTI, Wilmington or WTC, respectively, immediately before the merger or consolidation hold less than 50% of the Voting Shares of the surviving or resulting Person; (iv) the merger or consolidation of the LLC with one or more other Persons (other than WTI, WTC or Wilmington) as a result of which the holders of the outstanding Preferred Membership Points immediately before the merger or consolidation hold less than 50% of the total outstanding Preferred Membership Points (or equivalent) of the surviving or resulting Person, or the holders of the outstanding Class A Common Membership Points immediately before the merger or consolidation hold less than 50% of the total outstanding Class A Common Membership Points (or equivalent) of the surviving or resulting Person; (v) the sale of all or substantially all of WTI's, WTC's, Wilmington's or the LLC's assets; or (vi) a proxy contest for the election of directors of Wilmington that results in Persons constituting the Board of Directors of Wilmington immediately prior to the initiation of such proxy contest ceasing to constitute a majority of the Board of Directors of Wilmington upon the conclusion of such proxy contest; provided, however, that neither (x) any transfer of the capital stock or assets of WTI, Wilmington or WTC to, or merger or consolidation of WTI, Wilmington or WTC with or into, (A) an entity that prior to and after such transfer, merger or consolidation has been and will be consolidated with WTI, Wilmington or WTC for federal income tax purposes, or (B) any newly-formed, wholly owned subsidiary of WTI, Wilmington or WTC that will be consolidated with WTI, Wilmington or WTC for federal income tax purposes, nor (y) a transfer of Common Interests by one or more Principals to one or more Permitted Transferees or Related Entities, shall be deemed to be a Change of Control for purposes of this Agreement. 5 1.16 "Class A Member" shall mean a Member of the LLC owning Class A Common Membership Points. 1.17 "Class B Member" has the meaning set forth in Article 15 hereof. 1.18 "Client" and "Clients" shall mean, at any particular time, any Person who is at such time an investment management customer or client of the LLC, any Person who, within the twelve (12) months immediately preceding such time, had been but at such time is not then an investment management customer or client of the LLC, and any Person to whom the LLC, through any of its managers, officers or employees, has within one (1) year prior to such time offered, by means of a personal meeting with representatives of such Person, to serve as investment manager but who is not at such time an investment management customer or client of the LLC. The term "Client," when used in this Agreement with respect to wrap accounts, shall mean the wrap sponsors, but not the underlying wrap account holders. 1.19 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any corresponding federal tax statute enacted after the date of this Agreement. A reference to a specific section of the Code refers not only to such specific section but also to any corresponding provision of any Federal tax statute enacted after the date of this Agreement, as such specific section or corresponding provision is in effect on the date of application of the provisions of this Agreement containing such reference. 1.20 "Commencement Date" means, with respect to any Person exercising a Put under Section 7.2 hereof or whose LLC Interests are the subject of a Wilmington Call, the date on which such Person first (i) becomes a Member; (ii) is granted an option to purchase a Common Interest pursuant to an Option Agreement or an Incentive Plan; or (iii) receives a Common Interest (whether or not vested) pursuant to an Incentive Plan. 1.21 "Common Interest" means an interest (including Common Membership Points, distribution and allocation rights, and any capital accounts) in the LLC held by a Common Member. A Common Interest represents a claim only on future profits of the LLC (i.e., profits earned by the LLC after issuance of the Common Interest). A holder of Common Interests has no interest in the capital of the LLC with respect to such Common Interests at the time such Common Interests are issued, and is not entitled to receive any assets upon liquidation of the LLC, except to the extent it has a positive balance in its Capital Account. 1.22 "Common Member" means the Founding Principal, the Principals, Roxbury, Wilmington, the Class A Members, the Class B Members (but only to the extent provided in Article 15 hereof) and any other Person subsequently admitted to the LLC as a Common Member. 1.23 "Common Membership Points" means those Membership Points relating to Common Interests owned by Common Members. There shall be two classes of Common Membership Points, "Class A Common Membership Points" and "Class B Membership Points." 6 1.24 "Delaware Act" has the meaning set forth in Recital A hereof. 1.25 "Depreciation" means, for each Fiscal Year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such Fiscal Year or other period, except that, if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year or other period bears to such beginning adjusted tax basis; provided, however, that, if the federal income tax depreciation, amortization or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the Board. 1.26 "Determination Date" means, with respect to any year, December 31 of such year. 1.27 "Disability" has the meaning set forth in a policy or policies of disability insurance, if any, obtained by the LLC for the benefit of itself and/or its employees. If there is no definition of "disability" applicable under any such policy or policies of disability insurance, if any, obtained by the LLC, or if the LLC maintains no such policy, then a Principal or an employee shall be considered disabled upon the first to occur of such Principal or employee being (a) adjudged incompetent by a court of competent jurisdiction; (b) physically or mentally incapable of performing the essential functions of his or her job for a period of 180 days in any 12-month period, in the opinion of a licensed medical doctor mutually approved by the Principal or employee and the LLC, with the heads of internal medicine at the UCLA Medical Center and Cedars Sinai Medical Center being deemed to be preapproved by each Principal, employee and the LLC; or (c) certified as permanently disabled under the provisions of the Social Security Act, as amended from time to time (in which case the date of such Disability shall be the date provided for in any such certification). 1.28 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 1.29 "Exercise Price," with respect to any LLC Interest that may be purchased pursuant to an Option Agreement, shall mean the exercise price for such LLC Interest as set forth in such Option Agreement. 1.30 "Extraordinary Events" has the meaning set forth in Section 7.3(a) hereof. 1.31 "Fair Market Value" means the amount for which any asset could be sold in an arm's length transaction by one who desires to sell, but is not under any urgent requirement to sell, to a buyer who desires to buy, but is under no urgent necessity to buy, when both have a reasonable knowledge of the facts. 1.32 "Fiscal Year" has the meaning set forth in Section 2.4 hereof. 1.33 "Founding Principal" means Anthony H. Browne. 7 1.34 "Free Cash Flow" means, with respect to any Fiscal Year, the Revenues of the LLC for such Fiscal Year, plus cash previously set aside as reserves that the Board determines is no longer needed for the LLC's business, less the sum of (i) all cash expenditures made by the LLC during such Fiscal Year, including, without limitation, operating expenses, bonuses paid to LLC employees or Principals with respect to such Fiscal Year or portion thereof, amounts paid to LLC Employees under the Profit Sharing Plan, principal and interest payments on any indebtedness of the LLC and lease payments on capitalized leases; (ii) all distributions made to the Preferred Members with respect to such Fiscal Year pursuant to Section 6.3(a)(i); and (iii) such funds as shall have been set aside by the Board as reserves for contingencies, working capital, debt service, taxes, insurance or other costs and expenses in connection with the LLC's business. 1.35 "Good Reason" means (i) a material breach by the LLC of its employment agreement with a Principal or an employee; (ii) action taken by the LLC which causes a material diminution in the position, authority, duties or responsibilities of a Principal or an employee without the consent of the Principal or employee, excluding for this purpose any isolated, immaterial or inadvertent action, and any action which is remedied by the LLC promptly after receipt of a notice thereof given by the Principal or employee, which notice shall be given by the Principal or employee within sixty (60) days of the adverse action; or (iii) a Change of Control. 1.36 "Historic Preferred Share" shall have the meaning set forth in Section 6.4(b) hereof. 1.37 "Incentive Plan" has the meaning set forth in Section 7.9 hereof. 1.38 "Investment Advisory Agreement" means (i) the Investment Advisory Agreement between Roxbury Partners Special Fund - II and the LLC or (ii) the Investment Advisory Agreement between Ocean Avenue Investors, LLC and the LLC, in each case in substantially the same form as the respective existing agreement between such entity and Roxbury. 1.39 "Liquidating Trustee" has the meaning set forth in Section 12.2 hereof. 1.40 "LLC" means Roxbury Capital Management, LLC, the limited liability company formed by the Original LLC Agreement and Certificate and continued under and pursuant to the Delaware Act, the A/R LLC Agreement and this Agreement. 1.41 "LLC Interest" means a Common Interest or a Preferred Interest. 1.42 "LLC Interest Purchase Agreement" means the Limited Liability Company Preferred Interest Purchase Agreement dated as of April 24, 1998 by and among the LLC, Roxbury, the Founding Principal, Kevin P. Riley, Harry Wilson, WTI, Wilmington and WTC, as it may, from time to time, be amended. 1.43 "LLC Value" is the fair market value of the LLC, which shall be determined by multiplying the average of the Adjusted Free Cash Flow for the two Fiscal Years ending on the Determination Date immediately preceding the Purchase Closing 8 Date ("Average Adjusted Free Cash Flow") by: (i) [*], if the compound annual growth rate of Advisory Fees for the five Fiscal Years ending on the Determination Date immediately preceding the Purchase Closing Date is 0% or less; or (ii) [*], if the compound annual growth rate of Advisory Fees for the five Fiscal Years ending on the Determination Date immediately preceding the Purchase Closing Date is [*] or more. If the compound annual growth rate of Advisory Fees for the five Fiscal Years ending on the Determination Date immediately preceding the Purchase Closing Date is between 0% and [*], the multiple will be interpolated evenly between [*] and [*]. LLC Value shall be determined only once each year; the determination will be made on or before February 28 of each year with respect to LLC Value as of December 31 of the immediately preceding year. 1.44 "Majority Vote" means the written approval of, or the affirmative vote by, Voting Members holding a majority of the Membership Points held by all Voting Members, as set forth on Schedule 1 hereto. 1.45 "Manager" has the meaning set forth in Section.18-101(10) of the Delaware Act. A Manager shall be deemed to be an "employee" of the LLC for purposes of Sections 1.13, 1.27, 1.35 and 1.69 of this Agreement. 1.46 "Members" means the Preferred Members and the Common Members. 1.47 "Membership Points" means, as of any date, with respect to a Member, the number of Common or Preferred Membership Points relating to the Member's LLC Interest set forth opposite such Member's name on Schedule 1 hereto, and as in effect on such date. For all voting purposes, Membership Points owned by Non-voting Members may not be voted and are not counted in the calculation of total Membership Points outstanding. 1.48 "Non-voting Member" means: (i) a Class B Member, and (ii) any other Member owning an LLC Interest but, pursuant to Section 4.6 hereof, not having the right to vote such Membership Points. 1.49 "Officers" has the meaning set forth in Section 5.13 hereof. 1.50 "Option Agreement" means any written agreement by which a Person is granted the right to purchase an LLC Interest from Roxbury. 1.51 "Original LLC Agreement" has the meaning set forth in the recitals hereof. 1.52 "Permitted Transferee" shall mean WTI, Wilmington, WTC, an officer of the LLC and, with respect to any Principal, the parents, siblings, spouses, issue or spouses of issue of such Principal (in any such case who are the age of 21 or over) and any trust created by one or more of such aforementioned individuals of which such individual or individuals are the trustees. * CONFIDENTIAL TREATMENT REQUESTED 9 1.53 "Person" means any individual, partnership (general or limited), corporation, limited liability company, limited liability partnership, association, trust, joint venture, unincorporated organization, government, governmental department or agency, instrumentality or political subdivision thereof, or other entity of any kind or nature. 1.54 "Pre-Tax Net Income" means Revenues minus all operating expenses of the LLC, as determined by the LLC's accountants in accordance with generally accepted accounting principles. (Pre-Tax Net Income shall be calculated without deduction for any Preferred Member Revenue Share.) 1.55 "Preferred Interest" means an interest (including Preferred Membership Points, distribution and allocation rights, and any capital accounts) in the LLC held by a Preferred Member. 1.56 "Preferred Member" means WTI, in its capacity as such, any successor thereto, and any other Person subsequently admitted to the LLC as a Preferred Member. 1.57 "Preferred Membership Points" means those Membership Points relating to Preferred Interests owned by a Preferred Member. 1.58 "Preferred Member Revenue Share" shall have the meaning set forth in Section 6.3(a)(i) hereof. 1.59 "Principal" or "Principals" means the individuals identified from time to time on Schedule 1 hereto as Principals. All natural persons who hold LLC Interests and Class A Common Membership Points, including holders who have exercised options to purchase LLC Interests and Class A Common Membership Points, shall be identified on Schedule 1 as Principals. 1.60 "Principal Entities" means (i) the Principal with respect to whom an Extraordinary Event has occurred or whose employment with the LLC has terminated (other than because of an Extraordinary Event) and (ii) such Principal's estate and Related Holders. 1.61 "Profits" and "Losses" for each Fiscal Year or other period means an amount equal to the LLC's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), but computed with the following adjustments: (i) Any income of the LLC that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition of Profits and Losses shall be added to such taxable income or loss; (ii) Any expenditures of the LLC described in Code Section 705(a)(2)(b) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Treasury Regulations, and not otherwise taken into account in 10 computing Profits and Losses pursuant to this definition, shall be subtracted from such taxable income or loss; (iii) Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Carrying Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Carrying Value; (iv) In lieu of the Depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period; and (v) Notwithstanding any other provisions of this definition, any items that are specially allocated pursuant to Section 6.5 hereof or which result from an adjustment to basis of one or more Members pursuant to Code Section 734(b) or 743(b) shall not be taken into account in computing Profits or Losses. 1.62 "Profit Sharing Plan" means that certain Executive Profit Sharing Plan effective as of January 1, 2003 pursuant to which the Board may grant to key employees participation in the profits of the LLC. 1.63 "Purchase Closing Date" shall mean the date upon which LLC Interests are purchased and paid for pursuant to Sections 7.2 or 7.3 hereof. 1.64 "Put" has the meaning set forth in Section 7.2(b) hereof. 1.65 "Put Notice" has the meaning set forth in Section 7.2(d) hereof. 1.66 "Put Price" means an amount equal to the LLC Value multiplied by a fraction (the "Interest Fraction"), the numerator of which is the number of Class A Common Membership Points relating to the LLC Interest to be purchased by Wilmington or its designee from a Principal or Roxbury and the denominator of which is the sum of the number of Class A Common Membership Points outstanding on the Purchase Closing Date plus all Class A Common Membership Points relating to LLC Interests that have been issued by the LLC pursuant to an Incentive Plan or may be purchased from the LLC pursuant to Incentive Plan options that are outstanding, exercisable and unexercised in whole or in part on the Purchase Closing Date. With respect to a Put under Section 7.2(b), the Put Price shall be determined as of the Determination Date immediately preceding the Purchase Closing Date. With respect to a purchase under Section 7.3(b) hereof, the Put Price shall be determined as follows: (i) a portion of the Put Price, which portion shall be determined by multiplying a fraction, the numerator of which is the number of days the Principal has been employed by the LLC during the Fiscal Year in which the event giving rise to the purchase obligation arises and the denominator of which is 365 (the "Employment Fraction"), by the LLC Value as of the Determination Date immediately preceding the Purchase Closing Date, and (ii) the balance of the Put Price shall be determined by multiplying (A) one minus the Employment Fraction by (B) the LLC Value as of the 11 penultimate Determination Date preceding the Purchase Closing Date. For example, if (w) the LLC Value as of December 31, 2004 is $[*] million; (x) the LLC Value as of December 31, 2005 is $[*] million; (y) a Principal owns 2% of the outstanding Class A Common Membership Points determined in accordance with the preceding paragraph; and (z) such Principal resigns his employment for Good Reason with the LLC on August 1, 2004, 212/365 of the Put Price would be based on the LLC Value determined as of December 31, 2005 and 153/365 of the Put Price would be based on the LLC Value determined as of December 31, 2004. The Put Price would thus equal $[*] million x .02 x 212/365, or $[*], plus $[*] million x .02 x 153/365, or $[*], for a total Put Price of $[*]. Notwithstanding the above the Put Price with respect to any LLC Interest Roxbury owns that may be purchased pursuant to an Option Agreement shall be the lesser of: (A) the Put Price calculated under this Section 1.66, or (B) the Exercise Price for such LLC Interest. 1.67 "Related Entities" shall mean, with respect to any Member or Members, any partnership, limited liability company, corporation or family trust in which such Member or Members or a Permitted Transferee of such Member or Members own all of the partnership, membership, other equity interests, all of the capital stock, or is the trustee or beneficiary as the case may be, and with respect to WTI, shall mean any entity that is or will be consolidated with WTI or WTC for federal income tax purposes. 1.68 "Related Holder" of a Principal shall mean all Persons (other than Wilmington, WTC or WTI) who acquired LLC Interests from such Principal, from a transferee from such Principal, or from a transferee of any such transferee or subsequent transferee. 1.69 "Retirement" means, with respect to a Principal or an employee, when that Principal or employee reaches age 62; provided, however, that Retirement shall not occur with respect to a Principal or an employee who continues to work for the LLC after reaching age 62 unless the Board notifies him or her that it objects to his or her continued participation in the LLC. Retirement with respect to a Principal or an employee who continues to participate in the LLC after reaching age 62 shall occur upon the earlier of (i) the voluntary cessation by the Principal or employee of his or her employment with the LLC, or (ii) with respect to Principals or employees other than the Founding Principal, notification from the Board that it objects to such Principal's or employee's continued participation. 1.70 "Revenues" means the gross receipts of the LLC from whatever source, including without limitation gross receipts from the sales of assets; provided, however, that Revenues shall not include (A) gross receipts from the sales of all or substantially all of the LLC's assets or the deemed sales of the LLC's assets in connection with the liquidation of the LLC, (B) any Wilmington Fund Revenue, or (C) any Oregon Manager FCF, as defined in Section 15.1(l). 1.71 "Roxbury" shall have the meaning set forth in the recitals hereof. * CONFIDENTIAL TREATMENT REQUESTED 12 1.72 "Roxbury Designees" means the individuals selected by the Principals to serve on the Board in accordance with Section 5.2 hereof. 1.73 "Subsidiary" means any corporation, partnership or other organization, whether incorporated or unincorporated, of which more than fifty percent (50%) of either the equity interests or the voting control is, directly or indirectly, through Subsidiaries or otherwise, beneficially owned by the LLC, or of which the LLC or any Subsidiary serves as the general partner. 1.74 "Tax Matters Member" has the meaning set forth in Section 9.1(a) hereof. 1.75 "Transfer" has the meaning set forth in Section 7.1(a) hereof. 1.76 "Treasury Regulations" means the income tax regulations, including temporary regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). 1.77 "Voting Members" means all Members other than Non-voting Members. 1.78 "Wilmington" has the meaning set forth in the recitals hereof. 1.79 "Wilmington Call" has the meaning set forth in Section 7.3(c) hereof. 1.80 "Wilmington Call Notice" has the meaning set forth in Section 7.3(d) hereof. 1.81 "Wilmington Clients" means investment management, custody and personal trust clients of WTI, Wilmington or WTC (including any former clients who were clients of WTI, Wilmington or WTC at any time during the one-year period immediately prior to the date of a Principal's termination of employment) and any Person who has been offered, by means of a personal meeting with such Person or representatives of such Person, investment management, personal trust or custodial services by WTI, Wilmington or WTC, and any Affiliates of such current, former and prospective clients. 1.82 "Wilmington Fund Revenue" means with respect to any Fiscal Year, the lesser of $[*], or any Advisory Fees, minus any advisory fee waivers, earned by the LLC for such Fiscal Year pursuant to an investment advisory agreement with the Wilmington Large Cap Growth Portfolio for management of assets held in that mutual fund. 1.83 "WTC" shall mean Wilmington Trust Company, a Delaware-chartered bank and trust company. 1.84 "WTI"" shall mean WT Investments, Inc., a Delaware corporation, which is a wholly-owned subsidiary of WTC. * CONFIDENTIAL TREATMENT REQUESTED 13 1.85 "WTI Designee" means the individual(s) selected and authorized by WTI, its successor or assign to represent WTI and serve on the Board in accordance with Section 5.2 hereof. 2 GENERAL PROVISIONS 2.1 Formation, Name and Continuation. This Agreement supersedes and replaces the A/R LLC Agreement in its entirety and the A/R LLC Agreement shall henceforth have no effect as of and from the date hereof. The name of the LLC heretofore formed and continued hereby is Roxbury Capital Management, LLC. The business of the LLC may also be conducted under any other name or names designated by the Board from time to time. The parties hereto agree to continue the LLC and enter into this Agreement, and do hereby continue the LLC and enter into this Agreement, pursuant to the provisions of the Delaware Act and for the purposes hereinafter described. The name, mailing address, capital contribution and Membership Points of each Member shall be listed on Schedule 1. The Secretary of the LLC shall update any Schedule from time to time as necessary to accurately reflect the information required to be contained therein. Any amendment or revision to a Schedule made in accordance with this Agreement shall not be deemed an amendment to this Agreement. Any reference in this Agreement to a Schedule shall be deemed to be a reference to such Schedule as amended and in effect from time to time. 2.2 Term. The term of the LLC commenced on the date the Certificate was filed in the office of the Secretary of State of the State of Delaware and shall continue in perpetuity, unless dissolved in accordance with the provisions of this Agreement. The existence of the LLC as a separate legal entity shall continue until the cancellation of the Certificate. 2.3 Registered Agent and Office; Principal Place of Business. (a) The LLC's registered agent and office in the State of Delaware shall be WT Investments, Inc., Rodney Square North, 1100 North Market St., New Castle County, Delaware 19890. (b) The principal place of business of the LLC shall be at 100 Wilshire Boulevard, Suite 600 Santa Monica, California 90401, and the LLC shall qualify to do business in California and any other location where its business requires it to qualify to do business. (c) The Board may, at any time and from time to time: (i) change the location of the LLC's principal place of business and establish such additional place or places of business of the LLC as it may determine; (ii) change the location of the LLC's books and records; (iii) change the LLC's registered office in Delaware; and (iv) change the LLC's resident agent for service of process in Delaware. 14 2.4 Fiscal Year. Except as otherwise determined by the Board, the Fiscal Year of the LLC for accounting and tax purposes shall be the calendar year, except for the short years in the years of the LLC's formation and termination and as otherwise required by the Code. 3 PURPOSE AND POWERS OF THE LLC 3.1 Purpose. The LLC is formed for the object and purpose of engaging in any lawful act or activity for which limited liability companies may be formed under the Delaware Act and engaging in any and all activities necessary or incidental to the foregoing, except that the LLC is not formed for the object and purpose of and shall not engage in any business that would cause WTI, Wilmington or WTC to be in violation of any Federal or Delaware state banking law, as such laws may be amended from time to time. 3.2 Powers of the LLC. The LLC shall have all power and authority granted under the Delaware Act to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purpose set forth in Section 3.1. 3.3 Authorized Persons. Any Manager shall be an "authorized person" for purposes of the Delaware Act. 4 MEMBERS 4.1 Voting. Members shall have the power to vote only as provided in this Article 4 and by Section 12.1 of this Agreement. Unless otherwise provided in this Agreement or required by law, any vote of Members shall be determined by a Majority Vote. 4.2 Meetings of Members. The Board of Managers of the LLC (the "Board") or the Chairman may call a meeting of Voting Members. Meetings of Voting Members shall be held at the principal place of business of the LLC or such other location as may be selected by the Board upon at least 10 days' written notice to all of the Voting Members. Any notice required hereunder may be waived in writing by the Person to whom notice should have been sent, whether before or after the related meeting, and attendance at any meeting waives that attendee's right to any notice required hereunder unless the Person attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. 15 4.3 Quorum. At any meeting of the Voting Members, the presence of (a) Preferred Members owning a majority of the Preferred Membership Points and (b) Common Members owning a majority of the Common Membership Points, other than Common Membership Points owned by Non-voting Members, shall constitute a quorum. Any meeting may be adjourned from time to time by Voting Members holding a majority of the votes present at the meeting, whether or not a quorum is present, and the meeting may be held as adjourned upon at least 10 days' written notice to all the Voting Members, unless such notice is waived. 4.4 Action by Consent. Any action of the Voting Members may be taken without a meeting if the Voting Members required to consent to the action to be taken, if such action had been taken at a meeting of Voting Members, consent to such action in writing. The written consents shall be filed with the records of the meetings of the Members. Such actions by consent shall be treated for all purposes as actions taken at a meeting. 4.5 Telephonic Meetings. Voting Members may participate in a meeting of the Voting Members by means of a conference telephone or similar communications equipment provided all Voting Members participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. 4.6 Non-voting Members. All Class B Members shall be Non-voting Members. In addition, any Member whose employment with the LLC is terminated for Cause, any Member who resigns from employment with the LLC other than for Good Reason and any Member, during the periods described in Sections 7.2(e) and 7.3(e), shall become a Non-voting Member until his or its LLC Interest has been purchased in full in accordance with Article 7 hereof. The estate or other successor of any Member that dies, dissolves or otherwise ceases to exist shall become a Non-voting Member until his or its LLC Interests have been purchased in full in accordance with Article 7 hereof. The Board may, in its sole and absolute discretion, waive the provisions of this Section 4.6 that would otherwise cause a Member to become a Non-voting Member. In accordance with Section 7.5 hereof, the Board may admit a substitute Member as a Voting or a Non-Voting Member. Non-voting Members do not have the right to receive notice of meetings of Voting Members or to participate in such meetings. 5 MANAGERS AND OFFICERS 5.1 Managers. The management of the LLC's business shall be vested in the Board, which shall consist of seven Managers, all of whom must be Voting Members, LLC employees, or officers or directors of Voting Members. Unless otherwise specified in this Agreement, the Board shall act by majority vote of those Managers present at a meeting at which a quorum is present, with each Manager on the Board having one vote. 16 5.2 Designation of Managers. (a) For so long as the Founding Principal is employed by the LLC, then five of the Managers shall be selected or replaced by the Principals by majority vote, which vote shall be based on their direct and indirect ownership of Membership Points ("Roxbury Designees"). Upon and after the termination of the Founding Principal's employment with the LLC for any reason, three of the Managers shall be Roxbury Designees. Roxbury Designees must at all times be employees of the LLC. (b) For so long as WTI, WTC or Wilmington is a Preferred Member, two of the Managers shall be selected or replaced by WTI, WTC or Wilmington ("WTI Designee"). After the termination of the Founding Principal's employment with the LLC for any reason, four of the Managers shall be WTI Designees. 5.3 Term. The term of any Manager shall begin immediately after his election and shall last until the election of his successor or the effective date of his resignation or removal, whichever is earlier. 5.4 Resignation or Removal of a Manager. (a) Any Manager may resign by delivering to the LLC a signed notice indicating his intent to resign and the effective date of his resignation. (b) The Board or the Voting Members, by Majority Vote, may remove any Manager (i) for Cause, or (ii) if the Manager becomes subject to a Disability. A Manager shall be automatically removed as such if he or she becomes a Non-voting Member. Any Person that has designated a Manager may remove the Manager, with or without Cause, using the same process that was used to appoint the Manager at any time upon prior written notice to the LLC. 5.5 Vacancies. If a Manager should resign or be removed from the Board, the Person(s) holding the power to designate that Manager pursuant to Section 5.2 hereof may at any time after the resignation or removal designate another Person to serve as a Manager by written notice to the LLC. 5.6 Meetings. The Board shall hold regular quarterly meetings without call or notice at the principal office of the LLC (or at such other place as shall be determined by the Board) and at such times as the Board may from time to time determine, provided reasonable notice of the first regular meeting following any such determination is given to Managers absent at the meeting fixing regular meetings. When called by the Chairman, or by any two Managers, the Board may hold special meetings at such places and times as are designated by the Board in the call of the meeting, upon at least two Business Days' notice given by the Chairman, the Secretary or an Assistant Secretary, or by the Managers calling the meeting. Any notice required hereunder may be waived in writing by the Person to whom notice should have been sent, whether before or after the related meeting, and attendance at any meeting waives that attendee's right to any notice required hereunder unless the Person attends for the express purpose of objecting at the 17 beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. 5.7 Quorum. At any meeting of the Board, the presence of four or more Managers (at least one of whom shall be a WTI Designee) shall constitute a quorum. Any meeting may be adjourned from time to time by Managers holding a majority of votes present at the meeting, whether or not a quorum is present, and the meeting may be held as adjourned upon at least two Business Days' notice to all the Managers, unless notice is waived. 5.8 Action by Consent. Any action of the Board may be taken without a meeting if all the Managers consent to the action in writing. The written consents shall be filed with the records of the meetings of the Board. Such actions by consent shall be treated for all purposes as actions taken at a meeting. 5.9 Telephonic Meetings. Managers may participate in a meeting of the Board by means of a conference telephone or similar communications equipment provided all Managers participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. 5.10 Managers as Agents; Limitation on Power of Members. The Managers, to the extent of the powers set forth herein, are agents of the LLC for the purpose of the LLC's business, and the actions of the Managers taken in accordance with such powers shall bind the LLC. No Manager or Member in that Person's capacity as Manager or Member, acting individually, and no Managers representing less than the number of Managers necessary for Board action under Sections 5.1, 5.8, 5.9 or 5.11 hereof, may bind the LLC. 5.11 Board Action. Notwithstanding the other provisions of this Article 5, the approval of (a) at least one WTI Designee and (b) a majority of the Roxbury Designees shall be required for any of the following matters: (i) any determination to engage in a business other than investment management and advisory services or to change in a fundamental manner the investment methodology and strategy heretofore used by Roxbury; (ii) issuance of additional LLC Interests other than upon exercise of an option granted pursuant to an Incentive Plan; (iii) adoption of an Incentive Plan; (iv) compensation arrangements and year end payments pursuant to any such arrangements, including bonus plans, employment contracts, or severance agreements, between the LLC (or any Affiliate thereof) and any Senior Managing Director or Managing Director of the LLC; (v) hiring or termination of any Person described in Section 5.11(iv); (vi) the LLC's annual budget; (vii) any sale, assignment or other disposition by the LLC of all or substantially all of its assets or of any interest in a Subsidiary; (viii) any consolidation or merger of the LLC with or into any other Delaware limited liability company or other business entity (as defined in Section 18-209(a) of the Delaware Act), or any dissolution of the LLC; (ix) (A) the creation or acquisition of any Subsidiary, (B) any consolidation or merger of any Subsidiary with or into any other Delaware limited liability company or other business entity (as defined in Section 18-209(a) of the Delaware Act) other than the LLC, (C) any sale by any Subsidiary of all or substantially all of its assets other than to 18 the LLC, or (D) any liquidation, dissolution or winding up of any Subsidiary other than into the LLC; (x) any issuance of any equity securities of any Subsidiary, or any securities convertible into equity securities of any Subsidiary; (xi) any acquisition by the LLC or any Subsidiary, other than for the accounts of Clients, of any stock or assets of another entity or of capital assets, in a single transaction or a series of related transactions in any 12-month period, for an aggregate purchase price in excess of $300,000; (xii) any incurrence by the LLC and its Subsidiaries, on a combined basis, of debt (including undrawn amounts under any credit facility) in excess of $250,000; (xiii) grants of options by the LLC to purchase Common Interests or grants of participation in the Profit Sharing Plan; (xiv) the resolution of third party claims involving an amount, including expenses, in excess of $250,000; (xv) the resolution of material disputes with any governmental, administrative or regulatory body, agency or similar entity; (xvi) any amendment to, or termination by the LLC of, an Investment Advisory Agreement; (xvii) making a determination pursuant to Section 6.3(c); (xviii) any transfer of a Common Interest to a Person other than a Permitted Transferee or Related Entity; and (xix) whether a transferee of a Common Interest (whether or not a Permitted Transferee or Related Entity) shall have voting rights. 5.12 Approval of Annual Budget. Subject to Section 5.11(vi) hereof, the Board alone shall have the power to approve the annual budget of the LLC. If the annual budget of the LLC is not approved in its entirety by the Board under this Section, the Board shall approve the budget to the extent of those items on which there is agreement and shall continue to negotiate in good faith until all items of the budget are agreed upon. 5.13 Officers. The Board may appoint agents and employees of the LLC who are designated as officers of the LLC (the "Officers"). The Officers of the LLC shall include a Chairman (who must be a Manager), a President and a Secretary and may include a Vice-Chairman (who must be a Manager), Chief Operating Officer, Chief Investment Officer and Treasurer, one or more Senior Managing Directors, Managing Directors, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Secretaries and such other Officers with such titles as may be approved by the Board. Subject to Section 5.11, the Board may remove any Officer at any time, for any reason, in its sole and absolute discretion. The Officers shall be agents of the LLC, authorized to execute and deliver documents and take other actions on behalf of the LLC, subject to the direction of the Board, and to have such other duties as may be approved by the Board; provided, however, that the delegation of any such power or authority to the Officers shall not limit in any respect the power and authority of the Board to take such actions (or any other action) on behalf of the LLC as provided in this Agreement. The Secretary shall record the actions of the Board, certify this Agreement and any related document or instrument, certify resolutions of the Board, incumbency and other matters of the LLC, and have such other ministerial duties as may be specified by the Board from time to time. 5.14 Powers of the Board; Powers of Officers. (a) Subject to the provisions of this Agreement requiring the approval of the Members, the Board's powers on behalf and in respect of the LLC shall be all 19 powers and privileges permitted to be exercised by managers of a limited liability company under the Delaware Act, including, without limitation, Section 18-402 of the Delaware Act. (b) Subject to Section 5.11 hereof and except to the extent that this Agreement requires the Board to vote on a matter, the Board may delegate any of its powers to the Officers of the LLC or any one or more of them. (c) Subject to the limitation set forth in Section 5.14(b), the Board hereby delegates to the Officers of the LLC the respective powers delegated to comparable officers of a corporation under the Delaware General Corporation Law, subject to the powers of a board of directors of a corporation under such Delaware law; provided, however, that the Board reserves the right to rescind the delegation of any such powers at any time in the sole and absolute discretion of the Board. 5.15 Reimbursement. The LLC shall reimburse each Manager for all reasonable and necessary out-of-pocket expenses incurred by such Manager on behalf of the LLC according to such terms as shall be approved by the Board. The Board's sole determination of which expenses may be reimbursed to a Manager and the amount of such expenses shall be conclusive. Such reimbursement shall be treated as an expense of the LLC that shall be deducted in computing Profits and Losses and shall not be deemed to constitute a distributive share of Profits or a distribution or return of capital to the Manager. 5.16 Duties of Managers. To the extent that, at law or in equity, a Manager has duties (including fiduciary duties) and liabilities relating thereto to the LLC or to any Member, a Manager acting under this Agreement shall not be liable to the LLC or to any Member for his or her good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of a Manager otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties and liabilities of such Manager. 5.17 Fiduciary Duties. (a) Unless otherwise expressly provided herein, (i) whenever a conflict of interest exists or arises between Managers, or (ii) whenever this Agreement or any other agreement contemplated herein or therein provides that a Manager shall act in a manner that is, or provides terms that are, fair and reasonable to the LLC or any Member, the Manager shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including his or her own interest or the interests of his or her employer) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Manager, the resolution, action or term so made, taken or provided by the Manager shall not constitute a breach of this Agreement or any other agreement contemplated herein or of any duty or obligation of the Manager at law or in equity or otherwise. 20 (b) Whenever in this Agreement a Manager is permitted or required to make a decision (i) in his or her "discretion" or under a grant of similar authority or latitude, the Manager shall be entitled to consider such interests and factors as he or she desires, including his or her own interests or the interests of his or her employer, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the LLC or any other person, or (ii) in "good faith" or under another express standard, the Manager shall act under such express standard and shall not be subject to any other or different standard imposed by this Agreement or other applicable law. 6 CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; DISTRIBUTIONS; ALLOCATIONS 6.1 Capital Contributions. (a) Each Member has contributed to the capital of the LLC, or as a result of acquiring an LLC Interest has succeeded to, the amount set forth opposite his or its name under the column labeled "Capital Account" on Schedule 1. (b) No Member shall be required to make any additional capital contributions to the LLC. 6.2 Capital Accounts. (a) Each Member shall have a Capital Account on the books of the LLC, which shall not bear interest. (b) Except as provided in Section 12.3(a)(ii) hereof, no Member has the right to demand a return of such Member's capital contributions (or the balance of such Member's Capital Account). Further, no Member has the right (i) to demand and receive any distribution from the LLC in any form other than cash or (ii) to bring an action of partition against the LLC or its property. 6.3 Distributions. (a) Except as provided in Section 6.3(f), within 90 days after the end of each Fiscal Year, the Board shall cause to be distributed: (i) First, subject to Section 6.3(c), to the Preferred Members in proportion to their respective numbers of Preferred Membership Points, (A) the lesser of Pre-Tax Net Income or [*] of all Revenues of the LLC for that Fiscal Year, plus (B) Wilmington Fund Revenue for that Fiscal Year, less (C) amounts paid for that Fiscal Year to LLC employees pursuant to the Profit Sharing Plan (collectively, the "Preferred Member Revenue Share"); and * CONFIDENTIAL TREATMENT REQUESTED 21 (ii) Thereafter, Free Cash Flow for that Fiscal Year shall be distributed to the Class A Members in proportion to their respective numbers of Class A Common Membership Points for such Fiscal Year. (b) Notwithstanding the provisions of Section 6.3(a), the Board shall make estimated distributions described by Section 6.3(a) to Members each quarter. To the extent the Board makes any distributions with respect to any Fiscal Year prior to the end of that Fiscal Year, the priority of distributions shall be in accordance with Section 6.3(a). All such distributions shall be deemed advances against the distributions required by Section 6.3(a). In the event that any such estimated distributions to any Member for any Fiscal Year are determined to exceed the distributions to which such Member is entitled under Section 6.3(a) for such Fiscal Year, such Member shall be required to repay, without interest, any excessive distribution within thirty (30) days of being notified in writing that the payment was excessive and must be repaid to the LLC. (c) If the Board determines that it is not possible to distribute all or part of the Preferred Member Revenue Share for any Fiscal Year because such a distribution would materially impair the LLC's ability to operate, the LLC shall execute a promissory note, without interest, which provides for payment within the subsequent 12 months of the unpaid portion of such Preferred Member Revenue Share and there shall be no distributions pursuant to Section 6.3(a) or (b) for that Fiscal Year or any subsequent Fiscal Year until such promissory note and the promissory note in the principal amount of $[*] dated August 1, 2003 issued to WTI by the LLC are paid in full. Notwithstanding anything herein to the contrary, the issuance of promissory note(s) to the Preferred Members under this Section 6.3(c) for any Fiscal Year shall not diminish or affect in any way the Preferred Members' right to a distribution of the Preferred Member Revenue Share under Section 6.3(a)(i) for any subsequent Fiscal Year. (d) All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment, distribution or allocation to the Members hereunder shall be treated as amounts actually distributed to the Members pursuant to this Section 6.3 for all purposes of this Agreement. The LLC is authorized to withhold from distributions or with respect to allocations to the Members and to pay over to any Federal, state or local government any amounts required to be so withheld pursuant to the Code or any provision of any other Federal, state or local law and shall allocate such amounts to those Members with respect to which such amounts were withheld. (e) Notwithstanding any provision to the contrary contained in this Agreement, the LLC shall not make a distribution to any Member on account of its LLC Interest if such distribution would (i) cause such Member to have an Adjusted Capital Account Deficit, or (ii) violate Section 18-607 of the Delaware Act or other applicable law. (f) Notwithstanding the provisions of Section 6.3(a), in the event of a sale of all or substantially all of the assets of the LLC, or a deemed sale of assets in * CONFIDENTIAL TREATMENT REQUESTED 22 connection with the liquidation of the LLC, the proceeds thereof shall be distributed as provided in Section 12.3(a). 6.4 Allocation of Profits and Losses. (a) After giving effect to the special allocations provided in Section 6.5 hereof, and except as otherwise provided in Section 6.4(b) hereof, Profits for any Fiscal Year shall be allocated to the Members as follows: (i) First, to the Preferred Members in proportion to their respective number of Preferred Membership Points in an amount equal to the Preferred Member Revenue Share distributable to the Preferred Members with respect to such Fiscal Year; (ii) Thereafter, to the Class A Members in proportion to their respective numbers of Class A Common Membership Points for such Fiscal Year. (b) Notwithstanding the provisions of Section 6.4(a) hereof, Profits from the sale of all or substantially all of the assets of the LLC, and Profits from a deemed sale of assets in connection with the liquidation of the LLC, shall be allocated among the Members as follows: (i) First, such Profits shall be allocated to the Preferred Members in proportion to their respective numbers of Preferred Membership Points to the extent that the cumulative Losses that have been allocated to the Preferred Members under Section 6.4(c) hereof exceed the cumulative Profits that have previously been allocated to the Preferred Members under Section 6.4(b); (ii) Second, an amount of such Profits equal to two-thirds (2/3) of the Purchase Price (as such term is defined in the LLC Interest Purchase Agreement) shall be allocated to the Class A Members in proportion to their respective numbers of Class A Common Membership Points; and; (iii) Thereafter, an amount of such Profits equal to the Historic Preferred Share of such Profits (after reduction for the amounts allocated to Members under Section 6.4(b)(i) above) shall be allocated to the Preferred Members in proportion to their respective numbers of Preferred Membership Points and the remainder of such Profits shall be allocated to the Class A Members in proportion to their respective numbers of Class A Common Membership Points. For purposes of this Section 6.4(b), the "Historic Preferred Share" shall be equal to a fraction, the numerator of which is the cumulative amount distributed plus any other amounts distributable to the Preferred Member, pursuant to Section 6.3(a)(i) hereof, without duplication, for the five Fiscal Years immediately preceding the year in which the sale or deemed sale of assets occurs and the denominator of which is the cumulative amount of all distributions made to Members in accordance with Section 6.3 hereof for the same period. 23 (c) All Losses shall be allocated to the Preferred Members in proportion to their respective numbers of Preferred Membership Points. However, no allocation shall be made under this Section 6.4(c) to the extent it causes a Preferred Member to have an Adjusted Capital Account Deficit. 6.5 Special Allocations. (a) If and to the extent that any employee or Principal of the LLC or an Affiliate recognizes or is deemed to recognize any item of income or gain pursuant to Code Section 83 by virtue of any transaction or deemed transaction between any Member and such employee, then any resulting item of loss recognized by the LLC or deduction to which the LLC is entitled shall be specially allocated to such Member. (b) The provisions of the Treasury Regulations promulgated under Code Section 704(b) relating to the qualified income offset, minimum gain chargeback, minimum gain chargeback with respect to nonrecourse debt, the allocation of nonrecourse deductions and the allocation of items of deduction, loss or expenditure relating to nonrecourse debt are hereby incorporated by this reference and shall be applied to the allocation of items of income, gain, loss or deduction of the LLC in the manner provided in such Treasury Regulations. However, the Members do not intend that the "deficit restoration obligation" described in Section 1.704-1(b)(2)(ii)(c) of the Treasury Regulations be incorporated by reference herein. (c) In the event that items of income, gain, loss or deduction are allocated to one or more Members pursuant to Section 6.5(b) above, subsequent items of income, gain, loss or deduction will first be allocated (subject to the provisions of Section 6.5(b)) to the Members in a manner designed to result in each Member having a Capital Account balance equal to what it would have been had the original allocation of Profits or Losses, or items thereof pursuant to Section 6.5(b) not occurred. 6.6 Tax Allocations: Code Section 704(c). (a) In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the LLC shall, solely for tax purposes, be allocated among the Class A Members so as to take account of any variation between the adjusted basis of such property to the LLC for federal income tax purposes and its initial Carrying Value at the time of its contribution to the LLC. (b) Allocations of income, gain, loss and deduction with respect to any asset revalued in accordance with Treasury Regulations under Code Section 704 shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Carrying Value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder and as required by Section 1.704-1(b)(2)(iv)(g) of the Treasury Regulations. (c) Any elections or other decisions relating to allocations described in paragraphs (a) or (b) of this Section 6.6 shall be made by the Members in any manner that 24 reasonably reflects the purposes and intention of this Agreement. Allocations pursuant to this Section 6.6 are solely for purposes of federal, state and local taxes and shall not affect, nor in any way be taken into account in computing, any Class A Member's Capital Account or share of Profits, Losses or other items or distributions pursuant to any provision of this Agreement. 6.7 Proration for Partial Years. In the event (a) the Membership Points of any Common Member shall be adjusted, by Transfer or otherwise, during any Fiscal Year or (b) any Common Member shall be admitted to the LLC during any Fiscal Year, any distributions and any allocations to such Member pursuant to this Article 6 shall be made based on the average of the Member's Membership Points for such Fiscal Year, determined on a monthly basis. For example, if in the months of January through July of a Fiscal Year (i.e., seven months) a Common Member owned nine Class A Membership Points, and in the months of August through December of such Fiscal Year (i.e., five months) the Member owned three Class A Membership Points, the distributions and allocations to such Member pursuant to this Article 6 would be based on an LLC Interest calculated as follows: (7 x 9) + (5 x 3) = 6.5 Membership Points ----------------- 12 7 TRANSFER OF LLC INTERESTS, PUT AND CALL OPTIONS, MANDATORY PURCHASES AND ADMISSION OF ADDITIONAL MEMBERS 7.1 Assignability of Interests. (a) Except as otherwise provided in this Article 7, no LLC Interest of a Member may be sold, assigned, transferred, pledged, hypothecated, gifted, exchanged, optioned, liened or encumbered (each, a "Transfer") and no Transfer in violation of this Agreement shall be binding upon the LLC. (b) A Member may transfer all or any portion of its or his LLC Interest (i) to any one or more Permitted Transferees or Related Entities who agree to be bound by the terms and conditions of this Agreement, or (ii) upon obtaining the prior approval of the Board in accordance with Section 5.11 hereof, to any other Person who agrees to be bound by the terms and conditions of this Agreement; provided, however, that notwithstanding anything contained in this Agreement to the contrary, the transferring Member shall retain the right to vote with respect to LLC Interests Transferred unless (A) the transferee is WTI, WTC, Wilmington or an officer of the LLC, (B) the Transfer is pursuant to an Option Agreement, or (C) the transferee is approved by the Board as a Voting Member. (c) In addition to Transfers permitted under Section 7.1(b), certain Members, including Permitted Transferees of Principals, may exercise Puts in accordance 25 with Section 7.2 and certain Members are required to make sales in accordance with Section 7.3, in accordance with the terms of such Sections. 7.2 Put Options. (a) On or before February 28 of each year, the LLC shall notify all Class A Members of the LLC Value as of December 31 of the immediately preceding year. (b) Subject to the terms, conditions and limitations of this Section 7.2, each Principal and Roxbury may exercise an option to sell to Wilmington all or any portion of his or its LLC Interest (each such Put to Wilmington being referred to as a "Put"). Upon exercise of a Put under this Section 7.2(b), Wilmington shall thereupon become obligated to purchase the LLC Interest as to which the Put has been exercised. (c) Notwithstanding anything contained in Section 7.2(b) to the contrary, unless otherwise agreed to by Wilmington: (i) neither a Principal nor Roxbury may exercise a Put prior to the fifth anniversary of the Commencement Date; and (ii) a Put may not be exercised with respect to LLC Interests acquired on exercise of an Option Agreement unless such LLC Interests have been held for at least six months (other than after a Change of Control or in an amount with a Put Price equal to the dollar amount of the maximum federal, state and local tax rates applicable to the exercise of such Option Agreement). (d) A Member may exercise a Put if, on or before March 15 of any year, Wilmington receives an irrevocable notice of exercise of the Put to Wilmington substantially in the form of Exhibit A hereto (the "Put Notice") stating that it or he is electing to exercise the Put and specifying the LLC Interest to be sold pursuant to the Put. On or before the first day of April after receipt of a Put Notice (or the next succeeding Business Day if such April 1 is not a Business Day), and subject to the limitations set forth in Section 7.2(c) hereof, Wilmington shall purchase from the Member the LLC Interest set forth in the Put Notice. At the closing of the exercise of a Put, Wilmington shall deliver the Put Price to the Member by certified check or wire transfer of immediately available funds against delivery of such documents or instruments of transfer as Wilmington may reasonably request. (e) On the last day of the month in which a Put is exercised by a Member, such Member shall cease to have any rights as a Member with respect to the LLC Interest so Put other than (i) the right to receive the Put Price on the Purchase Closing Date and (ii) the right to receive distributions and allocations with respect to such LLC Interest through the Purchase Closing Date. For example, this means that the LLC Interests to be purchased shall not have any voting rights during such period. (f) In the event of a Change of Control, a Member may send a Put Notice at any time during the fifteen months following the Change of Control, and the restrictions of Section 7.2(c)(i) shall not apply to such Put, in which case the LLC Value shall be determined as of December 31 immediately prior to the date of the Put Notice 26 and the Purchase Closing Date shall be 60 days following delivery of the Put Notice (or the next succeeding Business Day if such date is not a Business Day). 7.3 Purchase on Occurrence of an Extraordinary Event or a Wilmington Call. (g) The provisions set forth in Section 7.3(b) shall apply to the purchase and sale of an LLC Interest of a Principal or a Related Holder of such Principal following the Principal's (i) death; (ii) Disability; (iii) Retirement; (iv) termination of employment by the LLC without Cause; (v) voluntary termination of employment with the LLC for Good Reason; (vi) a transfer of LLC Interests required by operation of law; or (vii) other involuntary transfers of an LLC Interest (all hereafter referred to as "Extraordinary Events"). Notwithstanding anything herein to the contrary, if an Extraordinary Event occurs that causes or permits a Person to become a Principal for the first time as a result of accelerated exercisability of vested options under an Option Agreement, the provisions of this Section 7.3(a) shall be effective immediately as if such Person were a Principal at the time the Extraordinary Event occurred. (h) In the event of an Extraordinary Event, Wilmington shall be obligated to purchase from such Principal Entities, and such Principal Entities shall be obligated to sell to Wilmington, all of such Principal Entities' LLC Interests at a purchase price equal to the Put Price thereof. (i) If the Extraordinary Event occurs between January 1 and June 30 of any calendar year, the Purchase Closing Date under this Section 7.3(b) shall be on April 1 (or if April 1 is not a Business Day, the next succeeding Business Day) of the year following the year of the date of the Extraordinary Event, at which time Wilmington shall deliver to such Principal Entities the purchase price by certified check or wire transfer of immediately available funds. If the Extraordinary Event occurs between July 1 and December 31 of any calendar year, the Purchase Closing Date under this Section 7.3(b) shall be on April 1 (or if April 1 is not a Business Day, the next succeeding Business Day) of the second year following the year of the date of the Extraordinary Event, at which time Wilmington shall deliver to such Principal Entities the purchase price by certified check or wire transfer of immediately available funds. On a date mutually agreed between Wilmington and the selling Principal Entities but in any event not later than 60 days after the date on which such Extraordinary Event occurs, Wilmington shall deliver to the Principal Entities the Advance Payment by certified check or wire transfer of immediately available funds against delivery of such documents or instruments of transfer as may be reasonably requested by Wilmington transferring 75% of the LLC Interests to be purchased pursuant to this Section 7.3(b) to Wilmington. In addition, on the Purchase Closing Date, such Principal Entities shall deliver to Wilmington such documents or instruments of transfer as may be reasonably requested by Wilmington transferring the remaining 25% of the LLC Interests to be purchased pursuant to this Section 7.3(b) to Wilmington, and (i) if the Put Price exceeds the Advance Payment, Wilmington shall deliver to such Principal Entities the excess of the Put Price over the Advance Payment by certified check or wire transfer of 27 immediately available funds, and (ii) if the Advance Payment exceeds the Put Price, such Principal Entities shall deliver to Wilmington the excess of the Advance Payment over the Put Price by certified check or wire transfer of immediately available funds. (i) Within 90 days following the termination of a Principal's employment with the LLC (other than because of an Extraordinary Event), Wilmington may exercise the right to purchase from such Principal Entities all or a portion of such Principal Entities' LLC Interests (a "Wilmington Call"). The purchase price for any LLC Interest subject to a Wilmington Call shall be the Call Price. (j) A Wilmington Call may be exercised by delivering to each appropriate Person a written notice signed by Wilmington in substantially the form of Exhibit B hereto (the "Wilmington Call Notice") stating that it is exercising the Wilmington Call and any LLC Interest with respect to which the Wilmington Call is being exercised. On April 1 of the year following the year in which the Wilmington Call Notice is delivered (or if such April 1 is not a Business Day, the next succeeding Business Day), each Person whose LLC Interest is subject to the Wilmington Call shall sell to Wilmington the LLC Interest (or portion thereof) set forth in the Wilmington Call Notice. At the closing of the exercise by Wilmington of a Wilmington Call, Wilmington shall deliver the purchase price by certified check or wire transfer of immediately available funds against delivery of such documents or instruments of transfer as may be reasonably requested by Wilmington. (k) On the last day of the month in which an Extraordinary Event occurs or in which a Wilmington Call is exercised, each Person whose LLC Interests have been called or who has experienced the Extraordinary Event, or his or her estate, as the case may be, shall cease to have any rights as a Member with respect to the LLC Interests being purchased, other than (i) the right to receive the Advance Payment, the Initial Put Price, the Subsequent Put Price or the Call Price, as the case may be, and (ii) the right to receive distributions and allocations with respect to such LLC Interests through the date on which such LLC Interests are transferred to Wilmington. For example, this means that the LLC Interests to be purchased shall not have any voting rights during such period. 7.3 LLC Interests Subject to Option Rights. If any LLC Interests purchased by Wilmington pursuant to Sections 7.2 or 7.3 are subject to the rights of an individual who has been granted the option to purchase such LLC Interests pursuant to an Option Agreement, that option holder shall retain all rights granted by that Option Agreement. 7.4 Substitute Members. Any Transfer of LLC Interests (other than a transfer by WTI to a Permitted Transferee, a transfer pursuant to this Article 7 or a transfer as a result of the exercise of rights to acquire LLC Interests under an Option Agreement) shall, nevertheless, not entitle the transferee, unless already a Member, to become a Member or to be entitled to exercise or receive any of the rights, powers or benefits of a Member other than the right to share in such profits and losses, to receive distributions and allocations of income, gain, loss, deduction, credit or similar item to which the 28 transferor Member would otherwise be entitled, to the extent assigned, unless the transferor Member designates, in a written instrument delivered to the Board, its transferee to become a substitute Member and the Board, in its sole and absolute discretion, consents to the admission of such transferee as a Non-voting Member; provided, however, that such transferee shall not become a substitute Member without having first executed an instrument reasonably satisfactory to the Board accepting and agreeing to the terms and conditions of this Agreement, including a counterpart signature page to this Agreement, and without having paid to the LLC a fee sufficient to cover all reasonable expenses of the LLC in connection with such transferee's admission as a substitute Member, and provided further that, upon the admission of such transferee as provided herein, such admission shall be reflected upon the books and records of the LLC, including Schedule 1 to this Agreement. 7.5 Recognition of Transfer by LLC. No Transfer of a Member's LLC Interest, or any part thereof, that is in violation of this Article 7 shall be valid or effective, and neither the LLC nor the Members shall recognize the same for the purpose of making distributions pursuant to Articles 6 or 12 hereof with respect to such transferred LLC Interest or part thereof. Neither the LLC, any member of the Board nor any Member shall incur any liability as a result of refusing to make any such distributions to the transferee of any such invalid Transfer. 7.6 Effective Date of Transfer; Order of Puts, Calls and Purchases Under Section 7.3(b). (a) Any valid Transfer of a Member's LLC Interest, or part thereof, pursuant to Sections 7.1, 7.2, 7.3 or 7.5 shall be effective as of the close of business on the last day of the calendar month in which such Transfer occurs. Upon the valid transfer of a Member's LLC Interest, such Person shall cease to be a Member, and the books and records of the LLC, including Schedule 1 to this Agreement, shall reflect such event. (b) With respect to Sections 7.2 and 7.3 hereof, the first to occur of (i) the delivery of a Put Notice under Section 7.2(d) or (f), (ii) the occurrence of the first Extraordinary Event under Section 7.3(a) or (iii) the delivery of a Wilmington Call Notice under Section 7.3(d), shall govern the rights and obligations of the parties with respect to the Common Interests subject to the Put Notice or the Wilmington Call Notice, or the Common Interests to be purchased under Section 7.3(b), as the case may be. 7.7 Indemnification. In the case of a Transfer or attempted Transfer of an LLC Interest that has not received the consents required by this Article 7, the parties engaging or attempting to engage in such Transfer shall, to the fullest extent permitted by law, indemnify and hold harmless the LLC and the other Members from all costs, liabilities and damages that any of such indemnified Persons may incur (including, without limitation, incremental tax liability and lawyers' fees and expenses) as a result of such Transfer or attempted Transfer and efforts to enforce the indemnity granted hereby. 29 7.8 Issuance of Additional LLC Interests. (a) Subject to Sections 5.11, 7.1 and 7.5 hereof, the Board may admit new Members to the LLC, issue additional LLC Interests and, pursuant to a written plan adopted and approved by the Board under Section 5.11 (an "Incentive Plan") issue Common Interests, or grant options to purchase Common Interests. As a condition to the admission of a new Member, such Member must become a party to this Agreement by signing a counterpart signature page to this Agreement and an agreement containing the representations and warranties set forth in Exhibit C. (b) Upon the issuance of additional LLC Interests to a Member, the LLC shall make the appropriate revisions to Schedule 1 hereto to reflect the additional LLC Interests issued to the Member and identifying the Member, other than Roxbury or any entity consolidated with Wilmington for Federal income tax purposes, as a Principal. (c) Upon the issuance of additional Common Interests pursuant to an Incentive Plan or otherwise, the percentage "[*]" set forth in Section 6.3(a)(i) hereof and used to calculate the Preferred Member Revenue Share shall be reduced in an amount and in a manner agreed to by Members holding a majority of the outstanding Preferred Membership Points and Members holding a majority of the outstanding Class A Common Membership Points to reflect the parties' agreement that any such issuance of Common Interests will dilute the ownership of the LLC represented by the Preferred Interests as well as the Common Interests. See an example in Exhibit D. 7.9 Assignment of Wilmington's Rights and Obligations. Wilmington may assign any or all of its rights and/or delegate any or all of its obligations under Sections 7.2 and 7.3 hereof to WTC or WTI, provided, that in the case of any such assignment or delegation, Wilmington shall remain obligated therefor. 8 BOOKS AND RECORDS 8.1 Books, Records and Financial Statements. The Board shall designate an appropriate employee of the LLC to prepare and maintain, or cause to be prepared and maintained, the books of account of the LLC. Such books of account and all financial records of the LLC shall be kept at the LLC's office located at 100 Wilshire Boulevard, Suite 600 Santa Monica, California 90401. A Member shall have the right to examine the books and records of the LLC at a reasonable time and for purposes reasonably related to the Member's interest as a Member. Such Person shall also cause the following documents to be transmitted at the times hereinafter set forth: (a) to each Member, as soon as available and in any event within 100 days after the end of each Fiscal Year of the LLC, a balance sheet, income statement, cash flow statement and statement of capital accounts of the LLC as of the end of such Fiscal Year, all of which shall be audited by the LLC's accountants; * CONFIDENTIAL TREATMENT REQUESTED 30 (b) to each Member, as soon as available and in any event within 30 days after the end of each quarter of each Fiscal Year of the LLC (other than the fourth quarter), a balance sheet, income statement, cash flow statement and statement of capital accounts of the LLC as of the end of such quarter; (c) to each Member, as soon as available from the LLC's accountants, the annual Federal and state income tax return of the LLC and a Schedule K-1 indicating its taxable income or loss for such Fiscal Year; (d) to each Member, ten days prior to the date on which any Federal or state quarterly estimated tax payments are due, a schedule setting forth the LLC's estimated taxable income allocable to each Member for such Fiscal Year; and (e) to WTI, within 10 Business Days after the end of each quarter, an estimate of the net income of the LLC for the year-to-date period through the end of such quarter. 8.2 Accounting Method. All records shall be maintained in accordance with generally accepted accounting principles in a consistent manner and shall reflect all LLC transactions and be appropriate and adequate for the LLC's business. 9 TAX 9.1 Tax Matters Member. (a) The Founding Principal is hereby designated as the initial tax matters Member of the LLC (the "Tax Matters Member") for purposes of Code Section 6231(a)(7) and shall have the power to manage and control, on behalf of the LLC, any administrative proceeding at the LLC level with the Internal Revenue Service relating to the determination of any item of LLC income, gain, loss, deduction or credit for federal income tax purposes. (b) The Tax Matters Member shall, within 10 days of the receipt of any notice from the Internal Revenue Service in any administrative proceeding at the LLC level relating to the determination of any LLC item of income, gain, loss, deduction or credit, mail a copy of such notice to each Member. (c) The Board may at any time hereafter designate a new Tax Matters Member. 9.2 Section 754 Election. The Board has made, on behalf of the LLC, an election in accordance with Code Section 754, to adjust the bases of LLC property in the case of a distribution of property within the meaning of Code Section 734 and, in the case of a transfer of an LLC interest within the meaning of Code Section 743. Each Member shall, upon request of the Board, supply the information necessary to give effect to such 31 an election. The Board may revoke such election on behalf of the LLC upon obtaining the required consent of the applicable IRS District Director and complying with all requirements of the Code and the Treasury Regulations; provided, however, that no such revocation may be made if it would have an adverse effect on WTI, WTC or Wilmington without the prior written consent thereof. 10 LIABILITY, EXCULPATION AND INDEMNIFICATION 10.1 Liability. (a) Except as otherwise expressly provided in this Article 10 or in Section 9.1 of the LLC Interest Purchase Agreement, the debts, obligations and liabilities of the LLC, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the LLC, and no Member shall be obligated personally for any such debt, obligation or liability of the LLC solely by reason of being a Member. (b) Except as otherwise expressly provided in this Article 10 or in Section 9.1 of the LLC Interest Purchase Agreement, a Member, in his capacity as such, shall have no liability in excess of (i) the amount of such Member's capital contributions; (ii) such Member's share of any assets and undistributed Profits of the LLC; and (iii) the amount of any distributions wrongfully distributed to such Member. 10.2 Exculpation. (a) No Officer or Manager shall be liable to the LLC or any Member for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Officer or Manager in good faith on behalf of the LLC and in a manner reasonably believed to be within the scope of authority conferred on such Officer or Manager, except that an Officer or Manager shall be liable for any such loss, damage or claim incurred by reason of such Officer's or Manager's bad faith, gross negligence, reckless disregard of his duties hereunder, willful misconduct or breach of the provisions of this Agreement. (b) An Officer or Manager shall be fully protected in relying in good faith upon the records of the LLC and upon such information, opinions, reports or statements presented to the LLC by any person as to matters the Officer or Manager reasonably believes are within such person's professional or expert competence and who has been selected with reasonable care by or on behalf of the LLC (including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses or net cash flow or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid). 10.3 Indemnification. To the fullest extent permitted by applicable law, the LLC shall indemnify each of its Officers and Managers for any loss, damage or claim incurred by any such Officer or Manager by reason of any act or omission performed or 32 omitted by such Officer or Manager in good faith on behalf of the LLC and in a manner reasonably believed to be within the scope of authority conferred on such Officer or Manager by this Agreement, except that no Officer or Manager shall be entitled to be indemnified in respect of any loss, damage or claim incurred by such Officer or Manager by reason of bad faith, gross negligence, reckless disregard of his duties hereunder, willful misconduct or breach of the provisions of this Agreement with respect to such acts or omissions; provided, however, that (i) any indemnity under this Section 10.3 shall be provided out of and to the extent of LLC assets only, and no Member shall have any personal liability on account thereof; and (ii) nothing contained herein shall limit any indemnification or other rights of the LLC or any Member under the LLC Interest Purchase Agreement or any of the documents referred to or incorporated therein. 10.4 Expenses. To the fullest extent permitted by applicable law, the LLC shall advance to an Officer or Manager any expenses (including legal fees) incurred by such Officer or Manager in defending any claim, demand, action, suit or proceeding (such advance to be made prior to the final disposition of such claim, demand, action, suit or proceeding), including, without limitation, claims, demands, actions, suits or proceedings with respect to which such Officer or Manager is alleged to have not met the applicable standard of conduct or is alleged to have acted or failed to act in a manner which, if such allegations were true, would not entitle such Officer or Manager to indemnification under this Agreement, upon receipt by the LLC of an undertaking by or on behalf of such Officer or Manager to repay such amount if it shall be determined that such Officer or Manager is not entitled to be indemnified as authorized in Section 10.3 hereof. 11 CERTAIN COVENANTS 11.1 Compliance with Laws; Maintenance. (a) The LLC and its Subsidiaries shall (and the Board shall cause the LLC and its Subsidiaries to) comply in all material respects with all laws and regulations applicable to the LLC and its Subsidiaries, including, without limitation, all laws and regulations applicable to the LLC and its Subsidiaries as a registered investment adviser and an Affiliate of a bank or a thrift or bank holding company. (b) The LLC and its Subsidiaries shall maintain in full force and effect their limited liability company or other existence, rights and franchises and all other rights, licenses and registrations owned or possessed by them and deemed by the LLC to be necessary to the conduct of their respective businesses. (c) Any options to purchase LLC Interests granted by Roxbury shall be granted in compliance with all statutes, rules and regulations governing the issuance of securities. 33 12 DISSOLUTION, LIQUIDATION AND TERMINATION 12.1 Events Causing Dissolution. The LLC shall be dissolved and its affairs shall be wound up only upon the occurrence of any of the following events: (a) the determination of the Board (subject to Section 5.11 hereof) and the Majority Vote of the Voting Members; or (b) the entry of a decree of judicial dissolution under Section 18-802 of the Delaware Act. With the exception of any event set forth in this Section 12.1, the Company shall not be dissolved by any other event or vote set forth in Section 18-801 of the Delaware Act. 12.2 Notice of Dissolution. Upon the dissolution of the LLC, the person or persons appointed to carry out the winding up of the LLC (the "Liquidating Trustee") shall promptly notify the Members of such dissolution. 12.3 Liquidation. (a) The proceeds of liquidation shall be distributed, as realized, in the following order and priority: (i) to creditors of the LLC, including Members who are creditors, to the extent otherwise permitted by law, in satisfaction of the liabilities of the LLC (whether by payment or the making of reasonable provision for payment thereof), other than liabilities for distributions to Members; and (ii) the remaining proceeds of liquidation shall be distributed among the Members in accordance with their positive Capital Account balances, after adjusting such Capital Accounts in accordance with Article 6 for the allocation of Profits or Losses resulting from the termination and liquidation of the LLC; provided, however, that such proceeds shall be distributed first to the Preferred Members until they have received an amount equal to the positive balance of their respective Capital Accounts (as so adjusted) and then, if there are proceeds remaining after the distribution to the Preferred Members, to the Common Members in proportion to their respective positive Capital Account balances. (b) If the Liquidating Trustee shall determine that it is not feasible to liquidate all of the assets of the LLC, then the Liquidating Trustee shall cause the Fair Market Value of the assets not so liquidated to be determined. Any unrealized appreciation or depreciation with respect to such assets shall be allocated among the 34 Members in accordance with Article 6 as though the property were sold for its Fair Market Value and distribution of any such assets in kind to a Member shall be considered a distribution of an amount equal to the assets' Fair Market Value for purposes of Article 6 and this Article 12. (c) No Member shall have the right to demand or receive property other than cash upon dissolution and termination of the LLC. 12.4 Termination. The LLC shall terminate when all of the assets of the LLC, after payment of or due provision for all debts, liabilities and obligations of the LLC, shall have been distributed to the Members in the manner provided in this Article 12, and the Certificate shall have been canceled in the manner required by the Delaware Act. 12.5 Claims of the Members. For purposes of this Article 12, the Members shall look solely to the LLC's assets for the return of their capital contributions and, if the assets of the LLC remaining after payment of or due provision for all debts, liabilities and obligations of the LLC are insufficient to return such capital contributions, the Members shall have no recourse against the LLC or any other Member. 13 INTENTIONALLY DELETED 14 MISCELLANEOUS 14.1 Amendments. Subject to Section 5.11 hereof and the next succeeding sentence of this Section 14.1, any amendment to this Agreement shall be adopted and be effective as an amendment hereto if it is approved by both (a) Common Members holding at least 80% of the outstanding Class A Common Membership Points and (b) Preferred Members holding a majority of the outstanding Preferred Membership Points. Notwithstanding the foregoing, the Board may amend this Agreement, without the vote or approval of the Members, to (i) reflect a change in the name of the LLC, (ii) cure any ambiguity or correct or supplement any provision hereof that may be inconsistent with any other provision hereof, or to correct any printing, stenographic or clerical errors or omissions and (iii) amend or restate the Certificate. 14.2 Notices. (a) All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be sent as provided below: 35 If to WTI, Wilmington or WTC, to: Rodney Square North 1100 North Market Street Wilmington, DE 19890 Attention: David R. Gibson, Chief Financial Officer If to Roxbury or a Principal, to: 100 Wilshire Boulevard, Suite 600 Santa Monica, California 90401 (b) All notices and other communications required or permitted under this Agreement which are addressed as provided in this Section 14.2, (i) shall be effective upon delivery if delivered personally against proper receipt and (ii) shall be effective upon delivery if sent (A) by certified or registered mail with postage prepaid or (B) by Federal Express or similar courier service with courier fees paid by the sender. The parties hereto may from time to time change their respective addresses for the purposes of notices to that party by a similar notice specifying a new address, but no such change shall be deemed to have been given unless it has been sent and received as provided in this Section 14.2. 14.3 Waivers. Any waiver of any term or condition or of the breach of any covenant, representation or warranty of this Agreement in any one instance shall not operate as or be deemed to be or construed as a further or continuing waiver of any other breach of such term, condition, covenant, representation or warranty or any other term, condition, covenant, representation or warranty, nor shall any failure or delay at any time or times to enforce or require performance of any provision hereof operate as a waiver of or affect in any manner such party's right at a later time to enforce or require performance of such provision or of any other provision hereof; provided, however, that no such waiver, unless, by its own terms, it explicitly provides to the contrary, shall be construed to effect a continuing waiver of the provision being waived and no such waiver in any instance shall constitute a waiver in any other instance or for any other purpose or impair the right of the party against whom such waiver is claimed in all other instances or for all other purposes to require full compliance. 14.4 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and, to the extent permitted by this Agreement, their heirs, legal representatives, successors and assigns. 14.5 Severability. If any provision of this Agreement shall be held by any court of competent jurisdiction or an Arbitrator to be illegal, invalid, or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be illegal, invalid or unenforceable, and such illegality, invalidity or unenforceability shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement. 36 14.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.7 Governing Law; Arbitration. This Agreement and the rights of the parties hereunder shall be interpreted in accordance with the laws of the State of Delaware, and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws. All disputes arising out of or relating to this Agreement and the matters covered herein shall be decided by arbitration pursuant to the applicable J.A.M.S./Endispute Comprehensive Arbitration Rules and Procedures in effect at the time. Among the disputes that must be submitted to arbitration are those concerning the interpretation, enforcement or alleged breach of this Agreement, as well as those based on state and/or federal law. The arbitration shall be held in Los Angeles, California and the laws of the State of Delaware shall be applied without effect given to that State's choice of law rules. The decision of the Arbitrator shall be final and binding on all parties. The prevailing party shall be entitled to recover all provable damages, consequential or otherwise, in addition to all other remedies as may be available under this Agreement, at law or in equity. The parties agree that injunctive or other equitable relief preventing any breach or otherwise enforcing this Agreement may be ordered by the Arbitrator to the fullest extent permitted by applicable law. Notwithstanding the foregoing, for emergency equitable relief (including temporary and preliminary injunctive relief), any party may petition a state or federal court of competent jurisdiction. 14.8 Captions. The captions in this Agreement are for convenience only and shall not affect the construction or interpretation of any term or provision hereof. 14.9 Gender. Whenever used herein, the singular number shall include the plural, the plural shall include the singular, unless the context otherwise requires, and the use of any gender shall include all genders. 14.10 Third Party Beneficiaries. No Person who is not a party to this Agreement shall be entitled to any rights or benefits under this Agreement. 14.11 Failure to Pursue Remedies. The failure of any party to seek redress for violation of, or to insist upon strict performance of, any provision of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation. 14.12 Cumulative Remedies. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. 14.13 Integration. This Agreement (as it may from time to time be amended) constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto. 37 15 CLASS B INTERESTS 15.1 Defined Terms. Notwithstanding anything to the contrary in Article 1, the terms defined in this Section 15.1 shall, for the purposes of this Article 15, have the meanings herein specified. (a) "B Put Price" means an amount equal to [*] multiplied by an amount equal to the Oregon Manager FCF multiplied by a fraction, the numerator of which is the number of Class B Membership Points to be sold by such Class B Member at such time, and the denominator of which is the total number of Class B Membership Points then outstanding. (b) "Break Even Point" means such date on which the Oregon Recoupment FCF equals the LLC Funded Startup Costs. (c) "Class B Member" means the Oregon Managing Members, and any other Person subsequently admitted to the LLC as a Class B Member. (d) "Class B Membership Interest" means an interest in the LLC held by a Class B Member. A Class B Membership Interest confers on its holders only the specific rights provided for in this Article 15. For purposes of applying the provisions of this Agreement, Class B Members shall not be treated as Members, Principals, or holders of Membership Points, except as specifically provided in this Article 15. Without limiting the generality of the foregoing, no Class B Member (i) shall have any voting rights of any kind under this Agreement, (ii) shall have any rights to any distributions or allocations under Article 6, or (iii) shall be counted for any purpose in respect of any provision relating to any Change of Control. (e) "Class B Membership Points" means those Membership Points representing Class B Membership Interests owned by Class B Members. (f) "LLC Funded Startup Costs" means an amount equal to the cumulative net costs and expenses of the LLC in connection with the establishment and operation of the Oregon division. (g) "Oregon Commission" means (i) [*] of the Oregon Fees if assets under management of the Oregon division (the "AUM") are equal to or less than [*] at the close of the applicable Fiscal Year, or (ii) [*] of the Oregon Fees if AUM are greater than [*] billion but equal to or less than [*] at the close of the applicable Fiscal Year, or (iii) [*] of the Oregon Fees if AUM are greater than $[*] but less than or equal to [*] at the close of the applicable Fiscal Year, or (iv) [*] of the Oregon Fees if AUM are greater than [*] at the close of the applicable Fiscal Year. (h) "Oregon FCF" means, for any accounting period, the Oregon Gross Revenue less (A) all direct expenses of the operations of the LLC's Oregon 38 * CONFIDENTIAL TREATMENT REQUESTED division, including without limitation, all salaries, benefits, and related expenses of employees managed by the LLC's Oregon division, (B) interest calculated at the rate of [*] per annum on the theretofore unrecouped LLC Funded Startup Costs, (C) all commissions paid with respect to accounts or assets managed by the Oregon division, which is an amount which is agreed to be the Oregon Commissions, and (D) the Oregon General Overhead Allocation. (i) "Oregon Fees" means the fees for investment advisory, sub-advisory, investment management, or administration services payable with respect to assets under management of the LLC's Oregon division. (j) "Oregon General Overhead Allocation" means the general overhead and other indirect expenses of the LLC allocable to the operation of the LLC's Oregon division, in an amount which is agreed to be [*] plus an amount equal to [*] of the Oregon Gross Revenue for the applicable period; provided, however, that such amount shall in no event exceed [*], unless the LLC's annual expense for wrap accounts exceeds [*] per wrap account, in which event the Oregon General Overhead Allocation shall be increased by an amount equal to the number of wrap accounts then under management of the LLC's Oregon division multiplied by the amount by which the LLC's annual expense per wrap account exceeds [*]. (k) "Oregon Gross Revenue" means, for any accounting period, the Oregon Fees and any other gross receipts from operations of the LLC's Oregon division (without deduction for any amounts payable to WTI, WTC, or Wilmington pursuant to Section 6.3(a)(i) of this Agreement). (l) "Oregon Manager FCF" means [*] of the Oregon Surplus FCF. (m) "Oregon Managing Members" means Steven N. Marshman, Robert Marvin, and Brian Smoluch. (n) "Oregon Recoupment FCF" means [*] of the Oregon FCF up to an amount equal to the LLC Funded Startup Costs. (o) "Oregon Surplus FCF" means [*] of the Oregon FCF which exceeds the Oregon Recoupment FCF. (p) "Outside Termination Date" shall have the meaning given in Section 7.3 of Exhibit A to the Employment Agreement of the applicable Oregon Managing Member. (q) "Put Window" means the month of March of each Fiscal Year following the Break Even Point. 39 * CONFIDENTIAL TREATMENT REQUESTED 15.2 Distributions; Allocations; Proration. (a) Notwithstanding anything in this Agreement to the contrary, no portion of any Oregon Gross Revenue shall be included in the determination of the Preferred Member Revenue Share pursuant to Section 6.3(a)(i)(A) of this Agreement. (b) The LLC's outside accountants (the "LLC Accountants") shall determine the Oregon FCF for each calendar year, and the Company shall notify the Class B Members of any such determinations on or prior to February 28 following the applicable Fiscal Year. (c) In the event that all Class B Members disagree with the calculation of Oregon FCF determined by the LLC Accountants, the Class B Members may elect, by written notice delivered to the LLC within 15 days after receipt of the LLC's calculation of Oregon FCF, to engage independent accountants ("Class B Accountants") at the Class B Members' expense, to review the LLC's calculation. The LLC shall cooperate, and shall instruct the LLC Accountants to cooperate, with the Class B Accountants, and shall make available to the Class B Accountants the LLC's relevant work papers used in the calculation of Oregon FCF. The Class B Members shall deliver the Class B Accountant's calculation of Oregon FCF to the LLC within 60 days of the delivery of the LLC's calculation of Oregon FCF. If, within 30 days after the Class B Members' delivery of the Class B Accountant's calculation of Oregon FCF, the LLC and the Class B Members have not reached an agreement as to the Oregon FCF for such preceding Fiscal Year, the LLC and the Class B Members shall engage a third, unaffiliated independent accounting firm ("Independent Accountants") to calculate the Oregon FCF. The decision of the Independent Accountants shall be final and binding. The LLC and the Class B Members shall share the costs and expenses associated with the engagement of the Independent Accountants. If the Independent Accountants determine that the Oregon FCF is more than 105% of the determination of the LLC Accountants, then the LLC shall be responsible for the costs of the Independent Accountants, and shall reimburse the Class B Members for the reasonable costs of the Class B Accountants. (d) Within 10 business days after the end of each calendar quarter, the Board shall cause to be distributed to the Class B Members, pro rata in accordance with their respective holdings of outstanding Class B Membership Points, not less than forty percent (40%) of the estimated undistributed Oregon Manager FCF (if any) applicable to such quarter of each Fiscal Year. (e) Within 75 days after the end of each Fiscal Year, the Board shall cause to be distributed to the Class B Members, pro rata in accordance with their respective holdings of outstanding Class B Membership Points, the theretofore undistributed portion of Oregon Manager FCF (if any) applicable to such Fiscal Year. If the distributions to Class B Members during any Fiscal Year exceed the Oregon Manager FCF applicable to such Fiscal Year, then the Class B Members shall return any such excess to the LLC within 75 days after the end of such Fiscal Year. 40 (f) The LLC shall not make any distributions to the Class B Members that violate Section 18-607 of the Delaware Act or other applicable law. (g) There shall be allocated to the Class B Members, pro rata with respect to their holdings of Class B Membership Points, profits equal to the Oregon Manager FCF. No other profits or losses shall be allocated to the Class B Members. All other profits and losses of the LLC, including the other [*] of the Oregon Surplus FCF, shall be allocated as otherwise provided in Sections 6.3 and 6.4 of this Agreement. (h) Section 6.7 of this Agreement shall apply to the Class B Members and their respective Class B Membership Points on the same terms as set forth in respect of the Common Members and their respective Common Membership Points. 15.3 Put Right. At any time and from time to time during each Put Window, each Class B Member shall have the right to sell to Wilmington, and Wilmington shall have the obligation to purchase, for the B Put Price (payable to such Class B Member within 15 days after the end of the applicable Put Window, such amount to accrue simple interest at the prime rate if unpaid at the end of such 15-day period until such amount is paid) a portion of the Class B Membership Points then held by such Class B Member; provided, however, that no Class B Member shall sell pursuant to this Section 15.3 more than fifty percent (50%) of the aggregate Class B Membership Points issued initially to such Class B Member. Notwithstanding the foregoing, if the total number of Class B Membership Points elected to be sold during any Put Window pursuant to this Section 15.3 by all Class B Members (the "Total Class B Election") exceeds twenty-five percent (25%) of the aggregate number of Class B Membership Points issued initially to all Class B Members (the "Yearly Limit"), then each Class B Member may sell pursuant to this Section 15.3 that number of his Class B Membership Points equal to the Yearly Limit multiplied by a fraction, the numerator of which is the number of Class B Membership Points elected to be sold by such Class B Member, and the denominator of which is the Total Class B Election during such Put Window. 15.4 Transfer. Class B Members shall be permitted to make Transfers of Class B Membership Interests as provided in Section 7.1(b) of this Agreement. 15.5 Reorganization. If at any time or from time to time there shall be a reorganization or other change in the business structure of the LLC, including without limitation a conversion to a subchapter "C" corporation (a "Structure Change") approved by the Board, then each Class B Member shall exchange such Class B Member's Class B Membership Interest for the applicable interest in the resulting entity (the "Exchange Interest") as determined by the Board; provided, however, that any such Exchange Interest shall have economic rights and characteristics substantially equivalent to the applicable Class B Membership Interest (including with respect to distributions of Oregon Manager FCF and sales of Class B Membership Interests). 41 * CONFIDENTIAL TREATMENT REQUESTED 15.6 Sale on Termination. (a) If (i) the LLC terminates the employment of any Class B Member (x) without Cause, (y) pursuant to either Sections 5.1(e) or 5.1(f) of such Class B Member's Employment Agreement, or (z) pursuant to the LLC's election not to renew the Term in accordance with Section 1 of such Class B Member's Employment Agreement, or (ii) such Class B Member terminates his employment with the LLC (x) for Good Reason, (y) such employment terminates by reason of such Class B Member's death or Disability, or, (z) pursuant to and in accordance with Section 7.3 of Exhibit A to such Class B Member's Employment Agreement if such employment is terminated by such Class B Member, with at least six months prior written notice, and with such termination to be effective not earlier than the Outside Termination Date, or (iii) the LLC sells all or substantially all of its assets or is deemed to have sold all of its assets in a liquidation, then such Class B Member (or his successors or legal representatives, as applicable) shall sell, and Wilmington shall purchase, all of such Class B Member's Class B Membership Points for a purchase price (payable to such Class B Member within 15 days after any such event occurs, such amount to accrue simple interest at the prime rate if unpaid at the end of such 15-day period until such amount is paid) equal to [*] multiplied by the Oregon Manager FCF for the twelve full calendar months immediately preceding the effective date of such termination, or the closing of such sale or deemed sale (as the case may be), multiplied by a fraction, the numerator of which is the total number of Class B Membership Points then owned by such Class B Member, and the denominator of which is the total number of Class B Membership Points then outstanding. (b) If (i) the LLC terminates the employment of any Class B Member for Cause, or if (ii) such employment is terminated by such Class B Member (x) without Good Reason, or (y) pursuant to such Class B Member's election not to renew the Term in accordance with Section 1 of such Class B Member's Employment Agreement prior to the Outside Termination Date, then such Class B Member shall sell, and Wilmington shall purchase, all of such Class B Member's Class B Membership Points for a purchase price (payable to such Class B Member within 15 days after any such event occurs, such amount to accrue simple interest at the prime rate if unpaid at the end of such 15-day period until such amount is paid) equal to [*] multiplied by the Oregon Manager FCF for the twelve full calendar months immediately preceding the effective date of such termination multiplied by a fraction, the numerator of which is the total number of Class B Membership Points then owned by such Class B Members, and the denominator of which is the total number of Class B Membership Points then outstanding. (c) As used in this Section 15.6, the terms "Cause", "Good Reason", "Term", and "Disability", shall all have the meanings set forth in the applicable Employment Agreement between any Class B Member and the LLC (the "Employment Agreement"). Any and all determinations concerning any such termination of employment of a Class B Member shall be made pursuant to such applicable Employment Agreement. 42 * CONFIDENTIAL TREATMENT REQUESTED 15.7 Execution of Agreement; Representations and Warranties. (a) The execution of the Third Amendment to this Agreement by Class B Members shall constitute the execution of such Class B Member of this Agreement, and shall evidence such Class B Member's agreement to be bound by the applicable terms and conditions of this Agreement. (b) Each Class B Member represents and warrants as follows: (i) such Class B Member has such knowledge and experience in financial and business matters that he or it is capable of evaluating the merits and risks of an investment in the LLC and making an informed investment decision with respect thereto; (ii) such Class B Member is able to bear the economic and financial risk of an investment in the LLC for an indefinite period of time; (iii) such Class B Member is acquiring an interest in the LLC for investment only and not with a view to, or for resale in connection with, any distribution to the public; (iv) the Class B Membership Interests have not been registered under the securities laws of any jurisdiction and cannot be disposed of unless they are subsequently registered and/or qualified under applicable securities laws or exempt therefrom and the provisions of this Agreement have been complied with; (v) such Class B Member is an "accredited investor" within the meaning of Rule 501(a) of Regulation D; and (vi) the execution, delivery and performance of this Agreement by such Class B Member do not require such Class B Member to obtain any consent or approval that has not been obtained and do not contravene or result in a default under any provision of any existing law or regulation applicable to him or it, or any agreement or instrument to which such Class B Member is a party or by which such Class B Member is bound. 15.8 Amendments. Without limiting the applicability of Section 14.1 of the Agreement, any amendment to this Article 15 shall require the consent of at least fifty percent (50%) of the then outstanding Class B Membership Points. 43 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above stated. PREFERRED MEMBERS WT INVESTMENTS, INC. By: /s/ David R. Gibson ---------------------------- David R. Gibson, Executive Vice President CLASS A MEMBERS ROXBURY CAPITAL MANAGEMENT By: /s/ Anthony H. Browne ------------------------------ Anthony H. Browne Managing Director WILMINGTON TRUST CORPORATION By: /s/ David R. Gibson ------------------------------------ David R. Gibson, Executive Vice President THE BROWNE FAMILY 1999 IRREVOCABLE TRUST By: /s/ Christopher Howard Browne ------------------------------------ Christopher Howard Browne, Trustee /s/ Anthony H. Browne ------------------------------------ Anthony H. Browne /s/ Brian Massey ------------------------------------ Brian Massey 44 CLASS A MEMBERS (CONT'D) /s/ Brian Beh --------------------------------------- Brian Beh /s/ David Kahn --------------------------------------- David Kahn /s/ Phyllis Nelson --------------------------------------- Phyllis Nelson --------------------------------------- Edward Shipe CLASS B MEMBERS /s/ Steven Marshman --------------------------------------- Steven Marshman /s/ Robert Marvin --------------------------------------- Robert Marvin /s/ Brian Smoluch --------------------------------------- Brian Smoluch 45 EX-10.58 7 w94679exv10w58.txt AMENDED 2002 LONG-TERM INCENTIVE PLAN AMENDED 2002 LONG-TERM INCENTIVE PLAN EXHIBIT 10.58 AMENDED 2002 LONG-TERM INCENTIVE PLAN OF WILMINGTON TRUST CORPORATION 1. PURPOSE. The 2002 Long-Term Incentive Plan (the "Plan") of Wilmington Trust Corporation ("Wilmington Trust") is designed to encourage and facilitate ownership of stock by, and provide additional incentive compensation based on appreciation of that stock to, key employees and directors of Wilmington Trust and other entities to whom the Committee grants Awards. Wilmington Trust hopes thereby to provide a potential proprietary interest as additional incentive for the efforts of those individuals in promoting Wilmington Trust's continued growth and the success of its business. The Plan also will aid Wilmington Trust in attracting and retaining professional and managerial personnel. 2. ADMINISTRATION. The Plan shall be administered by the Corporation's Compensation Committee, consisting solely of non-employee directors, the Corporation's Select Committee, consisting of either or both of its two employee directors, or any other committee of the Corporation's Board of Directors that the Board may appoint from time to time to administer the Plan (all such committees are hereinafter sometimes collectively referred to as the "Committee"). The Compensation Committee shall have sole authority to grant Awards to a Participant who is, at the Date of Grant of the Award, either a "covered employee" as defined in Section 162(m) or subject to Section 16 of the Exchange Act. The Compensation Committee also shall have authority to grant Awards to other Participants. The Select Committee shall have authority to grant Awards to Participants who are not, at the Date of Grant of the Award, either "covered employees" as defined in Section 162(m) or subject to Section 16 of the Exchange Act. The Committee shall have the power and authority to administer the Plan in accordance with this Section 2. Wilmington Trust's Board may appoint members of the Committee from time to time in substitution for those members who previously were appointed and may fill vacancies in the Committee, however caused. The Committee shall have exclusive and final authority in each determination, interpretation, or other action affecting the Plan and the Participants. The Committee shall have the sole and absolute discretion to interpret the Plan, establish and modify administrative rules for the Plan, select persons to whom Awards may be granted, determine the terms and provisions of Award Agreements (which need not be identical), determine all claims for benefits hereunder, impose conditions and restrictions on Awards it determines to be appropriate, and take steps in connection with the Plan and Awards it deems necessary or advisable. In the event of a conflict between determinations made by the Compensation Committee and the Select Committee, the determination of the Compensation Committee shall control. A majority of the Compensation Committee's members shall constitute a quorum thereof, and action by a majority of a quorum shall constitute action by the Compensation Committee. Compensation Committee members may participate in meetings by conference -1- telephone or other similar communications equipment by means of which all members participating in the meeting can hear each other. Any decision or determination reduced to writing and signed by all of the Compensation Committee's members shall be as effective as if that action had been taken by a vote at a meeting of the Committee duly called and held. 3. THE SHARES. The Committee shall not authorize issuance of more than a total of 2,000,000 shares hereunder, except as otherwise provided in Section 9(i) below. These may either be authorized and unissued shares or previously issued shares Wilmington Trust has reacquired. The shares covered by any unexercised portions of terminated Options granted under Section 5 and shares subject to any Awards the Participant otherwise surrenders without receiving any payment or other benefit may again be subject to new Awards hereunder. If a Participant pays the purchase price of an Option or tax liability associated with that exercise in whole or part by delivering Wilmington Trust stock, the number of shares issuable in connection with the Option's exercise shall not again be available for the grant of Awards. Shares used to measure the amount payable to a Participant in respect of Performance Awards or Other Awards shall not again be available for the grant of Awards. Shares issued in payment of Performance Awards denominated in cash amounts shall not again be available for the grant of Awards. 4. PARTICIPATION. The Committee shall designate Participants from time to time in its sole and absolute discretion. Those Participants may include officers, other key employees, and directors of, and consultants to, Wilmington Trust or its subsidiaries or affiliates. In making those designations, the Committee may take into account the nature of the services the officers, key employees, directors, and consultants render, their present and potential contributions to Wilmington Trust, and other factors the Committee deems relevant in its sole and absolute discretion. If the Committee designates a Participant in any year, it need not designate that person to receive an Award in any other year. In addition, if the Committee designates a Participant to receive an Award under one portion hereof, it need not include that Participant under any other portion hereof. The Committee may grant more than one type of Award to a Participant at one time or at different times. 5. OPTIONS. a. GRANT OF OPTIONS. The Committee shall designate the form of Options and additional terms and conditions not inconsistent with the Plan. The Committee may grant Options either alone or in addition to other Awards. The terms and conditions of Option Awards need not be the same with respect to each Participant. The Committee may grant to Participants one or more incentive stock options ("Incentive Stock Options") that meet the requirements of Section 422 of the Code, stock options that do not meet those requirements ("Nonstatutory Stock Options"), or both. To the extent any Option does not qualify as an Incentive Stock Option, whether because of its provisions, the time or manner of its exercise, or -2- otherwise, that Option or the portion thereof that does not so qualify shall constitute a separate Nonstatutory Stock Option. b. INCENTIVE STOCK OPTIONS. Each provision hereof and in any Award Agreement the Committee designates as an Incentive Stock Option shall be interpreted to entitle the holder to the tax treatment afforded by Section 422 of the Code, except in connection with the exercise of Options: (1) following a Participant's Termination of Employment; (2) in accordance with the Committee's specific determination with the consent of the affected Participant; or (3) to the extent Section 9 would cause an Option to no longer be entitled to that treatment. If any provision herein or the Award Agreement is held not to comply with requirements necessary to entitle that Option to that tax treatment, then except as otherwise provided in the preceding sentence: (x) that provision shall be deemed to have contained from the outset the language necessary to entitle the Option to that tax treatment; and (y) all other provisions herein and in that Award Agreement shall remain in full force and effect. Except as otherwise specified in the first sentence of this Section 5(b), if any Award Agreement covering an Option the Committee designates to be an Incentive Stock Option does not explicitly include any term required to entitle that Option to that tax treatment, all those terms shall be deemed implicit in the designation of that Option, and that Option shall be deemed to have been granted subject to all of those terms. c. OPTION PRICE. The Committee shall determine the per share exercise price of each Option. That price shall be at least the greater of (1) the par value per share of Wilmington Trust stock and (2) 100% of the last sale price of Wilmington Trust stock on the Date of Grant. d. OPTION TERM. The Committee shall fix the term of each Option, but no Option shall be exercisable more than ten years after the date the Committee grants it. e. EXERCISABILITY. The Committee may at the time of grant determine performance targets, waiting periods, exercise dates, and other restrictions on exercise and designate those in the Award Agreement. f. METHOD OF EXERCISE. Subject to any waiting periods that may apply under Section 5(e) above, a Participant may exercise Options in whole or in part at any time during the period of time, if any, set forth in the Award Agreement during which that Option or portion thereof is exercisable by giving Wilmington Trust written notice specifying the number of shares to be purchased. The Participant must accompany that notice by payment in full of the purchase price in a form the Committee may accept. If the Committee determines in its sole discretion at or after grant, a Participant also may make payment in full or in part in the form of shares of Wilmington Trust stock already owned and/or in the form of shares otherwise issuable upon exercise of the Option. In either case, the value of that stock shall be based on the Market Value Per Share of Wilmington Trust stock tendered on the date the Option is exercised. Notwithstanding the foregoing, the right to pay the purchase price of an Incentive Stock Option in the form of already-owned shares or shares otherwise issuable upon exercise of the Option may be authorized only at the time of grant. No shares shall be issued until payment therefor has -3- been made as provided herein, except as otherwise provided herein. In general, a Participant shall have the right to dividends and other rights of a shareholder with respect to Wilmington Trust stock subject to the Option only when certificates for shares of that stock are issued to the Participant. g. ACCELERATION OR EXTENSION OF EXERCISE TIME. The Committee may, in its sole and absolute discretion, on or after the Date of Grant, permit shares subject to any Option to become exercisable or be purchased before that Option would otherwise become exercisable under the Award Agreement. In addition, the Committee may, in its sole and absolute discretion, on or after the Date of Grant, permit any Option granted hereunder to be exercised after its expiration date, subject to the limitation in Section 5(d) above. h. TERMINATION OF EMPLOYMENT. Unless the Committee provides otherwise in an Award Agreement or after granting an Option, if the employment of a Participant who has received an Option terminates on other than: (1) the Participant's Normal Retirement Date; (2) the Participant's Other Retirement Date; (3) the Participant's death; or (4) the Participant's Disability, all Options previously granted to that Participant but not exercised before that Termination of Employment shall expire as of that date. i. DEATH, DISABILITY, OR RETIREMENT OF A PARTICIPANT. If a Participant dies while employed by the employer he or she was employed with when he or she was last granted Options, an Option theretofore granted to that Participant shall not be exercisable after the earlier of the expiration of that Option or three years after the date of that Participant's death, and only (1) by the person or persons to whom the Participant's rights under that Option passed under the Participant's will or by the laws of descent and distribution and (2) if and to the extent the Participant was entitled to exercise that Option at the date of his or her death. If a Participant's employment with the employer he or she was employed with when he or she was last granted Options terminates due to Disability or on the Participant's Normal Retirement Date or Other Retirement Date, an Option theretofore granted to that Participant shall not be exercisable after the earlier of the expiration date of the Option or three years after the date of the Disability or retirement. If the Participant has died before then, an Option theretofore granted to that Participant shall be exercisable (1) only by the person or persons to whom the Participant's rights under the Option passed under the Participant's will or by the laws of descent and distribution and (2) if and to the extent the Participant was entitled to exercise that Option on the date of his or her death. 6. PERFORMANCE AWARDS. a. GRANT OF PERFORMANCE AWARDS. The Committee also may grant awards payable in cash or shares or a combination of both at the end of a specified performance period ("Performance Awards") hereunder. These shall consist of the right to receive payment measured by (1) a specified number of shares at the end of an Award Period, (2) the Market Value Per Share of a specified number of shares at the end of an Award Period, (3) the increase in the Market Value Per Share of a specified number of shares during an Award Period, or (4) a -4- fixed cash amount payable at the end of an Award Period, contingent on the extent to which certain pre-determined performance targets are met during the Award Period. The Committee shall determine the Participants, if any, to whom Performance Awards are awarded, the number of Performance Awards awarded to any Participant, the duration of the Award Period during which any Performance Award will be vested, and other terms and conditions of Performance Awards. b. PERFORMANCE TARGETS. The Committee may establish performance targets for Performance Awards in its sole and absolute discretion. These may include individual performance standards or specified levels of revenues from operations, earnings per share, return on shareholders' equity, and/or other goals related to the performance of Wilmington Trust or any of its subsidiaries or affiliates. The Committee may, in its sole and absolute discretion, in circumstances in which events or transactions occur to cause the established performance targets to be an inappropriate measure of achievement, change the performance targets for any Award Period before the final determination of a Performance Award. c. EARNED PERFORMANCE AWARDS. In granting a Performance Award, the Committee may prescribe a formula to determine the percentage of the Performance Award to be earned based upon the degree performance targets are attained. The degree of attainment of performance targets shall be determined as of the last day of the Award Period. d. PAYMENT OF EARNED PERFORMANCE AWARDS. Wilmington Trust shall pay earned Performance Awards granted under Section 6(a)(2) or 6(a)(3) above in cash or shares based on the Market Value Per Share of Wilmington Trust stock on the last day of an Award Period, or a combination of cash and shares, at the Committee's sole and absolute discretion. Wilmington Trust shall normally make payment as soon as practicable after an Award Period. However, the Committee may permit deferral of payment of all or a portion of a Performance Award payable in cash upon a Participant's request made on a timely basis in accordance with rules the Committee prescribes. Those deferred amounts may earn interest for the Participant under the conditions of a separate agreement the Committee approves and the Participant executes. In its sole and absolute discretion, the Committee may define in the Award Agreement other conditions on paying earned Performance Awards it deems desirable to carry out the purposes hereof. e. TERMINATION OF EMPLOYMENT. Unless the Committee provides otherwise in the Award Agreement or as otherwise provided below, in the case of a Participant's Termination of Employment before the end of an Award Period, the Participant will not be entitled to any Performance Award. f. DISABILITY, DEATH, OR RETIREMENT. Unless the Committee provides otherwise in the Award Agreement or after the grant of a Performance Award, if a Participant's Disability Date or the date of a Participant's Termination of Employment due to death or retirement on or after his or her Normal Retirement Date or Other Retirement Date occurs before the end of an Award Period, the Participant or the Participant's Beneficiary shall be entitled to receive a pro-rata share of his or her Award in accordance with Section 6(g) below. -5- g. PRO-RATA PAYMENT. The amount of any payment Wilmington Trust makes to a Participant or that Participant's Beneficiary under circumstances described in Section 6(f) above shall be determined by multiplying the amount of the Performance Award that would have been earned, determined at the end of the Performance Award Period, if that Participant's employment had not been terminated, by a fraction, the numerator of which is the number of whole months the Participant was employed during the Award Period and the denominator of which is the total number of months in the Award Period. That payment shall be made as soon as practicable after the end of that Award Period, and shall relate to attainment of the applicable performance targets over the entire Award Period. h. OTHER EVENTS. Notwithstanding anything to the contrary contained in this Section 6, the Committee may, in its sole and absolute discretion, determine to pay all or any portion of a Performance Award to a Participant who has terminated employment before the end of an Award Period under certain circumstances, including a material change in circumstances arising after the date the Performance Award is granted, and subject to terms and conditions the Committee deems appropriate. 7. OTHER STOCK-BASED AWARDS. a. GRANT OF OTHER AWARDS. The Committee may grant other Awards under this Section 7 ("Other Awards"), valued in whole or in part by reference to, or otherwise based on, shares of Wilmington Trust stock. Subject to the provisions hereof, the Committee shall have the sole and absolute discretion to determine the persons to whom and the time or times at which those Awards are made, the number of shares to be granted pursuant thereto, if any, and all other conditions of those Awards. Any Other Award shall be confirmed by an Award Agreement. The Award Agreement shall contain provisions the Committee determines necessary or appropriate to carry out the intent hereof with respect to the Award. b. TERMS OF OTHER AWARDS. In addition to the terms and conditions specified in the Award Agreement, Other Awards made under this Section 7 shall be subject to the following: (1) Any shares subject to Other Awards may not be sold, assigned, transferred, pledged, or otherwise encumbered before the date on which those shares are issued or, if later, the date on which any applicable restriction, performance, or deferral period lapses; (2) If specified in the Award Agreement, the recipient of an Other Award shall be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to the shares covered by that Award, and the Committee may, in its sole and absolute discretion, provide in the Award Agreement that those amounts be reinvested in additional shares; -6- (3) The Award Agreement shall contain provisions dealing with the disposition of the Award in the event of the Participant's Termination of Employment before the exercise, realization, or payment of the Award. The Committee may, in its sole and absolute discretion, waive any of the restrictions imposed with respect to any Other Award; and (4) Shares issued as a bonus pursuant to this Section 7 shall be issued for the consideration the Committee determines is appropriate, in its sole and absolute discretion, but rights to purchase shares shall be priced at least 100% of the Market Value Per Share on the date the Other Award is granted. 8. PAYMENT OF ANNUAL RETAINER. During the term hereof, each non-employee director of each company the Compensation Committee designates to participate in this Section 8 may elect to receive the first and/or second half of his or her Annual Retainer in cash or Wilmington Trust stock, or a combination of both. The Compensation Committee shall establish rules with respect to electing the form of payment provided for in the preceding sentence to facilitate compliance with Rule 16b-3. The number of shares to be issued to a non-employee director who receives shares pursuant to this Section 8 shall be the dollar amount of the portion of the Annual Retainer payable in shares divided by the Market Value Per Share of a share of Wilmington Trust stock on the business day immediately preceding the date that installment of the Annual Retainer is otherwise paid to that company's directors. Wilmington Trust shall not be required to issue fractional shares. Whenever under this Section 8 a fractional share would otherwise be required to be issued, Wilmington Trust shall pay an amount in lieu thereof in cash based upon the Market Value Per Share of that fractional share. 9. TERMS APPLICABLE TO ALL AWARDS GRANTED UNDER THE PLAN. a. EFFECT OF CHANGE IN CONTROL. Upon a Change in Control: (1) Any and all Options shall become exercisable immediately; and (2) The target values attainable under all Performance Awards and Other Awards shall be deemed to have been fully earned for the entire Award Period as of the effective date of the Change in Control. b. LIMITATIONS. (1) No person may be granted Awards in respect of more than 100,000 shares in any calendar year during the term hereof; (2) No Options or other Awards can be re-priced after they have been granted; and (3) No Awards other than Options can be made hereunder in respect of more than a total of 100,000 shares of Wilmington Trust Stock during the Plan's term. -7- c. PLAN PROVISIONS CONTROL AWARD TERMS. The terms of the Plan govern all Awards granted hereunder. The Committee shall not have the power to grant a Participant any Award that is contrary to any provision hereof. If any provision of an Award conflicts with the Plan as it is constituted on the date the Award is granted, the terms of the Plan shall control. Except as provided in Sections 6(b) and 9(i) of the Plan, or unless the Committee provides otherwise in its sole and absolute discretion in the Award Agreement, the terms of any Award granted hereunder may not be changed after the date it is granted to materially decrease the value of the Award without the express written approval of the holder thereof. No person shall have any rights with respect to any Award until Wilmington Trust and the Participant have executed and delivered an Award Agreement or the Participant has received a written acknowledgement from Wilmington Trust that constitutes an Award Agreement. d. LIMITATIONS ON TRANSFER. A Participant may not transfer or assign his or her rights or interests with respect to Awards except by will, the laws of descent and distribution, or, in certain circumstances, pursuant to a qualified domestic relations order, as defined by the Code, Title I of ERISA, or the rules thereunder. Except as otherwise specifically provided herein, a Participant's Beneficiary may exercise the Participant's rights only to the extent they were exercisable hereunder at the date of the Participant's death and are otherwise currently exercisable. e. TAXES. If the Committee deems it necessary or desirable, Wilmington Trust shall be entitled to withhold (or secure payment from a Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or that Wilmington Trust pays (1) with respect to any amount payable and/or shares issuable under that Participant's Award, (2) with respect to any income recognized upon the lapse of restrictions applicable to an Award, or (3) upon a disqualifying disposition of shares received upon the exercise of any Incentive Stock Option. Wilmington Trust may defer payment or issuance of the cash or shares upon the grant, exercise, or vesting of an Award unless indemnified to its satisfaction against any liability for that tax. The Committee or its delegate shall determine the amount of that withholding or tax payment. The Participant shall make that payment at the time the Committee determines. In each Award Agreement, the Committee shall prescribe one or more methods by which the Participant may satisfy his or her tax withholding obligation. This may include the Participant's paying Wilmington Trust cash or shares of Wilmington Trust stock or Wilmington Trust's withholding from the Award, at the appropriate time, a number of shares sufficient to satisfy those tax withholding requirements, based on the Market Value Per Share of those shares. In its sole and absolute discretion, the Committee may establish rules and procedures relating to any withholding methods it deems necessary or appropriate. These may include rules and procedures relating to elections by Participants who are subject to Section 16 of the Exchange Act to have shares withheld from an Award to meet those withholding obligations. f. AWARDS NOT INCLUDABLE FOR BENEFIT PURPOSES. Income a Participant recognizes pursuant to the provisions hereof shall not be included in determining benefits under any employee pension benefit plan, as that term is defined in Section 3(2) of ERISA, group -8- insurance, or other benefit plan applicable to the Participant that the Participant's employer maintains, except if those plans or the Committee provide otherwise. g. COMPLIANCE WITH RULE 16b-3 AND SECTION 162(m). (1) If the Compensation Committee desires to structure any Award so that the compensation payable thereunder will qualify as "performance based" under Section 162(m), the Compensation Committee may establish objective performance goals as the basis for that Award. Those performance goals will be based on any combination the Compensation Committee selects of earnings per share, return on equity, return on assets, income, fees, assets, stockholder return, expenses, chargeoffs, nonperforming assets, and overhead ratio. Those goals may be company-wide or on a departmental, divisional, regional, or individual basis. Any goal may be measured in absolute terms, by reference to internal performance targets, or as compared to another company or companies, and may be measured by the change in that performance target compared to a previous period. The goals may be different each year, and will be established with respect to a particular year by the latest date permitted by Section 162(m). No payment under such an Award will be made under the Plan to a Section 162(m) Participant unless the pre-established performance goals are met or exceeded. (4) It is intended that the Plan be applied and administered in compliance with Rule 16b-3 and Section 162(m). If any provision of the Plan would be in violation of Section 162(m) if applied as written, that provision shall not have effect as written and shall be given effect so as to comply with Section 162(m) as the Compensation Committee determines in its sole and absolute discretion. Wilmington Trust's Board of Directors is authorized to amend the Plan, and the Compensation Committee is authorized to make any such modifications to Award Agreements, to comply with Rule 16b-3 and Section 162(m), as they may be amended from time to time, and to make any other amendments or modifications deemed necessary or appropriate to better accomplish the purposes of the Plan in light of any amendments to Rule 16b-3 or Section 162(m). Notwithstanding the foregoing, Wilmington Trust's Board of Directors may amend the Plan so that it (or certain of its provisions) no longer comply with either or both of Rule 16b-3 or Section 162(m) if the Board specifically determines that compliance is no longer desired. The Compensation Committee may grant Awards that do not comply with Rule 16b-3 and/or Section 162(m) if it determines, in its sole and absolute discretion, that it is in Wilmington Trust's interest to do so. h. AMENDMENT AND TERMINATION. (1) AMENDMENT. Wilmington Trust's Board of Directors shall have complete power and authority to amend the Plan at any time it deems it necessary or appropriate. However, those directors shall not, without the affirmative approval of Wilmington Trust's shareholders, make any amendment that requires shareholder approval under Rule 16b-3, the Code, or any other applicable law or rule of any exchange on which Wilmington Trust's shares are listed unless the directors determine that compliance with Rule 16b-3, the Code, or those laws or rules is no longer desired. No termination or amendment hereof may, without the consent of the Participant to whom any Award has been granted, adversely affect the right of -9- that individual under that Award. However, the Committee may make provision in the Award Agreement for amendments it deems appropriate in its sole and absolute discretion. (2) TERMINATION. Wilmington Trust's Board of Directors may terminate the Plan at any time. No Award shall be granted hereunder after that termination. However, that termination shall not have any other effect. Any Award outstanding at the termination hereof may be exercised or amended after that termination at any time before the expiration of that Award to the same extent that that Award would have been exercisable or could have been amended if the Plan had not terminated. i. CHANGES IN WILMINGTON TRUST'S CAPITAL STRUCTURE. The existence of outstanding Awards shall not affect the right of Wilmington Trust or its shareholders to make or authorize any and all adjustments, recapitalizations, reclassifications, reorganizations, and other changes in Wilmington Trust's capital structure, Wilmington Trust's business, any merger or consolidation of Wilmington Trust, any issue of bonds, debentures, or preferred stock, Wilmington Trust's liquidation or dissolution, any sale or transfer of all or any part of Wilmington Trust's assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise. The number and kind of shares subject to outstanding Awards, the purchase or exercise price of those Awards, the number and kind of shares available for Awards subsequently granted, and the limitation in Section 9(b) hereof shall be adjusted appropriately to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation, or other change in capitalization with a similar substantive effect on the Plan or Awards granted hereunder. The Committee shall have the power and sole and absolute discretion to determine the nature and amount of the adjustment to be made in each case. However, in no event shall any adjustment be made under the provisions of this Section 9(i) to any outstanding Award if an adjustment has been made or will be made to the shares of Wilmington Trust stock awarded to a Participant in that person's capacity as a shareholder. If Wilmington Trust is merged or consolidated with another entity and Wilmington Trust is not the surviving entity, or if Wilmington Trust is liquidated or sells or otherwise disposes of all or substantially all of its assets to another entity while unexercised Awards remain outstanding, then (1) subject to the provisions of Section 9(i)(2) below, after the effective date of that merger, consolidation, liquidation, or sale, each holder of an outstanding Award shall be entitled to receive, upon exercise of that Award in lieu of shares, other stock or other securities as the holders of shares of Wilmington Trust stock received in the merger, consolidation, liquidation, or sale; and (2) the Committee may cancel all outstanding Awards as of the effective date of that merger, consolidation, liquidation, or sale, provided that (x) notice of that cancellation has been given to each holder of an Award and (y) in addition to any rights he or she may have under Section 9(a) above, each holder of an Award shall have the right to exercise that Award in full, without regard to any limitations set forth in or imposed pursuant to Section 5, 6, or 7 above, during a 30-day period preceding the effective date of the merger, consolidation, liquidation, or sale. The exercise and/or vesting of any Award that was permissible solely because of this Section 9(i)(2)(y) shall be conditioned on consummation of the -10- merger, consolidation, liquidation, or sale. Any Awards not exercised as of the date of the merger, consolidation, liquidation, or sale shall terminate as of that date. If Wilmington Trust is consolidated or merged with another entity under circumstances in which Wilmington Trust is the surviving entity, and its outstanding shares are converted into shares of a third entity, a condition to the merger or consolidation shall be that the third entity succeed to Wilmington Trust's rights and obligations hereunder, and that the Plan be administered by a committee of the Board of that entity. Comparable rights shall accrue to each Participant in the event of successive reorganizations, mergers, consolidations, or other transactions similar to those described above. Except as expressly provided herein, Wilmington Trust's issuance of shares or any other securities for cash, property, labor, or services, either upon direct sale, the exercise of rights or warrants to subscribe therefor, or conversion of shares or obligations of Wilmington Trust convertible into shares or other securities shall not affect, and no adjustment by reason thereof shall be made with respect to, the number, class, or price of shares then subject to Awards outstanding. After any reorganization, merger, or consolidation in which Wilmington Trust or one of its subsidiaries or affiliates is a surviving entity, the Committee may grant substituted Awards replacing old options or other awards granted under a plan of another party to the reorganization, merger, or consolidation whose stock subject to the old options or awards may no longer be issued following that reorganization, merger, or consolidation. The Committee shall determine the foregoing adjustments and the manner in which the foregoing provisions are applied in its sole and absolute discretion. Any of those adjustments may provide for eliminating any fractional shares of Wilmington Trust stock that might otherwise become subject to any Options or other Awards. j. PERIOD OF APPROVAL AND TERM OF PLAN. The Plan shall be submitted to Wilmington Trust's shareholders at their annual meeting scheduled to be held on April 18, 2002 or any adjournment or postponement thereof. The Plan shall be adopted and become effective only when approved by Wilmington Trust's shareholders. Awards may be granted hereunder at any time up to and including April 17, 2005, at which time the Plan will terminate, except with respect to Awards then outstanding. Those shall remain in effect until their exercise, expiration, or termination in accordance herewith. k. COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES. No Award shall be exercisable, and no shares shall be delivered hereunder, except in compliance with all applicable Federal and state laws and regulations, the rules of the New York Stock Exchange, and all other stock exchanges on which Wilmington Trust shares are listed. Any certificate evidencing shares issued hereunder may bear legends the Committee deems advisable to ensure compliance with Federal and state laws and regulations. No Award shall be exercisable, and no shares shall be delivered hereunder, until Wilmington Trust has obtained consent or approval -11- from Federal and state regulatory bodies that have jurisdiction over matters as the Committee deems advisable. If a Participant's Beneficiary exercises an Award, the Committee may require reasonable evidence regarding the ownership of the Award and consents, rulings, or determinations from taxing authorities the Committee deems advisable. l. NO RIGHT OF EMPLOYMENT. Neither the adoption of the Plan nor its operation, nor any document describing or referring to the Plan or any part hereof, shall confer upon any Participant any right to continue in the employ of the Participant's employer, nor in any other way affect the employer's right or power to terminate the Participant's employment at any time, to the same extent as might have been done if the Plan had not been adopted. m. USE OF PROCEEDS. Funds Wilmington Trust receives on the exercise of Awards shall be used for its general corporate purposes. n. SEVERABILITY. Whenever possible, each provision hereof and of every Award granted hereunder shall be interpreted in a manner as to be effective and valid under applicable law. If any provision hereof or of any Award granted hereunder is held to be prohibited by or invalid under applicable law, then (1) that provision shall be deemed amended to accomplish the provision's objectives as originally written to the fullest extent permitted by law and (2) all other provisions hereof and of every other Award granted hereunder shall remain in full force and effect. o. CONSTRUCTION OF THE PLAN. The place of administration of the Plan shall be in Delaware, and the validity, construction, interpretation, administration, and effect hereof, its rules and regulations, and rights relating hereto shall be determined solely in accordance with Delaware law, other than the conflict of law provisions of those laws, and except as that law is superseded by Federal law. p. INTERPRETATION OF THE PLAN. Headings are given to the sections hereof solely as a convenience for reference. Those headings and the numbering and paragraphing hereof shall not be deemed in any way material or relevant to the construction of any provision hereof. The use of a singular shall also include within its meaning the plural, and vice versa, where appropriate. q. NO STRICT CONSTRUCTION. No rule of strict construction shall be implied against Wilmington Trust, the Committee, or any other person interpreting any term of the Plan, any Award granted under the Plan, or any rule or procedure the Committee establishes. r. COSTS AND EXPENSES. Wilmington Trust shall bear all costs and expenses incurred in administering the Plan. -12- s. UNFUNDED PLAN. The Plan shall be unfunded. Wilmington Trust shall not be required to establish any special or separate fund or otherwise segregate assets to assure payment of any Award. t. SURRENDER OF AWARDS. Any Award granted to a Participant may be surrendered to Wilmington Trust for cancellation on terms the Committee and the Participant approve. 10. DEFINITIONS. For purposes of the Plan, capitalized terms not otherwise defined herein have the following meanings: a. "Annual Retainer" means the payment(s) the Board of Directors of each company the Compensation Committee designates to participate in Section 8 determines from time to time to be the annual retainer payable each year to each non-employee director thereof. b. "Award" means (1) any grant to a Participant of any one or a combination of Incentive Stock Options, Nonstatutory Stock Options, Performance Awards, or Other Awards or (2) shares of Wilmington Trust stock received with respect to an Annual Retainer pursuant to Section 8. c. "Award Agreement" means a written agreement between Wilmington Trust and a Participant or a written acknowledgement from Wilmington Trust specifically setting forth the terms and conditions of an Award granted to a Participant under the Plan. d. "Award Period" means, with respect to an Award, the period of time, if any, set forth in the Award Agreement during which specified performance goals must be achieved or other conditions set forth in the Award Agreement must be satisfied. e. "Beneficiary" means an individual, trust, or estate who or that, by will or the laws of descent and distribution, succeeds to a Participant's rights and obligations under the Plan and an Award Agreement upon the Participant's death. f. "Cause" means, with respect to a Participant who is an employee of Wilmington Trust or one of its subsidiaries or affiliates or who is a consultant, termination for, as the Committee determines in its sole and absolute discretion, the Participant's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses), or a final cease-and-desist order. g. "Change in Control" means any of the events described below, directly or indirectly or in one or more series of transactions. However, the Committee may, in its sole and absolute discretion, specify in any Award Agreement a more restrictive definition of Change in Control. In that event, the definition of Change in Control set forth in that Award Agreement shall apply to the Award granted thereunder: -13- (1) Approval by Wilmington Trust Company's ("WTC's") or Wilmington Trust's shareholders of a consolidation or merger of WTC or Wilmington Trust with any Third Party, unless WTC or Wilmington Trust is the entity surviving that merger or consolidation; (2) Approval by WTC's or Wilmington Trust's shareholders of a transfer of all or substantially all of the assets of WTC or Wilmington Trust to a Third Party or of a complete liquidation or dissolution of WTC or Wilmington Trust; (3) Any person, entity, or group that is a Third Party, without prior approval of WTC's or Wilmington Trust's Board of Directors, by itself or through one or more persons or entities: (a) Acquires beneficial ownership of 15% or more of any class of WTC's or Wilmington Trust's Voting Stock; (b) Acquires irrevocable proxies representing 15% or more of any class of WTC's or Wilmington Trust's Voting Stock; (c) Acquires any combination of beneficial ownership of Voting Stock and irrevocable proxies representing 15% or more of any class of WTC's or Wilmington Trust's Voting Stock; (d) Acquires the ability to control in any manner the election of a majority of WTC's or Wilmington Trust's directors; or (e) Acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of WTC or Wilmington Trust; (4) Any election occurs of persons to Wilmington Trust's Board of Directors that causes a majority of that Board of Directors to consist of persons other than (a) persons who were members of that Board of Directors on February 29, 1996 (the "Effective Date") and/or (b) persons who were nominated for election as members of that Board of Directors by Wilmington Trust's Board of Directors (or a committee thereof) at a time when the majority of that Board of Directors (or that committee) consisted of persons who were members of Wilmington Trust's Board of Directors on the Effective Date. However, any person nominated for election by Wilmington Trust's Board of Directors (or a committee thereof), a majority of whom are persons described in clauses (a) and/or (b), or are persons who were themselves nominated by that Board of Directors (or a committee thereof), shall be deemed for this purpose to have been nominated by a Board of Directors composed of persons described in clause (a) above. A Change in Control shall not include any of the events described above if they (x) occur in connection with the appointment of a receiver or conservator for WTC or Wilmington Trust, provision of assistance under Section 13(c) of the Federal Deposit Insurance Act (the "FDI Act"), the approval of a supervisory merger, a determination that WTC is in default as defined in Section 3(x) of the FDI Act, insolvent, or in an unsafe or unsound condition to transact business, -14- or, with respect to any Participant, the suspension, removal, and/or temporary or permanent prohibition by a regulatory agency of that Participant from participating in WTC's or Wilmington Trust's business or (y) are the result of a Third Party inadvertently acquiring beneficial ownership or irrevocable proxies or a combination of both for 15% or more of any class of WTC's or Wilmington Trust's voting stock, and that Third Party as promptly as practicable thereafter divests itself of the beneficial ownership or irrevocable proxies for a sufficient number of shares so that the Third Party no longer has beneficial ownership or irrevocable proxies or a combination of both for 15% or more of any class of WTC's or Wilmington Trust's Voting Stock. h. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto. References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements, or supersedes that section. i. "Date of Grant" means the date designated by the Plan or the Committee as the date as of which an Award is granted. The Date of Grant shall not be earlier than the date on which the Committee approves the granting of the Award. j. "Disability" means any physical or mental injury or disease of a permanent nature that renders a Participant incapable of meeting the requirements of the employment or other work the Participant performed immediately before that disability commenced. The Committee shall make the determination of whether a Participant is disabled and when the Participant becomes disabled in its sole and absolute discretion. k. "Disability Date" means the date which is six months after the date on which a Participant is first absent form active employment or work due to a Disability. l. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. m. "Exchange Act" means the Securities Exchange Act of 1934, as amended. n. "Market Value Per Share" of a share of Wilmington Trust stock means, as of any date, the last sale price of a share of Wilmington Trust stock on that date on the principal national securities exchange on which Wilmington Trust stock is then traded. If Wilmington Trust stock is not then traded on a national securities exchange, "Market Value Per Share" shall mean the last sale price or, if none, the average of the bid and asked prices of Wilmington Trust stock on that date as reported on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). However, if there were no sales reported as of that date, the Market Value Per Share shall be computed as of the last date preceding that date on which a sale was reported. If any such exchange or quotation system is closed on any day on which the Market Value Per Share is to be determined, the Market Value Per Share shall be determined as of the first date immediately preceding that date on which that exchange or quotation system was open for trading. -15- o. "Normal Retirement Date" means the date on which a Participant terminates active employment with the employer he or she was employed with when he or she was last granted Awards on or after attaining age 65, but does not include termination for Cause. p. "Option" means any option to purchase Wilmington Trust stock the Committee grants to a Participant under Section 5. q. "Other Retirement Date" means a date, on or after a Participant attains age 55 but earlier than the Participant's Normal Retirement Date, that the Committee in its sole and absolute discretion specifically approves and designates in writing to be the date upon which a Participant retires for purposes hereof, but does not include termination for Cause. r. "Participant" means any employee or director (including, without limitation, a director who receives some or all of an Annual Retainer in shares of Wilmington Trust Stock) of or consultant to Wilmington Trust or any of its subsidiaries or affiliates whom the Committee selects to receive Options, Performance Awards, or Other Awards. s. "Rule 16b-3" means Rule 16b-3 promulgated by the SEC under Section 16 of the Exchange Act and any successor rule. t. "SEC" means the Securities and Exchange Commission. u. "Section 162(m)" means Section 162(m) of the Code and its regulations. v. "Section 162(m) Participant" means a Participant a portion of whose compensation would be subject to Section 162(m) and that Wilmington Trust desires to deduct. w. "Subsidiary" means a company more than 50% of the equity interests of which Wilmington Trust beneficially owns, directly or indirectly. x. "Termination of Employment" means, with respect to an employee Participant, the voluntary or involuntary termination of the Participant's employment with Wilmington Trust or any of its subsidiaries or affiliates for any reason (including, without limitation, death, Disability, retirement, or as the result of the sale or other divestiture of the Participant's employer or any similar transaction in which the Participant's employer ceases to be Wilmington Trust or one of its subsidiaries or affiliates). With respect to a consultant, Termination of Employment means termination of the Participant's services as a consultant to Wilmington Trust or one of its subsidiaries or affiliates. y. "Third Party" includes a person or entity or a group of persons or entities acting in concert not wholly-owned by Wilmington Trust or WTC, directly or indirectly. -16- z. "Voting Stock" means the classes of stock of Wilmington Trust or WTC entitled to vote generally in the election of directors of Wilmington Trust or WTC, as the case may be. aa. "Wilmington Trust Stock" means Wilmington Trust's common stock, par value $1 per share. -17- EX-13 8 w94679exv13.txt 2003 ANNUAL REPORT TO SHAREHOLDERS ANNUAL REPORT TO SHAREHOLDERS FOR 2003 EXHIBIT 13 Wilmington Trust Corporation 2003 Annual Report [PHOTO OF WOMAN][PHOTO OF CHILD AND ADULT IN PLAYGROUND.][PHOTO OF MAN READING.] [WILMINGTON TRUST LOGO] Wilmington Trust Corporation A CENTURY OF SHAREHOLDER VALUE On July 8, 2003, Wilmington Trust celebrated its 100th anniversary -- and a century of solutions that help clients succeed, build capital strength, and create shareholder value. As we commence our second century, our advisory, investment, fiduciary, and banking expertise converges in three contrasting, yet complementary, businesses that share an uncompromising dedication to client relationships. REGIONAL BANKING Our Regional Banking business is concentrated in the Delaware Valley region, which includes our home state of Delaware, and geographically adjacent areas along the I-95 corridor from Princeton to Baltimore and Maryland's Eastern Shore. The diversified and stable economy in this region has fueled consistent growth in this business. We conduct commercial banking throughout the region, where we seek to build long-term relationships with successful business owners who need a combination of lending and wealth management services. Our target commercial client is a family-owned or closely held business with up to $250 million in annual sales. According to D&B, there are nearly 35,000 such businesses in the Delaware Valley region. Our retail banking activities are focused on the state of Delaware, where we serve clients through a combination of traditional branches, investment and banking sales centers, electronic banking centers, and online services. We have relationships with nearly 40% of the households in Delaware and more than 50% of Delaware businesses with sales of $500,000 to $10 million. Our loan and deposit balances are higher than those of any other full-service bank in Delaware, and we have 43 branch offices located throughout the state, more than any competitor. CORPORATE CLIENT SERVICES Our Corporate Client Services business helps companies that want to use trusts and other legal structures to protect assets, generate capital, and establish a legal presence in multiple locations. The specialized collection of fiduciary and administrative services we offer in this business grew out of our extensive knowledge of the legal and tax advantages available in the state of Delaware. Today our expertise encompasses the most advantageous jurisdictions in the United States, the Caribbean, and Europe. Our capabilities range from the routine to the complex. Our clients are the financial executives, tax experts, and investment bankers who advise the largest corporations in the United States and around the world. Our trustee services support such capital markets transactions as asset-backed securitizations, equipment leasing, and corporate restructurings. We also provide trust and custody services for 401(k) and other retirement plans. In addition we help companies achieve legal residency in multiple jurisdictions by providing administrative services that include everything from mail processing and accounting to the provision of independent directors. WEALTH ADVISORY SERVICES The Wealth Advisory Services business has been the cornerstone of our company for more than 100 years. When members of the du Pont family founded Wilmington Trust in 1903, they established a company to help manage their wealth - -- and a culture that was forged on family relationships. Some of our client relationships span five generations, and we specialize in serving families over long periods of time. Today we are the 15th largest personal trust provider in the United States. We have had clients in all 50 states and nearly 30 other countries for decades. For many years, we served these clients from our Delaware headquarters and offices on Florida's Treasure Coast. Since 1998 we have opened 14 Wealth Advisory offices in six states, and established a presence in markets where there is a high concentration of wealth. Our focus is on clients with $10 million or more to invest. We aim to be their most trusted advisor, and our goal is to grow and protect their wealth. We do this by crafting complex solutions that employ sophisticated financial planning techniques, investment consulting, asset management, trust services, wealth transfer strategies, and custom lending plans. [WILMINGTON TRUST 100TH ANNIVERSARY LOGO] Wilmington Trust Corporation YEAR IN BRIEF
INCREASE FOR THE YEAR ENDED DECEMBER 31 2003 2002 (DECREASE) - --------------------------------------------------------------------------------------------------------- INCOME STATEMENT (in millions, except per share amounts) - --------------------------------------------------------------------------------------------------------- Net interest income $ 277.1 $ 276.5 0.2% Noninterest income 264.2 262.2 0.8 Noninterest expense 312.0 309.9 0.7 Net income 134.4 133.2 0.9 Net income per share (diluted) $ 2.02 $ 2.01 0.5 Dividends paid per share $ 1.065 $ 1.005 6.0 - --------------------------------------------------------------------------------------------------------- AVERAGE BALANCES (in millions) - --------------------------------------------------------------------------------------------------------- Total assets $ 8,529.5 $ 7,661.0 11.3% Loans 6,060.0 5,691.3 6.5 Reserve for loan losses 86.7 83.0 4.5 Core deposits 4,356.2 3,981.1 9.4 Stockholders' equity 769.6 719.6 6.9 - --------------------------------------------------------------------------------------------------------- ASSETS UNDER MANAGEMENT (in billions) - --------------------------------------------------------------------------------------------------------- Wilmington Trust Company $ 24.4 $ 21.0 16.2% Cramer Rosenthal McGlynn 4.7 3.5 34.3 Roxbury Capital Management 3.2 3.7 (13.5) Combined assets under management 32.3 28.2 14.5 - --------------------------------------------------------------------------------------------------------- SELECTED STATISTICS Change - --------------------------------------------------------------------------------------------------------- Return on assets 1.58% 1.74% (0.16)% Return on equity 17.46% 18.51% (1.05)% Net interest margin 3.60% 4.02% (0.42)% Full-time equivalent staff 2,307 2,361 (54) Weighted average shares outstanding (diluted) 66,536 66,301 235
2003 ANNUAL REPORT 1 LETTER TO SHAREHOLDERS In 2003 we celebrated the 100th anniversary of our company and completed our 100th year of profitability. Although the economic environment was challenging, each of our businesses produced impressive growth. In the latter half of the year, our performance began to reflect the rebounding economy and improving equity markets. As a result, we reported net income of $134.4 million for 2003, which was slightly higher than our 2002 net income of $133.2 million. Earnings per share for 2003, on a diluted basis, were $2.02, versus $2.01 for 2002. In our Regional Banking business, loan and deposit balances reached record highs, and credit quality remained stable. Loan balances rose steadily throughout 2003 and grew 6.5% to $6.06 billion, on average. Most of the growth occurred in the commercial portfolio, where balances rose 12.2% to $3.87 billion, on average. Core deposits advanced 9.5% to $4.36 billion, on average. [PHOTO OF TED T. CECALA.] Our success at generating loan growth helped mitigate the impact of the lowest interest rates since 1958 on our net interest margin, which fell to 3.60%. This was the lowest margin we have recorded since 1981. Business development was robust in our Wealth Advisory Services and Corporate Client Services businesses, yielding record-high income. This helped offset the effects of equity markets that remained below their 2002 levels for much of 2003, which masked the full extent of the growth in Wealth Advisory Services and caused income from our affiliate money managers to decrease. Total advisory income rose 1.5% to $210.7 million. Expense management, already ingrained in our corporate culture, was emphasized even more strongly in 2003. We held noninterest expenses to $312.0 million, which was less than 1% higher than the 2002 amount. Assets under management, including those at affiliates Cramer Rosenthal McGlynn and Roxbury Capital Management, totaled $32.3 billion. This 14.5% increase represented additional business as well as appreciation in market values. In April 2003 your Board of Directors reiterated its commitment to shareholder value by authorizing the 22nd consecutive increase in the cash dividend, which rose from $1.02 to $1.08 per share on an annualized basis. According to Mergent, Inc.'s 2003 Dividend Achievers, only 150 of the more than 11,400 dividend-paying companies that are traded publicly on U.S. exchanges have raised their dividends consecutively for 20 years or more. MAXIMIZING OPPORTUNITY IN A DIFFICULT ECONOMY Our aim is to build lasting relationships with our clients, and our focus is on providing solutions. Conditions in 2003 highlighted the advantages of our approach, and helped us attract new clients as well as additional business from existing clients. In a year when many banks experienced little, if any, commercial loan growth, we recorded a double-digit increase in commercial balances. This growth reflected credit standards that are based on our familiarity with the Delaware Valley market, and lending decisions that are based on our relationships with clients. We helped clients capitalize on a 2 variety of opportunities that emerged as a result of the economic diversity and stability in the region. In addition, continuing consolidation among commercial banks in the area led more clients to seek relationships with easily accessible decision-makers who live and work in the same communities. In our Corporate Client Services business, uncertainty in the post-Enron regulatory environment underscored the benefits of doing business with a company that has a track record like ours. Few competitors, if any, can match our scope of specialized trust and entity management services, our expertise in the nuances of trust law and nexus services, and our extensive experience in multiple jurisdictions. Much of the new business we captured in 2003 resulted from our expanded capabilities in Europe and the Caribbean. The double-digit growth in our Wealth Advisory Services business showed the strength of our open-architecture investment consulting capabilities and our comprehensive view of wealth management. The protracted downturn in equity markets confirmed the importance of asset allocation and objective investment advice, two aspects of wealth management in which we specialize. In 2003 we launched the Wilmington Strategic Asset Allocation Mutual Funds, which made it possible for clients to access our asset allocation offerings through separately managed accounts, private partnerships, mutual funds, or common trust funds. Financial planning and estate settlement are other areas of expertise, and there was high demand for these services in 2003. [BAR GRAPHS OF (1) NET INTEREST AND NONINTEREST INCOME FOR EACH YEAR FROM 1993 TO 2003, WITH THE FOLLOWING PLOT POINTS, IN MILLIONS, AND (2) THE NUMBER OF STAFF MEMBERS AT THE END OF EACH YEAR FROM 1993 TO 2003, WITH THE FOLLOWING PLOT POINTS:
93 94 95 96 97 98 99 00 01 02 03 NET INTEREST AND NONINTEREST INCOME $ 289 $ 297 $ 325 $ 353 $ 388 $ 422 $ 437 $ 471 $ 487 $ 539 $ 541 STAFF MEMBERS 2,254 2,303 2,332 2,418 2,428 2,442 2,434 2,299 2,316 2,361 2,307.]
OUR PEOPLE MAKE THE DIFFERENCE Throughout our history, the essential element of our success has been the ability of our people to capture opportunities and convert them into growth for our company. During our centennial celebration, we acknowledged the tremendous legacy of the people who preceded us. The people who surround us today are just as important, and I would like to recognize the efforts they expend each day on behalf of our clients and shareholders. None of what we achieved in 2003 would have been possible without our staff members. These are the people who manage our client relationships, develop solutions, and deliver superior service. I am deeply grateful for the energy, resolve, and focus they display every day. I also would like to acknowledge the contributions and involvement of our Board of Directors. We are fortunate to have Board members who approach their work with such diligence. They help us maintain the highest standards of integrity and accountability. Their advice and counsel have been especially valuable as we continue to implement the requirements of the Sarbanes-Oxley Act of 2002. Finally, I would like to thank our shareholders for your confidence in our company. Our 2003 results demonstrated our ability to deliver consistent profitability and growth with low volatility, even in less than ideal economic circumstances. As we move forward, I firmly believe that we have the right business model in place, the best expertise in the industry, and the most talented people on board to leverage the success of our first century well into our second. [BAR GRAPHS OF DILUTED EARNINGS PER SHARE, DIVIDENDS PAID, AND DIVIDEND PAYOUT RATIO FOR EACH YEAR FROM 1993 TO 2003, WITH THE FOLLOWING PLOT POINTS:
93 94 95 96 97 98 99 00 01 02 03 EARNINGS PER SHARE $1.10 $1.17 $1.27 $1.34 $1.54 $1.67 $1.61 $1.85 $1.90 $2.01 $2.02 DIVIDENDS PAID $0.49 $0.53 $0.59 $0.65 $0.71 $0.77 $0.83 $0.89 $0.95 $1.005 $1.065 DIVIDEND PAYOUT RATIO 0.44 0.45 0.46 0.46 0.45 0.45 0.51 0.47 0.492 0.495 0.522.]
/s/ Ted T. Cecala ------------------------------------- Ted T. Cecala Chairman and Chief Executive Officer 2003 ANNUAL REPORT 3 Regional Banking [PHOTO OF ROBERT V.A. HARRA, JR.] [PHOTO OF WOMAN.] [PHOTO OF FIVE CO-WORKERS.] "WE HAVE BEEN HELPING INDIVIDUALS AND FAMILIES BUY HOMES, EXPAND BUSINESSES, AND PLAN FOR FUTURE FINANCIAL NEEDS FOR MORE THAN 100 YEARS NOW. WE LIVE AND WORK IN THE COMMUNITIES WE SERVE, AND WE HAVE A LONG-TERM AND CONSISTENT APPROACH TO LENDING. THESE ARE DISTINCTIONS THAT CLIENTS VALUE, AND THAT HELP US PRODUCE CONSISTENT LOAN GROWTH AND STABLE CREDIT QUALITY." Robert V. A. Harra Jr. President and Chief Operating Officer Business Head, Regional Banking In 2003 our focus on relationship management drove growth in loan and deposit balances to record highs. Loan balances for the year were $6.1 billion, on average, which was an increase of more than 6%, and the fourth quarter of 2003 marked our 11th consecutive quarter of loan growth. Core deposit balances rose more than 9%, on average, to $4.4 billion. Our loan portfolio remained well diversified across commercial and consumer lines, and its composition was relatively unchanged. Our disciplined underwriting culture kept credit quality stable, and net charge-offs were lower than in 2002. Most of the loan growth occurred in our commercial portfolio, where strong lending activity drove balances, on average, to $3.9 billion, which was a 12% increase. Retail loan balances declined because we sell new residential mortgage production into the secondary market, but consumer loan originations rose 17%. From a geographic perspective, the growth in the commercial loan portfolio was split fairly evenly between Delaware and Pennsylvania. In Delaware we continued to hold the dominant market share. In southeastern Pennsylvania we continued to gain market share, as more of our target commercial banking clients--family-owned or closely held businesses with annual sales of up to $250 million--were attracted by our relationship-based approach. 4 Our commercial banking business benefited from a regional economy that encompasses a broad array of industries and sectors, and the recent economic downturn was less severe in the Delaware Valley than elsewhere in the United States. In 2003 the U.S. Census Bureau ranked Delaware as the seventh-fastest-growing state in the nation. The Bureau also reported that Delaware was the fifth most popular choice for relocation among retirees. In addition Delaware's unemployment rate remained well below the national average. Contributing to 2003 loan growth in Delaware was the completion of a limited-access highway that links the northern and central parts of the state. This new artery significantly shortened commuting times and sparked both business and housing development in what formerly had been mostly a rural area. Development also was strong in the southernmost part of Delaware, where easy access to Atlantic Ocean beach resorts continued to draw increasing numbers of year-round residents as well as tourists. Our loans funded a variety of projects, including single-family, multi-family, and age-restricted residential developments, as well as hotel, industrial, and retail ventures. [PHOTO OF MAN.] In southeastern Pennsylvania the target market for our commercial banking business is six times the size of the market in Delaware. Although its economy in 2003 was less robust than Delaware's, the size of the Pennsylvania market more than compensated. Loan balances in southeastern Pennsylvania, which topped $1 billion for the first time in 2002, reached $1.3 billion, on average, in 2003. Our Pennsylvania lending was not concentrated in any one area, and we funded industrial, commercial, and residential projects throughout the region. [BAR GRAPHS OF AVERAGE LOAN BALANCES FOR WILMINGTON TRUST COMPANY AND WILMINGTON TRUST OF PENNSYLVANIA FOR EACH YEAR FROM 1994 TO 2003, WITH THE FOLLOWING PLOT POINTS, IN MILLIONS: WILMINGTON TRUST COMPANY 1994 - $2.943 1995 - $3.196 1996 - $3.366 1997 - $3.581 1998 - $3.759 1999 - $3.910 2000 - $4.169 2001 - $4.275 2002 - $4.533 2003 - $4.716 WILMINGTON TRUST OF PENNSYLVANIA 1994 - $.170 1995 - $.194 1996 - $.237 1997 - $.340 1998 - $.398 1999 - $.620 2000 - $.884 2001 - $.960 2002 - $1.157 2003 - $1.334.] Core deposit balances for 2003 were $4.4 billion, on average, which was an increase of 9%. Clients seemed to prefer the safety and accessibility of insured deposits to the more volatile investing environment and the longer-term commitments of certificates of deposit. In addition the number of new deposit accounts was 16% higher than in 2002. Approximately 97% of our core deposit balances were generated in Delaware. We continued to invest in our retail banking franchise and dominant market position in Delaware. We renovated several branches, enhanced the security of our ATM network, and continued to position our branch offices as resources that offer clients a broader scope of financial products. Each of our full-service branches has at least one licensed investment specialist on staff. We launched new online bill-paying and checking products, and clients increasingly opted to perform routine banking transactions online. The number of registered online users rose 28%, and online transaction volume jumped 52%. In comparison, the number of teller transactions fell for the fourth consecutive year, and declined more than 8% from 2002. A factor in the strength of our business in Delaware is the tenure of our branch staff. More than 50% of our branch staff members have been with Wilmington Trust 10 years or longer, and the average tenure of a branch manager is 25 years. This longevity facilitates the focus on client relationships that has been a competitive advantage throughout our first century. 2003 ANNUAL REPORT 5 Corporate Client Services [BAR GRAPHS OF CORPORATE CLIENT INCOME (CAPITAL MARKETS SERVICES, ENTITY MANAGEMENT SERVICES, AND CORPORATE RETIREMENT SERVICES) FOR EACH YEAR FROM 1993 TO 2003, WITH THE FOLLOWING PLOT POINTS, IN MILLIONS: CAPITAL MARKETS SERVICES 1993 - $9.271 1994 - $9.99 1995 - $10.433 1996 - $10.298 1997 - $13.237 1998 - $18.375 1999 - $23.367 2000 - $26.419 2001 - $34.007 2002 - $38.347 2003 - $36.5 ENTITY MANAGEMENT SERVICES 1993 - $3.116 1994 - $4.257 1995 - $4.688 1996 - $5.127 1997 - $5.947 1998 - $6.984 1999 - $8.772 2000 - $10.615 2001 - $12.467 2002 - $17.29 2003 - $20.9 CAPITAL MARKETS SERVICES 1993 - $11.504 1994 - $11.594 1995 - $11.992 1996 - $12.364 1997 - $13.505 1998 - $10.416 1999 - $8.247 2000 - $9.685 2001 - $8.468 2002 - $8.971 2003 - $9.90.] [PHOTO OF TWO MEN AT A TRAIN STATION.] [PHOTO OF FOUR MEN AND A WOMAN AT CONFERENCE TABLE.] Our ability to craft customized solutions for specialty corporate trusts and business enterprises in the most favorable legal jurisdictions in the world resulted in another year of growth in the Corporate Client Services business. Income for 2003 was $67.3 million, an increase of 5%. The geographic expansion we have undertaken in the last several years and our reputation for superior service delivery were key factors in our 2003 performance. Our acquisition last year of London-based SPV Management added Ireland, Italy, Luxembourg, and The Netherlands to the list of jurisdictions in which we are authorized to provide fiduciary and administrative services. This augmented our capabilities in the United Kingdom, the Channel Islands, the Cayman Islands, and the two premier jurisdictions in the United States, which are Delaware and Nevada. Our larger presence in Europe opened up new markets for our products and services and helped us gain additional business from existing clients. It also enabled us to win more appointments from multinational clients who establish trusts and entities in more than one location. Some of the transactions we supported in 2003 simultaneously involved European, Caribbean, and American jurisdictions. As we widened our geographic and jurisdictional scope, we experienced increased demand for multijurisdictional services, and stronger interest in our Caribbean capabilities. In the Cayman Islands we added staff and opened a new office in George Town, Grand Cayman, in December. 6 One of the factors in our 2003 growth was demand for services that support asset-backed securitizations. Activity was high among existing clients as well as new issuers, especially toward the end of the year. We supported twice as many asset-backed securitizations in 2003 as in 2002. These structures are used widely in the United States, and they are gaining popularity in Europe, where the market for them is less developed. Before the euro was adopted, the use of many different currencies made it difficult to achieve optimum scale. One of our specialties is providing trust and custody services for retirement plans. This aspect of the business is growing, because retirement plans are increasing in number, and the way in which they are administered is changing. This has created additional opportunities for us, and we added 200 plans in 2003. [PHOTO OF HOWARD K. COHEN.] Retirement plan sponsors increasingly are electing to separate the three aspects of plan administration into what is called an "unbundled"approach. This gives them the flexibility to select best-in-class providers who specialize in each of the distinctly different roles of investment manager, record keeper, and trustee. Our focus is on serving as trustee for 401(k) and other defined contribution plans, which comprise the fastest-growing segment of the industry. According to the Society of Professional Administrators and Record keepers, the percentage of U.S. retirement plan assets held in defined contribution plans rose from 49% in 1995 to 59% in 2002. At Wilmington Trust, defined contribution plans represented only 13% of the plan assets we supported in 1995. By the end of 2003, that number had jumped to 67%. The capital markets component of Corporate Client Services was challenged by economic conditions in 2003. To a certain extent, this portion of the business is counter-cyclical. In a down economic cycle, when there is an increase in the number of companies facing financial distress, entering bankruptcy, or exiting bankruptcy, we win more successor trustee and creditor's committee appointments. In a more robust economy, our bankruptcy-related business declines, but we tend to see higher volumes of structured finance transactions. Distressed-company assignments were a strong source of growth in 2002 and the first half of 2003. We have a competitive advantage in this market, because these appointments must be awarded to providers that have no lending or securities underwriting relationships with the company in question. We have no such conflicts of interest. Every time consolidation occurs in the financial services industry, the number of conflict-free providers dwindles. In the second half of the year, the number of distressed-company appointments waned, but the market for structured finance transactions remained soft until late in the fourth quarter. Another challenge to growth in 2003 was the post-Enron regulatory environment, which prompted many entity management clients and prospects to delay projects until new accounting rules are adopted. [PHOTO OF HOWARD K. COHEN.] "The advisors who craft complex financial structures for our client companies look for a service provider of substance that is both conflict-free and independent. We offer them a broad array of capabilities across multiple jurisdictions, customizing our services to meet their clients' needs. We're experienced and flexible. That is why this business continues to grow." Howard K. Cohen Executive Vice President Corporate Client Services 2003 ANNUAL REPORT 7 Wealth Advisory Services [PHOTO OF RODNEY P. WOOD.] "OUR CLIENTS HAVE A LONG-TERM FOCUS. TO THEM, FINANCIAL PLANNING AND ASSET PROTECTION ARE AS IMPORTANT AS INVESTMENT PERFORMANCE. OUR EXPERTISE IN WRAPPING COMPREHENSIVE PLANNING TECHNIQUES AROUND OBJECTIVE INVESTMENT MANAGEMENT GIVES US A COMPETITIVE EDGE THAT CONSISTENTLY ATTRACTS BUSINESS FROM NEW CLIENTS AS WELL AS ADDITIONAL ASSETS FROM EXISTING CLIENTS." Rodney P. Wood Executive Vice President Wealth Advisory Services [PHOTO OF MAN AND WOMAN TALKING.] [PHOTO OF FAMILY IN LIVING ROOM.] Our Wealth Advisory Services business had its best year yet in 2003, thanks to exceptionally strong business development activity. Throughout the year, we attracted new clients and cultivated additional business from existing clients. We strengthened our investment platform, enhanced client service, and continued to invest in markets outside of our home state of Delaware. Wealth Advisory income rose 10% to $140 million, a record high. This achievement was especially noteworthy because nearly half of Wealth Advisory income is tied to equity market valuations, and the equity markets remained below their 2002 levels for much of 2003. Although the extended equity market downturn during the first half of the year masked the full extent of the growth in this business, it generated more demand for our financial planning and asset allocation expertise. As markets improved toward the end of the year and valuations rose, the magnitude of the growth became more apparent, and we had an especially strong fourth quarter. Poor market performance in recent years has reinforced the importance of asset allocation. We believe that asset allocation is the chief determinant of investment return, that diversification is the key to controlling risk, and that objectivity is essential. We achieve objectivity by offering a variety of proprietary and nonproprietary investment solutions across the full spectrum of asset classes and styles. 8 In 2003 we improved our asset allocation process by creating an Investment Strategy Team of economists and investment professionals from our California, Delaware, Florida, Georgia, New York, and Pennsylvania offices. The team is structured with permanent as well as rotating members who provide diverse perspectives and expertise in various investment disciplines. In addition to developing forward-looking asset allocation strategies, the team is responsible for selecting and monitoring independent managers. We also launched the Wilmington Strategic Asset Allocation Mutual Funds. Each of these five funds focuses on a single asset class, and each fund utilizes multiple managers, combines active and index management, and allows tactical adjustments between styles and strategies. Now clients may access our asset allocation offerings through separately managed accounts, private partnerships, mutual funds, or common trust funds. [PHOTO OF WOMAN NEXT TO A PAINTING OF HERSELF.] Demand continued to be strong for our open-architecture investment consulting services, which we gained with our 2002 acquisition of Balentine & Company. The Balentine process uses only independent managers. The level of interest in such a process among our target Wealth Advisory clients was quantified in a 2003 survey by The VIP Forum, which reported that more than 82% of affluent individuals and families prefer that their financial advisor offer services and products from many different companies. [BAR GRAPHS OF WEALTH ADVISORY INCOME FOR EACH YEAR FROM 1993 TO 2003 WITH THE FOLLOWING PLOT POINTS, IN MILLIONS, AND THE STANDARD AND POORS' 500 INDEX AT THE END OF EACH YEAR FROM 1994 TO 2003, WITH THE FOLLOWING PLOT POINTS: WEALTH ADVISORY INCOME: 1994 - $56.7 1995 - $60.9 1996 - $70.1 1997 - $81.8 1998 - $96.3 1999 - $114.101 2000 - $125.819 2001 - $130.155 2002 - $143.17 2003 - $143.4 STANDARD & POORS' 500: 1994 - 459.27 1995 - 615.93 1996 - 740.74 1997 - 970.43 1998 - 1,229.23 1999 - 1,469.25 2000 - 1.320.28 2001 - 1,148.08 2002 - 879.82 2003 - 1,111.92.] Although asset management is an important aspect of comprehensive wealth management, it is not the only consideration. Investment return is important to our clients, but in many cases it is superseded by the need for wealth preservation and transfer strategies. In 2003 the largest percentage of growth in Wealth Advisory income came from the planning, trust, and estate settlement services in which we specialize. Much of our success in this area stems from our century of experience with the nuances of advantageous Delaware trust and tax laws. Our expansion into key centers of affluence throughout the United States also contributed to our 2003 growth. In the past five years, we have opened Wealth Advisory offices in six states, and this has created additional and more diversified sources of income and business opportunities. Sales have increased more than 250% since 1998, and the contribution to revenue from our newer offices has risen consistently. In 2003 results were particularly strong in our Florida, New York, and Pennsylvania offices. The primary sources of new Wealth Advisory business are referrals from clients, attorneys, and tax advisors. In California, we relocated our West Coast headquarters from Santa Monica to Century City, which improved our proximity to prominent influencers in the Los Angeles area. In addition, we expanded our office in Stuart, Florida. According to the Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2003, there are approximately 18,000 individuals in the United States with investable assets of $30 million or more, and this number is increasing. Our relationship focus, superior client service, accessible size, and 100-year track record comprise a competitive advantage in a wealth management market that continues to grow. 2003 ANNUAL REPORT 9 Company Overview The Corporation is a financial services holding company with a diversified mix of three businesses -- Wealth Advisory Services, Corporate Client Services, and Regional Banking -- which it delivers through its primary wholly owned subsidiaries: - - Wilmington Trust Company, a Delaware-chartered bank and trust company that has engaged in commercial and trust banking activities since 1903. Wilmington Trust Company is the 15th largest personal trust provider in the United States and the largest full-service bank in Delaware, with 43 branch offices throughout the state. - - Wilmington Trust of Pennsylvania, a Pennsylvania-chartered bank and trust company. Wilmington Trust of Pennsylvania has offices in center city Philadelphia, Doylestown, Villanova, and West Chester. - - Wilmington Trust FSB, which serves as the platform for the Corporation's activities beyond Delaware and Pennsylvania. Wilmington Trust FSB offices are located in California, Florida, Georgia, Maryland, Nevada, and New York. The Corporation and its affiliates also have offices in Tennessee,the Cayman Islands, the Channel Islands, and London, and other affiliates in Dublin and Milan. Through its subsidiaries, the Corporation engages in fiduciary, wealth management, investment advisory, financial planning, insurance, broker-dealer services, deposit taking, and residential, commercial, and construction lending. The Wealth Advisory Services business provides a variety of financial planning and asset management services for high-net-worth individuals and families throughout the United States and in many foreign countries. The Corporate Client Services business provides a variety of specialty trust and administrative services for national and multinational institutions. The Regional Banking business targets consumer banking clients in Delaware and middle-market commercial clients throughout the Delaware Valley region. The Corporation and its subsidiaries are subject to the regulations of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Delaware Department of Banking, the Pennsylvania Department of Banking, and certain other federal and state authorities. Wilmington Trust Corporation TABLE OF CONTENTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 Summary of 2003 performance 13 Analysis of financial condition 13 Assets 16 Liabilities and stockholders' equity 18 Results of operations 18 Net interest income 19 Net interest margin 19 Noninterest income 23 Noninterest expense 24 Asset quality, loan loss reserves, and loan loss provision 26 Disclosures about market risk 27 Liquidity and capital position 29 Off-balance sheet arrangements and contractual obligations 29 Market price of common stock and dividends paid per share 30 Other information and accounting pronouncements UNAUDITED FINANCIAL STATEMENTS 32 11-year summary of selected financial data 36 5-year comparative analysis of average balance sheets and income statements, interest income and expense, and the respective yields and costs of funds for those years 38 5-year comparison of average statements of condition 39 5-year comparison of statements of income 40 2-year comparison of consolidated quarterly results of operations [WILMINGTON TRUST LOGO] AUDITED FINANCIAL STATEMENTS 41 Consolidated statements of condition for 2003 and 2002 42 Consolidated statements of income for 2003, 2002, and 2001 44 Consolidated statements of changes in stockholders' equity for 2003, 2002, and 2001 46 Consolidated statements of cash flows for 2003, 2002, and 2001 48 Notes to consolidated financial statements 69 Management's responsibility for financial reporting 70 Independent auditors' report OTHER INFORMATION 71 Directors and committees 72 Officers and subsidiaries Stockholder information -- inside back cover
[WILMINGTON TRUST LOGO.] Wilmington Trust Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY OF 2003 PERFORMANCE All of the Corporation's businesses performed well in 2003. In the Regional Banking business, loan and deposit balances reached record highs. The Wealth Advisory Services and Corporate Client Services businesses produced record high income. Expense control remained paramount throughout the year, and 2003 noninterest expenses were less than 1% above their 2002 levels. These achievements were muted by economic conditions resulting from the impact of the war with Iraq, erosion in investor confidence due to corporate and mutual fund scandals, and uncertainty about the post-Enron regulatory environment. The year was characterized by: - - the lowest market interest rates since 1958, and - - financial market valuations that remained below their 2002 levels for more than half of 2003. These circumstances contributed to significant compression in the Corporation's net interest margin, caused a substantial reduction in income from the affiliate money managers, and masked strong business development in the advisory businesses. While these factors challenged the Corporation's ability to surpass its 2002 results, their convergence in the span of one 12-month period demonstrated the Corporation's resilience and its ability to generate consistent profitability from its diversified mix of businesses. In its 100-year history, Wilmington Trust never has had an unprofitable year. Net income for 2003 was $134.4 million, a slight increase from 2002. Net income per share, on a diluted basis, was $2.02, compared with $2.01 for 2002. Net interest income totaled $277.1 million. Noninterest income was $264.2 million, and accounted for 42% of total interest and noninterest income for 2003. The trend seen in recent years of growth in noninterest income was curtailed in 2003 by affiliate money manager income that was 81.6% below its 2002 level. Assets under management at Wilmington Trust rose 16.1% to $24.4 billion. On a combined basis,including Cramer Rosenthal McGlynn (CRM) and Roxbury Capital Management (RCM), assets under management rose 14.5% to $32.3 billion. Total balance sheet assets were $8.82 billion at year-end 2003, which was 8.5% above the $8.13 billion at year-end 2002. Investment portfolio balances rose 39.3% to $1.88 billion. The net interest margin was affected in 2003 by low interest rates, balance sheet expansion, and the Corporation's interest rate sensitivity. After falling steadily throughout the first nine months of the year, the margin stabilized during the fourth quarter. For the full year 2003, the net interest margin was 3.60%, which was 42 basis points lower than for 2002. The average yield on total earning assets was 91 basis points lower than for 2002, while the average cost of funds used to support those assets fell only 49 basis points. Helping to offset the margin compression was steady growth throughout the year in loan balances, which reached $6.23 billion at year-end and $6.06 billion, on average. The 2003 fourth quarter marked the 11th consecutive quarter of loan growth. This growth was achieved even as residential mortgage balances decreased $187.6 million from 2002, primarily because of the Corporation's strategy of selling new residential mortgage production into the secondary market. The 2003 loan balance growth was balanced between the state of Delaware, where the Corporation is the dominant banking company, and the five-county metropolitan area surrounding Philadelphia, where the Corporation continues to gain market share. Deposit balances rose to $6.58 billion at year-end and $6.29 billion, on average, for 2003. These increases, which the Corporation attributed mainly to client concern about volatility in the equity markets, helped reduce the compression in the net interest margin. The Regional Banking business benefited from an economy that remained relatively strong compared to many other parts of the U.S. The Regional Banking business is concentrated in the Delaware Valley, which the Corporation defines as the area along the I-95 corridor from Princeton, New Jersey, to Baltimore, Maryland, the state of Delaware, and Maryland's Eastern Shore. The economy in this region is not dominated by any single large company or industry, and it is well diversified among the financial services, life sciences, pharmaceutical, technology, manufacturing, construction, retail, agriculture, and tourism sectors. Credit quality remained stable. The net charge-off ratio for 2003 was 27 basis points. This was 4 basis points lower than the 2002 ratio of 31 basis points, and the lowest level since 1994. Net charge-offs have remained below 50 basis points since 1990. In keeping with the growth in loan balances, the reserve for loan losses increased 5.5% to $89.9 million, while the provision for loan losses remained relatively stable, at $21.6 million for 2003 versus $22.0 million for 2002. Even though equity market conditions obscured the full extent of its growth, the Wealth Advisory Services business produced record-high income of $140.4 million. This 10.6% increase reflected the most successful year of sales in the history of this business. Income from the Corporate Client Services business rose 4.7% to $67.3 million. The growth of this business was affected by weak economic conditions that slowed demand for services that support structured finance transactions. Other aspects of this business that provide management services and retirement plan services recorded double-digit increases. 12 Wilmington Trust Corporation The extended downturn in the equity markets caused income from the two affiliate money managers to fall sharply. Income from value-style manager CRM was $5.3 million for 2003, versus $7.7 million for 2002. Growth-style manager RCM recorded losses for the first three quarters of the year and broke even in the fourth quarter. As a result, RCM reported a loss of $2.3 million for 2003, versus income of $8.6 million in 2002. The combined decline in income from the two affiliates represented approximately $0.13 per share for 2003. The net interest margin compression made expense management a priority in 2003. Noninterest expenses were held to $312.0 million, which was an increase of 0.7% from the $309.9 million recorded for 2002. The primary source of the savings was the elimination of the Corporation's profit-sharing plan, which reduced expenses by approximately $10.2 million. The tight expense control environment did not prevent the Corporation from continuing to invest in opportunities to serve clients better and improve efficiencies. The California headquarters office in Santa Monica was relocated to Century City and enlarged. This move improved the proximity of Wealth Advisory Services staff members to key influencers, such as trust and estate attorneys and tax advisors, who are a prime source of business. As a result of increased demand for Corporate Client Services capabilities in Caribbean jurisdictions, additional staff members were hired in the Cayman Islands and a new office was opened in George Town, Grand Cayman, in December. Growth in the Corporate Client business also prompted expansion of the Las Vegas office, which underwent its third expansion in five years. In Delaware, major renovations were completed on two branch offices. Technology improvements were made to the client contact management system, the installment loan system, and the auto dealer floor plan system. The provision for income taxes was $72.2 million for 2003, which was slightly less than the $73.0 million reported for 2002. The decline in income from the affiliate money managers, which reduced state taxes, accounted for most of the decrease. On a full-time equivalent basis, there were 2,307 staff members at year-end 2003, which was 54 fewer than at year-end 2002. Net income per staff member was $58,300, which was an increase of 3.4% from the $56,400 reported for 2002. The net profit margin was 24.78%, which was slightly higher than the 24.76% recorded for 2002. The 2003 results produced a return on average stockholders' equity of 17.46% and a return on assets of 1.58%, compared with 18.51% and 1.74%, respectively, for 2002. Stockholders' equity rose 8.0% to $800.8 million. The Corporation improved its regulatory capital position with the issue in April 2003 of $250 million in Tier 2-eligible subordinated long-term debt. The proceeds were invested primarily in mortgage-backed securities. Also in April 2003 the Board of Directors increased the cash dividend for the 22nd consecutive year, from $1.02 to $1.08 per share on an annualized basis. According to Mergent, Inc.'s 2003 Dividend Achievers, only 150 of the more than 11,400 dividend-paying companies that trade on U.S. exchanges have raised their dividends for 20 or more consecutive years. The Corporation celebrated the 100th anniversary of Wilmington Trust Company's founding throughout 2003 with client events, staff recognition, and sales promotions. On July 7, senior management and selected staff rang the closing bell at the New York Stock Exchange. On July 8, the formal anniversary date, celebrations were held at all branches and offices throughout the U.S. Over the course of the year, hundreds of clients commented on how much they valued doing business with a company with such extensive experience. The Corporation's performance in 2003 opposite challenging economic conditions exemplified how its emphasis on client service and relationship management continues to be a competitive advantage. In the Regional Banking business, clients value the fact that lending decisions are made locally on the merits of individual projects and relationships, instead of being based solely on economic indicators or industry trends. Advisory business clients appreciate how the company's size makes it possible for solutions to be customized and crafted specifically for their needs. Clients in all three businesses enjoy having access to and frequent contact with decision makers, including business line heads, the president, and the chairman, all of whom regard regular client contact as a priority. ANALYSIS OF FINANCIAL CONDITION BALANCE SHEET SUMMARY Balance sheet expansion continued in 2003, with increases in loans, investments, deposits, and capital. Changes in the balance sheet between year-end 2002 and year-end 2003 reflected 3.3% growth in loan balances, 6.5% growth in core deposit balances, a modest shift in funding sources, 39.3% growth in investment portfolio balances, and an 8.0% increase in stockholders' equity. In comparison, between year-end 2001 and year-end 2002, there was 9.8% growth in loan balances and a 7.8% increase in core deposit balances. Stockholders' equity rose 8.6%. ASSETS The Corporation's assets rose to $8.8 billion at year-end 2003 and $8.5 billion, on average, for the year, which were increases of 8.5% and 11.3%, respectively, from 2002. Total earning assets also rose in 2003, to $7.8 billion, on average, which was 11.6% more than for 2002. Higher loan and investment portfolio balances were the primary causes of the 2003 increases. 2003 ANNUAL REPORT 13 Wilmington Trust Corporation In comparison, balance sheet assets at year-end 2002 totaled $8.1 billion, which was 8.0% higher than at year-end 2001. On average, balance sheet assets were $7.7 billion, which was 6.0% more than for 2001. Total earning assets for 2002 were $7.0 billion, which was 6.2% more than for 2001. Loan balance growth was the primary cause of the 2002 increases. INVESTMENT SECURITIES Investment portfolio balances rose during 2003 to $1.9 billion. The increase was due in large part to the investment of $250 million in proceeds from the Corporation's issue in April 2003 of long-term debt. Growth in the portfolio also offset declining residential mortgage balances. Management believes that duration and risk can be managed more effectively by investing in mortgage-backed securities than by retaining individual residential mortgages. Accordingly, all new residential mortgage production continues to be sold into the secondary market. The Corporation characterizes all new investments as available for sale. In 2003 available-for-sale balances rose 39.5% to $1.9 billion. This included unrealized gains of $15.1 million and unrealized losses of $13.4 million. At year-end 2002 the investment portfolio balance was $1.3 billion, which was 5.3% higher than at year-end 2001. The available-for-sale portfolio was $1.3 billion, which was 6.2% more than for 2001. The held-to-maturity portfolio declined 70.9%, from $16.5 million at year-end 2001 to $4.8 million at year-end 2002. The following table compares changes in the composition of the investment portfolio.
INVESTMENT PORTFOLIO COMPOSITION AT DECEMBER 31 2003 2002 2001 - ------------------------------------------------------------------------ Mortgage-backed securities and collateralized mortgage obligations 52% 37% 35% Treasuries 11% 24% 33% Corporate issues 14% 15% 8% Agencies 13% 11% 11% Money market preferred stocks 8% 10% 9% Municipal bonds 1% 2% 2% Other 1% 1% 2%
The majority of the 2003 investment portfolio growth occurred in mortgage-backed instruments, which is where most of the debt issue proceeds were invested. The following table compares changes in the Corporation's overall exposure to mortgage-related instruments.
BALANCE AT DECEMBER 31 (in millions) 2003 2002 2001 - --------------------------------------------------------------------- Mortgage-backed investments in the securities portfolio $ 978.7 $ 507.5 $ 450.3 Residential mortgages in the loan portfolio $ 489.6 $ 677.2 $ 865.3 - --------------------------------------------------------------------- Total exposure to mortgage-related instruments $1,468.3 $1,184.7 $1,315.6
At December 31, 2003, the average life of the total portfolio was approximately 5.67 years. Duration was approximately 2.81. On mortgage-related instruments, the average life was approximately 4.50 years and the duration was approximately 4.50. At December 31, 2002, the average life of the total portfolio was approximately 4.86 years and duration was approximately 2.50. LOANS Loan balances increased steadily throughout 2003, and were $6.23 billion at year-end and $6.06 billion on average. These were increases of 3.3% and 6.5%, respectively, from 2002. The Corporation considers average loan balances, rather than period-end balances, to be more indicative of trends in its banking business. Loan growth was likewise steady throughout 2002, when balances topped $6.0 billion for the first time. Year-end 2002 balances rose 9.8% from year-end 2001. On average, loan balances were $5.7 billion for 2002, which was 8.7% higher than for 2001. The loan balance increases resulted from business development with existing as well as new clients. Almost all of the loan growth occurred in the Delaware Valley region, where the Corporation's Regional Banking business is focused. The economy in this region remained diversified and relatively stable compared to other parts of the United States. The majority of the 2003 growth in loan balances occurred in the commercial portfolio. In 2002, approximately 97% of the loan growth was in the commercial portfolio. In both 2003 and 2002, certain components of the retail portfolio reflected balance increases, but retail balances on the whole declined as residential mortgage balances decreased. The following table compares changes in loan growth by geographic market.
PERCENTAGE OF LOAN GROWTH OCCURRING IN: 2003 2002 2001 - --------------------------------------------------------------------- Delaware 28% 47% 44% Pennsylvania 68% 43% 42% Elsewhere 4% 10% 14% (Average balances)
Lending outside the Delaware Valley region was mainly consumer lending associated with Wealth Advisory Services clients throughout the United States. The composition of the portfolio remained relatively unchanged and well diversified across consumer and commercial lines, as the following table illustrates.
LOAN PORTFOLIO COMPOSITION AT DECEMBER 31 2003 2002 2001 - ------------------------------------------------------------------- Commercial/financial/agricultural 36% 35% 31% Commercial construction/real estate 10% 8% 8% Commercial mortgage 17% 17% 19% Residential mortgage 10% 14% 17% Retail 27% 26% 25% (Average balances)
14 Wilmington Trust Corporation The following table compares the composition of the loan portfolio by banking subsidiary:
Wilmington Trust Company Wilmington Trust of Pennsylvania Wilmington Trust FSB - ------------------------------------------------------------------------------------------------------------------------------- PORTFOLIO COMPOSITION BY SECTOR 2003 2002 2001 2003 2002 2001 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- Commercial 87% 90% 90% 12% 10% 10% 1% -- % -- % Commercial construction/real estate 93% 96% 96% 7% 4% 4% --% -- % -- % Commercial mortgage 92% 93% 95% 7% 6% 4% 1% 1% 1% Residential mortgage 80% 81% 82% 12% 11% 11% 8% 7% 7% Retail 87% 90% 91% 9% 7% 6% 4% 3% 3% (Average balances)
In 2003 approximately 71% of the loans in the portfolio had floating rates, compared with approximately 61% in 2002 and 51% in 2001. At December 31, 2003, the Corporation's banking affiliates had approximately $2.8 billion in loan commitments outstanding that had not been drawn. At December 31, 2002, this number was approximately $2.7 billion, the same amount as at December 31, 2001. COMMERCIAL LOANS Commercial loan balances, on average, were $3.87 billion for 2003, which was 12.2% higher than for 2002, when commercial balances, on average, were $3.45 billion. The 2002 increase was 13.3% above 2001 commercial balances, on average. Commercial balances accounted for 65% of the total loan portfolio at year-end 2003, 63% at year-end 2002, and 60% at year-end 2001. Commercial balances generated in the Pennsylvania market topped $1 billion for the first time in 2002 and reached $1.08 billion, on average, in 2003, and accounted for approximately 28% of the total commercial portfolio. The Delaware Valley region continued to experience consolidation among commercial banks. As a result, more clients found an attractive alternative in the Corporation's size, local headquarters, and ready access to decision makers. In addition to being focused specifically on the Delaware Valley market, the commercial banking business is targeted to specific clients:family owned and closely held businesses with annual sales of up to $250 million, where the potential exists for a wealth management as well as a credit relationship. The Corporation does not pursue syndicated lending opportunities, and usually does not lend to commercial clients outside the Delaware Valley region. In the last several years, loan demand has been supported by the stability of the regional economy. No single sector dominates the regional economy; it is well diversified among the financial services, life sciences, pharmaceutical, refining, manufacturing, construction, retail, agriculture, and tourism sectors. Commercial loan balances are reported in three categories: - - Commercial, financial, and agricultural (C and I) loans, - - Commercial construction/real estate (CRE) loans, and - - Commercial mortgage loans. In 2003 the largest percentage of growth in the commercial portfolio occurred in CRE loan balances, which were $612.4 million, on average. This was a 36.7% increase from 2002. CRE loans were made throughout the commercial banking market and not concentrated in any one particular area of the region. Housing demand remained strong throughout the Delaware Valley. CRE loans were booked across a variety of hotel, industrial, and retail projects, both on a construction and permanent financing basis. CRE loans funded primary, retirement, and resort residential projects and included single-family, multi-family, and age-restricted developments. In Delaware much of the development was spurred by completion of a limited access highway that links the more urban parts of the state with areas that were predominantly rural. Development also was strong at Delaware's beach resorts, where year-round living is growing in popularity. The U.S. Census Bureau ranked Delaware as the seventh fastest growing state in the nation, and the fifth most popular choice for retirement living. Restrictive development and zoning laws in northern Delaware have been a factor in development in southeastern Pennsylvania, particularly in areas adjacent to the Delaware border. C and I loan balances in 2003, on average, were 10.2% higher than for 2002. Commercial mortgage balances, on average, were 4.6% higher than for 2002. In comparison, in 2002, C and I loan growth was stronger than CRE loan growth. C and I lending, on average, was 22.5% ahead of 2001 levels. CRE loans, on average, were 10.5% higher than for 2002. Commercial mortgage balances, on average, were lower for 2002 than for 2001. RETAIL LOANS While the Corporation conducts commercial banking activities throughout the Delaware Valley region, its retail banking business is concentrated in the state of Delaware. At year-end 2003, retail loan balances totaled $2.17 billion, which was 2.7% less than at year-end 2002. On average, retail loan balances for 2003 were $2.19 billion, which was a decline of 2.2% from 2002. Lower residential mortgage balances accounted for the decrease. 2003 ANNUAL REPORT 15 Wilmington Trust Corporation Most of the growth in retail loan balances was in loans secured with liquid collateral, which are associated primarily with Wealth Advisory Services clients. On average, these balances were $571.1 million for 2003, which was a 25.9% increase. This growth was indicative of the expansion of the Wealth Advisory business in key markets throughout the United States, as clients utilized the Corporation's full complement of wealth advisory and financial services. Consumer loan balances, on average, were $1.0 billion, which was 2.9% higher than for 2002. Indirect auto loan origination volumes rose 13.8% and reached their highest level in the Corporation's history. Wilmington Trust is the dominant indirect auto loan lender in Delaware. Residential mortgage originations rose 39%, on average, in 2003, but residential mortgage balances declined 24.7%, due to refinancings, maturities, and sales into the secondary market. During 2003 the Corporation sold approximately $198.2 million of newly originated residential mortgage loans into the secondary market, compared with approximately $129.6 million in 2002 and approximately $87.9 million in 2001. In 2003, 1,287 mortgages representing $186.9 million were refinanced. This was a 45.1% increase in the number of mortgages refinanced and a 44.3% increase in the dollar amount refinanced from 2002, when 887 mortgages representing $129.5 million were refinanced. In 2001, 701 mortgages representing $92.0 million were refinanced. Similar dynamics were apparent in the retail portfolio during 2002. Year-end 2002 retail balances of $2.23 billion were slightly higher than at year-end 2001. On average, retail balances for 2002 were $2.24 billion, which was an increase of 2.4% from 2001 retail balances, on average. Balances rose on the strength of installment, credit card, and home equity loans and loans secured with liquid collateral, but this growth was offset by a 14% decline from 2001 in residential mortgage balances. The following table compares changes in the composition of the retail portfolio:
RETAIL LOANS BY INDUSTRY CLASSIFICATION 2003 2002 2001 - ------------------------------------------------------------------- Residential mortgage 23% 30% 40% Home equity 11% 9% 7% Indirect 23% 20% 18% Other consumer 12% 15% 16% Credit card 3% 3% 1% Secured by liquid collateral 28% 23% 17% (Year-end balances)
RESERVE FOR LOAN LOSSES At year-end 2003 the reserve for loan losses was $89.9 million, or 1.44% of loans outstanding. This was a 5.5% increase from year-end 2002, when the reserve was $85.2 million, or 1.41% of loans outstanding. A comparison of the year-end 2002 reserve to the 2001 year-end reserve showed that, at year-end 2002, the reserve was 5.4% higher but the reserve ratio was 6 basis points lower. The year-end 2001 reserve was $80.8 million and the reserve ratio was 1.47%. Changes in the reserve reflected the growth in loan balances and the application of the Corporation's reserve methodology, including the internal risk rating analysis and net charge-off experience. For more information about the reserve for loan losses, please refer to the "Asset quality"section on page 24; the "Reserve for loan losses" section in Note 1 to the Consolidated Financial Statements on page 50 and Note 5 to the Consolidated Financial Statements, "Reserve for loan losses," on page 54 of this report. LIABILITIES AND STOCKHOLDERS' EQUITY The strength of the Regional Banking business, and increased client interest in the safety and security of insured deposits, caused liabilities to rise above their prior-year levels in both 2003 and 2002. Growth in deposit balances, which reached consecutive record highs, were the primary reasons for the increases. In 2003 liabilities totaled $8.0 billion at year-end and $7.8 billion, on average, which were increases of 8.1% and 13.0%, respectively, from 2002 levels. In 2002 liabilities totaled $7.4 billion at year-end and $6.9 billion, on average. These were increases of 8.8% and 4.5%, respectively, from 2001. DEPOSITS Period-end deposits typically include deposits associated with the Corporate Client Services business that are not indicative of trends in the Regional Banking business. Accordingly, as it does with loan balances, the Corporation regards average deposit balances as the more appropriate indicator. The Corporation's deposits contain a mix of core deposit balances, which are those generated by banking activities, and wholesale CD balances. Core deposit balances, which exclude wholesale CD balances, are more representative of trends in the Regional Banking business than wholesale CD balances. Core deposits consist of noninterest-bearing demand, interest-bearing demand, and savings balances, CDs in amounts less than $100,000, and CDs of $100,000 or more that are generated by the banking business. Wholesale CDs are generally in amounts of $100,000 or more. For 2003 deposit balances were $6.29 billion, on average, which was a record high, and a 8.0% increase from 2002. Core deposit balances accounted for $375.1 million of the 2003 increase and far outpaced the growth in wholesale CD balances, which rose $91.2 million. 16 Wilmington Trust Corporation Core deposit balances for 2003 were $4.36 billion, on average, which was 9.5% higher than for 2002. Wholesale CD balances for 2003, on average, increased 4.9% to $1.94 billion. In core deposits, most of the 2003 growth occurred in interest-bearing demand deposits, which jumped 25.9% to $2.18 billion. Noninterest demand and savings balances rose modestly. With interest rates at historic lows, clients seemed to prefer the accessibility of demand accounts to the longer-term commitments associated with CDs. Core CD balances, which on average have fallen every year since 1999, were 8.3% lower for 2003 than for 2002. For 2002 deposit balances, on average, were $5.83 billion, which was a record high at the time, and 10.7% higher than for 2001. The 2002 versus 2001 increase was split more evenly between core deposits and wholesale CDs. Core deposit balances contributed $306.2 million of the 2002 increase, and wholesale CDs represented $258.4 million of the change. Core deposit balances, on average, were $3.98 billion for 2002, which was 8.3% higher than for 2001. Wholesale CD balances, on average, were $1.85 billion for 2002, which was an increase of 16.4% from 2001. In core deposits, the 2002 growth in interest-bearing demand deposits was stronger than the 2003 growth. Interest-bearing demand deposits for 2002, on average, were $1.74 billion, which was $438.1 million, or 33.8%, higher than for 2001. Savings balances rose slightly in 2002, while noninterest-bearing demand balances dropped by $96.6 million. Core CD balances for 2002, on average, fell $42.5 million from 2001. In 2003, 2002, and 2001, approximately 97% of core deposit balances, on average, were generated in Delaware, where the Corporation's retail banking business is focused. Approximately 2% were generated in Pennsylvania for each of those years, and the remainder was generated elsewhere. The continued growth in core deposit and consumer loan (excluding residential mortgages) balances is noteworthy in the context of how the branch network has been repositioned in recent years. The Corporation has closed 14 branches since 1997 and transformed others into sales centers. During this time, online, ATM, and telephone services have increased in popularity as convenient methods of performing routine banking transactions. In 1999, 12.0 million teller transactions were recorded. That number dropped to 11.0 million in 2000, 9.9 million in 2001, and 9.0 million in 2002. In 2003, that number dropped another 8% and fell to 8.3 million. At the same time, use of online services continues to increase. Comparing 2003 with 2002, the number of registered online users rose 28% and online transaction volume jumped 52%. OTHER SOURCES OF FUNDS The Corporation uses a combination of core deposits and purchased funds to support growth in earning assets. In 2003 core deposits funded approximately 100% of the Corporation's loan growth and approximately 43% of the Corporation's total balance sheet growth, on average. In 2002 core deposits funded approximately 67% of loan growth and 71% of total asset growth. Short-term borrowings were 18.8% higher, on average, for 2003 than for 2002. Most of the increase was in federal funds purchased and securities sold under agreements to repurchase, which were 21.7% more, on average, than for 2002, and represented all of the total 2003 increase in short-term borrowings. U.S. Treasury demand balances, on average, were 60.0% lower. Short-term borrowings were 20.1% lower, on average, for 2002 than for 2001. For more information about sources of funding, please refer to the "Liquidity" section on page 27 of this report. LONG-TERM DEBT In April 2003 the Corporation issued long-term debt of $250 million in 10-year subordinated notes. Semiannual interest payments at a rate of 4.875% are due on the notes on April 15 and October 15 of each year, and commenced on October 15, 2003. The notes are not redeemable prior to maturity and will not be subject to any sinking fund. This debt issue accounted for most of the increase in long-term debt, which totaled $407.1 million at December 31, 2003. This was $246.6 million, or 153.6%, more than the $160.5 million recorded at December 31, 2002. Prior to the April 2003 debt issue, most of the Corporation's long-term debt was associated with the $125 million of debt issued in 1998 to support investments in the affiliate money managers. STOCKHOLDERS' EQUITY At December 31, 2003, stockholders' equity totaled $800.8 million. This was $59.5 million, or 8.0%, higher than the $741.3 million recorded at December 31, 2002. Additions to equity from earnings were offset partially by unrealized losses on securities within the available-for-sale investment portfolio, dividends, and the Corporation's ongoing stock repurchase plan. At December 31, 2002, stockholders' equity totaled $741.3 million, which was 8.6% more than at year-end 2001. Additions to equity from earnings and improvement in the level of unrealized gains within the available-for-sale investment portfolio were offset partially by dividends and stock repurchases. For more information about stockholders' equity, please refer to the "Capital position" section on page 27 of this report. 2003 ANNUAL REPORT 17 Wilmington Trust Corporation RESULTS OF OPERATIONS INCOME STATEMENT OVERVIEW The Corporation's mix of businesses generates a diversified stream of revenue from net interest income and noninterest income. For many years, net interest income was the Corporation's primary source of income. Since 1997, the Corporation has endeavored to achieve more balance between net interest and noninterest income. The Corporation believes that balance among its revenue sources is a key factor in its ability to generate consistent profitability and growth, with low volatility, in a variety of economic conditions. Interest income is earned by the Corporation's assets, such as loans and investment securities, and is produced primarily by the Regional Banking business. Net interest income is the difference between the interest revenue received on earning assets and the interest expense paid on liabilities, such as deposits and short-term borrowings. Interest expense is driven by the average balances and composition of the Corporation's interest-bearing liabilities, and by the respective costs of the funding sources found within the mix of interest-bearing liabilities. These factors are influenced by market interest rate levels, competition for deposits, and the availability of alternative sources of funding. Noninterest income is income the Corporation earns from fees it charges for services it provides. The majority of noninterest income is generated by the advisory businesses, which include Wealth Advisory Services, Corporate Client Services, and contributions from the two affiliate money managers, CRM and RCM. In addition to advisory income, noninterest income includes service charges on deposit accounts, loan and credit card fees, the amortization of other intangibles associated with affiliate acquisitions and investments in the two affiliate money managers, securities gains or losses, and other noninterest sources of income. Net income is the sum of net interest income and noninterest income, minus the sum of noninterest expenses, the provision for loan losses, income taxes, and minority interests associated with acquisitions. Net income is expressed in dollar amounts, earnings-per-share amounts, and as a percentage of average assets and average stockholders' equity. Net income for 2003 was $134.4 million, which was $1.2 million more than for 2002. Net income per share, on a diluted basis, was $2.02, compared with $2.01 for 2002. Solid growth in loan balances and record-high advisory revenue were offset by the historically low market interest rate levels, significant compression in the net interest margin, securities market declines that occurred during much of the year, and considerably less income from the affiliate money managers. The economic and financial market factors also affected net income in 2002, but the growth rate was higher because 2002 results reflected the acquisitions of Balentine & Company and SPV Management. Net income for 2002 was $133.2 million, which was 6.4% higher than the $125.2 million recorded for 2001. Net income per share for 2002, on a diluted basis, was 5.8% higher than the $1.90 reported for 2001. As the following table shows, the main sources of income have remained balanced and, on a percentage basis, relatively unchanged. In 2002 noninterest income exceeded 50% of total net interest and noninterest income for the first time in the Corporation's history.
SOURCE OF INCOME AT DECEMBER 31 2003 2002 2001 - ------------------------------------------------------------------ Advisory business income 40.5% 40.2% 39.6% Total noninterest income 50.8% 50.7% 48.8% Net interest income (after provision for loan 49.2% 49.3% 51.2% losses)
NET INTEREST INCOME In each of the last two years, loan balances and earning assets have reached record-high levels, but declines in market interest rates have precluded a corresponding increase in net interest income. In 2001 the Federal Reserve Board, in 11 downward moves in a 12-month period, reduced short-term rates by 475 basis points. In November 2002 another 50-basis-point reduction occurred, which brought rates to their lowest levels in four decades. In June 2003 rates were reduced by another 25 basis points. This interest rate environment caused the Corporation to reduce its prime lending rate (the rate at which it lends to its most creditworthy clients), on average, for the second consecutive year. As the following table shows, the 2003 rate was 55 basis points lower than the average for 2002, which in turn was 226 basis points lower than the average for 2001.
FOR THE YEAR ENDED DECEMBER 31 2003 2002 2001 - ------------------------------------------------------------ Prime lending rate,on average 4.12% 4.67% 6.93%
As a result, even though loan balances continued to rise, the pace of growth in net interest income slowed. In 2003 the protracted duration of the low interest rate environment resulted in the smallest increase in net interest income in three years. Net interest income for 2003 was $277.1 million, which was slightly more than the $276.5 million recorded for 2002. In comparison, 2003 loan balances, on average, were 6.5%, or $368.7 million, higher than for 2002. Interest income for 2003 was $368.8 million, which was $24.0 million, or 6.1%, less than for 2002. Interest and fees earned on loans declined by $29.9 million, or 9.0%. Interest income on federal funds sold and securities purchased under agreements to resell was 33.3% lower. These declines were mitigated by interest and dividends received on investments, which were $67.3 million, or 10.0%, higher than for 2002. 18 Wilmington Trust Corporation Interest expense for 2003 was $91.7 million, which was $24.6 million, or 21.2%, less than for 2002. Interest paid on deposits was $24.3 million lower, and interest paid on short-term borrowings was $3.2 million lower. Interest expense on long-term debt was $2.9 million higher, due to the April 2003 long-term debt issuance. In contrast to the 0.2% increase in 2003, net interest income for 2002 was up 6.8%, or $17.6 million from the $258.9 million recorded for 2001. Loan balances, on average, for 2002 were 8.7%, or $456.0 million, higher than for 2001. Both interest income and interest expense were lower in 2002 than in 2001. In 2003 the average rate the Corporation paid on its interest-bearing liabilities was 1.35%, which was 60 basis points lower than the 1.95% recorded for 2002. In 2002 the average rate the Corporation paid on interest-bearing liabilities was 1.95%, which was 185 basis points lower than the 3.80% average in 2001. NET INTEREST MARGIN To compute the net interest margin, the Corporation divides net interest income on a fully tax-equivalent (FTE) basis by average total earning assets. On an FTE basis, net interest income for 2003 was $281.9 million, which was $300,000, or 0.1%, higher than the $281.6 million reported for 2002. Total earning assets, on average, were $7.83 billion for 2003, which was $816.0 million, or 11.6%, higher than the $7.01 billion reported for 2002. This brought the net interest margin for 2003 to 3.60%, which was 42 basis points lower than the 2002 margin of 4.02%. The margin fell steadily during the first nine months of 2003, from 3.75% for the first quarter to 3.45% for the third quarter. The net interest margin stabilized and reached 3.52% for the fourth quarter. The low interest rate environment, balance sheet expansion, and the Corporation's asset sensitivity all contributed to the margin compression. Although loan balances rose, the yields on new loans were lower than those of older loans in the portfolio. A high volume of pay-downs and refinancings also reduced yields. Likewise, the increases in investment portfolio balances were offset by declining yields. Between 2002 and 2003, the average yield on total earning assets fell nearly twice as much as the cost of funds used to support those assets. The average yield on total earning assets for 2003 was 4.78%, which was 91 basis points lower than for 2002. In comparison, the average cost of funds used to support those assets was 1.18% for 2003, a decline of 49 basis points from 2002. The average yield on loan balances was 5.0%, which was 86 basis points lower in 2003 than 2002. The average yield on total commercial loan balances was 4.66%, also an 86-basis-points decline. The average yield on retail loans was 5.58%, which was 79 basis points lower. Declines of 70 basis points or more in 2003 versus 2002 average yields occurred in: - - Investment securities balances (94 basis points), - - C and I loan balances (81 basis points), - - Commercial mortgage balances (103 basis points), - - Retail installment loans (72 basis points), and - - Loans secured with liquid collateral (73 basis points). The change in the securities portfolio yield reflected approximately $250 million of proceeds from the April 2003 long-term debt issue, which were invested at a net average spread of 1.65%. The magnitude of the 2003 yield declines in the loan and investment portfolios far outpaced the corresponding adjustments to core deposit pricing. The average rate paid on core interest-bearing deposits for 2003 reached a new low of 0.98%, which was a decline of 50 basis points from the average rate of 1.48% for 2002. The FTE net interest income in 2002 of $281.6 million was a 6.1% increase from the $265.5 million reported for 2001. Total earning assets, on average, were $7.01 billion for 2002, which was 6.2%, or $409.0 million, higher than the $6.61 billion reported for 2001. The net interest margin was 4.02% for both 2002 and 2001. The dynamics of the 2002 versus 2001 difference between the average yield on earning assets and the average cost of funds was much different. The 2002 versus 2001 decline in the average yield on total earning assets was 152 basis points, which was equal to the corresponding decline in the cost of funds. The 2002 average yield on loans was 164 basis points lower than for 2001, while the average rate paid on core interest-bearing deposits fell 120 basis points. For more information about net interest income and average rates, please refer to the "Five-year analysis of earnings"table on page 36 of this report. NONINTEREST INCOME The pace of growth in noninterest income slowed in 2003. Noninterest income totaled $264.2 million for 2003, which was $2.0 million higher than the 2002 amount of $262.2 million. In comparison, noninterest income for 2002 was 15.0%, or $34.2 million, higher than for 2001. In both years, record-high revenue from the Wealth Advisory Services and Corporate Client Services businesses was offset by significantly lower income from the affiliate money managers. The decline in income from the affiliate money managers was far more severe in 2003 than in 2002. Advisory fee income, which includes Wealth Advisory Services, Corporate Client Services, and the affiliate money managers, was $210.7 million for 2003 before amortization expense, compared with $207.5 million for 2002. The 2002 level of advisory income was 12.2% higher than the $185.0 million recorded in 2001. 2003 ANNUAL REPORT 19 Wilmington Trust Corporation In 2003 amortization expense rose $400,000 to $1.7 million. This was related to the acquisitions of Balentine and SPV Management. In 2002 amortization expense was $1.3 million, which was $6.9 million less than the $8.2 million recorded for 2001. The 2002 versus 2001 decrease occurred due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," which discontinued the practice of systematically amortizing goodwill, but not other intangible, expenses. In 2003 the affiliate contribution to revenue was $3.0 million, which was $13.3 million, or 81.6%, lower than in 2002. This decline represented approximately $0.13 per share. In comparison, the 2002 contribution from the affiliate managers was $4.2 million less than for 2001. In 2003 income from service charges on deposit accounts was 8.0% higher than for 2002, and totaled $32.3 million. In 2002 income from service charges was $29.9 million, which was 10.0% higher than for 2001. These changes reflected higher volumes of returned items, overdrafts, and other transactions. Loan fees and late charges, card fees, and other noninterest income totaled $22.2 million in 2003, which was 7.9% lower than for 2002. The decrease reflected the sale of the merchant credit card business, which occurred in the fourth quarter of 2002. In 2002 these other noninterest income items totaled $24.1 million, which was 7.1% higher than the $22.5 million reported for 2001. This increase resulted from more favorable dispositions of leased autos and residential mortgages. In addition, approximately $1 million in tenant revenue was recorded in December 2002 on completion of the Corporation's purchase of the 50% of its headquarters building that it did not previously own. Securities gains of $0.7 million were recorded in 2003, compared with $2.0 million of gains in 2002 and $1.5 million of gains in 2001. WEALTH ADVISORY SERVICES The Wealth Advisory Services business has produced record-high sales volumes and income in recent years, but the full extent of its growth has been obscured by equity market levels that reduced asset valuations and their associated fees. For much of 2003, equity markets were in their fourth consecutive year of decline until they began to improve mid-year. It wasn't until late in the third quarter that market-based Wealth Advisory fees began to reflect the corresponding increases in asset valuations. Wealth Advisory Services income totaled $140.4 million for 2003. This was $13.5 million, or 10.6%, higher than for 2002. Wealth Advisory income for 2002 was $126.9 million, which was $17.3 million, or 15.8%, more than the 2001 amount of $109.6 million. The 2002 versus 2001 increase included $13.8 million from the Balentine acquisition. Balentine's revenue and expenses were consolidated in the Corporation's financial statements beginning in January 2002. In the 2003 fourth quarter, the Corporation began disclosing the sources of Wealth Advisory Services income in three categories. This disclosure shows how much of Wealth Advisory revenue is tied to financial market activity and how much is based on the complexity of the services provided. The three categories are: - - Trust and investment advisory fees. These fees are based on the valuations of assets held in client portfolios. Approximately 75% of these fees are tied to the equity markets. The remainder is associated with fixed income and other assets that do not track the equity markets. - - Mutual fund fees. Approximately 95% of these fees are related to money market funds and therefore do not reflect equity market movements. - - Other service fees. These fees are transaction-based and bear no relationship to financial markets. They represent the planning and other services that are provided in addition to asset management as part of a comprehensive wealth management program. Because these fees reflect client demand at any given point in time, they may fluctuate from period to period. The largest percentage increase in 2003 Wealth Advisory revenue was in other service fees, which were 33.1% higher in 2003 than in 2002. Several large and highly complex financial, retirement, and estate plans and estate settlements were completed during 2003. The following table compares changes in the components of Wealth Advisory Services income.
WEALTH ADVISORY SERVICES INCOME (in millions) 2003 2002 2001 - ------------------------------------------------------------------------------------- Trust and investment advisory fees $ 96.8 $ 88.8 $ 79.8 Mutual fund fees $ 22.3 $ 22.1 $ 19.2 Other service fees $ 21.3 $ 16.0 $ 10.6 - ------------------------------------------------------------------------------------- Wealth Advisory Services total $140.4 $126.9 $109.6
Behind the revenue increases were record-high sales volumes. As measured by annualized fees, sales totaled $18.7 million for 2003, which was 5.6% higher than 2002 sales, which were $17.7 million. The 2002 sales results were 31.1% higher than the $13.5 million recorded in 2001. In both years, the sales increases reflected relationships with new clients as well as additional business from existing clients. Along with the planning services noted earlier, demand continued to be strong for the open architecture investment consulting services, which were added as a result of the Balentine acquisition. In addition, all of the Corporation's key wealth management markets contributed to business development, which was especially strong in Florida and Pennsylvania. Delaware continued to account for the majority of sales, since the headquarters location serves clients throughout the United States and in other countries. 20 Wilmington Trust Corporation The following table compares changes in the percentage of sales that were generated in the key wealth management markets and illustrates how geographic expansion has produced new and more diversified sources of business.
PERCENTAGE OF WEALTH ADVISORY SALES BY MARKET 2003 2002 2001 - ------------------------------------------------------------------------------------ California 5% 7% 12% Delaware 53% 59% 50% Florida 10% 5% 11% New York 15% 16% 19% Pennsylvania 14% 11% 8%
The percentages will not necessarily add up to 100, since other smaller sources of growth are not included in this table. CORPORATE CLIENT SERVICES The Corporate Client Services business produced record-high income in 2003, due largely to increased demand for entity management services in multiple jurisdictions. Compared to prior years, the overall pace of growth in the Corporate Client Services business slowed due to weakness in the structured finance industry. Corporate Client Services income totaled $67.3 million for 2003, which was 4.7% higher than for 2002. In comparison, 2002 Corporate Client income of $64.3 million was 17.1% above the 2001 amount. The 2002 versus 2001 increase included approximately $3.6 million from the acquisition of SPV Management. SPV's revenue and expenses were consolidated in the Corporation's financial statements beginning in April 2002. The Corporate Client Services business consists of three specialized components: - - The capital markets component. This component provides trust and related services on behalf of financing structures that clients create in preferred jurisdictions. Such structures typically might hold securitized assets, such as credit card receivables or mortgage balances; hold leases on capital equipment such as aircraft, marine vessels, or rolling stock; issue trust-preferred securities; or support financially distressed companies that are reorganizing, or entering or exiting bankruptcy. - - The entity management component. This component provides administrative services that enable organizations to establish legal residency, or nexus, in favorable jurisdictions. Examples of such services include processing mail, accounting, preparing statutory and tax filings, organizing meetings, and providing independent directors. - - The retirement services component. This component provides trust, custodial, and administrative services for retirement plans as mandated by the U.S. Employee Retirement Income Security Act (ERISA). The Corporate Client Services business also produces fee income from cash management services that may be provided in conjunction with trust or entity management activity. The following table compares changes in the sources of Corporate Client Services income.
CORPORATE CLIENT SERVICES INCOME (in millions) 2003 2002 2001 - ---------------------------------------------------------------------------------------------------- Capital markets services $31.7 $32.2 $29.5 Entity management services $20.9 $17.3 $12.4 Retirement services $ 9.9 $ 9.0 $ 8.5 Cash management services $ 4.8 $ 5.8 $ 4.5 - ---------------------------------------------------------------------------------------------------- Corporate Client Services total $67.3 $64.3 $54.9
Approximately 78% of Corporate Client revenue is earned on a fee-for-service basis. Fees are priced according to the complexity of the services provided. Fees may range from $2,000 to $200,000 annually. The services provided may be as routine as acting as registrar or paying agent, or as sophisticated as managing cash flows and investments for international project financing. Most of these services are performed on a multi-year contract basis, which generates an annuity-like stream of income. Such contracts may range from two years to 30 years or more. The remainder of Corporate Client revenue is tied to asset valuations, and relates primarily to retirement and cash management services. The capital markets component is the largest component of the Corporate Client Services business. This component represented 47.1% of total Corporate Client income in 2003, versus 50.1% in 2002 and 53.7% in 2001. Income from the capital markets component was lower in 2003 than in 2002, due to economic conditions that showed improvement but were not strong enough to spur the volume of activity seen in prior years. Certain elements of the capital markets component are counter-cyclical. In difficult economies, demand for services that support financially distressed companies typically increases, and the volume of structured finance activity slows. In more robust economies, the opposite tends to occur. In 2003 demand was strong for distressed company services during the first part of the year. In the third quarter, as the economy began to recover, demand for these services waned. Activity in the structured finance industry began to rebound late in the fourth quarter. The entity management component was the fastest-growing component in 2003. It recorded 20.8% growth and represented 31.1% of total Corporate Client Services income for 2003, compared with 26.9% for 2002 and 22.8% for 2001. Factors in the increase were growing demand for European-based entities and cross-border transactions in which structures or entities are serviced in multiple jurisdictions. The growth reflected the momentum generated by the 2002 acquisition of London-based provider SPV Management, which added important European jurisdictions and broadened the Corporation's cross-border capabilities. The level of 2003 ANNUAL REPORT 21 Wilmington Trust Corporation client interest in multi-jurisdictional services prompted expansion in the Caribbean, and the Corporation opened a new office in George Town, Grand Cayman, in December. The retirement services component produced 10.0% growth and represented 14.7% of total Corporate Client income in 2003, versus 14.0% in 2002 and 15.3% in 2001. The growth of this component reflected the increasing popularity in the retirement plan industry of "unbundled" plans, which are plans where the asset management, record keeping, and trustee components are administered separately. More plan sponsors are choosing an unbundled approach because it gives them the flexibility to select providers who specialize in the distinctly different roles. The Corporation specializes in providing trustee services for unbundled plans. The growth also reflected industry preference for defined contribution plans, such as 401(k) plans, over defined benefit plans. Defined contribution plans represent the fastest-growing segment of the retirement plan industry. According to the Society of Professional Administrators and Recordkeepers, the percentage of retirement assets held in defined contribution plans rose 10% between 1995 and 2002. In 2003 Wilmington Trust added 200 plans to its client roster. CRAMER ROSENTHAL MCGLYNN Fluctuations in income from value-style manager CRM in recent years reflected the impact on assets under management of volatility in the equity markets. In 2003, after falling to a low of $3.2 billion in March, CRM's assets under management rose steadily throughout the year and totaled $4.7 billion at December 31. This was an increase of 34.3% from year-end 2002. While assets under management rose, income fell. Income from CRM in 2003 was $5.3 million, which was 31.2% lower than in 2002. This occurred because of the low level of market valuations for much of the year and because incentive payments related to hedge fund performance declined. In comparison, in 2002, assets under management at CRM fell from their 2001 level, but income increased. CRM's managed assets totaled $3.5 billion at year-end 2002, which was 23.9% lower than at year-end 2001. Income from CRM in 2002 was $7.7 million, which was 22.2% higher than in 2001. Higher incentive payments on hedge fund performance accounted for most of the increase. The amount of income received from CRM is based on the Corporation's ownership interest in the firm, which was 69.14% at year-end 2003, 63.47% at year-end 2002, and 56.53% at year-end 2001. CRM's results are not consolidated in the Corporation's financial statements. ROXBURY CAPITAL MANAGEMENT Repercussions from equity market volatility, lower market valuations, and investor reticence were extensive at growth-style manager RCM. Income decreased due to lower valuations and the loss of business as interest ebbed in growth-style investing. The pace of the revenue declines exceeded RCM's ability to reduce expenses. Expenses had grown in line with the 300% rise in assets under management that the firm experienced from 1998 until September 2000, when assets under management reached $14.2 billion. After recording losses for each of the first three quarters of 2003, the situation at RCM stabilized and the firm reported break-even results for the fourth quarter. For the 2003 full year, a loss of $2.3 million was recorded. In comparison, RCM contributed income of $8.6 million for 2002 and $14.2 million for 2001. RCM implemented significant changes in order to reverse its losses. Expense reduction initiatives were begun in 2002 and continued in 2003. By the end of 2003, monthly expenses and net outflows of business at RCM had declined appreciably. At the same time it reduced expenses, RCM took steps to generate additional income. The firm launched a new small-capitalization product in June 2002, which by the end of 2003 had attracted more than $200 million in new assets. Assets under management at RCM were lower for 2003 than for 2002. At December 31, 2003, RCM had $3.2 billion in managed assets, which was 13.5% lower than the year-end 2002 amount of $3.7 billion. That amount, in turn, was 51.9% lower than at December 31, 2001, when assets under management totaled $7.7 billion. The magnitude of the decline in managed assets between year-end 2001 and year-end 2002 manifested itself in substantially lower income. RCM contributed income in the first three quarters of 2002 but recorded a loss for the fourth quarter. For the full-year 2002, RCM's contribution was $8.6 million in income. This was a decrease of 39.4% from the $14.2 million in income recorded for 2001. The results reported for RCM reflect the Corporation's ownership position in the firm. At year-end 2003, the Corporation held a 41.23% interest in RCM's common shares and a 30% preferred interest in RCM's gross revenue. At year-end 2002, these amounts were 40.91% and 30%, respectively. At year-end 2001, they were 40.25% and 30%, respectively. ASSETS UNDER MANAGEMENT The following table compares changes in assets under management at Wilmington Trust and the two affiliate money managers.
ASSETS UNDER MANAGEMENT AT YEAR-END (in billions) 2003 2002 2001 - ---------------------------------------------------------------------------------------------------- Wilmington Trust $24.4 $21.0 $23.8 Cramer Rosenthal McGlynn $ 4.7 $ 3.5 $ 4.6 Roxbury Capital Management $ 3.2 $ 3.7 $ 7.7 - ---------------------------------------------------------------------------------------------------- Total $32.3 $28.2 $36.1
22 Wilmington Trust Corporation Wilmington Trust's managed assets are invested in a mix of instruments that reflects the primary considerations of Wealth Advisory Services clients, who count wealth preservation, tax savings, and income generation among their chief concerns. Approximately 80% of Wilmington Trust's managed assets pertain to Wealth Advisory Services relationships. The following table compares changes in the investment mix in Wilmington Trust's managed assets, excluding affiliate managers.
WILMINGTON TRUST ASSET MIX AT YEAR-END 2003 2002 2001 - ----------------------------------------------------------------------------------- Equities 55% 56% 62% Fixed income 25% 26% 21% Cash and equivalents 9% 10% 10% Mutual funds 7% 5% 4% Miscellaneous assets 4% 3% 3%
NONINTEREST EXPENSE Noninterest expense reflects the costs that the Corporation incurs in the course of normal operations. It includes expenses associated with employment, occupancy, supplies, advertising, third-party providers, and other items. In 2003 it was apparent by the end of the first quarter that economic conditions would likely prevent the Corporation from achieving its budgeted revenue goals. In response, management increased its emphasis on expense management and instituted several major cost-cutting initiatives. The company-wide profit sharing plan was eliminated, discretionary expenses were reduced wherever possible, and several renovation and technology-related projects were delayed. As a result, noninterest expense for 2003 totaled $312.0 million. This was $2.1 million, or 0.7%, more than for 2002. The ability to limit expense growth to this extent was especially noteworthy considering 2003 expenses reflected: - - 12 months of expenses associated with the acquisition of SPV Management, while 2002 expenses reflected only nine months of expenses from SPV, which was acquired in April 2002. - - Office expansion in Los Angeles, Las Vegas, Stuart, Florida, and Grand Cayman, and renovations to two branch offices in Delaware. - - Higher incentive payments in line with the record-high sales levels. The cost-cutting initiative that had the most impact on limiting expense growth was cancellation of the company-wide profit sharing plan, which reduced expenses by approximately $10.2 million and caused a 3.5% decline in total incentive and bonus expense. The decision to end the plan was a difficult one, but management elected to reduce compensation rather than eliminate jobs. Although the profit-sharing plan no longer exists, incentive-based compensation continues to be a key component of total compensation, and more than 20 incentive plans remain in place throughout the Company. Other expense control initiatives were evident in furniture, equipment, and supplies; advertising; and travel and entertainment. The decline in furniture, equipment, and supplies occurred because depreciation expense associated with the desktop operating system was lower, and several technology projects were postponed. The advertising and travel reductions reflected ongoing restraint in discretionary spending. Salary and wage expense for 2003 totaled $124.1 million, which was $4.6 million, or 3.8%, higher than the 2002 amount of $119.5 million. Approximately 13.0% of the increase was associated with SPV Management salary expense, as 2003 marked the first full year that these expenses were recorded. The remainder of the increase was due to merit raises. Employment benefits expense for 2003 was $35.6 million, which was $3.0 million, or 9.2%, more than for 2002. The increase was due to higher health insurance and pension costs. Pension costs were higher by $5.3 million, or 32.5%, in 2003 than in 2002. This rise reflected changes in actuarial assumptions that were prompted by declining interest rates and the performance of financial markets. For 2003, the Corporation lowered its discount rate from 7.25% to 6.75%, and reduced the assumption on returns from 9.5% to 8.5%. Servicing and consulting fees rose 20.7% in 2003 to $16.3 million. This increase reflected demand for the open-architecture investment process, which resulted in additional payments to the third party investment advisors. Originating and processing expense rose 6.8% to $7.8 million, due primarily to higher costs associated with wholesale lockbox services, which were outsourced in May 2003. In 2002 noninterest expense totaled $309.9 million, which was $33.0 million, or 11.9%, more than the $276.9 million recorded for 2001. Approximately $15.6 million, or 47%, of the increase was due to the Balentine and SPV Management acquisitions. Absent these acquisitions, 2002 noninterest expense was $294.3 million, which was 6.3% higher than for 2001. Expenses associated with staff employment, which include salaries and wages, incentives and bonuses, and employment benefits, rose in 2002 by $15.6 million, or 9.4%, from their 2001 level. Approximately $8.1 million, or 52%, of this increase was related to the acquisitions. Absent the acquisitions, the increase was $7.5 million, or 4.6%. Net occupancy expense for 2002 was $20.4 million, which was 21.4% higher than for 2001. Approximately 27% of this increase was acquisition-related. The opening of new offices in Atlanta, Baltimore, and Palm Beach during 2002 also contributed to the increase. Furniture and equipment expenses for 2002 were 11%, or $2.5 million, higher than for 2001. Approximately 20% of this increase was acquisition-related. The remainder was due to higher depreciation and maintenance costs on furnishings and data processing equipment. 2003 ANNUAL REPORT 23 Wilmington Trust Corporation Servicing and consulting expense was 48.4%, or $4.4 million, higher than for 2001. Payments to third party investment advisors who are utilized in the open-architecture investment counseling service accounted for approximately 44%, or $1.9 million, of this increase. Other noninterest expense in 2002 was $37.4 million, which was 15.1% higher than for 2001. Approximately $1.8 million, or 34%, of this increase was acquisition-related and included fees paid by SPV Management to directors it provides on behalf of clients. Legal fees rose 85%, or $2.8 million. Approximately $1.8 million of this amount reflected the settlement of litigation that had been pending since 1996 regarding an aircraft-leasing transaction for which the Corporation served as trustee. In addition, other noninterest expense included $1.2 million for the write-down of the Corporation's investment in Clemente Capital, Inc. HEADCOUNT At year-end 2003 full-time equivalent headcount was 2,307. This was 54 fewer than at year-end 2002. The decrease occurred through normal attrition. At year-end 2002 full-time equivalent headcount was 2,361, which was 45 more than at year-end 2001. The Balentine and SPV acquisitions added 63 staff members. Absent these additions, full-time equivalent fell by 18 during 2002. INCOME TAXES In 2003 income tax expense totaled $72.2 million, which was 1.1% less than for 2002. The decrease occurred because pre-tax income and revenue from the affiliate money managers were lower, which reduced state income taxes. Federal income tax expense for 2003 was $67.4 million, which was slightly higher than the $66.9 million recorded for 2002. State income tax expense for 2003 was $4.6 million, which was 20.0% lower than the $6.0 million recorded in 2002. In comparison, income taxes were higher for 2002 than for 2001, because acquisitions and office expansion subjected the Corporation to additional local and state taxing authorities and to rates that were higher than Delaware's. Income tax expense for 2002 was $73.0 million, which was 10.6% higher than for 2001. Pay-downs, redemptions, and maturities of tax-exempt securities and loans also contributed to the increase. Federal income tax expense for 2002 was $66.9 million, which was 8.9% more than for 2001. State income tax expense was $6.0 million, which was 30.4% higher than for 2001. The Corporation's effective tax rate was 34.8% for 2003, compared with 35.3% for 2002 and 34.7% for 2001. ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION The Corporation seeks to maintain stable credit quality by using an approach to lending that is based on adherence to strict underwriting standards. Before extending credit, the Corporation undertakes a comprehensive review of the financial condition of the individuals and companies to which it lends. One of the key determinants in the decision to extend credit is the nature and extent of the client relationship. The Corporation rarely makes loans outside of the Regional Banking business's Delaware Valley footprint. Furthermore, within that region, the Corporation's commercial lending business is focused specifically on family-owned and privately held businesses with annual sales of up to $250 million. By concentrating the Corporation's lending activities on specific markets in defined geographic areas that are in and adjacent to its home state of Delaware, management remains cognizant of the economic and other external factors that may affect credit quality. Changes in the regional economy or other external factors could impair the ability of some borrowers to repay their loans. Such an environment would cause management to anticipate increases in nonperforming assets, credit losses, and the provision for loan losses. To minimize the impact of changing economic conditions, management endeavors to maintain a loan portfolio that is well diversified across commercial and consumer lines and industry sectors. Management continually monitors the entire loan portfolio to identify potential problem loans and to avoid disproportionately high concentrations of loans to any one borrower or industry sector. Integral parts of this process include a regular analysis of all past-due loans, and the identification of loans that management doubts will be repaid on a timely basis. In addition, the Corporation conducts internal risk rating analyses of the loan portfolio on a quarterly basis. The rating system has four classifications: - - Pass, which identifies loans with no current potential problems; - - Watchlisted, which identifies potential problem credits; - - Substandard, which identifies problem credits with some probability of loss; and - - Doubtful, which identifies problem credits with a higher probability of loss. The definitions of problem and potential problem credits are consistent with the classifications used by regulatory agencies. According to the internal risk rating classification, more than 95% of the portfolio has been rated pass every year since 2000. More than 92% of the loans have been rated pass every year since 1998. 24 Wilmington Trust Corporation The Corporation maintains a reserve for loan losses that reflects management's best estimate of known and inherent estimated losses that is based on subjective judgments regarding the collectibility of loans within the portfolio. In calculating the reserve, the Corporation evaluates micro-and macro-economic factors, historical net loss experience, delinquency trends, and movements within the internal risk rating classifications, among other things. To accommodate growth in loan balances, a portion of the reserve is allocated to new loans within the parameters of the reserve methodology. Management reassesses the reserve on a quarterly basis, as part of the regular application of the reserve methodology. The process that is used to calculate the reserve has provided a high degree of reserve adequacy over an extended period of time, and the Corporation believes that it is sound. For more information about the loan loss reserve policy, please refer to the "Reserve for loan losses" section in Note 1 to the Consolidated Financial Statements on page 50. In management's opinion, the most meaningful indicator of credit quality is the net charge-off ratio. Net charge-offs have been below 50 basis points every year since 1990. Other credit quality indicators utilized by management include the ratio of the period-end reserve for loan losses to loans, the ratio of period-end nonperforming assets to loans, and the ratio of period-end loans past due 90 days or more to total loans. Over the past three years: - - Credit quality has remained stable, - - The portfolio has remained well diversified across commercial and consumer lines, - - The internal risk rating analysis has rated more than 95% of loans outstanding as pass, and - - The net charge-off ratio has remained low. The following table illustrates the diversification of the loan portfolio.
LOAN PORTFOLIO COMPOSITION AT DECEMBER 31 2003 2002 2001 - ----------------------------------------------------------------------------------------------- Commercial permanent mortgage 10% 10% 12% Commercial real estate development 13% 13% 12% Commercial real estate interim projects 2% 2% 2% Commercial business 40% 42% 37% Consumer personal 22% 17% 17% Consumer residential mortgage fixed rate 6% 8% 10% Consumer residential mortgage floating rate 2% 3% 5% Home equity 4% 3% 3% Credit cards 1% 1% 1% Leases --% 1% 1% (Year-end balances)
The following table compares changes in the internal risk rating analysis.
RISK RATINGS AT DECEMBER 31 2003 2002 2001 - --------------------------------------------------------------------------------- Pass 95.83% 95.65% 95.12% Watchlisted 2.58% 2.57% 2.60% Substandard 1.27% 1.53% 2.10% Doubtful 0.32% 0.25% 0.18%
The 2003 increase in the percentage of loans rated doubtful was due mainly to one commercial loan that was moved to non-accruing status at the end of the 2003 first quarter. The 2003 net charge-off ratio of 27 basis points was the lowest the ratio has been since 1994. The following table shows changes in net charge-offs.
NET CHARGE-OFFS FOR THE YEAR 2003 2002 2001 - -------------------------------------------------------------------------------------- Net charge-off ratio 27 basis points 31 basis points 30 basis points Net charge-offs $16.9 million $17.6 million $15.8 million
The increase in net charge-offs in 2002 compared to 2001 was due primarily to a single relationship with a client in the biomedical industry. Changes in the provision and reserve for loan losses reflected the growth in loan balances. For 2003 the provision was slightly lower, while the reserve was $4.7 million higher and the reserve ratio was 3 basis points higher, than for 2002. In 2002, the provision and reserve were increased, but the ratio was 6 basis points lower. The following table compares changes in the provision and reserve for loan losses:
PROVISION AND RESERVE AT YEAR END 2003 2002 2001 - ----------------------------------------------------------------------------------------------- Provision for loan losses (in millions) $ 21.6 $ 22.0 $ 19.9 Reserve for loan losses (in millions) $ 89.9 $ 85.2 $ 80.8 Reserve ratio 1.44% 1.41% 1.47%
At year-end 2003 loans past due 90 days or more totaled $5.6 million, which was a decrease of $6.9 million, or 55.2%, from 2002. The ratio of period-end loans past due 90 days or more to total loans was 9 basis points, compared with 21 basis points for 2002. At year-end 2002 loans past due 90 days or more were $12.5 million, which was $1.0 million less than at year-end 2001. The ratio of period-end loans past due 90 days or more to total loans was 25 basis points for 2001. Approximately 39% of the 2003 year-end loans past due 90 days or more were in the commercial loan portfolio; 37% were in the residential mortgage portfolio; and 24% were consumer loans. At year-end 2002 the corresponding ratios were 64%, 22%, and 14%, respectively. At year-end 2001 the corresponding ratios were 68%, 23%, and 9%, respectively. 2003 ANNUAL REPORT 25 Wilmington Trust Corporation In 2003 there was a substantial decrease from 2002 in the percentage of year-end loans past due 90 days or more that were in the commercial portfolio. This occurred as loans were moved to nonaccruing status or other real estate owned (OREO), or charged off. At year-end 2003 nonperforming assets totaled $46.8 million, which was 2.9% higher than at year-end 2002. The year-end 2003 ratio of nonperforming assets was 0.75%, which was 1 basis point lower that at year-end 2002. Nonaccruing loans accounted for 97.0% of nonperforming assets at year-end 2003, and totaled $45.4 million. This was 7.1% higher than at year-end 2002. Most of the increase was associated with a $20 million credit relationship with a client in the specialty restaurant and entertainment business. This credit was moved to nonaccruing status at the end of the 2003 first quarter, and it accounted for the majority of the increase in loans rated "doubtful" in the internal risk rating analysis. During the 2003 third quarter, this client made a payment on this loan of approximately $10 million. OREO decreased substantially in 2003. This was due primarily to the successful work-out of a residential construction project at a beach resort in Maryland that was classified as OREO in December 2002. At year-end 2002 nonperforming assets totaled $45.5 million, compared with $38.4 million at year-end 2001. The year-end 2002 ratio of nonperforming assets was 0.76%, compared with 0.70% at year-end 2001. Nonaccruing loans accounted for 93.2% of nonperforming assets for 2002. At year-end 2002, nonaccruing loans totaled $42.4 million and were 11.6% higher than at year- end 2001. Nearly all of this increase was associated with a single relationship with a commercial client in the educational services industry. The same project that accounted for the decrease in OREO in 2003 was the reason for the increase in OREO in 2002 versus 2001. The following table provides a comparison of the risk elements in the Corporation's loan portfolio:
NONPERFORMING ASSETS AT DECEMBER 31 (in millions) 2003 2002 2001 - ----------------------------------------------------------------------------------------------- Nonaccruing loans $ 45.4 $ 42.4 $ 38.0 Past due 90 days or more $ 5.6 $ 12.5 $ 13.5 - ----------------------------------------------------------------------------------------------- Total $ 51.0 $ 54.9 $ 51.5 Percentage of period-end loans 0.82% 0.91% 0.94% Other real estate owned $ 1.4 $ 3.1 $ 0.4
No loans were classified as restructured in 2003 or 2002. In 2001 loans totaling $375,000 were classified as restructured. At December 31, 2003, management identified approximately $28.5 million of loans that it doubted would be repaid on a timely basis, even though these loans were performing in accordance with their terms or were less than 90 days past due. This compares with $36.2 million of loans about which management had similar doubts at December 31, 2002, and $60.6 million at December 31, 2001. At year-end 2003, in light of the levels of past due, nonaccruing, and problem loans, management believed that the reserve for loan losses was a reasonable assessment of estimated and inherent losses in the loan portfolio. At December 31, 2003, approximately $6.1 million, or 6.8%, of the reserve for loan losses was unallocated. In comparison, approximately $6.1 million, or 7.0%, of the reserve was unallocated at year-end 2002. At year-end 2001, approximately $6.3 million, or 8.0%, of the reserve was unallocated. For more information about the loan loss reserve, please refer to Note 5 to the Consolidated Financial Statements on page 54 of this report. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a financial institution, the Corporation's primary market risk lies in its exposure to interest rate volatility. Fluctuations in interest rates impact net interest income, which is an important determinant of the Corporation's financial performance. Through management of its interest rate risk, the Corporation seeks to maximize the growth of net interest income on a consistent basis by minimizing the effects of fluctuations associated with changing market interest rates. The Corporation employs simulation models to assess interest rate exposure and the effect of variations in interest rates on net interest income. The models evaluate numerous factors, including: - - the composition of assets, liabilities, and off-balance sheet instruments; - - their respective repricing and maturity characteristics; - - the level of market interest rates;and - - other external factors. The simulations compare multiple interest rate scenarios against a stable interest rate environment. As a general rule, the model employs scenarios in which rates gradually move up or down 250 basis points over a period of one year. The Corporation's objective is to keep market interest rate changes from reducing net interest income by 10% or more within a one-year period. Because interest rates were at historic lows in 2003, the declining rate scenario in the simulation model gradually moved down only 100 basis points, until the federal funds rate equaled zero. This prevented the creation of negative interest rates within the model. The rising rate scenario remained able to accommodate a 250-basis-point upside move. At year-end 2003, the model projected that, if interest rates were to experience a gradual decline of 100 basis points, net interest income would decrease 5.33% over a one-year period. Conversely, the model projected that a gradual 250-basis-point increase in market interest rates would cause net interest income to rise 6.14% over a one-year period. 26 Wilmington Trust Corporation For 2002 the declining rate scenario moved down only 125 basis points. The rising rate scenario remained at 250 basis points. At year-end 2002, the model projected that a 125-basis-point decline would cause a decrease in net interest income of approximately 7.17%. The model projected that a gradual 250-basis-point increase would cause net interest income to rise 8.53%. For 2001 the declining rate scenario moved down only 175 basis points. At December 31, 2001, the model projected that such a decline would result in a decrease in net interest income of 5.1%. A gradual rise of 250 basis points would result in an increase in net interest income of 2.7%. The three preceding paragraphs contain certain forward-looking statements regarding the anticipated effects on the Corporation's net interest income resulting from hypothetical changes in market interest rates. The assumptions the Corporation uses regarding the effects of changes in interest rates on the adjustment of retail deposit rates and the prepayment of residential mortgages, asset-backed securities, and collateralized mortgage obligations play a significant role in the results the simulation model projects. Rate and prepayment assumptions used in the Corporation's simulation model differ for both assets and liabilities in rising, as compared to declining, interest rate environments. Nevertheless, these assumptions are inherently uncertain and, as a result, the simulation model cannot predict precisely the impact of changes in interest rates on net interest income. Management reviews the exposure to interest rate risk regularly, and may employ a variety of strategies as needed to adjust its sensitivity. This includes changing the relative proportions of fixed-rate and floating-rate assets and liabilities; changing the number and maturity of funding sources; securitizing assets; and utilizing such derivative contracts as interest rate swaps and interest rate floors. LIQUIDITY The Corporation manages its liquidity to ensure that its cash flows are sufficient to support its operating, investing, and financing activities. The Corporation manages its liquidity to meet increases in demand for loans or other assets, and decreases in deposits or other funding sources. Liquidity is affected by the proportion of funding that is provided by core deposits and stockholders' equity. The Corporation's sources of funding include deposit balances, cash that is generated by the investment and loan portfolios, short-term and long-term borrowings, internally generated capital, and other credit facilities. Among the Corporation's available sources of funds is the Federal Home Loan Bank of Pittsburgh, of which Wilmington Trust Company is a member. The Company has $1 billion in available borrowing capacity secured by collateral. In addition, at December 31, 2003, the Corporation had $67 million in available borrowing capacity through two lines of credit it maintains with major U.S. financial institutions. In 2003 the primary source of funding for the $368.7 million increase in loan balances was core deposit balances, which rose $375.1 million. The proportion of funding provided by core deposits in 2003 was 53.0%, compared with 54.0% in 2002 and 54.2% in 2001. The 2003 proportion of funding from core deposits and stockholders' equity was 62.1%, compared with 63.1% in 2002 and 63.3% in 2001. Another source of funding in 2003 was the issue of $250 million in subordinated long-term debt. The debt was issued for general corporate purposes. Proceeds initially were invested in mortgage-backed securities. At December 31, 2003, the investment portfolio balance was $1.9 billion. The portfolio is expected to generate approximately $0.6 billion in cash during 2004. The Corporation is a guarantor for a portion of two line-of-credit obligations of affiliate money manager CRM. The Corporation's guaranty portion is representative of its ownership interest in CRM. For more information about this guaranty, please refer to Note 14 of the Consolidated Financial Statements, "Related party transactions," on page 60 of this report. Management continuously monitors the Corporation's existing and projected liquidity requirements, and believes that its standing in the national markets will enable it to obtain additional funding in a timely and cost-effective manner, should the need arise. For more information about liquidity, please refer to the "Consolidated Statements of Cash Flows," which begin on page 46 of this report. CAPITAL POSITION The Corporation manages its capital to enhance shareholder value and enable management to act opportunistically in a dynamic marketplace. Management reviews the Corporation's capital position and makes adjustments as needed to assure that the capital base is sufficient to satisfy existing and impending regulatory requirements, to meet appropriate standards of safety, and to provide for future growth. The Corporation is subject to Federal Reserve Board guidelines that establish minimum levels of capital for bank holding companies to be considered adequately capitalized or well capitalized. The guidelines are intended to reflect the varying degrees of risk associated with different on- and off-balance sheet items. Management continually reviews the Corporation's on- and off-balance sheet items and calculates its capital position under these risk-based capital guidelines. 2003 ANNUAL REPORT 27 Wilmington Trust Corporation The Corporation's capital ratios have exceeded the minimum levels to be considered a well-capitalized institution every year since 1984, when the minimums initially were set. The following table compares the Corporation's ratios to the guidelines.
Adequately Well- capitalized capitalized CAPITAL RATIOS AT YEAR-END 2003 2002 2001 minimum minimum - ------------------------------------------------------------------------------------------------------------- Total risk-based capital 12.45% 10.15% 11.16% 8% 10% Tier 1 risk-based capital 7.46% 7.03% 7.78% 4% 6% Tier 1 leverage capital 6.34% 6.08% 6.49% 4% 5%
The improvement in the total risk-based capital ratio between 2002 and 2003 was due in large part to the Corporation's issuance in April 2003 of $250 million of 10-year 4.875% subordinated notes. The proceeds of this issue were invested primarily in mortgage-backed securities. For more information about the Corporation's risk-based capital, please refer to Note 13 to the Consolidated Financial Statements, "Capital Requirements," on page 59 of this report. The Corporation's dividend history demonstrates its sustained capital strength. The Corporation has paid cash dividends on its common stock every year since 1908, paid quarterly cash dividends every year since 1916, and increased the dividend every year since 1982. In 2003 the Board of Directors continued to allocate capital to the cash dividend, which was increased for the 22nd consecutive year. Share buyback activity was minimal, as the Corporation moved to replenish capital levels that were reduced in connection with the Balentine and SPV acquisitions and other investments. Stockholders' equity rose from $741.3 million at December 31, 2002, to $800.8 million at December 31, 2003, or 8.0%, primarily due to earnings. The additions to capital during 2003 consisted of: - - $64.2 million, which reflected earnings of $134.4 million net of $70.2 million in cash dividends; - - $11.3 million from the issue of common stock under employment benefit plans; and - - $0.2 million in foreign currency exchange adjustments. These additions were offset by $16.2 million in reductions, which consisted of: - - $10.0 million in unrealized losses on securities, net of income taxes; - - $4.5 million for the minimum pension liability adjustment, net of income taxes; - - $1.1 million for the repurchase of shares; and - - a $0.6 million reclassification adjustment for derivative and securities gains included in net income, net of income taxes. For more information about stockholders' equity, please refer to the "Consolidated Statement of Changes in Stockholders' Equity" on page 44 of this report. Although stockholders' equity rose, the capital generation rate fell to 8.7% for 2003 from 9.8% for 2002, because cash dividend payments were higher in 2003 than they were in 2002. On April 17, 2003, the Corporation's Board of Directors increased the quarterly dividend 5.9%, from $0.255 per share to $0.27 per share. This marked the 22nd consecutive year of increases. Dividends paid for 2003 were $1.065 per share, and dividend payments totaled $70.2 million, which was 6.4% higher than the $66.0 million paid in 2002. The dividend payout ratio for 2003 was 52.2%, compared to 49.5% for 2002. The Corporation repurchased 35,635 of its shares during 2003 at a total cost of $1.1 million and at an average cost per share of $31.24. This increased the total number of shares repurchased under the current 8-million-share program, which was authorized in April 2002, to 84,369, at a cost of $2.5 million. At December 31, 2002, the Corporation's stockholders' equity was 8.6% higher than the year-end 2001 amount of $682.5 million. The additions to stockholders' equity during 2002 consisted of: - - $67.2 million, which reflected earnings of $133.2 million net of $66.0 million in cash dividends, - - $2.2 million from increases in the market value of available-for-sale investments, - - $12.5 million from the issue of common stock under employment benefit plans, - - $8.9 million from the acquisition of Balentine & Company, and - - $0.4 million in foreign currency translation adjustments and net unrealized securities gains on derivatives held as cash flow hedges. These additions were offset by reductions of $32.5 million, which consisted of: - - $18.7 million for share repurchases, and - - $13.8 million for the recording of an after-tax minimum pension liability. The 2002 capital generation rate of 9.8% was lower than the 2001 rate of 10.8%. On April 18, 2002, the Corporation's Board of Directors announced the 21st consecutive increase in the cash dividend, a two-for-one stock split that took the form of a 100% stock dividend, and a new 8-million-share stock repurchase plan. The quarterly dividend rose 6.25% in 2002, from $0.24 per share to $0.255 per share. Dividends paid for 2002 were $1.005 per share, and dividend payments totaled $66.0 million, which was 7.3% higher than the $61.5 million paid in 2001. The dividend payout ratio for 2002 was 50.0%, compared to 49.7% for 2001. In 2002 the Corporation repurchased 600,360 (383,199 on a pre-split basis) of its shares, at a total cost of $18.7 million and an average cost per share of $31.18. Of the shares purchased in 2002, 551,626 (334,465 on a pre-split basis) shares completed the 8-million-share (split-adjusted) program that was authorized in April 1996. The other 48,734 shares were bought under the new program authorized in April 2002. 28 Wilmington Trust Corporation OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS In its day-to-day operations, the Corporation employs various financial instruments that generally accepted accounting principles deem to be off-balance sheet arrangements. Under regulatory guidelines, these instruments are considered for the purpose of calculating risk-based capital ratios, but they do not appear on the Corporation's balance sheet. These instruments include stand-by and performance letters of credit, unfunded loan commitments, unadvanced lines of credit, and interest rate swaps. The interest rate swaps permit clients to convert floating-rate loan payments into fixed-rate loan payments without exposing the Corporation to interest rate risk. In these arrangements, the Corporation retains the credit risk associated with the potential failure of counter-parties. At December 31, 2003, the liquidity exposure of the Corporation that was associated with letters of credit, unfunded loan commitments, and unadvanced lines of credit was $3.25 billion. At year-end 2003 the Corporation had entered into $573.9 million of interest rate swaps on behalf of loan clients. The Corporation had entered into an additional $375.0 million of interest rate swap contracts with other financial institutions as part of its efforts to manage interest rate risk. These contracts were associated with the Corporation's issues of subordinated debt. The Corporation has two outstanding loans that total $35.5 million from the Federal Home Loan Bank of Pittsburgh. These funds were used to construct Wilmington Trust Plaza, the Corporation's operations center in Wilmington, Delaware, which was completed in 1998. Many of the Corporation's branch offices in Delaware, and all of its offices outside the state of Delaware, are leased. Lease commitments, net of sub-lease arrangements, for these locations totaled $38.1 million at year-end 2003. At December 31, 2003, the Corporation was the guarantor of two obligations of affiliate manager CRM. The guaranty is for 69.14%, which represents the Corporation's ownership interest in CRM, of two lines of credit totaling $8 million, which will expire on December 6, 2004. The following table summarizes the obligations referenced above and the periods over which they extend.
Less More CONTRACTUAL OBLIGATION PAYMENTS than 1-3 3-5 than DUE BY PERIOD (in millions) Total 1 year years years 5 years - ------------------------------------------------------------------------------------------------------------ Long-term debt obligations $578.0 $ 22.8 $ 75.8 $198.9 $280.5 Operating lease obligations $ 38.1 $ 6.1 $ 16.1 $ 10.8 $ 5.1 Guaranty obligations $ 8.0 $ 8.0 $ -- $ -- $ -- - ------------------------------------------------------------------------------------------------------------ Total $624.1 $ 36.9 $ 91.9 $209.7 $285.6
The long-term debt obligations in the table above refer to the Corporation's two outstanding subordinated long-term debt issues and its Federal Home Loan Bank advances. The first debt issue, in the amount of $125 million, was issued in 1998, is due in 2008, and was used in the acquisitions of affiliate money managers CRM and RCM. The second, in the amount of $250 million, was issued in 2003, is due in 2013, and was for general liquidity purposes. All of these debt issues are included in the "Long-term debt" line of the Corporation's balance sheet. In addition, subject to certain restrictions, principal members of Balentine, CRM, and RCM may put their interests in their respective firms to the Corporation. For more information on these arrangements, please refer to Note 1 to the Consolidated Financial Statements on page 48 of this report. MARKET PRICE OF COMMON STOCK AND DIVIDENDS PAID PER SHARE The Corporation's common stock has been traded on the New York Stock Exchange under the symbol "WL" since January 12, 1999. Prior to that, the Corporation's common stock was traded on the NASDAQ Stock Market(R) under the symbol "WILM." At December 31, 2003, there were 66,063,332 shares outstanding and there were 8,666 registered shareholders. The number of registered owners does not include those investors whose shares were held for them by a bank or broker at that date. The following table summarizes the price ranges of the Corporation's common stock, its quarterly dividends, and the dividend payout ratio:
2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Quarter High Low Dividend High Low Dividend High Low Dividend - ----------------------------------------------------------------------------------------------------------------------------------- First $ 33.61 $ 26.00 $ 0.255 $ 34.63 $ 30.85 $ 0.240 $ 27.72 $ 26.67 $ 0.225 Second $ 30.55 $ 26.50 $ 0.27 $ 34.53 $ 29.75 $ 0.255 $ 33.18 $ 28.10 $ 0.240 Third $ 32.78 $ 29.03 $ 0.27 $ 32.17 $ 25.05 $ 0.255 $ 33.50 $ 25.10 $ 0.240 Fourth $ 36.47 $ 30.80 $ 0.27 $ 33.09 $ 25.20 $ 0.255 $ 31.73 $ 25.50 $ 0.240 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 1.065 $ 1.005 $ 0.945 Payout ratio 52.2% 49.5% 49.2% (Split-adjusted for periods prior to June 17, 2002)
2003 ANNUAL REPORT 29 Wilmington Trust Corporation INFLATION The Corporation's asset and liability structure is substantially different from that of an industrial company, since virtually all of the assets and liabilities of a financial institution are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a bank holding company's performance. Interest rates do not necessarily move in the same direction or at the same magnitude as the prices of goods and services. The impact, therefore, of inflation on a bank holding company's financial performance is indeterminable. CONTROLS AND PROCEDURES The Chairman of the Board and Chief Executive Officer of the Corporation and its Chief Financial Officer conducted an evaluation of the effectiveness of the Corporation's disclosure controls and procedures as of the end of the period covered by this report, pursuant to Securities Exchange Act Rule 13a-14. Based on that evaluation, the Chairman of the Board and Chief Executive Officer and the Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in alerting them on a timely basis to material information about the Corporation (including its consolidated subsidiaries) required to be included in the periodic filings it makes with the Securities and Exchange Commission. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect those controls subsequent to the date of that evaluation. OTHER INFORMATION ACCOUNTING PRONOUNCEMENTS Please refer to Note 1 to the Consolidated Financial Statements, "Summary of Significant Accounting Policies, "on pages 48-52 of this report for a discussion of the impact of recent accounting pronouncements on the Corporation's financial condition and results of operation. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of the Corporation, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements and during the reporting period. Management evaluates those estimates on an ongoing basis, including those estimates related to the reserve for loan losses, stock-based employee compensation, affiliate fee income, impairment of goodwill, recognition of Corporate Client Services fees, loan origination fees, and mortgage servicing assets. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and the estimates that are used in preparation of the consolidated financial statements and relate to the reserve for loan losses, stock-based employee compensation, and impairment of goodwill. RESERVE FOR LOAN LOSSES: The Corporation maintains a reserve for loan losses that is management's best estimate of known and inherent estimated losses, based on subjective judgments regarding the collectibility of loans within the portfolio. The reserve is reduced by actual credit losses, and is increased by the provision for loan losses and recoveries from loans previously charged-off. Personnel independent of the various lending functions evaluate the reserve on a quarterly basis. The level of the reserve is determined by assigning specific amounts to individually identified problem credits. A general amount is reserved for all other loans. In evaluating the reserve, management gives specific consideration to current micro- and macro-economic factors, historical net loss experience, current delinquency trends, and movement within the internal risk rating classification system. The methodology used to determine the necessary level of the reserve has been applied on a basis consistent with prior periods. A portion of the reserve is not specifically allocated to the individual components of the portfolio, and represents probable or inherent losses that could be caused by certain business conditions not accounted for otherwise. Typically, business conditions, including current economic and market conditions, portfolio complexity, payment performance, loan portfolio risk rating migration, the level of serious doubt loans, litigation impact, and bankruptcy trends, are the core of the unallocated reserve position. The determination of the reserve is inherently subjective, and it requires material estimates, including with respect to the amounts and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the reserve will not be necessary if the quality of loans deteriorates as a result of the factors discussed above. Management believes that it uses the best information available to make determinations about the reserve and that it has established its existing reserve for loan losses in accordance with generally accepted accounting principles. If circumstances differ substantially from the assumptions used in making the determinations, future adjustments to the reserve may be necessary and results of the Corporation's operations could be affected. 30 Wilmington Trust Corporation In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's banking affiliates' reserve for losses on loans. These agencies may require the Corporation to recognize additions to the reserve based on their judgments about information available to them at the time of their examination. STOCK-BASED EMPLOYEE COMPENSATION: The Corporation accounts for its stock-based employee compensation plans under the "intrinsic value" approach, in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, rather than the "fair value"approach prescribed in Statement of Financial Accounting Standards (SFAS) No. 123. The "intrinsic value" approach limits the compensation expense to the excess of a stock option's market price on the grant date over the option's exercise price. Since the Corporation's stock-based employee compensation option plans have exercise prices equal to market values on the grant date, no compensation expense is recognized in the financial statements. The "fair value" approach under SFAS No. 123 takes into account the time value of the option and will generally result in compensation expense being recorded upon grant. Each year since the inception of SFAS No. 123, the Corporation has disclosed, in the notes to the financial statements contained in its annual report to shareholders, what the earnings impact would have been had the Corporation elected the "fair value" approach under SFAS No. 123 (see the section on "Stock-based compensation plans" in Note 1, "Summary of Significant Accounting Policies" on page 52). Future earnings would be impacted if any change in generally accepted accounting principles were to limit the continued use of the "intrinsic value" approach. Such changes are reported to be under consideration by the financial accounting standard-setters. IMPAIRMENT OF GOODWILL: Through a series of acquisitions, the Corporation has accumulated goodwill with a net carrying value of $243. 2 million at December 31, 2003. Through 2001, this goodwill was subject to periodic amortization in accordance with the provisions of APB No. 17, "Intangible Assets." This treatment provided for a gradual reduction in the book value of the assets over their useful lives. Amortization could be changed if later events and circumstances warrant a revised estimate of the useful lives of the assets. Additionally, under APB No. 17, estimations of value and future benefits could indicate that the unamortized cost should be reduced by a reduction in net income. The 2002 adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," eliminated the requirement to amortize goodwill, and substituted impairment testing in its place. The purpose of impairment testing is to ensure that an amount presented in the financial statements for goodwill does not exceed its actual fair value. A methodology that is consistent with how the acquired entity or business was originally valued is to be utilized in testing for impairment on an annual basis. If this testing indicates that the fair value of the asset is less than its book value, an impairment expense must be recorded. There may be more volatility in reported income than under the previous standard, because impairment losses are likely to occur irregularly and in varying amounts. A major portion of the goodwill on the Corporation's books is related to certain of its affiliate asset manager acquisitions. A decline in the fair value of the investment in any of these firms could result in an impairment expense. CAUTIONARY STATEMENT: Estimates, predictions, opinions, or statements of belief in this report might be construed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of such statements could relate to identification of trends, statements about the adequacy of the reserve for loan losses, credit quality, the impact of FASB pronouncements on the Corporation, and the effects of asset sensitivity, interest rate changes, and information concerning market risk described in the "Quantitative and Qualitative Disclosures About Market Risk"section on page 26 of this report. Forward-looking statements are based on current expectations and assessments of potential developments. The Corporation's ability to achieve the results reflected in those statements could be affected by, among other things, changes in national or regional economic conditions, changes in market interest rates, significant changes in banking laws or regulations, increased competition in our businesses, higher-than-expected credit losses, the effects of acquisitions and integration of acquired businesses, unanticipated changes in regulatory, judicial, or legislative tax treatment of business transactions, and economic uncertainty created by unrest in other parts of the world. HISTORICAL PERSPECTIVE The following tables offer an historical perspective on the Corporation's performance and include: - - An unaudited 11-year summary of selected financial data, - - An unaudited 5-year comparative analysis of average balance sheets and income statements, interest income and expense, and the respective yields and costs of funds for those years, - - An unaudited 5-year comparison of average statements of condition, - - An unaudited 5-year comparison of statements of income, - - An unaudited 2-year comparison of consolidated results of operations by quarter, - - Audited consolidated statements of condition for 2003 and 2002, - - Audited consolidated statements of income for 2003, 2002, and 2001, - - Audited consolidated statements of changes in stockholders' equity for 2003, 2002, and 2001, and - - Audited consolidated statements of cash flows for 2003, 2002, and 2001. - - Notes to audited consolidated financial statements. Other statistical disclosures that are required of bank holding companies by Industry Guide 3 are included in the Corporation's 2003 Annual Report on Form 10-K. 2003 ANNUAL REPORT 31 Wilmington Trust Corporation C O N S O L I D A T E D E L E V E N - Y E A R S U M M A R Y O F S E L E C T E D F I N A N C I A L D A T A
(in millions, except per share amounts) 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED AVERAGE STATEMENTS OF CONDITION ASSETS: Cash and due from banks $ 190.2 $ 189.1 $ 215.8 Short-term investments 28.5 28.2 28.7 Investment securities 1,742.4 1,295.4 1,341.9 Loans 6,060.0 5,691.3 5,235.3 Reserve for loan losses (86.7) (83.0) (77.8) Net loans 5,973.3 5,608.3 5,157.5 Other 595.1 540.0 485.3 - -------------------------------------------------------------------------------------------------------------------------------- Total $ 8,529.5 $ 7,661.0 $ 7,229.2 LIABILITIES AND STOCKHOLDERS' EQUITY: Demand deposits (noninterest-bearing) $ 833.3 $ 831.3 $ 927.9 Deposits (interest-bearing) 5,460.6 4,996.3 4,335.2 Short-term borrowings 975.7 821.1 1,027.7 Other 144.4 132.1 131.3 Long-term debt 345.8 160.5 166.3 - -------------------------------------------------------------------------------------------------------------------------------- Total 7,759.8 6,941.3 6,588.4 Minority interest 0.1 0.1 -- Stockholders' equity 769.6 719.6 640.8 - -------------------------------------------------------------------------------------------------------------------------------- Total $ 8,529.5 $ 7,661.0 $ 7,229.2 CONSOLIDATED STATEMENTS OF INCOME Net interest income $ 277.1 $ 276.5 $ 258.9 Advisory fees: Wealth Advisory Services 140.4 126.9 109.6 Corporate Client Services 67.3 64.3 54.9 Cramer Rosenthal McGlynn 5.3 7.7 6.3 Roxbury Capital Management (2.3) 8.6 14.2 - -------------------------------------------------------------------------------------------------------------------------------- Total advisory fees 210.7 207.5 185.0 Amortization of affiliate goodwill and other intangibles (1.7) (1.3) (8.2) - -------------------------------------------------------------------------------------------------------------------------------- Net advisory fees 209.0 206.2 176.8 Other noninterest income 54.5 54.0 49.7 Securities gains/(losses) 0.7 2.0 1.5 - -------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 264.2 262.2 228.0 Net interest and noninterest income (before provision for loan losses) 541.3 538.7 486.9 Provision for loan losses (21.6) (22.0) (19.9) Salaries and employment benefits 186.5 182.4 166.8 Other noninterest expense(1) 125.5 127.5 110.1 - -------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 312.0 309.9 276.9 Income before income taxes, minority interest and cumulative effect of change in accounting principle 207.7 206.8 190.1 Applicable income taxes 72.2 73.0 66.0 - -------------------------------------------------------------------------------------------------------------------------------- Net income before minority interest and cumulative effect of change in accounting principle 135.5 133.8 124.1 Minority interest 1.1 0.6 -- - -------------------------------------------------------------------------------------------------------------------------------- Net income before cumulative effect of change in accounting principle 134.4 133.2 124.1 Cumulative effect of change in accounting principle (net of income taxes of $0.6 in 2001) -- -- 1.1 - -------------------------------------------------------------------------------------------------------------------------------- Net income(1) $ 134.4 $ 133.2 $ 125.2 ---------- ---------- ----------
32 Wilmington Trust Corporation
Compound Growth Rates 1993 1998 2000 1999 1998 1997 1996 1995 1994 1993 to 2003 to 2003 ---- ---- ---- ---- ---- ---- ---- ---- ------- ------- $ 194.7 $ 198.0 $ 188.2 $ 190.2 $ 187.5 $ 194.2 $ 202.8 $ 194.8 (0.24)% 0.21% 29.5 31.5 31.1 22.4 26.5 17.5 26.4 21.2 3.00 (1.73) 1,567.0 1,594.4 1,609.6 1,386.3 1,343.0 1,184.0 1,060.0 946.1 6.30 1.60 5,053.1 4,530.4 4,156.4 3,921.5 3,602.4 3,390.8 3,114.4 2,949.9 7.46 7.83 (75.3) (73.3) (66.2) (56.7) (50.8) (47.9) (50.3) (48.6) 5.96 5.54 4,977.8 4,457.1 4,090.2 3,864.8 3,551.6 3,342.9 3,064.1 2,901.3 7.49 7.87 439.7 408.1 333.3 216.3 198.8 194.3 168.7 158.4 14.15 12.29 - ---------------------------------------------------------------------------------------------------------------- $ 7,208.7 $ 6,689.1 $ 6,252.4 $ 5,680.0 $ 5,307.4 $ 4,932.9 $ 4,522.0 $ 4,221.8 7.29 6.41 $ 889.7 $ 856.2 $ 747.8 $ 678.7 $ 633.1 $ 580.9 $ 559.6 $ 500.4 5.23 2.19 4,381.4 3,910.3 3,679.5 3,191.7 2,890.9 2,584.0 2,704.7 2,718.9 7.22 8.22 1,145.9 1,138.1 1,076.5 1,188.2 1,195.8 1,239.4 775.3 545.0 6.00 (1.95) 92.2 84.9 96.0 99.6 101.8 86.7 73.8 65.7 8.19 8.51 168.0 168.0 125.9 43.0 30.9 7.0 -- -- -- 22.39 - ---------------------------------------------------------------------------------------------------------------- 6,677.2 6,157.5 5,725.7 5,201.2 4,852.5 4,498.0 4,113.4 3,830.0 7.32 6.27 -- -- -- -- -- -- -- -- -- -- 531.5 531.6 526.7 478.8 454.9 434.9 408.6 391.8 6.98 7.88 - ---------------------------------------------------------------------------------------------------------------- $ 7,208.7 $ 6,689.1 $ 6,252.4 $ 5,680.0 $ 5,307.4 $ 4,932.9 $ 4,522.0 $ 4,221.8 7.29 6.41 $ 255.1 $ 245.9 $ 237.7 $ 230.0 $ 214.2 $ 197.4 $ 184.3 $ 174.8 4.72 3.11 104.5 98.1 88.8 81.8 70.1 60.9 56.7 54.4 9.95 9.60 46.7 40.4 35.8 32.7 28.1 27.1 25.8 23.9 10.91 13.46 1.6 4.1 4.9 -- -- -- -- -- -- 1.58 19.7 12.0 2.5 -- -- -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------- 172.5 154.6 132.0 114.5 98.2 88.0 82.5 78.3 10.41 9.80 (7.5) (6.2) (3.2) -- -- -- -- -- -- (11.88) - ---------------------------------------------------------------------------------------------------------------- 165.0 148.4 128.8 114.5 98.2 88.0 82.5 78.3 10.32 10.17 51.6 41.8 48.4 43.0 38.8 37.3 32.8 35.1 4.50 2.40 (0.4) 1.3 6.7 -- 1.2 2.3 (2.2) 0.3 8.84 (36.35) - ---------------------------------------------------------------------------------------------------------------- 216.2 191.5 183.9 157.5 138.2 127.6 113.1 113.7 8.80 7.52 471.3 437.4 421.6 387.5 352.4 325.0 297.4 288.5 6.50 5.13 (21.9) (17.5) (20.0) (21.5) (16.0) (12.3) (4.6) (9.5) 8.56 1.55 162.9 147.2 137.9 129.8 119.6 110.7 101.8 95.8 6.89 6.22 101.8 111.0 92.2 77.9 72.7 70.3 70.2 65.9 6.65 6.36 - ---------------------------------------------------------------------------------------------------------------- 264.7 258.2 230.1 207.7 192.3 181.0 172.0 161.7 6.79 6.28 184.7 161.7 171.5 158.3 144.1 131.7 120.8 117.3 5.88 3.90 63.8 54.4 57.2 52.3 46.8 41.7 35.6 34.5 7.66 4.77 - ---------------------------------------------------------------------------------------------------------------- 120.9 107.3 114.3 106.0 97.3 90.0 85.2 82.8 5.05 3.46 -- -- -- -- -- -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------- 120.9 107.3 114.3 106.0 97.3 90.0 85.2 82.8 4.96 3.29 -- -- -- -- -- -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------- $ 120.9 $ 107.3 $ 114.3 $ 106.0 $ 97.3 $ 90.0 $ 85.2 $ 82.8 4.96 3.29 ------- ------
(continued) 2003 ANNUAL REPORT 33 Wilmington Trust Corporation C O N S O L I D A T E D E L E V E N - Y E A R S U M M A R Y O F S E L E C T E D F I N A N C I A L D A T A (continued)
(in millions, except per share amounts) 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------- Net income per share--diluted: Income before cumulative effect of change in accounting principle(6) $ 2.02 $ 2.01 $ 1.88 Cumulative effect of change in accounting principle(6) -- -- 0.02 - ------------------------------------------------------------------------------------------------------------------- Net income per share--diluted(6) $ 2.02 $ 2.01 $ 1.90 Percentage change from prior year --% 6% 3% SELECTED FINANCIAL RATIOS AND STATISTICS Net income as a percentage of: Average stockholders' equity(2) 17.46% 18.51% 19.54% Average total assets(2) 1.58 1.74 1.73 Loan quality: Percentage of average total loans: Net charge-offs 0.28% 0.31% 0.30% Nonaccruing loans 0.75 0.74 0.73 Percentage of total loans: Reserve for loan losses(3) 1.44 1.41 1.47 Selected per share data: Dividends paid(6) $ 1.065 $ 1.005 $ 0.945 Book value(3,6) 12.12 11.30 10.44 Stock price(3,6) 36.00 31.68 31.66 Assets under management: Wilmington Trust Company 24,352.8 20,966.7 23,829.2 Cramer Rosenthal McGlynn 4,698.6 3,512.0 4,643.0 Roxbury Capital Management 3,210.7 3,712.4 7,700.0 - ------------------------------------------------------------------------------------------------------------------- 32,262.1 28,191.1 36,172.2 Staff members (full-time equivalents)(3) 2,307 2,361 2,316 Stockholders(3) 8,666 8,712 8,841 Net income per staff member (in thousands)(2) $ 58.3 $ 56.4 $ 54.1 Efficiency ratio(2,4) 57.13% 56.99% 56.11% Capital generation rate(2,5) 8.66% 9.85% 10.75% Risk-based capital ratio(3) 12.31% 10.15% 11.16% Price/earnings multiple(3) 17.65 15.61 16.49
(1) 1999 results included a $13.4 million one-time pre-tax charge for outsourcing data processing functions. (2) Based upon income before the cumulative effect of change in accounting principle or one-time pre-tax charge for outsourcing data processing functions. (3) At year-end. (4) Total other expenses as a percentage of net interest and other income on a tax-equivalent basis. (5) Net income less dividends paid as a percentage of prior year-end stockholders' equity. (6) Adjusted for two-for-one stock split June 2002. 34 Wilmington Trust Corporation
Compound Growth Rates 1993 1998 2000 1999 1998 1997 1996 1995 1994 1993 to 2003 to 2003 - ----------------------------------------------------------------------------------------------------------------- $ 1.85 $ 1.61 $ 1.67 $ 1.54 $ 1.39 $ 1.27 $ 1.17 $ 1.10 6.27% 3.88% -- -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- $ 1.85 $ 1.61 $ 1.67 $ 1.54 $ 1.39 $ 1.27 $ 1.17 $ 1.10 6.27 3.88 15% (4)% 8% 11% 9% 9% 6% 31% 22.75% 20.18% 21.70% 22.14% 21.39% 20.70% 20.85% 21.13% 1.68 1.60 1.83 1.87 1.83 1.82 1.88 1.96 0.44% 0.28% 0.29% 0.31% 0.32% 0.33% 0.23% 0.28% 0.80 0.64 0.74 0.73 1.13 0.99 0.93 0.75 1.48 1.60 1.66 1.60 1.44 1.42 1.48 1.69 $ 0.885 $ 0.825 $ 0.765 $ 0.705 $ 0.645 $ 0.585 $ 0.53 $ 0.4875 9.14 7.70 8.19 7.51 6.86 6.55 5.90 5.44 31.03 24.13 30.82 31.19 19.75 15.44 11.38 13.13 27,994.4 25,529.7 22,770.2 18,740.7 15,569.4 13,806.4 11,462.8 11,254.1 3,495.0 3,204.0 4,319.0 -- -- -- -- -- 11,300.0 11,200.0 6,000.0 -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- 42,789.4 39,933.7 33,089.2 18,740.7 15,569.4 13,806.4 11,462.8 11,254.1 2,299 2,434 2,442 2,428 2,418 2,332 2,303 2,254 9,189 9,617 9,868 10,164 10,241 9,000 9,097 8,880 $ 52.6 $ 44.1 $ 46.8 $ 43.7 $ 40.2 $ 38.6 $ 37.0 $ 36.7 55.31% 57.99% 53.51% 52.32% 53.04% 53.86% 55.86% 53.97% 12.80% 9.69% 12.54% 12.59% 11.51% 11.68% 11.88% 12.35% 10.80% 10.67% 12.47% 12.38% 12.01% 12.06% 12.51% 12.36% 16.59 14.80 18.07 19.80 13.96 12.06 9.60 11.72
2003 ANNUAL REPORT 35 Wilmington Trust Corporation F I V E - Y E A R A N A L Y S I S O F E A R N I N G S A N D C O N S O L I D A T E D S T A T E M E N T S O F C O N D I T I O N
2003 - ----------------------------------------------------------------------------------------------------------------------------- Average Income/ Average (in millions, except per share amounts; rates on tax-equivalent basis) balance expense rate - ----------------------------------------------------------------------------------------------------------------------------- ASSETS: Federal funds sold and securities purchased under agreements to resell $ 28.5 $ 0.4 1.26% U.S. Treasury and government agencies 498.8 16.5 3.38 Obligations of state and political subdivisions(1) 16.4 1.4 9.00 Preferred stock(1) 118.4 8.8 7.44 Mortgage-backed securities 861.1 36.3 4.23 Other securities(1) 247.7 7.4 2.95 - ----------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,742.4 70.4 4.07 Loans: Commercial, financial, and agricultural 2,209.3 97.0 4.39 Real estate--construction 612.4 27.5 4.49 Mortgage--commercial 1,044.1 55.7 5.34 - ----------------------------------------------------------------------------------------------------------------------------- Total commercial loans 3,865.8 180.2 4.66 Mortgage--residential 585.2 39.1 6.67 Installment loans to individuals 1,037.9 68.1 6.56 Secured with liquid collateral 571.1 15.4 2.69 - ----------------------------------------------------------------------------------------------------------------------------- Total retail loans 2,194.2 122.6 5.58 Total loans(1,2) 6,060.0 302.8 5.00 Total earning assets 7,830.9 373.6 4.78 Other assets 698.6 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $ 8,529.5 LIABILITIES AND STOCKHOLDERS' EQUITY: Savings deposits $ 366.0 0.6 0.16 Interest-bearing demand deposits 2,183.9 9.2 0.42 Certificates under $100,000 834.4 22.3 2.67 Local certificates $100,000 and over 138.6 2.4 1.74 - ----------------------------------------------------------------------------------------------------------------------------- Core interest-bearing deposits 3,522.9 34.5 0.98 National certificates $100,000 and over 1,937.7 29.2 1.50 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 5,460.6 63.7 1.17 Federal funds purchased and securities sold under agreements to repurchase 964.1 14.4 1.50 U.S. Treasury demand 11.6 0.1 0.87 - ----------------------------------------------------------------------------------------------------------------------------- Total short-term borrowings 975.7 14.5 1.49 Long-term debt 345.8 13.5 3.91 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 6,782.1 91.7 1.35 Demand deposits 833.3 Other noninterest funds 215.5 - ----------------------------------------------------------------------------------------------------------------------------- Total funds used to support earning assets 7,830.9 91.7 1.18 Minority interest 0.1 Stockholders' equity 769.6 Equity used to support earning assets (215.5) Other liabilities 144.4 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 8,529.5 Net interest income/yield 281.9 3.60 Tax-equivalent adjustment (4.8) - ----------------------------------------------------------------------------------------------------------------------------- Net interest income 277.1
(1) Tax-advantaged income has been adjusted to a tax-equivalent basis using a combined statutory federal and state income tax rate of 35% for all years. (2) Loan balances include nonaccrual deferred loan fees has been included in interest loans. Amortization of income. Note: Average rates are calculated using average balances based on historical cost and do not reflect market valuation adjustments. 36 Wilmington Trust Corporation
2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- RAverage Income/ Average Average Income/ Average Average Income/ Average Average Income/ Average balance expense rate balance expense rate balance expense rate balance expense rate - ------------------------------------------------------------------------------------------------------------------------------- $ 28.2 $ 0.6 2.14% $ 28.7 $ 1.0 3.48% $ 29.5 $ 1.8 6.13% $ 31.5 $ 1.6 4.97% 584.3 24.6 4.30 579.7 31.9 5.60 641.2 39.2 5.73 603.0 35.3 5.82 17.2 1.5 8.98 18.3 2.9 16.07 14.3 1.0 7.28 14.4 1.1 7.64 86.4 7.4 8.19 87.1 7.7 8.31 112.7 9.9 8.12 159.7 11.3 7.05 428.5 23.9 5.76 501.3 30.0 6.07 605.1 38.4 5.92 687.5 42.3 6.07 179.0 6.6 3.56 155.5 9.1 5.81 193.7 13.4 6.87 129.8 7.4 5.73 - ------------------------------------------------------------------------------------------------------------------------------- 1,295.4 64.0 5.01 1,341.9 81.6 6.12 1,567.0 101.9 6.31 1,594.4 97.4 6.06 2,005.5 104.2 5.20 1,636.5 117.3 7.17 1,580.1 137.8 8.72 1,423.8 113.2 7.95 448.0 22.8 5.09 405.6 29.9 7.38 361.3 34.9 9.65 268.7 23.8 8.85 998.5 63.6 6.37 1,006.0 80.6 8.01 942.9 82.8 8.79 882.0 77.2 8.75 - ------------------------------------------------------------------------------------------------------------------------------- 3,452.0 190.6 5.52 3,048.1 227.8 7.47 2,884.3 255.5 8.86 2,574.5 214.2 8.32 777.1 53.8 6.92 906.2 64.5 7.11 977.2 70.2 7.18 895.1 63.9 7.14 1,008.5 73.4 7.28 955.2 82.3 8.62 917.8 86.7 9.45 859.4 78.8 9.17 453.7 15.5 3.42 325.8 18.2 5.59 273.8 21.6 7.89 201.4 14.2 7.05 - ------------------------------------------------------------------------------------------------------------------------------- 2,239.3 142.7 6.37 2,187.2 165.0 7.54 2,168.8 178.5 8.23 1,955.9 156.9 8.02 5,691.3 333.3 5.86 5,235.3 392.8 7.50 5,053.1 434.0 8.59 4,530.4 371.1 8.19 7,014.9 397.9 5.69 6,605.9 475.4 7.21 6,649.6 537.7 8.03 6,156.3 470.1 7.62 646.1 623.3 559.1 532.8 - ------------------------------------------------------------------------------------------------------------------------------- $ 7,661.0 $ 7,229.2 $ 7,208.7 $6,689.1 $ 353.9 0.9 0.25 $ 346.8 2.7 0.78 $ 379.8 5.8 1.53 $ 411.4 7.4 1.79 1,735.2 10.1 0.58 1,297.1 18.3 1.41 1,327.5 29.3 2.20 1,377.8 29.7 2.15 891.2 31.2 3.51 914.4 44.3 4.85 981.2 48.7 4.96 1,137.8 57.0 5.01 169.5 4.4 2.60 188.8 8.2 4.34 187.9 10.0 5.32 221.3 10.8 4.88 - ------------------------------------------------------------------------------------------------------------------------------- 3,149.8 46.6 1.48 2,747.1 73.5 2.68 2,876.4 93.8 3.26 3,148.3 104.9 3.33 1,846.5 41.4 2.24 1,588.1 78.4 4.94 1,505.0 98.4 6.54 762.0 42.6 5.59 - ------------------------------------------------------------------------------------------------------------------------------- 4,996.3 88.0 1.76 4,335.2 151.9 3.51 4,381.4 192.2 4.39 3,910.3 147.5 3.77 792.1 17.3 2.19 983.2 45.5 4.62 1,102.4 69.4 6.30 1,102.5 55.9 5.07 29.0 0.4 1.46 44.5 1.5 3.45 43.5 2.6 6.05 35.6 1.8 5.18 - ------------------------------------------------------------------------------------------------------------------------------- 821.1 17.7 2.16 1,027.7 47.0 4.57 1,145.9 72.0 6.29 1,138.1 57.7 5.07 160.5 10.6 6.60 166.3 11.0 6.59 168.0 11.1 6.58 168.0 11.1 6.58 - ------------------------------------------------------------------------------------------------------------------------------- 5,977.9 116.3 1.95 5,529.2 209.9 3.80 5,695.3 275.3 4.83 5,216.4 216.3 4.15 831.3 927.9 889.7 856.2 205.7 148.8 64.6 83.7 - ------------------------------------------------------------------------------------------------------------------------------- 7,014.9 116.3 1.67 6,605.9 209.9 3.19 6,649.6 275.3 4.11 6,156.3 216.3 3.51 0.1 -- -- -- 719.6 640.8 531.5 531.6 (205.7) (148.8) (64.6) (83.7) 132.1 131.3 92.2 84.9 - ------------------------------------------------------------------------------------------------------------------------------- $ 7,661.0 $ 7,229.2 $ 7,208.7 $6,689.1 281.6 4.02 265.5 4.02 262.4 3.92 253.8 4.11 (5.1) (6.6) (7.3) (7.9) - ------------------------------------------------------------------------------------------------------------------------------- 276.5 258.9 255.1 245.9 - -------------------------------------------------------------------------------------------------------------------------------
2003 ANNUAL REPORT 37 Wilmington Trust Corporation F I V E - Y E A R C O M P A R I S O N O F A V E R A G E S T A T E M E N T S O F C O N D I T I O N
(in millions) For the year ended December 31 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 190.2 $ 189.1 $ 215.8 $ 194.7 $ 198.0 Federal funds sold and securities purchased under agreements to resell 28.5 28.2 28.7 29.5 31.5 Investment securities: U.S. Treasury and government agencies 498.8 584.3 579.7 641.2 603.0 Obligations of state and political subdivisions 16.4 17.2 18.3 14.3 14.4 Preferred stock 118.4 86.4 87.1 112.7 159.7 Mortgage-backed securities 861.1 428.5 501.3 605.1 687.5 Other securities 247.7 179.0 155.5 193.7 129.8 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,742.4 1,295.4 1,341.9 1,567.0 1,594.4 Loans: Commercial, financial, and agricultural 2,209.3 2,005.5 1,636.5 1,580.1 1,423.8 Real estate--construction 612.4 448.0 405.6 361.3 268.7 Mortgage--commercial 1,044.1 998.5 1,006.0 942.9 882.0 - ---------------------------------------------------------------------------------------------------------------------------------- Total commercial loans 3,865.8 3,452.0 3,048.1 2,884.3 2,574.5 Mortgage--residential 585.2 777.1 906.2 977.2 895.1 Consumer 1,037.9 1,008.5 955.2 917.8 859.4 Secured with liquid collateral 571.1 453.7 325.8 273.8 201.4 - ---------------------------------------------------------------------------------------------------------------------------------- Total retail loans 2,194.2 2,239.3 2,187.2 2,168.8 1,955.9 Total loans net of unearned income 6,060.0 5,691.3 5,235.3 5,053.1 4,530.4 Reserve for loan losses (86.7) (83.0) (77.8) (75.3) (73.3) - ---------------------------------------------------------------------------------------------------------------------------------- Net loans 5,973.3 5,608.3 5,157.5 4,977.8 4,457.1 Premises and equipment 153.4 140.8 137.8 130.3 146.6 Goodwill 244.1 234.0 191.1 170.0 141.4 Other intangibles 22.1 12.2 7.1 9.3 9.1 Other assets 175.5 153.0 149.3 130.1 111.0 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 8,529.5 $ 7,661.0 $ 7,229.2 $7,208.7 $6,689.1 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 833.3 $ 831.3 $ 927.9 $ 889.7 $ 856.2 Interest-bearing: Savings 366.0 353.9 346.8 379.8 411.4 Interest-bearing demand 2,183.9 1,735.2 1,297.1 1,327.5 1,377.8 Certificates under $100,000 834.4 891.2 914.4 981.2 1,137.8 Local certificates $100,000 and over 138.6 169.5 188.8 187.9 221.3 - ---------------------------------------------------------------------------------------------------------------------------------- Total core deposits 4,356.2 3,981.1 3,675.0 3,766.1 4,004.5 National certificates $100,000 and over 1,937.7 1,846.5 1,588.1 1,505.0 762.0 - ---------------------------------------------------------------------------------------------------------------------------------- Total deposits 6,293.9 5,827.6 5,263.1 5,271.1 4,766.5 Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 964.1 792.1 983.2 1,102.4 1,102.5 U.S. Treasury demand 11.6 29.0 44.5 43.5 35.6 - ---------------------------------------------------------------------------------------------------------------------------------- Total short-term borrowings 975.7 821.1 1,027.7 1,145.9 1,138.1 Other liabilities 144.4 132.1 131.3 92.2 84.9 Long-term debt 345.8 160.5 166.3 168.0 168.0 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 7,759.8 6,941.3 6,588.4 6,677.2 6,157.5 Minority interest 0.1 0.1 -- -- -- Stockholders' equity 769.6 719.6 640.8 531.5 531.6 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 8,529.5 $ 7,661.0 $ 7,229.2 $7,208.7 $6,689.1
38 Wilmington Trust Corporation FIVE - YEAR COMPARISON OF STATEMENTS OF INCOME
(in millions, except per share amounts) For the year ended December 31 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME Interest income $ 368.8 $ 392.8 $ 468.8 $ 530.4 $ 462.2 Interest expense 91.7 116.3 209.9 275.3 216.3 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 277.1 276.5 258.9 255.1 245.9 Provision for loan losses (21.6) (22.0) (19.9) (21.9) (17.5) - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 255.5 254.5 239.0 233.2 228.4 NONINTEREST INCOME Advisory fees: Wealth Advisory Services 140.4 126.9 109.6 104.5 98.1 Corporate Client Services 67.3 64.3 54.9 46.7 40.4 Cramer Rosenthal McGlynn 5.3 7.7 6.3 1.6 4.1 Roxbury Capital Management (2.3) 8.6 14.2 19.7 12.0 - ----------------------------------------------------------------------------------------------------------------------------------- Advisory fees 210.7 207.5 185.0 172.5 154.6 Amortization of affiliate goodwill and other intangibles (1.7) (1.3) (8.2) (7.5) (6.2) - ----------------------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of affiliate goodwill and other intangibles 209.0 206.2 176.8 165.0 148.4 Service charges on deposit accounts 32.3 29.9 27.2 25.3 23.8 Other noninterest income 22.2 24.1 22.5 26.3 18.0 Securities gains/(losses) 0.7 2.0 1.5 (0.4) 1.3 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 264.2 262.2 228.0 216.2 191.5 Net interest and noninterest income 519.7 516.7 467.0 449.4 419.9 NONINTEREST EXPENSE Salaries and wages 124.1 119.5 109.2 102.9 98.1 Incentives and bonuses 26.8 30.3 28.4 32.1 22.7 Employment benefits 35.6 32.6 29.2 27.9 26.4 Net occupancy 20.6 20.4 16.8 15.7 15.4 Furniture, equipment and supplies 28.2 31.9 29.0 29.0 27.4 Other noninterest expense 76.7 75.2 64.3 57.1 68.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 312.0 309.9 276.9 264.7 258.2 NET INCOME Income before income taxes, minority interest and cumulative effect of change in accounting principle 207.7 206.8 190.1 184.7 161.7 Applicable income taxes 72.2 73.0 66.0 63.8 54.4 - ----------------------------------------------------------------------------------------------------------------------------------- Net income before minority interest and cumulative effect of change in accounting principle 135.5 133.8 124.1 120.9 107.3 Minority interest 1.1 0.6 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income before cumulative effect of change in accounting principle 134.4 133.2 124.1 120.9 107.3 Cumulative effect of change in accounting principle (net of income taxes of $0.6 in 2001) -- -- 1.1 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 134.4 $ 133.2 $ 125.2 $ 120.9 $ 107.3 Net income per share--basic: Before cumulative effect of change in accounting principle $ 2.04 $ 2.03 $ 1.90 $ 1.87 $ 1.63 Cumulative effect of change in accounting principle -- -- 0.02 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income per share--basic $ 2.04 $ 2.03 $ 1.92 $ 1.87 $ 1.63 Net income per share--diluted: Before cumulative effect of change in accounting principle $ 2.02 $ 2.01 $ 1.88 $ 1.85 $ 1.61 Cumulative effect of change in accounting principle -- -- 0.02 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income per share--diluted $ 2.02 $ 2.01 $ 1.90 $ 1.85 $ 1.61 Weighted average shares outstanding (in thousands) Basic 65,869 65,617 65,147 64,610 65,827 Diluted 66,536 66,301 65,942 65,360 66,765 Net income as a percentage of: Average total assets 1.58% 1.74% 1.73% 1.68% 1.60% Average stockholders' equity 17.46 18.51 19.54 22.75 20.18
2003 ANNUAL REPORT 39 Wilmington Trust Corporation CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the unaudited quarterly results of operations.
2003 2002 (in millions, except per share amounts) ------------------------------------ ----------------------------------- For the year ended December 31 Dec.31 Sept.30 June 30 Mar.31 Dec.31 Sept.30 June 30 Mar.31 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income $ 90.7 $ 90.5 $ 94.7 $ 92.8 $ 96.9 $ 100.1 $ 99.6 $ 96.3 Interest expense 20.3 22.4 24.5 24.5 27.0 29.3 29.0 31.1 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 70.4 68.1 70.2 68.3 69.9 70.8 70.6 65.2 Provision for loan losses (5.0) (5.7) (5.9) (4.9) (5.5) (5.1) (6.1) (5.3) - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 65.4 62.4 64.3 63.4 64.4 65.7 64.5 59.9 Noninterest income 73.0 66.3 63.0 61.1 65.7 65.5 64.3 64.7 Securities gains/(losses) 0.7 -- -- -- 2.0 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 139.1 128.7 127.3 124.5 132.1 131.2 128.8 124.6 Noninterest expense 80.0 75.2 77.1 79.6 81.7 77.1 75.9 75.3 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and minority interest 59.1 53.5 50.2 44.9 50.4 54.1 52.9 49.3 Applicable income taxes 20.8 18.8 17.4 15.3 17.9 19.4 18.5 17.1 - ----------------------------------------------------------------------------------------------------------------------------------- Net income before minority interest 38.3 34.7 32.8 29.6 32.5 34.7 34.4 32.2 Minority interest 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.1 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 38.0 $ 34.4 $ 32.6 $ 29.4 $ 32.3 $ 34.5 $ 34.2 $ 32.1 Net income per share--basic $ 0.58 $ 0.52 $ 0.50 $ 0.45 $ 0.49 $ 0.53 $ 0.52 $ 0.49 Net income per share--diluted $ 0.57 $ 0.52 $ 0.49 $ 0.44 $ 0.49 $ 0.52 $ 0.52 $ 0.48
40 Wilmington Trust Corporation CONSOLIDATED STATEMENTS OF CONDITION
(in millions, except per share amounts) For the year ended December 31 2003 2002 - -------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 210.2 $ 248.9 Federal funds sold and securities purchased under agreements to resell 3.8 -- Investment securities available for sale 1,875.2 1,343.9 Investment securities held to maturity (market value of $4.5 in 2003 and $5.1 in 2002) 4.2 4.8 Loans: Commercial, financial, and agricultural 2,275.2 2,137.1 Construction/real estate 699.8 591.9 Commercial mortgage 1,078.2 1,065.9 - -------------------------------------------------------------------------------------------------------------------- Total commercial loans 4,053.2 3,794.9 Residential mortgage 489.6 677.2 Installment loans to individuals 1,077.1 1,046.7 Secured with liquid collateral 605.4 506.3 - -------------------------------------------------------------------------------------------------------------------- Total retail loans 2,172.1 2,230.2 Total loans net of unearned income 6,225.3 6,025.1 Reserve for loan losses (89.9) (85.2) - -------------------------------------------------------------------------------------------------------------------- Net loans 6,135.4 5,939.9 Premises and equipment, net 152.3 155.2 Goodwill, net of accumulated amortization of $29.8 in 2003 and 2002 243.2 240.2 Other intangible assets, net of accumulated amortization of $11.1 in 2003 and $8.1 in 2002 24.0 21.7 Accrued interest receivable 39.5 38.6 Other assets 132.4 138.1 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 8,820.2 $ 8,131.3 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 1,025.5 $ 1,189.6 Interest-bearing: Savings 369.0 349.3 Interest-bearing demand 2,364.1 1,833.6 Certificates under $100,000 788.3 884.1 Local certificates $100,000 and over 130.3 135.3 - -------------------------------------------------------------------------------------------------------------------- Total core deposits 4,677.2 4,391.9 National certificates $100,000 and over 1,900.0 1,945.2 - -------------------------------------------------------------------------------------------------------------------- Total deposits 6,577.2 6,337.1 Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 820.5 658.8 U.S. Treasury demand deposits 48.3 41.9 Line of credit 8.0 34.0 - -------------------------------------------------------------------------------------------------------------------- Total short-term borrowings 876.8 734.7 Accrued interest payable 23.6 29.7 Other liabilities 134.5 128.0 Long-term debt 407.1 160.5 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 8,019.2 7,390.0 Minority interest 0.2 -- Stockholders' equity: Common stock: $1.00 par value, authorized 150,000,000 shares, issued 78,528,346 shares 78.5 78.5 Capital surplus 54.6 49.2 Retained earnings 948.4 884.2 Accumulated other comprehensive income (16.1) (1.2) - -------------------------------------------------------------------------------------------------------------------- Total contributed capital and retained earnings 1,065.4 1,010.7 Less: Treasury stock; 12,465,014 shares in 2003 and 12,900,601 shares in 2002, at cost (264.6) (269.4) - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 800.8 741.3 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 8,820.2 $ 8,131.3
See notes to consolidated financial statements 2003 ANNUAL REPORT 41 Wilmington Trust Corporation CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts) For the year ended December 31 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME Interest and fees on loans $ 301.1 $ 331.0 $ 389.5 Interest and dividends on investment securities: Taxable interest 59.5 54.1 69.4 Tax-exempt interest 0.9 1.0 1.9 Dividends 6.9 6.1 7.0 Interest on federal funds sold and securities purchased under agreements to resell 0.4 0.6 1.0 - ----------------------------------------------------------------------------------------------------------------- Total interest income 368.8 392.8 468.8 Interest on deposits 63.7 88.0 151.9 Interest on short-term borrowings 14.5 17.7 47.0 Interest on long-term debt 13.5 10.6 11.0 - ----------------------------------------------------------------------------------------------------------------- Total interest expense 91.7 116.3 209.9 Net interest income 277.1 276.5 258.9 Provision for loan losses (21.6) (22.0) (19.9) - ----------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 255.5 254.5 239.0 NONINTEREST INCOME Advisory fees: Wealth Advisory Services 140.4 126.9 109.6 Corporate Client Services 67.3 64.3 54.9 Cramer Rosenthal McGlynn 5.3 7.7 6.3 Roxbury Capital Management (2.3) 8.6 14.2 - ----------------------------------------------------------------------------------------------------------------- Advisory fees 210.7 207.5 185.0 Amortization of affiliate goodwill and other intangibles (1.7) (1.3) (8.2) - ----------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of affiliate goodwill and other intangibles 209.0 206.2 176.8 Service charges on deposit accounts 32.3 29.9 27.2 Loan fees and late charges 8.1 7.7 7.7 Card fees 9.4 10.7 10.3 Other noninterest income 4.7 5.7 4.5 Securities gains 0.7 2.0 1.5 - ----------------------------------------------------------------------------------------------------------------- Total noninterest income 264.2 262.2 228.0 Net interest and noninterest income 519.7 516.7 467.0
(continued) 42 Wilmington Trust Corporation
(in millions, except per share amounts) For the year ended December 31 2003 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and wages $ 124.1 $ 119.5 $ 109.2 Incentives and bonuses 26.8 30.3 28.4 Employment benefits 35.6 32.6 29.2 Net occupancy 20.6 20.4 16.8 Furniture, equipment and supplies 28.2 31.9 29.0 Advertising and contributions 8.0 9.5 8.9 Servicing and consulting fees 16.3 13.5 9.1 Travel, entertainment and training 6.9 7.5 6.3 Originating and processing fees 7.8 7.3 7.5 Other noninterest expense 37.7 37.4 32.5 - --------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 312.0 309.9 276.9 NET INCOME Income before income taxes, minority interest and cumulative effect of change in accounting principle 207.7 206.8 190.1 Income tax expense 72.2 73.0 66.0 - --------------------------------------------------------------------------------------------------------------------------- Net income before minority interest and cumulative effect of change in accounting principle $ 135.5 $ 133.8 $ 124.1 Minority interest 1.1 0.6 -- - --------------------------------------------------------------------------------------------------------------------------- Net income before cumulative effect of change in accounting principle 134.4 133.2 124.1 Cumulative effect of change in accounting principle (net of income taxes of $0.6) -- -- 1.1 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 134.4 $ 133.2 $ 125.2 Net income per share--basic: Before cumulative effect of change in accounting principle $ 2.04 $ 2.03 $ 1.90 Cumulative effect of change in accounting principle -- -- 0.02 - --------------------------------------------------------------------------------------------------------------------------- Net income per share--basic $ 2.04 $ 2.03 $ 1.92 Net income per share--diluted: Before cumulative effect of change in accounting principle $ 2.02 $ 2.01 $ 1.88 Cumulative effect of change in accounting principle -- -- 0.02 - --------------------------------------------------------------------------------------------------------------------------- Net income per share--diluted $ 2.02 $ 2.01 $ 1.90 Weighted average shares outstanding (in thousands): Basic 65,869 65,617 65,147 Diluted 66,536 66,301 65,942
See notes to consolidated financial statements 2003 ANNUAL REPORT 43 Wilmington Trust Corporation CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated other Common Capital Retained comprehensive Treasury (in millions, except per share amounts) stock surplus earnings income stock Total - ----------------------------------------------------------------------------------------------------------------------------------- 2001 Balance at January 1,2001 $ 39.3 $ 72.8 $ 753.4 $ (4.5) $ (269.1) $ 591.9 Comprehensive income: Net income -- -- 125.2 -- -- 125.2 Other comprehensive income, net of tax: Unrealized gains on securities, net of income taxes of $8.3 -- -- -- 14.7 -- 14.7 Reclassification adjustment for security losses included in net income, net of income taxes of $(0.5) -- -- -- (0.9) -- (0.9) -------- Net unrealized gains on securities 13.8 Net unrealized holding gains arising during the year on derivatives used for cash flow hedge, net of income taxes of $0.4 -- -- -- 0.9 -- 0.9 Reclassification adjustment for derivative gains included in net income, net of income taxes of $0.0 -- -- -- (0.2) -- (0.2) ------- Total comprehensive income 139.7 Cash dividends paid--$.945 per share -- -- (61.6) -- -- (61.6) Common stock issued under employment benefit plans and to the Board of Directors (364,307 shares issued) -- 5.3 -- -- 10.6 15.9 Nonemployee stock option expense -- 0.1 -- -- -- 0.1 Acquisition of treasury stock (57,408 shares acquired) -- -- -- -- (3.5) (3.5) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31,2001 39.3 78.2 817.0 10.0 (262.0) 682.5 2002 Balance at January 1, 2002 39.3 78.2 817.0 10.0 (262.0) 682.5 Comprehensive income: Net income -- -- 133.2 -- -- 133.2 Other comprehensive income, net of tax: Unrealized gains on securities, net of income taxes of $1.9 -- -- -- 3.5 -- 3.5 Reclassification adjustment for security gains included in net income, net of income taxes of $(0.7) -- -- -- (1.3) -- (1.3) -------- Net unrealized gains on securities 2.2 Reclassification adjustment for derivative gains included in net income, net of income taxes of $(1.0) -- -- -- (0.2) -- (0.2) Foreign currency translation adjustments, net of income taxes of $(0.3) -- -- -- 0.6 -- 0.6 Minimum pension liability adjustment, net of income taxes of $(7.5) -- -- -- (13.8) -- (13.8) ------- Total comprehensive income 122.0 Cash dividends paid--$1.005 per share -- -- (66.0) -- -- (66.0) Stock dividend--100% (32,836,677 shares issued, 6,427,496 treasury shares) 39.2 (39.2) -- -- -- -- Common stock issued under employment benefit plans and to the Board of Directors (332,561 shares issued) -- 5.2 -- -- 7.3 12.5 Nonemployee stock option expense -- 0.1 -- -- -- 0.1 Common stock issued for purchase of subsidiary (141,489 shares issued) -- 4.9 -- -- 4.0 8.9 Acquisition of treasury stock (383,199 shares acquired) -- -- -- -- (18.7) (18.7) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31,2002 $ 78.5 $ 49.2 $ 884.2 $ (1.2) $ (269.4) $ 741.3
(continued) 44 Wilmington Trust Corporation
Accumulated other Common Capital Retained comprehensive Treasury (in millions, except per share amounts) stock surplus earnings income stock Total - ----------------------------------------------------------------------------------------------------------------------------------- 2003 Balance at January 1, 2003 $ 78.5 $ 49.2 $ 884.2 $ (1.2) $(269.4) $741.3 Comprehensive income: Net income -- -- 134.4 -- -- 134.4 Other comprehensive income, net of tax: Unrealized losses on securities, net of income taxes of $(5.5) -- -- -- (10.0) -- (10.0) Reclassification adjustment for security gains included in net income, net of income taxes of $(0.3) -- -- -- (0.4) -- (0.4) ----- Net unrealized gains on securities (10.4) Reclassification adjustment for derivative gains included in net income, net of income taxes of $(0.1) -- -- -- (0.2) -- (0.2) Foreign currency translation adjustments, net of income taxes of $(0.1) -- -- -- 0.2 -- 0.2 Minimum pension liability adjustment, net of income taxes of $(2.3) -- -- -- (4.5) -- (4.5) ------ Total comprehensive income 119.5 Cash dividends paid -- $1.065 per share -- -- (70.2) -- -- (70.2) Common stock issued under employment benefit plans and to the Board of Directors (471,222 shares issued) -- 5.4 -- -- 5.9 11.3 Acquisition of treasury stock (35,635 shares acquired) -- -- -- -- (1.1) (1.1) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 $ 78.5 $ 54.6 $ 948.4 $ (16.1) $(264.6) $800.8
See notes to consolidated financial statements. 2003 ANNUAL REPORT 45 Wilmington Trust Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions) For the year ended December 31 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 134.4 $ 133.2 $ 125.2 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 21.6 22.0 19.9 Provision for depreciation and other amortization 18.6 21.2 18.6 Amortization of goodwill and other intangible assets 3.0 2.4 9.8 Minority interest in net income 1.1 0.6 -- Compensation expense--nonemployee stock options -- 0.1 0.1 Amortization of investment securities available for sale discounts and premiums 14.7 15.3 11.3 Deferred income taxes (5.3) 5.8 (2.9) Originations of residential mortgages available for sale (198.2) (129.6) (87.9) Gross proceeds from sales of residential mortgages 201.5 131.7 88.8 Gains on sales of residential mortgages (3.3) (2.1) (0.9) Securities gains (0.7) (2.0) (1.5) Decrease/(increase) in other assets 7.9 (21.7) 9.8 Increase/(decrease) in other liabilities 1.8 10.8 (8.6) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 197.1 187.7 181.7 INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 19.6 114.6 54.7 Proceeds from maturities of investment securities available for sale 1,061.1 661.3 463.5 Proceeds from maturities of investment securities held to maturity 0.6 11.8 4.2 Purchases of investment securities available for sale (1,642.2) (865.0) (331.2) Purchases of investment securities held to maturity -- (0.1) -- Investments in affiliates (5.9) (16.9) (44.6) Cash paid for purchase of subsidiary -- (19.1) -- Purchases of residential mortgages (5.2) (3.3) (12.0) Net increase in loans (211.9) (551.4) (303.4) Purchases of premises and equipment (27.6) (40.8) (49.6) Dispositions of premises and equipment 12.2 4.8 21.9 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (799.3) (704.1) (196.5)
(continued) 46 Wilmington Trust Corporation
(in millions) For the year ended December 31 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand, savings and interest-bearing demand deposits $ 386.1 $ 347.7 $ 305.7 Net(decrease)/increase in certificates of deposit (146.0) 398.6 (0.9) Net increase/(decrease) in federal funds purchased and securities sold under agreements to repurchase 161.7 (169.5) (271.1) Net increase/(decrease) in U.S. Treasury demand 6.4 (53.0) 64.1 Proceeds from issuance of long-term debt 246.6 -- -- Maturity of long-term debt -- -- (7.5) Net(decrease)/increase in line of credit (26.0) 0.5 16.5 Cash dividends (70.2) (66.0) (61.6) Distributions to minority shareholders (0.9) (0.6) -- Proceeds from common stock issued under employment benefit plans, net of taxes 10.5 11.1 14.2 Payments for common stock acquired through buybacks (1.1) (18.7) (3.5) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 567.1 450.1 55.9 Effect of foreign currency translation on cash 0.2 0.1 -- (Decrease)/increase in cash and cash equivalents (34.9) (66.2) 41.1 Cash and cash equivalents at beginning of year 248.9 315.1 274.0 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 214.0 $ 248.9 $ 315.1 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 97.8 $ 121.2 $ 227.1 Taxes 63.3 74.8 62.8 In conjunction with the acquisition of Balentine, SPV Management, Rodney Square Investors, Cramer Rosenthal McGlynn, LLC, Roxbury Capital Management, LLC and Camden Partners Holdings, LLC, liabilities were assumed as follows: Fair value of assets acquired $ 5.9 $ 61.6 $ 44.6 Common stock issued -- (8.8) -- Cash paid (5.9) (36.0) (44.6) Liabilities assumed $ -- $ 16.8 $ --
See notes to consolidated financial statements. 2003 ANNUAL REPORT 47 Wilmington Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Wilmington Trust Corporation (the Corporation) is a bank and thrift holding company organized under the General Corporation Law of Delaware. In December 2000, the Corporation became a financial holding company under the Bank Holding Company Act. Through its subsidiaries, the Corporation engages in fiduciary, wealth management, investment advisory, financial planning, insurance, broker-dealer services, deposit taking, and lending. The Corporation's primary wholly owned subsidiary is Wilmington Trust Company (WTC), a Delaware-chartered bank and trust company. The Corporation holds all of the outstanding capital stock of WTC. The Corporation also owns two other depository institutions, Wilmington Trust of Pennsylvania (WTPA), a Pennsylvania-chartered bank and trust company, and Wilmington Trust FSB (WTFSB), a federally-chartered savings bank. The Corporation also owns a registered investment advisor, Rodney Square Management Corporation (RSMC), and three investment holding companies: WT Investments, Inc. (WTI), Wilmington Trust (UK) Limited (WTUK), and Balentine Holdings, Inc. (BHI). The Corporation and its subsidiaries are subject to competition from other financial institutions. The Corporation and its subsidiaries are also subject to the regulations of, and undergo periodic examinations by, certain federal and state regulatory agencies. AFFILIATE ASSET MANAGERS CRAMER ROSENTHAL MCGLYNN: On January 2, 1998, WTI consummated a transaction with Cramer Rosenthal McGlynn, LLC (CRM), an investment advisory firm specializing in equity investments in small- to middle-capitalization stocks with offices in New York, in which WTI acquired a 24% equity interest, with the ability to acquire additional ownership in the future. WTI increased its equity interest in the firm to 34% in 1999, 56.53% in 2000, 63.47% in 2002, and 69.14% in 2003. Under the acquisition agreement, principal members and certain key employees (principals) of CRM were granted options to purchase interests in CRM. If all of these options were exercised at December 31, 2003, WTI's equity interest would be reduced to 52.86%. Additionally, these same principals, subject to certain restrictions, can put their interests in CRM to WTI, which would increase WTI's equity interest. Conversely, WTI, subject to certain restrictions, can call interests held by principals of CRM, which would increase WTI's equity interest. In the event of a change in control of the Corporation, the principals of CRM can call the interests held by WTI and retain ownership. WTI's investment is accounted for under the equity method of accounting and is recorded in the "Goodwill," "Other intangible assets," and "Other assets" lines of the Corporation's Consolidated Statements of Condition. The financial results of CRM are not consolidated with those of the Corporation, in part because of the control the other owners of CRM retain over numerous important governance matters. ROXBURY CAPITAL MANAGEMENT: On July 31, 1998, WTI consummated a transaction with Roxbury Capital Management, LLC (RCM), an asset management firm headquartered in California that performs investment management services relating to large-capitalization stocks for institutional and individual clients, in which WTI acquired 100% of the preferred interests of RCM. This entitles WTI to a preferred profits interest equal to 30% of the revenues of RCM. In 2000 WTI acquired 10.96% of the common interests of RCM and increased its ownership of the common interests to 40.25% in 2001, 40.91% in 2002, and 41.23% in 2003. Under the acquisition agreement, principal members and certain key employees (principals) of RCM were granted options to purchase common interests in RCM owned by WTI. If all these options were exercised at December 31, 2003, WTI's common interests would be reduced to 32.65%. Additionally, these same principals of RCM can put their common interests in RCM to WTI, which would increase WTI's ownership. Conversely, WTI, subject to certain restrictions, can call common interests held by principals of RCM, which would increase WTI's ownership. WTI's investment is accounted for under the equity method of accounting and is recorded in the "Goodwill," "Other intangible assets," and "Other assets" lines of the Corporation's Consolidated Statements of Condition. The excess of the carrying value over the underlying equity resulting from the CRM and RCM transactions was $227 million and $225 million at December 31, 2003, and 2002, respectively. CAMDEN PARTNERS: In February 2002 WTI acquired a 25% equity interest in Camden Partners Holdings, LLC, a Baltimore-based private equity firm. In 2003 WTI increased its equity interest to 31.25%. BALENTINE & COMPANY: On January 2, 2002, WTI consummated a transaction with Balentine & Company, LLC (Balentine), an investment counseling firm specializing in selecting independent managers across all asset classes, with headquarters in Georgia, in which WTI acquired an 80% interest in Balentine, with the ability to acquire additional ownership in the future. The Corporation's interest in the firm was 78.91% at the end of 2003. Under the acquisition agreement, principal members of Balentine, subject to certain restrictions, can put their interests in Balentine to the Corporation, which would increase the Corporation's interest. Conversely, the Corporation, subject to certain restrictions, can call interests held by principals of Balentine, which would increase the Corporation's interest. In the event of a change in control of the Corporation, the principals of Balentine can either put their interests to the Corporation or call the interests held by the Corporation and retain ownership. The financial results of Balentine are consolidated with those of the Corporation. 48 Wilmington Trust Corporation BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and include, after elimination of material intercompany balances and transactions, the accounts of the Corporation, WTC, WTPA, WTFSB, RSMC, WTI, WTUK, BHI, and WTC's subsidiaries. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management evaluates these estimates on an ongoing basis, including those estimates related to the reserve for loan losses, stock-based employee compensation, affiliate fee income, impairment of goodwill, recognition of corporate trust fees, loan origination fees, and mortgage servicing assets. Certain prior year amounts have been reclassified to conform to current year presentation. All common stock and per-share amounts have been adjusted to reflect the 100% stock dividend paid on June 17, 2002. ACCOUNTING PRONOUNCEMENTS SFAS NO. 146: In June 2002 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of this Statement did not have an impact on the Corporation's consolidated earnings, financial condition, or equity. SFAS NO. 148: In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends Accounting Principles Board (APB) Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The requirements for SFAS No. 148 are effective for financial statements for fiscal years ended and interim periods beginning after December 15, 2002. The Corporation uses the "intrinsic value" approach to accounting for stock-based compensation as permitted under APB Opinion No. 25. The Corporation has adopted the disclosure provisions of SFAS No. 148. The disclosure provisions had no impact on the Corporation's consolidated earnings, financial condition, or equity. On April 22, 2003, the FASB announced its intention to require that all companies expense the value of employee stock options. The FASB plans to issue a new exposure draft that could become effective in 2004. Until the new Statement is issued, the provisions of Statement No. 123 remain in effect. See "Stock-based employee compensation" under "Critical accounting policies and estimates." SFAS NO. 149: In April 2003 the FASB issued SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including derivatives embedded in other contracts and hedging activities. This Statement amends Statement No. 133 for decisions made by the FASB as part of its Derivatives Implementation Group process. The Statement also amends Statement No. 133 to incorporate clarifications of the definition of a derivative. The Statement is effective for contracts entered into or modified and hedging relationships designated after June 30, 2003. The provisions of this Statement did not have a material impact on the Corporation's consolidated earnings, financial condition, or equity. SFAS NO. 150: In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This Statement establishes standards for how an issuer classifies financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify these financial instruments as a liability (or, in certain circumstances, an asset). Previously these financial instruments would have been classified entirely as equity, or between the liabilities section and equity section of the statement of financial condition. This Statement also addresses questions about the classification of certain financial instruments that embody obligations to issue equity shares. The provisions of this Statement are effective for interim periods beginning after June 15, 2003. The adoption of this Statement did not have an impact on the Corporation's consolidated earnings, financial condition, or equity. SFAS NO. 132 (REVISED): In December 2003 the FASB issued SFAS No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 (revised) prescribes employers' disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or recognition of those plans. This Statement retains and revises the disclosure requirements contained in the original Statement 132. It also requires additional disclosures about the assets, 2003 ANNUAL REPORT 49 Wilmington Trust Corporation obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. This Statement generally is effective for fiscal years ending after December 15, 2003. The Corporation's disclosures in Note 15 to the Consolidated Financial Statements, which begins on page 61 of this report, incorporate the requirements of SFAS No. 132 (revised). FIN NO. 45: In November 2002 the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This is an interpretation of FASB Nos. 5, 57, and 107, and rescinds FASB Interpretation No. 34. The Interpretation elaborates on the disclosures a guarantor is required to make in both its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's year-end. Accounting for guarantees issued prior to the date of this Interpretation's initial application will not be revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation. The application of this Interpretation did not have a material effect on the Corporation's consolidated earnings, financial condition, or equity. FIN NO. 46: In January 2003 the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, whether it should consolidate the entity. FIN 46 Revised (FIN 46R), issued in December 2003, replaces FIN 46. FIN 46R requires public entities to apply FIN 46 or FIN 46R to all entities that are considered special purpose entities in practice and under the FASB literature that was applied before the issuance of FIN 46 by the end of the first reporting period that ends after December 15, 2003. For any variable interest entities (VIEs) that must be consolidated under FIN 46R, the assets, liabilities, and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities, and noncontrolling interest of the VIE. The adoption of FIN 46R did not have a material impact on the Corporation's consolidated earnings, financial condition, or equity, nor has there been any additional requirement for disclosure. ACCOUNTING POLICIES CASH: The Corporation defines cash and cash equivalents as those amounts included in the balance sheet captions "Cash and due from banks" and "Federal funds sold and securities purchased under agreements to resell." INVESTMENT SECURITIES: Debt securities that the Corporation has the intent and ability to hold until maturity are classified as "held to maturity" and are carried at historical cost, adjusted for any amortization of premium or accretion of discount. Marketable equity securities and debt securities that are not classified as held to maturity are classified as "available for sale" and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a part of "Other comprehensive income" within stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary are included in earnings. The specific identification method is utilized in determining the cost of a security that has been sold. Premiums and discounts are amortized and accreted, respectively, as an adjustment of the securities' yield using the interest method, adjusted for the effects of prepayments on the underlying assets. LOANS: Loans generally are stated at their outstanding unpaid principal balance, net of any deferred fees or costs on originated loans, and net of any unamortized premiums or discounts on purchased loans. Interest income is accrued and recognized as income based upon the principal amount outstanding. Loan origination and commitment fees, net of certain direct origination costs, are deferred, and the net amounts are amortized over the contractual life of the loans as adjustments to the yield, utilizing the interest method. The accrual of interest and fee income is discontinued when a reasonable doubt exists as to the collectibility of interest or principal. A loan is determined to be impaired when it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loans, including those determined impaired under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," generally are placed on nonaccrual status after they have become 90 days past due. For installment and revolving consumer loans, the accrual of interest income continues until the loan is charged off, which is generally 120 days past due for installment loans and 180 days past due for revolving consumer loans. A nonaccrual loan is not necessarily deemed to be uncollectible. Loans are returned to accrual status when all principal and interest delinquency has been cured and reasonable assurance exists (normally six months of satisfactory payment performance) that contractual payments will continue. RESERVE FOR LOAN LOSSES: The reserve for loan losses has been established through provisions for loan losses charged against 50 Wilmington Trust Corporation income. Loans deemed to be uncollectible are charged against the reserve on a quarterly basis. Recoveries, if any, are credited to the reserve. It is the policy of the Corporation to maintain a reserve for loan losses that is management's best estimate of known and inherent estimated losses, based on subjective judgments regarding the collectibility of loans within the portfolio. The reserve for loan losses is evaluated on a quarterly basis by personnel independent of the various lending functions. In evaluating the reserve, specific consideration is given to current micro- and macro-economic factors, historical net loss experience, current delinquency trends, and movement within the internally reported loan quality classifications, among other matters. The methodology employed to determine the necessary level of reserve to maintain has been applied on a basis consistent with prior periods. Reserve allocations for the commercial portfolios are maintained at various levels. Impairment reserve allocations typically are established for nonperforming commercial credits as identified for evaluation in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and are based on the present value of anticipated cash flows discounted at the loan's effective interest rate at the date the loan is determined to be impaired or, for collateral-dependent loans, the fair value of the collateral. For collateral-dependent loans, management obtains appraisals for all significant properties. Specific allocations represent subjective estimates of probable losses and consider estimated collateral shortfalls. All commercial credits and letters of credit not subject to specific impairment allocations are assigned a general reserve based on their internal risk-rating classification. An eight-point risk rating classification system is maintained. The definitions and reserve allocation percentages for all adverse classifications are consistent with current regulatory guidelines. Reserve allocations for the retail portfolios are determined using historical trend data. Specific allocations are established for identified problem credits, which typically represent loans nearing the policy guidelines for charge-off recognition. General allocations are established for the remaining retail portfolios by applying a ratio to the outstanding balances that considers the net loss experience recognized over a historical period for the respective product. Adjustments are made as information becomes known that adversely affects the perceived quality of an individual retail portfolio. A portion of the reserve is not specifically allocated to the commercial or retail portfolios and represents probable or inherent losses caused by certain business conditions not accounted for otherwise. Typically, business conditions, including current economic and market conditions, portfolio complexity, payment performance, loan portfolio risk rating migration, the level of "serious doubt" loans, litigation impact, and bankruptcy trends comprise the core of an unallocated reserve position. The determination of the reserve is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed on the straight-line basis over the estimated useful life of the asset. Improvements are capitalized and depreciated over their useful lives. Gains or losses on dispositions of property and equipment are included in income as realized. GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the unamortized balance of the excess of the purchase price over the proportionate underlying fair value of net equity at the time of the Corporation's investments in its affiliate asset managers and other acquisitions. In addition to periodic testing, a substantial and permanent loss of either client accounts and/or assets under management would trigger testing for impairment using a discounted cash flow approach. Amortization expense of other intangible assets is computed on the straight-line or sum of the years' digits basis over the estimated useful life of the asset. INCOME TAXES: The Corporation accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are determined based upon the differences between financial statement carrying amounts and the tax bases of existing assets and liabilities. These temporary differences are measured at prevailing enacted tax rates that will be in effect when the differences are settled or realized. The Corporation and its subsidiaries, except for Brandywine Life Insurance Company, Rodney Square Investors, L.P., Wilmington Trust (Cayman), Ltd., Wilmington Trust (Channel Islands), Ltd., and WTUK and its subsidiaries, file a consolidated federal income tax return. Brandywine Life Insurance Company, Rodney Square Investors, L.P., Wilmington Trust (Cayman), Ltd., Wilmington Trust (Channel Islands), Ltd., and WTUK and its subsidiaries file separate returns. Wilmington Trust (Cayman), Ltd., Wilmington Trust (Channel Islands), Ltd., and WTUK and its subsidiaries are foreign companies and are not subject to United States federal income taxes. The Corporation records low-income housing and rehabilitation investment tax credits using the equity and the effective yield methods, respectively, in accordance with Emerging Issues Task Force Abstract No. 94-1. ADVISORY FEES: Advisory income is recognized on an accrual basis. PER-SHARE DATA: Basic net income per share is based on the weighted average number of shares outstanding during each year. Diluted net income per share is similar to basic net income per share, but includes the dilutive effect of shares issuable under stock option plans. 2003 ANNUAL REPORT 51 Wilmington Trust Corporation COMPREHENSIVE INCOME: SFAS No. 130, "Reporting Comprehensive Income," establishes rules for the reporting and display of comprehensive income and its components. This Statement requires, among other things, unrealized gains or losses on the Corporation's available for sale securities, additional minimum pension liabilities, derivative gains and losses, and foreign currency translation adjustments to be included in comprehensive income. DERIVATIVE INTEREST RATE CONTRACTS: The Corporation recognizes all derivatives on its balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be recognized in earnings immediately. The Corporation previously has entered into interest rate swap and interest rate floor contracts in managing interest rate risk to reduce the impact of fluctuations in interest rates of identifiable asset categories, principally floating-rate commercial loans and commercial mortgage loans. Swaps are contracts to exchange, at specified intervals, the difference between fixed- and floating-rate interest amounts computed on contractual notional principal amounts. Floors are contracts that generate interest payments to the Corporation based on the difference between the floating-rate index and a predetermined strike rate of the specific floor when the index is below the strike rate. When the index is equal to or above the strike rate, no payments are made or received by the Corporation. Changes in the fair value of the floors attributed to the change in "time value" are excluded in assessing the hedge's effectiveness and are recorded to "Other noninterest income" in the Consolidated Statements of Income. Changes in the fair value that are determined to be ineffective are also recorded to "Other noninterest income" in the Consolidated Statements of Income. The effective portion of the change in fair value is recorded in "Other comprehensive income" in the Consolidated Statements of Condition. The Corporation does not hold or issue derivative financial instruments for trading purposes. For the period ended December 31, 2001, other noninterest income includes net gains of $596,048 resulting from the change in fair value of floors that was excluded in assessing hedge effectiveness. Net gains or losses resulting from the cash flow hedges' ineffectiveness were immaterial. The amounts recorded to "Other comprehensive income" were subsequently reclassified to "Interest and fees on loans" in the Consolidated Statements of Income as a yield adjustment in the same period in which the hedged forecasted transaction affected earnings. On April 17, 2001, the Corporation sold all of its floors at a gain of $32,682. For the 12 months ended December 31, 2003, and 2002, $308,400 and $302,601, respectively, of gains in "Accumulated other comprehensive income" were reclassified to earnings. During the twelve months ending December 31, 2004, $308,400 of gains in "Accumulated other comprehensive income" are expected to be reclassified to earnings. OTHER REAL ESTATE OWNED: Other real estate owned (OREO), which is reported as a component of "Other assets" in the Consolidated Statements of Condition, consists of assets that have been acquired through foreclosure or acceptance of a deed in lieu of foreclosure, and loans for which the Corporation has taken possession of the collateral. These assets are recorded on the Corporation's books at the lower of their cost or estimated fair value less cost to sell, adjusted periodically based upon current appraisals. STOCK-BASED COMPENSATION PLANS: At December 31, 2003, the Corporation had three types of stock-based compensation plans, which are described in Note 15. The Corporation applies APB No. 25 and related Interpretations in accounting for these plans. No stock-based compensation cost has been recognized in the accompanying consolidated financial statements for those plans. If compensation cost had been determined based on the fair value at the grant dates for awards under those plans consistent with the methods outlined in SFAS No. 123, "Accounting for Stock-Based Compensation," the Corporation's net income would have been as follows:
(in millions, except per share amounts) 2003 2002 2001 - -------------------------------------------------------------------- NET INCOME: As reported $134.4 $133.2 $125.2 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects (3.9) (4.5) (4.7) - -------------------------------------------------------------------- Pro forma net income $130.5 $128.7 $120.5 Basic earnings per share: As reported $ 2.04 $ 2.03 $ 1.92 Pro forma 1.98 1.96 1.85 Diluted earnings per share: As reported $ 2.02 $ 2.01 $ 1.90 Pro forma 1.96 1.94 1.83
NOTE 2: RESTRICTIONS ON CASH AND DUE FROM BANKS The Federal Reserve Board requires banks to maintain cash reserves against certain categories of average deposit liabilities. Such reserves averaged $12.5 million and $10.8 million during 2003 and 2002, respectively. 52 Wilmington Trust Corporation NOTE 3: INVESTMENT SECURITIES The amortized cost and estimated market value of securities at year-end 2003 and 2002 are as follows:
Amortized cost Gross Gross Estimated market value -------------- unrealized unrealized ---------------------- (in millions) Debt Equity gains losses Debt Equity - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2003 INVESTMENT SECURITIES AVAILABLE FOR SALE: U.S. Treasury and government agencies $ 464.0 $ -- $ 6.0 $ -- $ 470.0 $ -- Obligations of state and political subdivisions 12.2 -- 0.7 -- 12.9 -- Other securities: Preferred stock -- 119.2 2.2 (1.3) -- 120.1 Mortgage-backed securities 984.4 -- 4.4 (10.1) 978.7 -- Other debt securities 251.4 -- 1.3 (2.0) 250.7 -- Other marketable equity securities -- 42.3 0.5 -- -- 42.8 - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities available for sale $1,712.0 $161.5 $ 15.1 $ (13.4) $1,712.3 $ 162.9 INVESTMENT SECURITIES HELD TO MATURITY: Obligations of state and political subdivisions $ 3.1 $ -- $ 0.3 $ -- $ 3.4 $ -- Mortgage-backed securities 0.3 -- -- -- 0.3 -- Other debt securities 0.8 -- -- -- 0.8 -- - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities held to maturity $ 4.2 $ -- $ 0.3 $ -- $ 4.5 $ -- Balance at December 31, 2002 INVESTMENT SECURITIES AVAILABLE FOR SALE: U.S. Treasury and government agencies $ 476.2 $ -- $ 13.3 $ -- $ 489.5 $ -- Obligations of state and political subdivisions 12.3 -- 0.8 -- 13.1 -- Other securities: Preferred stock -- 113.7 -- (1.9) -- 111.8 Mortgage-backed securities 496.2 -- 11.3 -- 507.5 -- Other debt securities 194.2 -- 1.3 (7.4) 188.1 -- Other marketable equity securities -- 33.4 0.5 -- -- 33.9 - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities available for sale $1,178.9 $ 147.1 $ 27.2 $ (9.3) $1,198.2 $ 145.7 INVESTMENT SECURITIES HELD TO MATURITY: Obligations of state and political subdivisions $ 3.6 $ -- $ 0.3 $ -- $ 3.9 $ -- Mortgage-backed securities 0.3 -- -- -- 0.3 -- Other debt securities 0.9 -- -- -- 0.9 -- - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities held to maturity $ 4.8 $ -- $ 0.3 $ -- $ 5.1 $ --
The following table shows the amortized cost and estimated market value of debt securities at December 31, 2003, by contractual maturity (in millions). Expected maturities will differ from contractual maturities, because the issuers may have the right to call or prepay obligations without incurring penalties.
Debt securities available for sale Debt securities held to maturity --------------------------------------------------------------------------- Amortized Market Amortized Market cost value cost value - ----------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 223.5 $ 226.9 $ -- $ -- Due after one year through five years 273.3 277.5 1.4 1.5 Due after five years through ten years 105.2 107.0 1.7 1.9 Due after ten years 1,110.0 1,100.9 1.1 1.1 - ----------------------------------------------------------------------------------------------------------------------- Total $ 1,712.0 $1,712.3 $ 4.2 $ 4.5
Proceeds from the sales of investment securities available for sale during 2003, 2002, and 2001 were $19.6 million, $114.6 million, and $54.7 million, respectively. Gross gains of $.07 million, $2.0 million, and $1.5 million in 2003, 2002, and 2001, respectively, were realized on those sales. There were no offsetting losses in 2003, 2002, or 2001. Gross gains of $83,000, $7,000, and $20,000 in 2003, 2002, and 2001, respectively, were realized on called securities, with offsetting losses of $134,000 in 2002. There were no offsetting losses in 2003 or 2001. Securities with an aggregate book value of $834.3 million at December 31, 2003, were pledged to secure deposits and other commitments. 2003 ANNUAL REPORT 53 Wilmington Trust Corporation The Corporation's preferred stock portfolio consists of cumulative and noncumulative preferred stocks. The following table shows the estimated market value and unrealized loss of debt and marketable equity securities that are temporarily impaired.
Less than 12 months 12 months or longer Total - --------------------------------------------------------------------------------------------------------------- Estimated Estimated Estimated market Unrealized market Unrealized market Unrealized (in millions) value losses value losses value losses - --------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2003 Other securities: Preferred stock $ 6.9 $ 0.1 $ 30.1 $ 1.2 $ 37.0 $ 1.3 Mortgage-backed securities 569.9 10.1 -- -- 569.9 10.1 Other debt securities 78.4 0.5 87.2 1.5 165.6 2.0 - --------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities $ 655.2 $10.7 $117.3 $ 2.7 $772.5 $ 13.4
At December 31, 2003, the Corporation's investment portfolio had 78 holdings with an estimated market value of $772.5 million and unrealized losses of $13.4 million. Of the 78 holdings, 26 securities, consisting of corporate and equity securities, carried unrealized losses for a continuous 12 month period. These unrealized losses reflected temporary impairment attributable to financial scandals throughout 2002 that caused credit spreads to widen. Higher credit ratings and narrower credit spreads reflected improved investor confidence in 2003. The mortgage-backed securities, which carried unrealized losses of $10.1 million for less than 12 months, were attributable to the steep rise in rates in July 2003 that have since moderated. Assuming steady and low interest throughout 2004, the loss position should improve in the corporate and financial sector. NOTE 4: CONCENTRATIONS OF LOANS The Corporation's lending activity is focused primarily within the Delaware Valley region, which the Corporation defines as including its home state of Delaware, Philadelphia and its surrounding five-county metropolitan area, northeastern Maryland, and Maryland's Eastern Shore. Some lending activity, associated mainly with Wealth Advisory Services clients, occurs in Florida and New York. The Corporation makes no loans outside the United States. The following table compares the composition of the loan portfolio by category at December 31, 2003, with the portfolio composition at December 31, 2002. There was no particular concentration of loans in any one category, and the composition remained relatively consistent.
FOR THE YEAR ENDED DECEMBER 31 2003 2002 - -------------------------------------------------------------------- Commercial, financial, and agricultural 37% 36% Construction/real estate 11 10 Commercial mortgage 17 18 Residential mortgage 8 11 Consumer 17 17 Secured with liquid collateral 10 8
In addition to these loans outstanding, at December 31, 2003, and 2002, unfunded commitments to lend in the real estate sector were approximately $819.2 million and $856.7 million, respectively. The Corporation generally requires collateral on all real estate exposure and a loan-to-value ratio of no greater than 80% at the time the loan is underwritten. Generally, commercial mortgage loans are secured by income-producing properties. NOTE 5: RESERVE FOR LOAN LOSSES The following table analyzes the reserve for loan losses.
(in millions) 2003 2002 2001 - ------------------------------------------------------------------- Balance at January 1 $ 85.2 $ 80.8 $ 76.7 Charge-offs (21.0) (22.4) (19.3) Recoveries 4.1 4.8 3.5 - ------------------------------------------------------------------- Net charge-offs (16.9) (17.6) (15.8) Provision charged to operations 21.6 22.0 19.9 - ------------------------------------------------------------------- Balance at December 31 $ 89.9 $ 85.2 $ 80.8
54 Wilmington Trust Corporation The following table contains information about loans that are considered to be impaired under SFAS No. 114.
FOR THE YEAR ENDED DECEMBER 31 (in millions) 2003 2002 2001 - ---------------------------------------------------------------------------- Average recorded investment in impaired loans $46.6 $37.9 $34.2 Recorded investment in impaired loans at year- end subject to a reserve for loan losses: 2003 reserve: $14.4 2002 reserve: $11.7 2001 reserve: $6.3 $39.5 $37.1 $34.5 Recorded investment in impaired loans at year- end requiring no reserve for loan losses 0.9 1.2 0.3 Recorded investment in impaired loans at year-end $40.4 $38.3 $34.8 Recorded investment in impaired loans at year-end classified as nonaccruing $39.3 $37.4 $32.6 Interest income recognized $ 0.8 $ 2.7 $ 2.0 Interest income recognized above using the cash basis method of income recognition 0.8 2.7 1.8
At December 31, 2003, there were $5.4 million of commitments to lend on nonaccruing loans. The following table analyzes the interest on nonaccruing loans.
(in millions) 2003 2002 2001 - -------------------------------------------------------------------- Nonaccruing loans at December 31 $45.4 $42.4 $38.0 Interest income which would have been recognized under original terms $ 2.6 $ 2.8 $ 2.7 Interest received 1.1 2.9 2.0
NOTE 6: PREMISES AND EQUIPMENT The following table summarizes the value of premises and equipment.
FOR THE YEAR ENDED DECEMBER 31 (in millions) 2003 2002 - --------------------------------------------------------------------- Land $ 10.1 $ 10.1 Buildings and improvements 147.2 137.6 Furniture and equipment 164.5 154.9 - --------------------------------------------------------------------- 321.8 302.6 Accumulated depreciation (169.5) (147.4) - --------------------------------------------------------------------- Premises and equipment, net $ 152.3 $ 155.2
Buildings and improvements are depreciated on a straight-line basis over an estimated useful life of 39 years. Leasehold improvements are depreciated on a straight-line basis over the life of the lease plus renewal options. Furniture and equipment are depreciated on a straight-line basis over an estimated useful life of three, five, or seven years. Minimum future rentals under noncancelable leases for real property are: $2004--$6.4 million; 2005--$6.1 million; 2006--$5.8 million; 2007--$5.0 million; 2008--$4.9 million; 2009 and thereafter--$11.3 million. NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS The following tables summarize goodwill and other intangible assets.
FOR THE YEAR ENDED DECEMBER 31 2003 2002 - -------------------------------------------------------------------------------------------------------------- Gross Net Gross Net carrying Accumulated carrying carrying Accumulated carrying (in millions) amount amortization amount amount amortization amount Goodwill (nonamortizing) $ 273.0 $ 29.8 $ 243.2 $ 270.0 $ 29.8 $240.2 Other intangibles: Amortizing: Mortgage servicing rights $ 7.2 $ 4.0 $ 3.2 $ 5.4 $ 3.0 $ 2.4 Customer lists 19.1 4.8 14.3 15.2 3.0 12.2 Acquisition costs 1.7 1.7 -- 1.7 1.5 0.2 Other intangibles 0.7 0.6 0.1 0.7 0.6 0.1 Nonamortizing: Pension and SERP intangibles 6.4 -- 6.4 6.8 -- 6.8 - -------------------------------------------------------------------------------------------------------------- Total other intangibles $ 35.1 $ 11.1 $ 24.0 $ 29.8 $ 8.1 $ 21.7 -------- ------ -------
The amortization expense of goodwill and other intangible assets is as follows:
FOR THE YEAR ENDED DECEMBER 31 (in millions) 2003 2002 2001 - ---------------------------------------------------------------------------------------------- Amortization expense $3.0 $2.4 $9.8
2003 ANNUAL REPORT 55 Wilmington Trust Corporation Mortgage servicing rights are amortized over an estimated useful life of eight years. Customer lists are amortized over an estimated useful life of 15 or 20 years. The estimated amortization expense of other intangible assets for each of the five succeeding years is:
For the year ended December 31 (in millions) 2004 2005 2006 2007 2008 - ------------------------------------------------------------------------------ $2.6 $2.5 $2.3 $1.3 $1.3
The following table shows changes in the carrying amount of goodwill by segment.
Wealth Corporate Affiliate Regional advisory client money (in millions) banking services services managers Totals - ---------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2003 Balance as of January 1 $3.8 $4.4 $7.2 $ 224.8 $240.2 Goodwill acquired -- -- -- 2.4 2.4 Amortization expense -- -- -- -- -- Impairment loss -- -- -- -- -- Increase in carrying value due to foreign currency translation adjustments -- -- 0.6 -- 0.6 - ---------------------------------------------------------------------------------------------------------------------------- Balance as of December 31 $3.8 $4.4 $7.8 $ 227.2 $243.2
Wealth Corporate Affiliate Regional advisory client money (in millions) banking services services managers Totals - ---------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2002 Balance as of January 1 $3.8 $ -- $ -- $ 209.1 $212.9 Goodwill acquired -- 4.4 6.5 16.8 27.7 Amortization expense -- -- -- -- -- Impairment loss -- -- -- (1.1) (1.1) Increase in carrying value due to foreign currency translation adjustments -- -- 0.7 -- 0.7 - ---------------------------------------------------------------------------------------------------------------------------- Balance as of December 31 $3.8 $4.4 $7.2 $ 224.8 $240.2
In the table above, the goodwill acquired includes $4.4 million recorded in connection with the acquisition of Balentine & Company; $2.4 million recorded in connection with WTI's investment in Camden Partners Holdings; $6.4 million recorded in connection with the acquisition of SPV Management; $13.8 million recorded in connection with increases in WTI's equity interest in Cramer Rosenthal McGlynn; and $0.6 million recorded in connection with increases in WTI's equity interest in Roxbury Capital Management. During 2002 a loss was recognized for $1.1 million, which represented the Corporation's remaining investment in Clemente Capital, Inc. (Clemente), a global investment management advisor. Clemente's financial performance and account retention led to the Corporation's write-off of this investment. The loss was recorded in the "Other noninterest expense" line of the Corporation's Consolidated Statements of Income. The following table lists other intangible assets acquired during the year ended December 31.
2003 2002 - ---------------------------------------------------------------------------------------------------------------------- Weighted Weighted average average Amount Residual amortization Amount Residual amortization (in millions) assigned value period in years assigned value period in years - ---------------------------------------------------------------------------------------------------------------------- Mortgage servicing rights $ 1.8 -- 8 $ 1.1 -- 8 Customer lists 3.5 -- 20 10.0 -- 18 Customer list increase in carrying value due to foreign currency translation adjustments 0.4 -- -- 0.4 -- -- Pension and SERP intangibles (0.4) -- -- 5.8 -- -- - ---------------------------------------------------------------------------------------------------------------------- Total other intangible assets $ 5.3 -- $17.3 --
56 Wilmington Trust Corporation The following table sets forth the computation of basic and diluted net income per share adjusted for the adoption of SFAS No. 142.
(in millions, except per share amounts) 2003 2002 2001 - ----------------------------------------------------------------------- Reported net income $ 134.4 $ 133.2 $ 125.2 Add back: goodwill amortization -- -- 8.6 Tax effect -- -- (3.0) - ----------------------------------------------------------------------- Adjusted net income $ 134.4 $ 133.2 $ 130.8 Net income per share--basic: Reported net income $ 2.04 $ 2.03 $ 1.92 Goodwill amortization -- -- 0.09 - ----------------------------------------------------------------------- Adjusted net income per share--basic $ 2.04 $ 2.03 $ 2.01 Net income per share--diluted: Reported net income $ 2.02 $ 2.01 $ 1.90 Goodwill amortization -- -- 0.08 - ----------------------------------------------------------------------- Adjusted net income per share--diluted $ 2.02 $ 2.01 $ 1.98
NOTE 8: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SHORT-TERM BORROWINGS Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, U.S. Treasury demand notes, and lines of credit. Federal funds purchased and securities sold under agreements to repurchase generally mature within 365 days from the transaction date. The securities underlying the agreements are U.S. Treasury bills, notes, and bonds that are held at the Federal Reserve as collateral. U.S. Treasury demand notes are generally repaid within seven to 180 days from the transaction date. The Corporation maintains lines of credit with two unaffiliated banks for $50.0 million and $25.0 million, respectively. Each line provides for interest to be paid on outstanding balances at LIBOR plus 0.35% and 0.30%, respectively. The agreements require the Corporation to maintain certain financial ratios pertaining to loan quality, limitations on debt, and risk-based capital. The Corporation was in compliance with all required covenants contained in the agreements at December 31, 2003, and 2002. The outstanding balances at December 31, 2003, and 2002, on lines of credit were $8.0 million and $34.0 million, respectively. The following table summarizes securities purchased under agreements to resell.
At December 31 (in millions) 2003 2002 - --------------------------------------------------------------------- Maximum amount outstanding at any month-end $ 32.8 $ 108.4 Daily average amount outstanding during the period 5.6 7.4 Weighted average interest rate for average amounts outstanding during the period 1.69% 2.51%
The following table summarizes securities sold under agreements to repurchase.
At December 31 (in millions) 2003 2002 - --------------------------------------------------------------------- Maximum amount outstanding at any month-end $337.7 $ 287.2 Daily average amount outstanding during the period 271.5 232.0 Weighted average interest rate for average amounts outstanding during the period 0.61% 1.03%
NOTE 9: LONG-TERM DEBT WTC has obtained advances from the Federal Home Loan Bank of Pittsburgh to finance its operations facility, the Wilmington Trust Plaza. Monthly interest payments are due on the first of each month at a fixed interest rate, with the principal due on the maturity date. Any payment of the principal prior to the originally scheduled maturity date is subject to a prepayment fee. The following table shows the terms, rates, and maturity dates of the advances.
Term Fixed Principal amount (in millions) (years) interest rate Maturity date - ------------------------------------------------------------------------- $28.0 15 6.55% October 4, 2010 7.5 10 6.41 November 6, 2006
On May 4, 1998, the Corporation issued $125.0 million in unsecured subordinated notes due May 1, 2008. Semiannual interest payments are due on May 1 and November 1 of each year at a fixed interest rate of 6.625%. The notes are not redeemable prior to maturity and will not be subject to any sinking fund. On April 4, 2003, the Corporation issued $250.0 million in unsecured subordinated notes due April 15, 2013. Semiannual interest payments are due on April 15 and October 15 of each year at a fixed interest rate of 4.875%. The notes are not redeemable prior to maturity and will not be subject to any sinking fund. NOTE 10: CONTINGENT LIABILITIES In the ordinary course of business, the Corporation and its subsidiaries are involved in various legal proceedings. While it is not feasible to predict the outcome of all pending suits and claims, management does not believe the ultimate resolution of any of these matters will have a materially adverse effect on the Corporation's consolidated financial condition. 2003 ANNUAL REPORT 57 Wilmington Trust Corporation NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS Following is a disclosure of the fair value of financial instruments held by the Corporation as of December 31, 2003, and 2002, whether or not such value is recognized in the Consolidated Statements of Condition. In cases in which quoted market prices were not available, fair values were based upon estimates using present value or other valuation techniques. These techniques were affected significantly by the assumptions used, including the discount rate and estimates of cash flows. Consequently, these fair values cannot be substantiated by comparisons with independent markets and, in many cases, may not be realized on the immediate sale of the instrument. Since generally accepted accounting principles do not require that certain financial instruments and all nonfinancial instruments be included in this presentation, the aggregated fair value amounts do not represent the underlying value of the Corporation. CASH AND SHORT-TERM INVESTMENTS. The carrying amounts reported for "Cash and due from banks," and "Federal funds sold and securities purchased under agreements to resell" approximate the fair value of those assets. INVESTMENT SECURITIES. The fair values of investment securities are based on quoted market prices when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. LOANS. The fair values of fixed- and variable-rate loans that reprice within one year with no significant credit risk are based upon their carrying amounts. The fair values of all other loans are estimated using discounted cash flow analyses, which utilize interest rates currently being offered with those offered under similar terms to borrowers of similar credit quality. ACCRUED INTEREST RECEIVABLE. The carrying amount of accrued interest receivable approximates its fair value. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The fair value of outstanding letters of credit and loan commitments approximate the fees charged for providing such services. DEPOSITS AND SHORT-TERM BORROWINGS. The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date. The carrying amounts for variable-rate deposits approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow analyses that utilize interest rates currently being offered on such certificates. The carrying amounts of federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings approximate their fair values. LONG-TERM DEBT. The fair value of long-term debt is based on the borrowing rate currently available to WTC for debt with similar terms and remaining maturities. ACCRUED INTEREST PAYABLE. The carrying amount of accrued interest payable approximates its fair value. DERIVATIVE INTEREST RATE CONTRACTS. The fair values of swaps and floors are based upon pricing models using current assumptions about market conditions and risks existing at each balance sheet date. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires the Corporation to recognize all derivatives on its balance sheet at their fair value. Interest rate swap and floor contracts are recorded in the "Other assets" and the "Other liabilities" lines of the Corporation's Consolidated Statements of Condition. Some of the Corporation's commercial loan customers minimize their interest rate risk by entering into swaps with the Corporation, in which they exchange the floating interest rate on a particular loan for a fixed interest rate. The Corporation, in turn, offsets this interest rate risk by entering into mirror swaps with a third party, in which the third party exchanges the loan customer's fixed-interest rate payments for floating-rate payments. These interest rate swap contracts are recorded in the "Other assets" and the "Other liabilities" lines of the Corporation's Consolidated Statements of Condition. On April 4, 2003, the Corporation entered into interest-rate swap agreements to exchange the 4.875% fixed-rate payments incurred for the newly issued $250.0 million in subordinated notes for floating-rate three-month LIBOR. On December 4, 2003, the Corporation entered into interest-rate swap agreements exchanging the 6.625% fixed-rate payments incurred for the $125.0 million subordinated notes issued on May 4, 1998 for floating-rate six-month LIBOR. The interest rates on the swaps reset quarterly with semiannual payments that coincide with the subordinated note payments. These interest-rate swap contracts are recorded in the "Other assets" and "Long-term debt" lines of the Corporation's Consolidated Statements of Condition. 58 Wilmington Trust Corporation The following tables show the carrying values and estimated fair values of the Corporation's financial assets, liabilities, and off-balance sheet financial instruments.
2003 2002 - ---------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in millions) value value value value - ---------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks $ 210.2 $ 210.2 $ 248.9 $ 248.9 Short-term investments 3.8 3.8 -- -- Investment securities 1,879.4 1,879.7 1,348.7 1,349.0 Loans, net of reserves 6,135.4 6,215.4 5,939.9 6,088.3 Interest-rate swap contracts 2.8 2.8 7.8 7.8 Accrued interest receivable 39.5 39.5 38.6 38.6 FINANCIAL LIABILITIES: Deposits 6,577.2 6,583.6 6,337.1 6,349.6 Short-term borrowings 876.8 876.8 734.7 734.7 Interest-rate swap contracts 5.0 5.0 7.8 7.8 Accrued interest payable 23.6 23.6 29.7 29.7 Long-term debt 407.1 403.5 160.5 158.7
For the year ended December 31 2003 2002 - ---------------------------------------------------------------------------------------- Contractual Fair Contractual Fair (in millions) amount value amount value - ---------------------------------------------------------------------------------------- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Unfunded commitments to extend credit $ 2,988.9 $ 11.8 $ 2,812.1 $ 11.0 Standby and commercial letters of credit 266.0 4.0 247.9 3.7 Loan guaranty--CRM 8.0 2.0 8.0 2.0
NOTE 12: OFF-BALANCE SHEET FINANCIAL AGREEMENTS In the normal course of business, the Corporation engages in off-balance sheet financial agreements in order to meet the needs of its customers. A summary of off-balance sheet financial agreements at December 31 is shown in the table above for Note 11, "Fair value of financial instruments." The Corporation's exposure to credit risk is represented by the contractual amount of both the commitments to extend credit and letters of credit, while the notional amount of the swaps and floors far exceeds any credit risk exposure. Commitments to extend credit are agreements to lend to a client. Generally, they have fixed expiration dates or termination clauses and may require payment of a fee. Many commitments expire without ever having been drawn upon. Letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a client to a third party. Maturities normally are for terms shorter than five years. Many letters of credit expire unfunded. The credit risk for both of these instruments is essentially the same as that involved in extending loans. The Corporation evaluates each client's creditworthiness on a case-by-case basis. Collateral (e.g., securities, receivables, inventory, equipment, and residential and commercial properties) is obtained depending on management's credit assessment of the client. NOTE 13: CAPITAL REQUIREMENTS The Corporation and each of its banking subsidiaries are subject to various regulatory capital requirements by the federal banking agencies. Management believes that, as of December 31, 2003, and 2002, the Corporation and each of its banking subsidiaries meet all capital adequacy requirements to which they are subject. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and each of its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. These capital amounts and classifications also are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets. As of the most recent notification from the federal regulators, the Corporation and each of its banking subsidiaries were categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes could change the above categorizations. 2003 ANNUAL REPORT 59 Wilmington Trust Corporation Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on the Corporation. The following table compares the risk-based capital ratios for the Corporation and its principal banking subsidiary with the minimum levels necessary to be categorized as adequately and well capitalized.
To be well-capitalized For capital under prompt corrective adequacy purposes action provisions Actual ------------------------------------------- ------------------ Amount Ratio Amount Ratio (in millions) Amount Ratio > or = > or = > or = > or = - ---------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2003: Total capital (to risk-weighted assets): Wilmington Trust Corporation $ 895.3 12.45% Wilmington Trust Company 713.7 10.70 $ 533.4 8.00% $666.8 10.00% Tier 1 capital (to risk-weighted assets): Wilmington Trust Corporation 536.6 7.46 Wilmington Trust Company 635.3 9.53 266.7 4.00 400.1 6.00 Tier 1 capital (to average assets): Wilmington Trust Corporation 536.6 6.34 Wilmington Trust Company 635.3 8.02 316.9 4.00 396.1 5.00 ------- ----- ------- ---- ------ -----
To be well-capitalized For capital under prompt corrective adequacy purposes action provisions Actual ------------------------------------------- ------------------ Amount Ratio Amount Ratio (in millions) Amount Ratio > or = > or = > or = > or = - ---------------------------------------------------------------------------------------------------------------- As of December 31, 2002: Total capital (to risk-weighted assets): Wilmington Trust Corporation $ 678.7 10.15% Wilmington Trust Company 614.9 10.10 $ 487.0 8.00% $608.8 10.00% Tier 1 capital (to risk-weighted assets): Wilmington Trust Corporation 470.1 7.03 Wilmington Trust Company 540.2 8.87 243.5 4.00 365.3 6.00 Tier 1 capital (to average assets): Wilmington Trust Corporation 470.1 6.08 Wilmington Trust Company 540.2 7.22 299.3 4.00 374.1 5.00
The primary source of funds for payment of dividends by the Corporation historically has been dividends received from WTC. The ability to pay dividends is limited by Delaware law, which permits a corporation to pay dividends only out of its capital surplus. In April 1996 the Corporation, after obtaining approval of its Board of Directors, announced a plan to buy back 8 million shares of its stock. During the years ended December 31, 2002, and 2001, 551,626 shares and 114,816 shares, respectively, were acquired, completing this program. The total cost was $200.6 million. In April 2002 the Corporation, after obtaining approval of its Board of Directors, announced a new plan to buy back 8 million shares of its stock. During the years ended December 31, 2003 and 2002, 35,635 shares and 48,734 shares, respectively, were acquired under this program at a cost of $2.5 million. NOTE 14: RELATED PARTY TRANSACTIONS In the ordinary course of banking business, loans are made to officers, directors, and associates of the Corporation and its affiliates. In the opinion of management, these loans are consistent with sound banking practices and do not involve more than the normal risk of collectibility. At December 31, 2003, and 2002, loans to executive officers, directors, and associates of the Corporation and its principal affiliates totaled $42.2 million and $67.2 million, respectively. During 2003, loan additions were $33.3 million and loan repayments were $58.3 million. The Corporation is a guarantor for 69.14%--its ownership interest--of two obligations of its affiliate, Cramer Rosenthal McGlynn. The guaranty is for two lines of credit totaling $8 million, at LIBOR plus 2%, which will expire December 6, 2004. 60 Wilmington Trust Corporation NOTE 15: EMPLOYMENT BENEFIT PLANS Employment benefit plans offered by the Corporation include long-term incentive plans, an employee stock purchase plan, a non-employee director stock option plan, a pension plan, a supplemental executive retirement plan, a postretirement health care and life insurance benefit plan, and a thrift savings plan. LONG-TERM INCENTIVE PLANS Under its 2002 long-term incentive plan, the Corporation may grant incentive stock options, nonstatutory stock options, and other stock-based and cash-based awards to officers, other key staff members, and directors for up to four million shares of common stock. Under the plan, the exercise price of each option equals the last sale price of the Corporation's stock on the date of grant, and an option's maximum term is 10 years. The following table shows option activity and pricing for the Corporation's long-term incentive plans for the last three years.
2003 2002 - ------------------------------------------------------------------------------------------------------------------------ Weighted Weighted average average Options exercise Options exercise outstanding price outstanding price - ------------------------------------------------------------------------------------------------------------------------ Balance at January 1 4,254,440 $ 27.29 3,906,984 $ 25.12 Options granted 1,504,894 27.64 917,796 32.90 Options exercised (340,756) 20.11 (443,778) 19.12 Options forfeited (76,698) 28.85 (126,562) 29.49 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31 5,341,880 27.82 4,254,440 27.29 Options exercisable at December 31 3,133,774 Weighted average fair value of options granted during the year $ 4.92 2,425,240 $ 5.86 2001 - ------------------------------------------------------------------------------------------------ Weighted average Options exercise outstanding price - ------------------------------------------------------------------------------------------------ Balance at January 1 3,772,800 $ 22.86 Options granted 858,812 30.82 Options exercised (622,310) 18.89 Options forfeited (102,318) 27.61 - ------------------------------------------------------------------------------------------------ Balance at December 31 3,906,984 25.12 Options exercisable at December 31 2,069,372 Weighted average fair value of options granted during the year $ 6.16
The following table shows the range of weighted average assumptions that were used to estimate the fair value of each option grant on the date of the grant using the Black-Scholes option-pricing model.
2003 2002 2001 - ---------------------------------------------------------------------------------------------------- Dividend yields 2.96-3.57% 3.02% 2.99% Expected volatility 27.13-27.91 26.73-27.65 27.05-28.20 Risk-free interest rate 2.37-2.78 2.37-2.78 3.74-3.99 Expected option life (years) 3-5 3-5 3-5
The following table summarizes stock options outstanding at December 31, 2003.
Options outstanding Options exercisable ------------------------------------------------------ -------------------------------- Weighted average Options remaining contractual Weighted average Options Weighted average Range of exercise prices outstanding life (years) exercise price exercisable exercise price - ------------------------------------------------------------------------------------------------------------------------- $12.38-16.50 409,562 1.6 $ 14.91 409,562 $ 14.91 21.31-26.03 903,282 4.8 24.63 858,270 24.64 26.35-29.81 2,085,028 7.4 27.94 584,020 28.73 30.12-35.72 1,944,008 8.0 31.91 1,281,922 31.85 - ------------------------------------------------------------------------------------------------------------------------- $12.38-35.72 5,341,880 6.7 $ 27.82 3,133,774 $ 27.08
2003 ANNUAL REPORT 61 Wilmington Trust Corporation 2000 EMPLOYEES STOCK PURCHASE PLAN Under the Corporation's 2000 employee stock purchase plan, substantially all staff members may elect to participate in purchasing the Corporation's common stock at the beginning of the plan year through payroll deductions of up to the lesser of 10% of their annual base pay or $21,250, and may terminate participation at any time. The price per share is the lower of 85% of fair market value at the time of election to participate or at the end of the plan year, which is May 31. The following table shows plan activity for the past three years.
Shares reserved for future Subscriptions Price subscriptions outstanding per share - ------------------------------------------------------------------------------------ Balance at January 1, 2001 696,144 103,856 Subscriptions entered into on June 1, 2001 (99,844) 99,844 $ 27.26 Forfeitures 4,416 (4,416) 22.29-27.26 Shares issued -- (101,792) 22.29 - ------------------------------------------------------------------------------------ Balance at December 31, 2001 600,716 97,492 Subscriptions entered into on June 1, 2002 (131,864) 131,864 $ 26.10 Forfeitures 4,169 (4,169) 26.10-27.26 Shares issued -- (95,584) 26.53 - ------------------------------------------------------------------------------------ Balance at December 31, 2002 473,021 129,603 Subscriptions entered into on June 1, 2003 (127,019) 129,019 $ 25.03 Forfeitures 5,337 (5,337) 25.03-26.10 Shares issued -- (126,359) 24.65 - ------------------------------------------------------------------------------------ Balance at December 31, 2003 351,339 124,926
2001 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN Under the Corporation's 2001 nonemployee director stock option plan, the Compensation Committee of the Board of Directors was authorized to grant nonstatutory stock options to nonemployee directors for up to 200,000 shares of common stock. Under the plan, the exercise price of each option equals the last sale price of the Corporation's stock on the date of grant, and an option's maximum term is 10 years. This plan terminated on May 17, 2003. The following table summarizes activity in this plan for the past three years.
Shares available Options Price for grant outstanding per share - ------------------------------------------------------------------------------------ Appropriation--new plan 200,000 -- Options granted (112,000) 112,000 $ 31.38 - ------------------------------------------------------------------------------------ Balance at December 31, 2001 88,000 112,000 Options granted (16,000) 16,000 $ 32.99 Options forfeited 8,000 (8,000) 32.99 - ------------------------------------------------------------------------------------ Balance at December 31, 2002 80,000 120,000 Options granted (42,000) 42,000 $ 27.91 Options forfeited 8,000 (8,000) 32.99 - ------------------------------------------------------------------------------------ Balance at December 31, 2003 46,000 154,000
PENSION PLAN The Wilmington Trust pension plan is a noncontributory, defined benefit plan for substantially all staff members of the Corporation and its subsidiaries, and provides for retirement and death benefits. The Corporation has agreed to contribute such amounts as are necessary to provide assets sufficient to meet the benefits to be paid to the plan's members. Annual contributions are designed to fund the plan's current and past service costs plus interest over 10 years. Costs of the plan are determined actuarially by the projected unit credit method. Plan benefits are based on years of service and a modified career average formula. The plan's assets are invested primarily in the equity and fixed-income portfolios of the Wilmington Strategic Allocation Funds managed by WTC's affiliates. Participation in these funds by the plan was $95.3 million and $78.2 million at December 31, 2003, and 2002, respectively. The measurement date of the plan was September 30 for all years presented below. The projected benefit obligation and the accumulated benefit obligation exceeded the plan assets by $30.8 million and $15.9 million, respectively, at December 31, 2003, and $38.0 million and $22.2 million, respectively, at December 31, 2002. An additional minimum liability in the amount of $5.7 million and $25.4 million was recorded at December 31, 2003, and 2002, respectively. The market-related value of the plan's assets at December 31, 2003, and 2002 was $136.3 million and $122.4 million, respectively. The following table shows the Corporation's pension plan weighted average asset allocations at December 31 by asset category.
Target Percentage of plan assets allocation at measurement date - --------------------------------------------------------------------------------- (in millions) 2003 2003 2002 - --------------------------------------------------------------------------------- Equity securities 53.0% 63.2% 49.3% Debt securities 30.0 28.8 42.4 Real estate 9.0 1.4 0.1 Other 8.0 6.6 8.2 - --------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0%
The Corporation's Pension Investment Committee is responsible for oversight of the pension plan assets. The committee meets quarterly to review performance, asset allocation, and investment manager due diligence. The investment manager responsible for the plan assets has direct responsibility to assure that the plan is managed in accordance with the investment policy. Permitted investments are those on the Corporation's mutual fund approved list or those investment programs that have met the committee's due diligence. The expected long-term rate of return for the plan's total assets is based on the expected return of each of the above categories, weighted based on the median of the target allocation for each class using long-term historical returns as published by Ibbotson Associates. For these purposes, equity securities are expected to return 10% to 11% over the long term, while cash and fixed income are expected to return between 4% and 6%. 62 Wilmington Trust Corporation The Corporation's pension plan investment policy is as follows: - Grow assets at an average annual rate in excess of the actuarially assumed expected rate of return on assets (currently 8.5%) in order to keep pace with future obligations. - Provide for maximum stability possible consistent with meeting the target growth rate and a medium level of risk aversion. - Plan assets should show positive returns after inflation. The Corporation's pension plan management objectives are as follows: - Provide large-cap domestic equity returns in excess of those from the Standard & Poor's 500 Index. - Provide mid-cap domestic equity returns in excess of those from the Standard & Poor's Mid Cap 400 Index. - Provide small-cap domestic equity returns in excess of those from the Russell 2000 Index. - Provide international equity returns in excess of those from the MSCI EAFE Index (Europe, Australia, Far East). - Provide fixed income returns in excess of those from the Lehman Government/Credit Index. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN In 1989 the Corporation adopted a supplemental executive retirement plan (SERP). The plan, which covers selected officers,is a non-qualified defined benefit plan. Assumptions used in determining the net periodic pension costs are similar to those used in determining the cost of the Corporation's pension plan. The Corporation has invested in corporate-owned life insurance contracts to meet its future obligations under this plan. The measurement date of the plan was September 30 for all years presented below. The projected benefit obligation and the accumulated benefit obligation exceeded the plan assets by $19.1 million and $12.8 million, respectively, at December 31,2003, and $16.0 million and $10.7 million, respectively, at December 31, 2002. An additional minimum liability in the amount of $0.4 million was recorded at December 31, 2003. No additional minimum liability was recorded at December 31,2002. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS In addition to providing pension benefits, the Corporation makes available certain health care and life insurance benefits for substantially all retired staff members. Staff members who retire from the Corporation are eligible to receive up to $7,000 each year toward the premium for medical coverage if they are younger than age 65,and up to $4,000 toward the premium if they are age 65 or older. Staff members who retire also are eligible for $7,500 of life insurance coverage. In accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," the cost of providing those benefits is recognized on an accrual basis. The measurement date of the plan was December 31 for all years presented below. The following table summarizes the pension, SERP, and postretirement benefit plans.
Pension benefits SERP benefits ----------------------------------------- (in millions) 2003 2002 2003 2002 - -------------------------------------------------------------------------------------------------------------------------------- Weighted average assumptions used to determine benefit obligations at December 31 were as follows: Discount rate 6.00% 6.75% 6.00% 6.75% Rate of compensation increase 4.50 4.50 4.50 4.50 The following table reflects the changes in the projected benefit obligation: Projected benefit obligation at beginning of year $ 129.9 $ 112.3 $ 16.0 $ 12.1 Service cost 5.2 4.6 0.5 0.3 Interest cost 8.8 8.4 1.1 1.0 Plan participants' contributions -- -- -- -- Plan amendments -- 0.2 -- -- Actuarial loss/(gain) 10.5 9.6 2.0 3.0 Gross benefits paid (5.2) (5.2) (0.5) (0.4) - -------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation at end of year $ 149.2 $ 129.9 $ 19.1 $ 16.0 Accumulated benefit obligation $ 134.3 $ 114.1 $ 12.8 $ 10.7 The following table reflects the changes in plan assets: Fair value of plan assets at beginning of year $ 91.9 $ 95.9 $ -- $ -- Actual return on plan assets 16.7 (8.8) -- -- Employer contribution 15.0 10.0 0.5 0.4 Plan participants' contributions -- -- -- -- Gross benefits paid (5.2) (5.2) (0.5) (0.4) - -------------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 118.4 $ 91.9 $ -- $ -- Funded status at end of year $ (30.8) $ (38.0) $ (19.1) $ (16.0) Postretirement benefits ------------------- (in millions) 2003 2002 - -------------------------------------------------------------------------------------------------------- Weighted average assumptions used to determine benefit obligations at December 31 were as follows: Discount rate 6.25% 6.75% Rate of compensation increase -- -- The following table reflects the changes in the projected benefit obligation: Projected benefit obligation at beginning of year $ 46.0 $ 33.5 Service cost 0.9 0.7 Interest cost 2.5 2.4 Plan participants' contributions 0.4 0.3 Plan amendments -- -- Actuarial loss/(gain) (3.0) 12.2 Gross benefits paid (3.7) (3.1) - -------------------------------------------------------------------------------------------------------- Projected benefit obligation at end of year $ 43.1 $ 46.0 Accumulated benefit obligation $ -- $ -- The following table reflects the changes in plan assets: Fair value of plan assets at beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contribution 3.3 2.8 Plan participants' contributions 0.4 0.3 Gross benefits paid (3.7) (3.1) - -------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ -- $ -- Funded status at end of year $ (43.1) $ (46.0)
2003 ANNUAL REPORT 63 Wilmington Trust Corporation
Pension benefits SERP benefits ------------------------------------------------- (in millions) 2003 2002 2003 2002 - -------------------------------------------------------------------------------------------------------------------------------- The following table reflects the net amount recognized in the Consolidated Statements of Condition: Unrecognized net actuarial loss/(gain) $ 43.5 $ 38.8 $ 6.7 $ 5.0 Unrecognized net transition obligation/(asset) (0.8) (1.7) 0.2 0.3 Unrecognized prior service cost 3.3 4.1 2.9 3.2 Contributions from measurement date to end of year -- -- 0.1 -- - -------------------------------------------------------------------------------------------------------------------------------- Net amount recognized at end of year $ 15.2 $ 3.2 $ (9.2) $ (7.5) The following table reflects the components of the net amount recognized in the Consolidated Statements of Condition: Accrued benefit cost $ -- $ 3.2 $ -- $ (7.5) Accrued benefit liability (15.8) (25.4) (12.8) (3.2) Intangible assets 3.3 4.1 3.1 3.2 - -------------------------------------------------------------------------------------------------------------------------------- Net liability recognized (12.5) (18.1) (9.7) (7.5) Accumulated other comprehensive income 27.7 21.3 0.4 -- Contributions from measurement date to end of year -- -- 0.1 -- - -------------------------------------------------------------------------------------------------------------------------------- Net amount recognized at end of year $ 15.2 $ 3.2 $ (9.2) $ (7.5) Increase in minimum liability included in other comprehensive income $ 6.4 $ 21.3 $ 0.4 $ -- Postretirement benefits --------------------------- (in millions) 2003 2002 - ---------------------------------------------------------------------------------------------------------- The following table reflects the net amount recognized in the Consolidated Statements of Condition: Unrecognized net actuarial loss/(gain) $ 14.3 $ 17.8 Unrecognized net transition obligation/(asset) -- -- Unrecognized prior service cost -- -- Contributions from measurement date to end of year -- -- - -------------------------------------------------------------------------------------------------------- Net amount recognized at end of year $ (28.8) $ (28.2) The following table reflects the components of the net amount recognized in the Consolidated Statements of Condition: Accrued benefit cost $ (28.8) $ (28.2) Accrued benefit liability -- -- Intangible assets -- -- - -------------------------------------------------------------------------------------------------------- Net liability recognized (28.8) (28.2) Accumulated other comprehensive income -- -- Contributions from measurement date to end of year -- -- - -------------------------------------------------------------------------------------------------------- Net amount recognized at end of year $ (28.8) $ (28.2) Increase in minimum liability included in other comprehensive income $ -- $ --
Pension benefits SERP benefits ------------------------------------------------------------------------------ (in millions) 2003 2002 2001 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- Weighted average assumptions used to determine net periodic benefit cost were as follows: Discount rate 6.75% 7.25% 7.25% 6.75% 7.25% 7.25% Expected return on plan assets 8.50 9.50 9.50 -- -- -- Rate of compensation increase 4.50 4.50 4.50 4.50 4.50 4.50 Components of net periodic benefit cost: Service cost $ 5.2 $ 4.6 $ 3.6 $ 0.5 $ 0.3 $ 0.3 Interest cost 8.8 8.4 7.7 1.1 1.0 0.8 Expected return on plan assets (11.0) (11.2) (10.6) -- -- -- Amortization of transition obligation/(asset) (0.8) (0.8) (0.8) 0.1 0.1 0.1 Amortization of prior service cost 0.8 0.8 0.8 0.3 0.4 0.3 Recognized actuarial (gain)/loss -- -- (0.8) 0.2 0.2 0.0 - -------------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 3.0 $ 1.8 $ (0.1) $ 2.2 $ 2.0 $ 1.5
Postretirement benefits ----------------------------------- (in millions) 2003 2002 2001 - -------------------------------------------------------------------------------------- Weighted average assumptions used to determine net periodic benefit cost were as follows: Discount rate 6.75% 7.25% 7.25% Components of net periodic benefit cost: Service cost $ 0.9 $ 0.7 $ 0.6 Interest cost 2.5 2.4 2.0 Recognized actuarial (gain)/loss 0.5 0.2 -- - -------------------------------------------------------------------------------------- Net periodic benefit cost $ 3.9 $ 3.3 $ 2.6
The following table shows the assumed health care cost trend rates, for measurement purposes, at December 31.
2003 2002 - ------------------------------------------------------------------------------------- Health care cost trend rate assumed for next year 10% 11% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5% 5% Year that the rate reaches the ultimate trend rate 2008 2008
The following table shows what effect a one-percentage-point change in the assumed health care trend rate would have.
(in millions) 1% increase 1% decrease - ------------------------------------------------------------------------------------ Effect on total service and interest cost components of net periodic postretirement health care benefit cost $ 0.1 $ (0.1) Effect on accumulated postretirement benefit obligation for health care benefits 1.8 (1.6)
64 Wilmington Trust Corporation The following table reflects contributions expected to be made to the respective plans in 2004:
Pension SERP Postretirement benefits benefits benefits - -------------------------------------------------------------------------------- Expected employer contributions $--* $0.5 $3.0 Expected employee contributions -- -- 0.7
*Management's current position is to make required contributions to the qualified pension plan under Internal Revenue Service guidelines. There are no required contributions for 2004. Management reserves the right, however, to consider emerging information relative to the plan as well as overall corporate cash and tax strategies in determining whether to modify this decision at a later date. THRIFT SAVINGS PLAN The Wilmington Trust Thrift Savings Plan covers all full-time staff members who elect to participate in the plan. Eligible staff members may contribute from 1% to 15% of their annual base pay. The first 6% of each staff member's pay is eligible for matching contributions from the Corporation of $.50 on each $1.00. The amounts contributed by the Corporation to this plan were $3.2 million, $3.0 million, and $2.8 million in 2003, 2002, and 2001, respectively. NOTE 16: INCOME TAXES The following table provides a reconciliation of the statutory income tax to the income tax expense included in the Consolidated Statements of Income.
For the year ended December 31 (in millions) 2003 2002 2001 - ---------------------------------------------------------------------------------------------- Income before taxes and cumulative effect of change in accounting principle, less minority interest $206.6 $206.2 $190.1 Income tax at statutory rate of 35% $ 72.3 $ 72.2 $ 66.5 Tax effect of tax-exempt and dividend income (3.1) (3.3) (4.3) State taxes, net of federal tax benefit 3.0 3.9 3.0 Other -- 0.2 0.8 - ---------------------------------------------------------------------------------------------- Total income taxes $ 72.2 $ 73.0 $ 66.0 Taxes currently payable: Federal $ 74.2 $ 63.6 $ 64.3 State 3.1 3.5 4.6 Foreign 0.2 0.1 -- Deferred taxes payable (benefit): Federal (6.8) 3.3 (2.9) State 1.5 2.5 -- - ---------------------------------------------------------------------------------------------- Total income taxes $ 72.2 $ 73.0 $ 66.0
The Corporation adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as of January 1, 2001. The cumulative effect of the adoption was a $1.1 million increase to consolidated income net of $584,000 of tax expense. The common stock issued under employment benefit plans in the Consolidated Statements of Changes in Stockholders' Equity for 2003, 2002, and 2001 includes tax benefits of $0.8 million, $1.4 million, and $1.7 million, respectively, which is recorded as a direct credit to equity. The following table shows the significant components of deferred tax liabilities and assets.
For the year ended December 31 (in millions) 2003 2002 - ----------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Prepaid VEBA costs $ -- $ 8.8 Automobile and equipment leases 1.4 5.0 Partnerships 23.0 14.3 Market valuation on investment securities 0.8 6.7 Pension and SERP 2.1 -- Other 3.2 3.6 - ----------------------------------------------------------------------- Total deferred tax liabilities 30.5 38.4 DEFERRED TAX ASSETS: Loan loss provision 31.5 29.8 OPEB obligation 10.1 9.9 Unearned fees 10.1 9.6 Pension and SERP -- 1.5 Additional minimum pension liability 9.7 7.4 Other 4.2 1.9 - ----------------------------------------------------------------------- Total deferred tax assets 65.6 60.1 Net deferred tax assets $35.1 $21.7
No valuation allowance was recognized for the deferred tax assets of December 31, 2003, and 2002. Management believes it is more likely than not that the deferred tax assets will be realized. 2003 ANNUAL REPORT 65 Wilmington Trust Corporation NOTE 17: EARNINGS PER SHARE The following table shows the computation of basic and diluted earnings per share.
(in millions) 2003 2002 2001 - ------------------------------------------------------------------------------------------------- Numerator: Net income $ 134.4 $ 133.2 $ 125.2 Denominator: Denominator for basic earnings per share-- weighted average shares 65.9 65.6 65.1 Effect of dilutive securities: Employee stock options 0.6 0.7 0.8 - ------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share--adjusted weighted average shares and assumed conversions 66.5 66.3 65.9 Basic earnings per share $ 2.04 $ 2.03 $ 1.92 Diluted earnings per share $ 2.02 $ 2.01 $ 1.90
The number of anti-dilutive stock options excluded from the calculation above were 2.0 million, 1.1 million, and 0.7 million for 2003, 2002, and 2001, respectively. NOTE 18: SEGMENT REPORTING For the purposes of segment reporting, the Corporation manages its business in four segments. There is a segment for each of the Corporation's three businesses, which are Regional Banking, Wealth Advisory Services, and Corporate Client Services, as well as a segment for Affiliate Money Managers. This segment reporting methodology was first implemented for the three and nine months ended September 30, 2003, and included in the Form 10-Q filed by the Corporation with the Securities and Exchange Commission on November 14, 2003. Segment reporting for the full-year 2003 has been revised to reflect that change, and all prior period amounts have been restated accordingly. The new methodology employs activity-based costing principles to assign corporate overhead expenses to each segment. In addition, funds transfer pricing concepts are used to credit and charge segments for funds provided and funds used. The Regional Banking segment includes lending, deposit-taking, and branch banking in the Corporation's primary banking markets of Delaware, southeastern Pennsylvania, and Maryland's Eastern Shore. It also includes institutional deposit-taking on a national basis. Lending activities include commercial loans, commercial and residential mortgages, and construction and consumer loans. Deposit products include demand checking, certificates of deposit, negotiable order of withdrawal accounts, and various savings and money market accounts. The Wealth Advisory Services segment includes financial planning, asset management, investment counseling, trust services, estate settlement, private banking, tax preparation, mutual fund services, broker-dealer services, and insurance services. Results from Balentine & Company, which the Corporation acquired in January 2002, are consolidated in the Wealth Advisory Services segment. The Corporate Client Services segment includes a variety of trust, custody, and administrative services that support capital markets transactions, entity management, and retirement plan assets. Results of SPV Management Limited, which the Corporation acquired in April 2002, are consolidated in the Corporate Client Services segment. The Affiliate Money Managers segment includes contributions from Cramer Rosenthal McGlynn (CRM) and Roxbury Capital Management (RCM), which are based on the Corporation's partial ownership interest in each. Services provided by these two affiliates include fixed-income and equity investing services and investment portfolio management services. Neither CRM's or RCM's results are consolidated in the Corporation's financial statements. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the Consolidated Financial Statements in the Corporation's Annual Report to Shareholders for 2003. The Corporation evaluates performance based on profit or loss from operations before income taxes and without including nonrecurring gains and losses. The Corporation generally records intersegment sales and transfers as if the sales or transfers were to third parties (e.g., at current market prices). Profit or loss from infrequent events, such as the sale of a business, is reported separately for each segment. 66 Wilmington Trust Corporation The following table reflects financial data by segment for the years 2003, 2002,and 2001.
Wealth Corporate Affiliate Regional Advisory Client Money (in millions) Banking Services Services Managers Totals - ---------------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2003 Net interest income $ 245.5 $ 25.8 $ 11.7 $ (5.9) $ 277.1 Provision for loan losses (20.7) (0.9) -- -- (21.6) - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision 224.8 24.9 11.7 (5.9) 255.5 ADVISORY FEES: Wealth Advisory Services 2.5 128.0 9.9 -- 140.4 Corporate Client Services 1.3 -- 66.0 -- 67.3 Affiliate managers -- -- -- 3.0 3.0 - ---------------------------------------------------------------------------------------------------------------------------------- Advisory fees 3.8 128.0 75.9 3.0 210.7 Amortization of affiliate other intangibles -- (0.6) (0.5) (0.6) (1.7) - ---------------------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of affiliate other intangibles 3.8 127.4 75.4 2.4 209.0 Other noninterest income 51.6 1.7 1.2 -- 54.5 Securities gains/(losses) 0.6 0.1 -- -- 0.7 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 280.8 154.1 88.3 (3.5) 519.7 Noninterest expense (139.1) (115.8) (57.1) -- (312.0) - ---------------------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes $ 141.7 $ 38.3 $ 31.2 $ (3.5) $ 207.7 Depreciation and amortization $ 23.3 $ 7.0 $ 5.4 $ 0.6 $ 36.3 Investment in equity method investees $ -- $ -- $ -- $ 242.7 $ 242.7 Segment average assets $6,998.4 $1,078.2 $ 210.0 $ 242.9 $8,529.5 -------- -------- -------- -------- -------- FOR THE YEAR ENDED DECEMBER 31, 2002 Net interest income $ 245.4 $ 25.3 $ 11.5 $ (5.7) $ 276.5 Provision for loan losses (21.1) (0.9) -- -- (22.0) - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision 224.3 24.4 11.5 (5.7) 254.5 ADVISORY FEES: Wealth Advisory Services 3.2 113.5 10.2 -- 126.9 Corporate Client Services 1.8 -- 62.5 -- 64.3 Affiliate managers -- -- -- 16.3 16.3 - ---------------------------------------------------------------------------------------------------------------------------------- Advisory fees 5.0 113.5 72.7 16.3 207.5 Amortization of affiliate other intangibles -- (0.6) (0.4) (0.3) (1.3) - ---------------------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of affiliate other intangibles 5.0 112.9 72.3 16.0 206.2 Other noninterest income 51.3 1.5 1.2 -- 54.0 Securities gains/(losses) 2.0 -- -- -- 2.0 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 282.6 138.8 85.0 10.3 516.7 Noninterest expense (152.2) (102.4) (54.1) (1.2) (309.9) - ---------------------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes $ 130.4 $ 36.4 $ 30.9 $ 9.1 $ 206.8 Depreciation and amortization $ 25.9 $ 7.2 $ 5.5 $ 0.3 $ 38.9 Investment in equity method investees $ -- $ -- $ -- $ 242.1 $ 242.1 Segment average assets $6,259.8 $ 995.0 $ 173.1 $ 233.1 $7,661.0 FOR THE YEAR ENDED DECEMBER 31, 2001 Net interest income $ 231.9 $ 26.3 $ 9.2 $ (8.5) $ 258.9 Provision for loan losses (19.0) (0.9) -- -- (19.9) - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision 212.9 25.4 9.2 (8.5) 239.0 ADVISORY FEES: Wealth Advisory Services 3.6 93.4 12.6 -- 109.6 Corporate Client Services 1.2 -- 53.7 -- 54.9 Affiliate managers -- -- -- 20.5 20.5 - ---------------------------------------------------------------------------------------------------------------------------------- Advisory fees 4.8 93.4 66.3 20.5 185.0 Amortization of affiliate goodwill and other intangibles -- -- -- (8.2) (8.2) - ---------------------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of affiliate goodwill and other intangibles 4.8 93.4 66.3 12.3 176.8 Other noninterest income 48.4 0.5 0.8 -- 49.7 Securities gains/(losses) 1.3 0.1 0.1 -- 1.5 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 267.4 119.4 76.4 3.8 467.0 Noninterest expense (145.5) (85.7) (45.6) (0.1) (276.9) - ---------------------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes $ 121.9 $ 33.7 $ 30.8 $ 3.7 $ 190.1 Depreciation and amortization $ 22.7 $ 4.7 $ 4.0 $ 8.3 $ 39.7 Investment in equity method investees $ -- $ -- $ -- $ 221.2 $ 221.2 Segment average assets $5,932.9 $ 941.5 $ 149.0 $ 205.8 $7,229.2
2003 ANNUAL REPORT 67 Wilmington Trust Corporation NOTE 19: PARENT COMPANY-ONLY FINANCIAL STATEMENTS The following tables show the Statements of Condition, Income, and Cash Flows for the parent company. STATEMENTS OF CONDITION
For the year ended December 31 (in millions) 2003 2002 - -------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 11.8 $ 0.7 Investment in subsidiaries 896.0 788.3 Investment securities available for sale 173.2 5.6 Advance to subsidiary 96.8 96.9 Income taxes receivable 2.3 7.9 Other assets 3.6 3.2 - -------------------------------------------------------------------------------------- Total assets $ 1,183.7 $ 902.6 Liabilities and stockholders' equity: Liabilities $ 3.3 $ 2.3 Line of credit 8.0 34.0 Long-term debt 371.6 125.0 Stockholders' equity 800.8 741.3 - -------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,183.7 $ 902.6
STATEMENTS OF INCOME
For the year ended December 31 (in millions) 2003 2002 2001 - -------------------------------------------------------------------------------------- Income: Dividend from subsidiaries $ 78.6 $ 84.7 $ 83.8 Interest on advance to subsidiaries 2.6 2.9 4.3 Interest 4.8 0.1 0.2 - -------------------------------------------------------------------------------------- Total income 86.0 87.7 88.4 Expense: Interest on other borrowings 0.3 0.6 0.9 Interest on long-term debt 11.2 8.3 8.3 Salaries and employment benefits -- 0.1 0.1 Other noninterest expense 1.8 1.6 1.2 - -------------------------------------------------------------------------------------- Total expense 13.3 10.6 10.5 Income before income tax benefit and equity in undistributed income of subsidiaries 72.7 77.1 77.9 Applicable income tax benefit (2.0) (2.7) (2.1) Equity in undistributed income of subsidiaries 59.7 53.4 45.2 - -------------------------------------------------------------------------------------- Net income $ 134.4 $ 133.2 $ 125.2
STATEMENTS OF CASH FLOWS
For the year ended December 31 (in millions) 2003 2002 2001 - -------------------------------------------------------------------------------------- Operating activities: Net income $ 134.4 $ 133.2 $ 125.2 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (59.7) (53.4) (45.2) Compensation expense--nonemployee stock options -- 0.1 0.1 Amortization of investment securities available for sale premiums 0.6 -- -- Decrease/(increase) in other assets 6.0 0.3 (0.2) Increase/(decrease) in other liabilities 1.2 (0.2) 0.2 - -------------------------------------------------------------------------------------- Net cash provided by operating activities 82.5 80.0 80.1 Investing activities: Proceeds from sales of investment securities available for sale 68.5 69.0 45.0 Proceeds from maturities of investment securities available for sale 20.6 -- -- Purchases of investment securities available for sale (257.7) (59.9) (59.5) Capital contribution to subsidiaries (62.7) (5.3) (23.0) Advance to subsidiary (6.8) (20.7) (17.3) Repayment of advance to subsidiary 6.9 11.9 10.1 Formation of subsidiary -- (5.2) -- Purchase of indirect subsidiary -- -- (1.0) - -------------------------------------------------------------------------------------- Net cash used for investing activities (231.2) (10.2) (45.7) Financing activities: Cash dividends (70.2) (66.0) (61.6) Net (decrease)/increase in line of credit (26.0) 0.5 16.5 Proceeds from issuance of long-term debt 246.6 -- -- Proceeds from common stock issued under employment benefit plans 10.5 11.1 14.2 Payments for common stock acquired through buybacks (1.1) (18.7) (3.5) - -------------------------------------------------------------------------------------- Net cash used for financing activities 159.8 (73.1) (34.4) (Decrease)/increase in cash and cash equivalents 11.1 (3.3) -- Cash and cash equivalents at beginning of year 0.7 4.0 4.0 - -------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 11.8 $ 0.7 $ 4.0
68 Wilmington Trust Corporation M A N A G E M E N T ' S R E S P O N S I B I L I T Y F O R F I N A N C I A L R E P O R T I N G The management of Wilmington Trust Corporation (the Corporation) is responsible for the financial statements and the other financial information included in this Annual Report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and include amounts based upon management's best judgment where necessary. Management maintains a system of internal controls and procedures designed to provide reasonable assurance as to the integrity and reliability of financial records and the protection of assets. The system of internal control is reviewed continually for its effectiveness and is revised, when appropriate, due to changing circumstances and requirements. Independent auditors are appointed by the Audit Committee of the Board of Directors, composed exclusively of outside directors, to audit the financial statements in accordance with auditing standards generally accepted in the United States and to independently assess the fair presentation of the Corporation's financial position, results of operations, and cash flows. The report of the independent auditors appears in this Annual Report. The Audit Committee is responsible for reviewing and monitoring the Corporation's accounting and reporting practices. The Audit Committee meets periodically with management, internal auditors, and the independent auditors to discuss specific accounting, financial reporting, and internal control matters. Both the internal auditors and the independent auditors have direct access to the Audit Committee. Both the chief executive officer and the chief financial officer have provided certifications regarding the quality of the Corporation's public disclosures in all periodic reports filed with the Securities and Exchange Commission that have required these certifications. /s/ Ted T. Cecala - ------------------------------------ Ted T. Cecala Chairman and Chief Executive Officer /s/ Robert V.A. Harra Jr. - ------------------------------------ Robert V.A. Harra Jr. President and Chief Operating Officer /s/ David R. Gibson - ------------------------------------ David R. Gibson Chief Financial Officer and Executive Vice President, Finance and Administration 2003 ANNUAL REPORT 69 INDEPENDENT AUDITORS' REPORT The Board of Directors Wilmington Trust Corporation: We have audited the accompanying consolidated statements of condition of Wilmington Trust Corporation and subsidiaries (the Corporation) as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders' equity, and cash flows each of the years in the three year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wilmington Trust Corporation and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in Notes 1, 7, and 16 to the consolidated financial statements, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets in 2002 and SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities in 2001. /s/ KPMG LLP March 1, 2004 70 Wilmington Trust Corporation DIRECTORS AND COMMITTEES BOARD OF DIRECTORS CAROLYN S. BURGER Former President and Chief Executive Officer, Bell Atlantic Delaware; Former Principal, CB Associates, Inc.; Director, PJM Interconnection, L.L.C. TED T. CECALA Chairman of the Board and Chief Executive Officer; Member, Board of Managers, Cramer Rosenthal McGlynn, LLC, Roxbury Capital Management, LLC, and Balentine Delaware Holding Company, LLC RICHARD R. COLLINS Chairman, Collins, Inc. Retired, Chief Executive Officer, and Chief Operating Officer, American Life Insurance Company CHARLES S. CROMPTON JR., ESQUIRE Attorney, Counsel, Law Firm of Potter, Anderson and Corroon EDWARD B. DU PONT Private Investor; Director, E.I. du Pont de Nemours and Company R. KEITH ELLIOTT Retired Director, Chairman, and CEO, Hercules Incorporated; Director, Computer Task Group, Checkpoint Systems, Inc., Windsor Tech, Inc., and The Institute for Defense Analyses ROBERT V.A. HARRA JR. President and Chief Operating Officer REX L. MEARS President, Ray S. Mears and Sons, Inc. HUGH E. MILLER Retired Vice Chairman, ICI Americas Incorporated; Director, MGI PHARMA, Inc. STACEY J. MOBLEY Senior Vice President, General Counsel, and Chief Administrative Officer, E.I. du Pont de Nemours and Company DR. DAVID P. ROSELLE President, University of Delaware H. RODNEY SHARP III Retired Manager, E.I. du Pont de Nemours and Company; Director, E.I. du Pont de Nemours and Company THOMAS P. SWEENEY, ESQUIRE Attorney, Member, Law Firm of Richards, Layton and Finger, P.A. ROBERT W. TUNNELL JR. Managing Partner, Tunnell Companies, L.P. WALTER D. MERTZ* Retired Senior Vice President STANDING COMMITTEES EXECUTIVE COMMITTEE Ted T. Cecala, Chair Charles S. Crompton Jr. Edward B. du Pont R. Keith Elliott Robert V.A. Harra Jr. Rex L. Mears Robert W. Tunnell Jr. AUDIT COMMITTEE Carolyn S. Burger, Chair Richard R. Collins Edward B. du Pont R. Keith Elliott Rex L. Mears COMPENSATION COMMITTEE Stacey J. Mobley,Chair Carolyn S. Burger Charles S. Crompton Jr. R. Keith Elliott H. Rodney Sharp III NOMINATING AND CORPORATE GOVERNANCE COMMITTEE Hugh E. Miller,Chair David P. Roselle H. Rodney Sharp III Thomas P. Sweeney DIVIDEND DECLARATION COMMITTEE Ted T. Cecala, Chairman Robert V.A. Harra Jr. *Associate Director of Wilmington Trust Company 2003 ANNUAL REPORT 71 Wilmington Trust Corporation OFFICERS AND SUBSIDIARIES WILMINGTON TRUST PRINCIPAL OFFICERS TED T. CECALA Chairman of the Board and Chief Executive Officer ROBERT V.A. HARRA JR. President and Chief Operating Officer ROBERT J. CHRISTIAN Chief Investment Officer and Executive Vice President, Investment Strategy HOWARD K. COHEN Executive Vice President, Corporate Client Services WILLIAM J. FARRELL II Executive Vice President, Information Technology and Trust Operations DAVID R. GIBSON Chief Financial Officer and Executive Vice President, Finance and Administration ROBERT A. MATARESE Executive Vice President, Credit Policy and Administration RITA C. TURNER Executive Vice President, Client Services and Marketing RODNEY P. WOOD Executive Vice President, Wealth Advisory Services REBECCA A. DEPORTE Senior Vice President, Personal Financial Services MICHAEL A. DIGREGORIO Senior Vice President, Secretary, and Chief Counsel I. GAIL HOWARD Senior Vice President, Human Resources BRADLEY A. HUBLEIN Senior Vice President, Commercial Banking Delaware/Maryland GERALD F. SOPP Vice President and Controller RONALD K. PENDLETON Auditor REGIONAL PRESIDENTS ROBERT M. BALENTINE Chairman and Chief Executive Officer, Balentine & Company Regional President, Georgia, and Wealth Strategy and Family Offices ALAN K. BONDE Western United States MARK A. GRAHAM Pennsylvania and New Jersey PETER E. "TONY" GUERNSEY JR. Northeastern United States and National Expansion RICHARD F. KLUMPP President and CEO, Wilmington Trust SP Services, Inc. MARTIN MCDERMOTT CEO and Managing Director, SPV Management Limited KEMP C. STICKNEY Florida OPERATING SUBSIDIARIES WILMINGTON TRUST COMPANY Brandywine Finance Corporation Brandywine Insurance Agency, Inc. Brandywine Life Insurance Company, Inc. Wilmington Trust SP Services, Inc. Wilmington Trust SP Services (Delaware), Inc. Wilmington Trust SP Services (Nevada), Inc. Wilmington Trust SP Services (New York), Inc. Special Services Delaware, Inc. Wilmington Brokerage Services Company Wilmington Trust Global Services, Ltd. Wilmington Trust (Cayman), Ltd. Wilmington Trust (Channel Islands), Ltd. RODNEY SQUARE MANAGEMENT CORPORATION WILMINGTON TRUST OF PENNSYLVANIA WILMINGTON TRUST FSB WT INVESTMENTS, INC. BALENTINE HOLDINGS, INC. Balentine Delaware Holding Company, LLC Balentine & Company, LLC Balentine & Company of Tennessee, L.L.C. Balentine Management, Inc. WILMINGTON TRUST (UK) LIMITED SPV Management Limited SPV Management (Dublin) Limited SPV Management (Italia) SRL SPV Jersey Limited SPV Cayman Limited 72 Wilmington Trust Corporation STOCKHOLDER INFORMATION CORPORATE HEADQUARTERS Wilmington Trust Center Rodney Square North 1100 North Market Street Wilmington, DE 19890-0001 888.456.9361 wilmingtontrust.com COMMON STOCK Wilmington Trust Corporation common stock is traded under the symbol WL on the New York Stock Exchange. DIVIDENDS Dividends usually are declared in the first month of each quarter to stockholders of record as of the first business day in February, May, August, and November. Dividend payment dates usually are two weeks later. Wilmington Trust has paid cash dividends on its common stock since 1908; paid quarterly dividends every year since 1916; and increased the cash dividend every year since 1982. STOCK TRANSFER AGENT, DIVIDEND REINVESTMENT AGENT, AND REGISTRAR OF STOCK Inquiries relating to stockholder records, stock transfers, changes of ownership, changes of address, duplicate mailings, dividend payments, and the dividend reinvestment plan should be directed to the stock transfer agent: Wells Fargo Bank, N.A. Telephone:800.999.9867 Mailing Address: P.O. Box 64854 St. Paul, MN 55164 Street Address: 161 North Concord Exchange South St. Paul, MN 55075 DIVIDEND REINVESTMENT AND VOLUNTARY STOCK PURCHASE PLAN The Corporation offers a plan under which participating stockholders can purchase additional shares of the Corporation's common stock through automatic reinvestment of their regular quarterly cash dividends and/or voluntary cash payments. All commissions and fees connected with the purchase and safekeeping of the shares are paid by the Corporation. For details of the plan, please contact the stock transfer agent. DUPLICATE MAILINGS You may receive more than one copy of this annual report due to multiple accounts within your household. The Corporation is required to mail an annual report to each name on our stockholder list unless the stockholder requests that duplicate mailings be eliminated. To eliminate duplicate mailings, please send a written request to the stock transfer agent. ANNUAL MEETING The annual meeting of the Corporation's stockholders will be held at the Wilmington Trust Plaza, 301 West 11th Street, Wilmington, Delaware, on Thursday, April 15, 2004, at 10:00 a.m. INFORMATION REQUESTS Analysts, investors, and others who seek financial information, including requests for the annual report on Form 10-K filed with the Securities and Exchange Commission, should contact Ellen J. Roberts, Vice President, Investor Relations, 302.651.8069. Members of the news media who seek information about the Corporation should contact J. William Benintende, Vice President, Public Relations, 302.651.8268. (C) 2004 Wilmington Trust Corporation. Affiliates in California, Delaware, Florida, Georgia, Maryland, Nevada, New York, and Pennsylvania. Members FDIC. Other offices in Tennessee, London, Channel Islands, and Cayman Islands. Authorized to conduct business in Ireland, Italy, Luxembourg, and the Netherlands. WILMINGTON TRUST OFFICE LOCATIONS CALIFORNIA Costa Mesa 714.384.4150 Los Angeles 310.300.3050 DELAWARE 43 offices throughout the state 877.836.9206 FLORIDA North Palm Beach 561.630.1477 Palm Beach 561.514.6730 Stuart 772.286.3686 Vero Beach 772.234.1700 GEORGIA Atlanta 404.760.2100 MARYLAND Baltimore 410.468.4325 NEVADA Las Vegas 702.866.2200 NEW YORK Manhattan 212.751.9500 PENNSYLVANIA Doylestown 267.880.7000 Philadelphia 215.419.6570 Villanova 610.520.1430 West Chester 610.430.2202 INTERNATIONAL London +44.20.7614.1111 Channel Islands +44.15.3449.5555 Cayman Islands 345.946.4091 2003 ANNUAL REPORT Wilmington Trust Corporation Corporate Headquarters Rodney Square North 1100 North Market Street Wilmington, DE 19890-0001 888.456.9361 wilmingtontrust.com EX-21 9 w94679exv21.txt SUBSIDIARIES OF WILMINGTON TRUST CORPORATION SUBSIDIARIES OF WILMINGTON TRUST CORPORATION EXHIBIT 21 Wilmington Trust Corporation has seven direct subsidiaries, Wilmington Trust Company, a Delaware-chartered bank and trust company, Wilmington Trust of Pennsylvania, a Pennsylvania-chartered bank and trust company, Wilmington Trust FSB, a Federally-chartered savings bank headquartered in Maryland, Rodney Square Management Corporation, a registered investment adviser, WT Investments, Inc. and Balentine Holdings, Inc., Delaware holding companies, and Wilmington Trust (UK) Limited, a holding company organized under the laws of England. Wilmington Trust Company has the following active direct subsidiaries:
Name Jurisdiction -------------------------------------------- --------------- 1. Brandywine Insurance Agency, Inc. Delaware 2. Brandywine Finance Corporation Delaware 3. Brandywine Life Insurance Company, Inc. Delaware 4. Compton Realty Corporation Delaware 5. Wilmington Trust SP Services, Inc.. Delaware 6. 100 West Tenth Street Corporation Delaware 7. Wilmington Trust SP Services (New York), Inc. Delaware 8. Wilmington Brokerage Services Company Delaware 9. Wilmington Trust Global Services, Ltd. Delaware 10. Wilmington Trust (Cayman), Ltd. Cayman Islands 11. Wilmington Trust (Channel Islands), Ltd. Channel Islands
Wilmington Trust SP Services, Inc. has three wholly-owned subsidiaries, Special Services Delaware, Inc. and Wilmington Trust SP Services (Delaware), Inc., incorporated in Delaware, and Wilmington Trust SP Services (Nevada), Inc., incorporated in Nevada. Balentine Holdings, Inc. owns 100% of the equity interests in Balentine Delaware Holding Company, LLC, a Delaware limited liability company, and all of the stock of Balentine Management, Inc., a Delaware corporation. Balentine Delaware Holding Company, LLC owns 100% of Balentine & Company, LLC, a limited liability company organized under Georgia law, and a 45.45% interest in Balentine & Company of Tennessee, L.L.C., a limited liability company organized under Tennessee law. Wilmington Trust (UK) Limited owns SPV Management Limited and SPV Advisers Limited, corporations organized under the laws of England. SPV Management Limited owns Lord SPV Limited, a corporation organized under the laws of England, SPV Management (Dublin) Limited, a corporation organized under the laws of Ireland, SPV Management (Italia) SRL, a corporation organized under the laws of Italy, SPV Jersey Limited, a corporation organized under the laws of the Channel Islands, and SPV Management Cayman Limited, a corporation organized under the laws of the Cayman Islands. SPV Management Limited also owns a 51% interest in Bedell SPV Management (Jersey) Limited, a corporation organized under the laws of the Channel Islands. EX-23 10 w94679exv23.txt CONSENT OF KPMG LLP CONSENT OF KPMG LLP EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Wilmington Trust Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 33-43675, 333-04042, 333-69479, 333-80009, 333-37928, 333-61096 and 333-86748) on Form S-8 and Registration Statements (Nos. 333-69453 and 333-76332) on Form S-3 of Wilmington Trust Corporation of our report dated March 1, 2004, with respect to the consolidated statements of condition of Wilmington Trust Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2003, which report appears in the December 31, 2003 annual report on Form 10-K of Wilmington Trust Corporation. Our report refers to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets in 2002 and SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities in 2001. /s/ KPMG LLP Philadelphia, Pennsylvania March 10, 2004 EXHIBIT 23 EX-99.1 11 w94679exv99w1.txt SECTIONS 302 CERTIFICATIONS SECTION 302 CERTIFICATIONS EXHIBIT 99.1 CERTIFICATIONS I, Ted T. Cecala, Chairman of the Board and Chief Executive Officer of Wilmington Trust Corporation, hereby certify that: 1. I have reviewed this annual report on Form 10-K of Wilmington Trust Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 26, 2004 /s/ Ted T. Cecala ------------------------------------------------- Ted T. Cecala Chairman of the Board and Chief Executive Officer CERTIFICATIONS I, David R. Gibson, Executive Vice President and Chief Financial Officer of Wilmington Trust Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of Wilmington Trust Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s)s and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 26, 2004 /s/ David R. Gibson ---------------------------------------------------- David R. Gibson Executive Vice President and Chief Financial Officer EX-99.2 12 w94679exv99w2.txt SECTION 906 CERTIFICATIONS SECTION 906 CERTIFICATION EXHIBIT 99.2 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES - OXLEY ACT OF 2003 The undersigned certify that, to their knowledge, the Form 10-K of Wilmington Trust Corporation ("Wilmington Trust") for 2003 fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 and that the information contained in that report fairly presents, in all material respects, the financial condition and results of operation of Wilmington Trust. /s/ Ted T. Cecala ------------------------------------------------- Ted T. Cecala Chairman of the Board and Chief Executive Officer /s/ David R. Gibson ---------------------------------------------------- David R. Gibson Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----