-----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, SDPJjFYH4a8bJJrP+T0J/y5UkX+BBMeuRX7qv0pYN2mmmwW4T7gaKFollJLeIQEd wU7GtsWOHfvWNaC0z5V8Uw== 0000893220-04-002427.txt : 20041109 0000893220-04-002427.hdr.sgml : 20041109 20041109150407 ACCESSION NUMBER: 0000893220-04-002427 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14659 FILM NUMBER: 041129137 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-Q 1 w68089e10vq.txt FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _____________________ Commission File Number: 1-14659 WILMINGTON TRUST CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 51-0328154 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) RODNEY SQUARE NORTH, 1100 NORTH MARKET STREET, WILMINGTON, DELAWARE 19890 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (302) 651-1000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding as of September 30, 2004 ----- ------------------------------------ COMMON STOCK - PAR VALUE $1.00 67,356,350
WILMINGTON TRUST CORPORATION AND SUBSIDIARIES THIRD QUARTER 2004 FORM 10-Q TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1 Financial Statements (unaudited) Consolidated Statements of Condition 1 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3 Quantitative and Qualitative Disclosures About Market Risk 43 Item 4 Controls and Procedures 45 PART II. OTHER INFORMATION Item 1 Legal Proceedings 45 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 46 Item 3 Defaults upon Senior Securities 46 Item 4 Submission of Matters to a Vote of Security Holders 46 Item 5 Other Information 46 Item 6 Exhibits and Reports on Form 8-K 47
Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF CONDITION (unaudited) Wilmington Trust Corporation and Subsidiaries
--------------------------- September 30, December 31, (in millions) 2004 2003 - ----------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 217.7 $ 210.2 --------------------------- Federal funds sold and securities purchased under agreements to resell 332.1 3.8 --------------------------- Investment securities available for sale: U.S. Treasury and government agencies 447.1 470.0 Obligations of state and political subdivisions 9.9 12.9 Other securities 1,403.8 1,392.3 - ----------------------------------------------------------------------------------------------------- Total investment securities available for sale 1,860.8 1,875.2 --------------------------- Investment securities held to maturity: Obligations of state and political subdivisions (market values of $3.0 and $3.4 respectively) 2.8 3.1 Other securities (market values of $0.5 and $ 1.1 respectively) 0.4 1.1 - ----------------------------------------------------------------------------------------------------- Total investment securities held to maturity 3.2 4.2 --------------------------- Loans: Commercial, financial, and agricultural 2,428.6 2,275.2 Real estate-construction 759.0 699.8 Mortgage-commercial 1,186.6 1,078.2 - ----------------------------------------------------------------------------------------------------- Total commercial loans 4,374.2 4,053.2 --------------------------- Mortgage-residential 439.8 489.6 Consumer 1,182.6 1,077.1 Secured with liquid collateral 619.4 605.4 - ----------------------------------------------------------------------------------------------------- Total retail loans 2,241.8 2,172.1 --------------------------- Total loans net of unearned income 6,616.0 6,225.3 Reserve for loan losses (91.3) (89.9) - ----------------------------------------------------------------------------------------------------- Net loans 6,524.7 6,135.4 --------------------------- Premises and equipment, net 151.5 152.3 Goodwill, net of accumulated amortization of $29.8 in 2004 and 2003 325.6 243.2 Other intangible assets, net of accumulated amortization of $13.6 in 2004 and $11.1 in 2003 34.6 24.0 Accrued interest receivable 39.2 39.5 Other assets 141.5 132.4 - ----------------------------------------------------------------------------------------------------- Total assets $ 9,630.9 $ 8,820.2 ===========================
1 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004
----------------------------- September 30, December 31, (in millions) 2004 2003 - --------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 1,167.5 $ 1,025.5 Interest-bearing: Savings 358.1 369.0 Interest-bearing demand 2,342.4 2,364.1 Certificates under $100,000 762.3 788.3 Local CDs $100,000 and over 181.1 130.3 - --------------------------------------------------------------------------------------------- Total core deposits 4,811.4 4,677.2 National CDs $100,000 and over 2,177.9 1,900.0 - --------------------------------------------------------------------------------------------- Total deposits 6,989.3 6,577.2 ----------------------------- Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 1,111.6 820.5 U.S. Treasury demand 78.6 48.3 Line of credit -- 8.0 - --------------------------------------------------------------------------------------------- Total short-term borrowings 1,190.2 876.8 ----------------------------- Accrued interest payable 23.7 23.6 Other liabilities 126.5 134.5 Long-term debt 410.7 407.1 - --------------------------------------------------------------------------------------------- Total liabilities 8,740.4 8,019.2 ----------------------------- Minority interest -- 0.2 ----------------------------- Stockholders' equity: Common stock ($1.00 par value) authorized 150,000,000 shares; issued 78,528,346 78.5 78.5 Capital surplus 94.3 54.6 Retained earnings 999.1 948.4 Accumulated other comprehensive loss (20.0) (16.1) - --------------------------------------------------------------------------------------------- Total contributed capital and retained earnings 1,151.9 1,065.4 Less: Treasury stock, at cost, 11,171,996 and 12,465,014 shares, respectively (261.4) (264.6) - --------------------------------------------------------------------------------------------- Total stockholders' equity 890.5 800.8 ----------------------------- Total liabilities and stockholders' equity $ 9,630.9 $ 8,820.2 =============================
See Notes to Consolidated Financial Statements 2 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 CONSOLIDATED STATEMENTS OF INCOME (unaudited) Wilmington Trust Corporation and Subsidiaries
-------------------------------------------------------- For the three months ended For the nine months ended September 30, September 30, -------------------------------------------------------- (in millions; except per share data) 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME Interest and fees on loans $ 79.4 $ 74.0 $ 226.2 $ 227.9 Interest and dividends on investment securities: Taxable interest 16.3 14.3 48.1 43.9 Tax-exempt interest 0.1 0.3 0.4 0.7 Dividends 1.9 1.8 5.5 5.3 Interest on federal funds sold and securities purchased under agreements to resell 0.1 0.1 0.2 0.3 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 97.8 90.5 280.4 278.1 ----------------------------------------------------- Interest on deposits 14.9 14.7 40.4 50.3 Interest on short-term borrowings 5.4 4.0 12.4 11.1 Interest on long-term debt 3.5 3.7 9.6 10.0 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 23.8 22.4 62.4 71.4 ----------------------------------------------------- Net interest income 74.0 68.1 218.0 206.7 Provision for loan losses (2.9) (5.7) (11.6) (16.6) - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 71.1 62.4 206.4 190.1 ----------------------------------------------------- NONINTEREST INCOME Advisory fees: Wealth Advisory Services: Trust and investment advisory fees 27.4 24.9 81.1 70.9 Mutual fund fees 5.0 5.6 15.1 16.9 Planning and other services 4.6 5.0 17.8 14.5 - ------------------------------------------------------------------------------------------------------------------------------ Total Wealth Advisory Services 37.0 35.5 114.0 102.3 ----------------------------------------------------- Corporate Client Services: Capital markets services 7.1 7.5 23.3 21.4 Entity management services 5.8 5.2 16.8 15.4 Retirement services 2.9 2.4 8.9 7.1 Cash management services 1.4 1.3 4.6 3.9 - ------------------------------------------------------------------------------------------------------------------------------ Total Corporate Client Services 17.2 16.4 53.6 47.8 ----------------------------------------------------- Cramer Rosenthal McGlynn 2.5 1.3 7.1 3.2 Roxbury Capital Management 0.3 (0.1) 0.7 (2.3) - ------------------------------------------------------------------------------------------------------------------------------ Advisory fees 57.0 53.1 175.4 151.0 Amortization of affiliate other intangibles (0.6) (0.7) (1.5) (1.4) - ------------------------------------------------------------------------------------------------------------------------------ Advisory fees after amortization of affiliate other intangibles 56.4 52.4 173.9 149.6 ----------------------------------------------------- Service charges on deposit accounts 7.8 8.6 24.1 23.7 Loan fees and late charges 1.7 2.1 4.6 6.5 Card fees 2.1 2.1 6.5 7.1 Securities gains 0.6 -- 0.6 -- Other noninterest income 0.8 1.1 2.6 3.6 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 69.4 66.3 212.3 190.5 ----------------------------------------------------- Net interest and noninterest income 140.5 128.7 418.7 380.6 -----------------------------------------------------
3 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004
---------------------------------------------------------------- For the three months ended For the nine months ended September 30, September 30, ---------------------------------------------------------------- (in millions; except per share data) 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and wages 33.8 31.5 98.6 92.5 Incentives and bonuses 7.1 5.4 21.8 19.2 Employment benefits 10.3 8.8 31.2 27.3 Net occupancy 5.2 4.8 15.5 15.2 Furniture, equipment, and supplies 8.1 6.6 23.5 21.1 Advertising and contributions 1.9 1.4 6.2 6.1 Servicing and consulting fees 5.9 4.0 15.4 12.0 Travel, entertainment, and training 2.2 1.8 6.2 5.1 Originating and processing fees 2.1 2.1 6.2 5.8 Other noninterest expense 10.3 8.8 27.9 27.6 - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense 86.9 75.2 252.5 231.9 ---------------------------------------------------------------- NET INCOME Income before income taxes and minority interest 53.6 53.5 166.2 148.7 Income tax expense 19.2 18.8 58.9 51.5 - -------------------------------------------------------------------------------------------------------------------- Net income before minority interest 34.4 34.7 107.3 97.2 Minority interest -- 0.3 0.7 0.8 - -------------------------------------------------------------------------------------------------------------------- Net income $ 34.4 $ 34.4 $ 106.6 $ 96.4 ================================================================ Net income per share: basic $ 0.51 $ 0.52 $ 1.60 $ 1.46 ================================================================ diluted $ 0.50 $ 0.52 $ 1.57 $ 1.45 ================================================================ Weighted average shares outstanding: basic 67,321 65,956 66,596 65,814 diluted 68,468 66,670 67,805 66,348
See Notes to Consolidated Financial Statements 4 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Wilmington Trust Corporation and Subsidiaries
------------------------- For the nine months ended September 30, (in millions) 2004 2003 - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 106.6 $ 96.4 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 11.6 16.6 Provision for depreciation and other amortization 14.4 14.0 Amortization of other intangible assets 2.5 2.3 Minority interest in net income 0.7 0.8 Amortization of investment securities available for sale discounts and premiums 10.1 11.2 Deferred income taxes (0.7) 4.3 Originations of residential mortgages available for sale (59.2) (149.2) Gross proceeds from sales of residential mortgages 60.3 151.6 Gains on sales of residential mortgages (1.1) (2.4) Securities gains (0.6) -- (Increase)/decrease in other assets (2.4) 1.7 Decrease in other liabilities (5.7) (11.8) - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 136.5 135.5 ------------------------- INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 30.7 0.4 Proceeds from maturities of investment securities available for sale 995.4 890.0 Proceeds from maturities of investment securities held to maturity 1.0 0.5 Purchases of investment securities available for sale (1,027.0) (1,365.7) Investments in affiliates (15.7) (7.2) Cash paid for purchase of subsidiary (33.0) -- Purchase of minority interest (1.3) -- Purchases of residential mortgages (5.2) (2.7) Net increase in loans (395.7) (82.0) Purchases of premises and equipment (32.6) (19.1) Dispositions of premises and equipment 19.3 8.5 - ---------------------------------------------------------------------------------------------------------- Net cash used for investing activities (464.1) (577.3) -------------------------
5 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004
------------------------- For the nine months ended September 30, (in millions) 2004 2003 - -------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand, savings, and interest-bearing demand deposits 109.4 679.3 Net increase/(decrease) in certificates of deposit 302.7 (245.7) Net increase in federal funds purchased and securities sold under agreements to repurchase 291.1 269.5 Net increase in U.S. Treasury demand 30.3 13.7 Proceeds from issuance of long-term debt -- 250.2 Net decrease in line of credit (8.0) (23.5) Cash dividends (55.9) (52.3) Distributions to minority shareholders (0.8) (0.5) Proceeds from common stock issued under employment benefit plans, net of income taxes 14.2 9.1 Payments for common stock acquired through buybacks (19.6) (0.8) - ------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 663.4 899.0 --------------------- Effect of foreign currency translation on cash -- 0.1 --------------------- Increase in cash and cash equivalents 335.8 457.3 Cash and cash equivalents at beginning of period 214.0 248.9 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $549.8 $ 706.2 ===================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 62.3 $ 68.8 Taxes 65.7 48.0 In conjunction with the acquisition of Balentine & Company, LLC, Cramer Rosenthal McGlynn, LLC, Roxbury Capital Management, LLC, and Camden Partners Holdings, LLC, liabilities were assumed as follows: Book value of assets acquired $ 6.4 $ -- Goodwill and other intangible assets acquired 92.7 7.2 --------------------- Fair value of assets acquired 99.1 7.2 Common stock issued (48.4) ------- Cash paid (50.7) (7.2) - ------------------------------------------------------------------------------------------------------------ Liabilities assumed $ -- $ --
See Notes to Consolidated Financial Statements 6 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------- NOTE 1 - STOCK-BASED COMPENSATION PLANS - --------------------------------------- At September 30, 2004, we had three types of stock-based compensation plans, which are described in "Note 15" to the "Consolidated Financial Statements" included in our 2003 Annual Report to Shareholders. We apply Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for these plans. If compensation cost for our three types of stock-based compensation plans had been determined based on the fair value at the grant dates for awards under those plans consistent with the methods outlined in Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," our net income would have been as follows:
-------------------------------------------------------- For the three months ended For the nine months ended September 30, September 30, -------------------------------------------------------- (in millions, except per share amounts) 2004 2003 2004 2003 - ---------------------------------------------------------------------------------------------------------- Net income: As reported $ 34.4 $ 34.4 $ 106.6 $ 96.4 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1.3) (1.0) (3.9) (2.8) - --------------------------------------------------------------------------------------------------------- Pro forma net income $ 33.1 $ 33.4 $ 102.7 $ 93.6 Basic earnings per share: As reported $ 0.51 $ 0.52 $ 1.60 $ 1.46 Pro forma 0.49 0.51 1.54 1.42 Diluted earnings per share: As reported $ 0.50 $ 0.52 $ 1.57 $ 1.45 Pro forma 0.48 0.50 1.51 1.41
We made grants of restricted stock to certain employees. The value of the award is amortized into compensation expense over the applicable vesting period. Forfeitures are recorded as incurred. During the restriction period, award holders have the rights of stockholders, including the right to vote and receive cash dividends, but they cannot transfer ownership. We recognized expense in connection with restricted stock awards for the three- and nine-month periods ended September 30, 2004 of $0.0 million and $0.1 million, respectively. 7 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 NOTE 2 - ACCOUNTING AND REPORTING POLICIES - ------------------------------------------ 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, Wilmington Trust Company (WTC), Wilmington Trust of Pennsylvania, Wilmington Trust FSB, WT Investments, Inc. (WTI), Rodney Square Management Corporation, Wilmington Trust (UK) Limited, Balentine Holdings, Inc., and WTC's subsidiaries. The preparation of financial statements in conformity with GAAP requires us 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. We evaluate 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 Client Services fees, loan origination fees, and mortgage servicing assets. The consolidated financial statements presented herein should be read in conjunction with the "Notes to Consolidated Financial Statements" included in our 2003 Annual Report to Shareholders. Certain prior year amounts have been reclassified to conform to current year presentation. NOTE 3 - COMPREHENSIVE INCOME - ----------------------------- The following table depicts other comprehensive income as required by SFAS No. 130:
------------------------------------------------------ For the three months ended For the nine months ended September 30, September 30, ------------------------------------------------------ (in millions) 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------------------------ Net income $ 34.4 $ 34.4 $106.6 $ 96.4 Other comprehensive income, net of income taxes: Net unrealized holding gains/(losses) on securities 13.9 (16.0) (3.3) (10.2) Reclassification adjustment for securities gains included in net income (0.4) -- (0.4) -- Net unrealized holding gains arising during the period on derivatives used for cash flow hedge 0.1 -- 0.1 -- Reclassification adjustment for derivative gains included in net income (0.1) -- (0.2) (0.1) Foreign currency translation adjustments -- 0.1 (0.1) 0.2 ---------------------------------------------------- Total comprehensive income $ 47.9 $ 18.5 $102.7 $ 86.3 ====================================================
8 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 NOTE 4 - EARNINGS PER SHARE - ---------------------------- The following table sets forth the computation of basic and diluted net earnings per share:
----------------------------------------------------------- For the three months ended For the nine months ended September 30, September 30, ----------------------------------------------------------- (in millions; except per share data) 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------- Numerator: Net income $ 34.4 $ 34.4 $ 106.6 $ 96.4 - -------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share - weighted-average shares 67.3 66.0 66.6 65.8 - -------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Employee stock options 1.2 0.7 1.2 0.5 - -------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 68.5 66.7 67.8 66.3 - -------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.51 $ 0.52 $ 1.60 $ 1.46 ============================================================================================================== Diluted earnings per share $ 0.50 $ 0.52 $ 1.57 $ 1.45 ============================================================================================================== Cash dividends per share $ 0.285 $ 0.27 $ 0.84 $ 0.795
The number of anti-dilutive stock options excluded was 1.0 million for the three- and nine-month periods ended September 30, 2004. The number of anti-dilutive stock options excluded was 1.1 and 2.1 million for the three- and nine-month periods ended September 30, 2003. NOTE 5 - SEGMENT REPORTING - --------------------------- For the purposes of segment reporting, we discuss our business in four segments. There is a segment for each of our three businesses, which are Regional Banking, Wealth Advisory Services, and Corporate Client Services, as well as a segment for Affiliate Money Managers. The segment reporting 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 our 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, insurance services, business management services, and family office services. Results of Balentine & Company are fully 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 are fully 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 our partial ownership interest in each firm. Services provided by these two affiliates 9 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 include fixed income and equity investing services and investment portfolio management services. Neither CRM's or RCM's results are consolidated in our 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 our 2003 Annual Report to Shareholders. We evaluate performance based on profit or loss from operations before income taxes and without including nonrecurring gains and losses. We generally record intersegment sales and transfers as if the sales or transfers were to third parties (e.g., at current market prices). We report profit or loss from infrequent events, such as the sale of a business, separately for each segment. Financial data by segment for the quarters ended September 30, 2004, and September 30, 2003, is as follows: - --------------------------------------------------------------------------------
Wealth Corporate Affiliate Regional Advisory Client Money Quarter ended September 30, 2004 (in millions) Banking Services Services Managers Totals - -------------------------------------------------------------------------------------------------------------------- Net interest income $ 67.4 $ 5.8 $ 2.2 $ (1.4) $ 74.0 Provision for loan losses (3.2) 0.3 -- -- (2.9) - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision 64.2 6.1 2.2 (1.4) 71.1 Advisory fees: Wealth Advisory Services 0.4 34.7 1.9 -- 37.0 Corporate Client Services 0.2 -- 17.0 -- 17.2 Affiliate Money Managers -- -- -- 2.8 2.8 - -------------------------------------------------------------------------------------------------------------------- Advisory fees 0.6 34.7 18.9 2.8 57.0 Amortization of other intangibles -- (0.3) (0.1) (0.2) (0.6) - -------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of of other intangibles 0.6 34.4 18.8 2.6 56.4 Other noninterest income 12.2 0.2 -- -- 12.4 Securities gains 0.6 -- -- -- 0.6 - -------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 77.6 40.7 21.0 1.2 140.5 Noninterest expense (36.0) (33.3) (17.6) -- (86.9) - -------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes $ 41.6 $ 7.4 $ 3.4 $ 1.2 $ 53.6 ==================================================================================================================== Depreciation and amortization $ 5.3 $ 2.1 $ 1.5 $ 0.3 $ 9.2
- -------------------------------------------------------------------------------------------------------------------- Wealth Corporate Affiliate Regional Advisory Client Money Quarter ended September 30, 2003 (in millions) Banking Services Services Managers Totals - -------------------------------------------------------------------------------------------------------------------- Net interest income $ 61.0 $ 6.0 $ 2.3 $ (1.2) $ 68.1 Provision for loan losses (5.1) (0.6) -- -- (5.7) - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision 55.9 5.4 2.3 (1.2) 62.4 Total advisory fees: Wealth Advisory Services 0.5 32.6 2.4 -- 35.5 Corporate Client Services 0.3 -- 16.1 -- 16.4 Affiliate Money Managers -- -- -- 1.2 1.2 - -------------------------------------------------------------------------------------------------------------------- Advisory fees 0.8 32.6 18.5 1.2 53.1 Amortization of other intangibles -- (0.2) (0.1) (0.4) (0.7) - -------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of of other intangibles 0.8 32.4 18.4 0.8 52.4 Other noninterest income 13.1 0.5 0.3 -- 13.9 - -------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 69.8 38.3 21.0 (0.4) 128.7 Noninterest expense (33.9) (28.2) (13.1) -- (75.2) - -------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes $ 35.9 $ 10.1 $ 7.9 $ (0.4) $ 53.5 ==================================================================================================================== Depreciation and amortization $ 6.4 $ 2.0 $ 1.5 $ 0.6 $ 10.5
10 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004
- ----------------------------------------------------------------------------------------------------------------------------- Wealth Corporate Affiliate Regional Advisory Client Money Year-to-Date September 30, 2004 (in millions) Banking Services Services Managers Totals - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 197.1 $ 18.2 $ 6.6 $ (3.9) $ 218.0 Provision for loan losses (11.6) -- -- -- (11.6) - ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision 185.5 18.2 6.6 (3.9) 206.4 Total advisory fees: Wealth Advisory Services 1.4 105.7 6.9 -- 114.0 Corporate Client Services 0.7 -- 52.9 -- 53.6 Affiliate Money Managers -- -- -- 7.8 7.8 - ----------------------------------------------------------------------------------------------------------------------------- Advisory fees 2.1 105.7 59.8 7.8 175.4 Amortization of other intangibles -- (0.6) (0.4) (0.5) (1.5) - ----------------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of of other intangibles 2.1 105.1 59.4 7.3 173.9 Other noninterest income 35.3 1.9 0.6 -- 37.8 Securities gains 0.6 -- -- -- 0.6 - ----------------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 223.5 125.2 66.6 3.4 418.7 Noninterest expense (105.7) (97.5) (49.3) -- (252.5) - ----------------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes $ 117.8 $ 27.7 $ 17.3 $ 3.4 $ 166.2 ============================================================================================================================= Depreciation and amortization $ 16.0 $ 6.0 $ 4.3 $ 0.7 $ 27.0 Segment average assets 7,432.2 1,172.0 196.9 248.0 9,049.1
- ----------------------------------------------------------------------------------------------------------------------------- Wealth Corporate Affiliate Regional Advisory Client Money Year-to-Date September 30, 2003 (in millions) Banking Services Services Managers Totals - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 185.4 $ 18.5 $ 7.6 $ (4.8) $ 206.7 Provision for loan losses (15.6) (1.0) -- -- (16.6) - ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision 169.8 17.5 7.6 (4.8) 190.1 Total advisory fees: Wealth Advisory Services 1.8 93.2 7.3 -- 102.3 Corporate Client Services 1.0 -- 46.8 -- 47.8 Affiliate Money Managers -- -- -- 0.9 0.9 - ----------------------------------------------------------------------------------------------------------------------------- Advisory fees 2.8 93.2 54.1 0.9 151.0 Amortization of other intangibles -- (0.4) (0.4) (0.6) (1.4) - ----------------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of of other intangibles 2.8 92.8 53.7 0.3 149.6 Other noninterest income 38.4 1.4 1.1 -- 40.9 - ----------------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 211.0 111.7 62.4 (4.5) 380.6 Noninterest expense (103.2) (86.5) (42.2) -- (231.9) - ----------------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes $ 107.8 $ 25.2 $ 20.2 $ (4.5) $ 148.7 ============================================================================================================================= Depreciation and amortization $ 16.7 $ 5.8 $ 4.2 $ 0.8 $ 27.5 Segment average assets 6,936.8 1,073.2 210.9 242.4 8,463.3
11 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 NOTE 6 - DERIVATIVE AND HEDGING ACTIVITIES - ------------------------------------------ From time to time, we enter into interest rate swap and interest rate floor contracts to manage interest rate risk and to reduce the impact of fluctuations in interest rates of identifiable asset categories, principally floating-rate commercial loans and commercial mortgage loans. When the index is equal to or above the strike rate, we do not make or receive any payments. Swaps are contracts to exchange, at specified intervals, the difference between fixed- and floating-rate interest amounts computed on contractual notional principal amounts. We employ interest rate swaps so that clients may convert floating-rate loan payments to fixed-rate loan payments without exposing us to interest rate risk. In these arrangements, we retain the credit risk associated with the potential failure of counter-parties. We also use interest rate swaps to manage interest rate risk associated with our issues of long-term subordinated debt. At September 30, 2004, we had entered into a total of $999.8 million notional amount of interest rate swaps as follows: - - $312.4 million of swaps were associated with loan clients for whom we exchanged floating rates for fixed rates. - - To offset the exposure from changes in the market value of those swaps, $312.4 million of swaps were made with other financial institutions that exchanged fixed rates for floating rates. - - $375.0 million of swaps associated with our long-term subordinated debt issues were made with other financial institutions. Changes in the fair value that are determined to be ineffective are also recorded in "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. For the third quarter of 2004, approximately $77,100 of gains, resulting from the sale of floors in 2001, in "Accumulated other comprehensive income" were reclassified to earnings. During the 12 months ending September 30, 2005, we expect to reclassify approximately $258,064 of gains in "Accumulated other comprehensive income" to earnings. We do not hold or issue derivative financial instruments for trading purposes. 12 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS - --------------------------------------------- A summary of goodwill and other intangible assets is as follows:
September 30, 2004 December 31, 2003 ------------------------------------------------------------------------------ Gross Net Gross Net carrying Accumulated carrying carrying Accumulated carrying (in millions) amount amortization amount amount amortization amount - ------------------------------------------------------------------------------------------------------------------- Goodwill (nonamortizing) $ 355.4 $ 29.8 $ 325.6 $ 273.0 $ 29.8 $ 243.2 ============================================================================= Other intangibles Amortizing: Mortgage servicing rights $ 7.8 $ 4.7 $ 3.1 $ 7.2 $ 4.0 $ 3.2 Customer lists 31.6 6.5 25.1 19.1 4.8 14.3 Acquisition costs 1.7 1.7 -- 1.7 1.7 -- Other intangibles 0.7 0.7 -- 0.7 0.6 0.1 Nonamortizing Other intangible assets 6.4 -- 6.4 6.4 -- 6.4 - ------------------------------------------------------------------------------------------------------------------ Total other intangibles $ 48.2 $ 13.6 $ 34.6 $ 35.1 $ 11.1 $ 24.0 =============================================================================
Amortization expense of other intangible assets for the three months and nine months ended September 30 is as follows:
--------------------------------------------------------- For the three months ended For the nine months ended September 30, September 30, --------------------------------------------------------- (in millions) 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------------------ Amortization expense $ 0.9 $ 1.0 $ 2.5 $ 2.3
The estimated amortization expense of other intangible assets for each of the five succeeding fiscal years is as follows:
Estimated annual amortization expense (in millions) - --------------------------------------------------- For the year ended December 31, 2005 $ 4.6 For the year ended December 31, 2006 4.4 For the year ended December 31, 2007 3.7 For the year ended December 31, 2008 3.0 For the year ended December 31, 2009 2.8
13 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 The changes in the carrying amount of goodwill for the nine months ended September 30 are as follows:
2004 ------------------------------------------------------------ Wealth Corporate Affiliate Regional Advisory Client Money (in millions) Banking Services Services Managers Total - ------------------------------------------------------------------------------------------------------------- Balance as of January 1, 2004 $ 3.8 $ 4.4 $ 7.8 $ 227.2 $ 243.2 Goodwill acquired -- 70.7 -- 11.7 82.4 - ------------------------------------------------------------------------------------------------------------- Balance as of September 30, 2004 $ 3.8 $ 75.1 $ 7.8 $ 238.9 $ 325.6 ============================================================
2003 ----------------------------------------------------------- Wealth Corporate Affiliate Regional Advisory Client Money (in millions) Banking Services Services Managers Total - ------------------------------------------------------------------------------------------------------------ Balance as of January 1, 2003 $ 3.8 $ 4.4 $ 7.2 $ 224.8 $ 240.2 Goodwill acquired -- -- -- 2.4 2.4 Increase in carrying value due to foreign currency translation adjustments -- -- 0.2 -- 0.2 - ------------------------------------------------------------------------------------------------------------ Balance as of September 30, 2003 $ 3.8 $ 4.4 $ 7.4 $ 227.2 $ 242.8 ===========================================================
The goodwill acquired in 2004 includes: $70.4 million recorded in connection with the payment of a portion of the purchase price for our interest in Balentine Delaware Holding Company, LLC; $11.7 million recorded in connection with an increase in WTI's equity interest in Cramer Rosenthal McGlynn; and $0.3 million recorded in connection with Balentine Delaware Holding Company, LLC's acquisition of the remaining interests in Balentine & Company Tennessee, L.L.C. The goodwill acquired in 2003 includes $1.9 million recorded in connection with increases in WTI's equity interest in Cramer Rosenthal McGlynn and $0.5 million recorded in connection with increases in WTI's equity interest in Camden Partners Holdings. The following table lists other intangible assets acquired during the nine months ended September 30.
2004 2003 ---------------------------------------------------------------------------- Weighted Weighted average average amortization amortization Amount Residual period Amount Residual period (in millions) assigned value in years assigned value in years - ---------------------------------------------------------------------------------------------------------------------- Mortgage servicing rights $ 0.6 -- 8 $ 1.2 -- 8 Customer lists 12.4 -- 20 3.5 -- 20 Customer list increase in carrying value due to foreign currency translation adjustments 0.1 -- -- -- -------------------------------------------------------------------------- $ 13.1 -- $ 4.7 -- ==========================================================================
14 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 NOTE 8 - COMPONENTS OF NET PERIODIC BENEFIT COST - ------------------------------------------------ The following table reflects the net periodic benefit cost of the pension plan, supplemental executive retirement plan (SERP), and other postretirement benefits for the three and nine months ended September 30, 2004, and 2003. Descriptions of these plans are contained in "Note 15" to the "Consolidated Financial Statements" in our Annual Report to Shareholders for 2003.
Pension benefits SERP benefits Postretirement benefits -------------------------------------------------------------------------- For the three months ended September 30, 2004 (in millions) 2004 2003 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 1.7 $ 1.6 $ 0.2 $ 0.1 $ 0.2 $ 0.2 Interest cost 2.2 2.7 0.4 0.3 0.6 0.6 Expected return on plan assets (2.8) (3.4) -- -- -- -- Amortization of transition obligation/(asset) (0.2) (0.3) -- -- -- -- Amortization of prior service cost 0.2 0.3 0.1 0.1 -- -- Recognized actuarial (gain)/loss 0.2 -- 0.2 -- 0.2 0.1 - -------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 1.3 $ 0.9 $ 0.9 $ 0.5 $ 1.0 $ 0.9 ========================================================================== Employer contributions $ 12.0 $ -- $ 0.1 $ 0.1 $ 1.0 $ 0.9
Pension benefits SERP benefits Postretirement benefits -------------------------------------------------------------------------- For the nine months ended September 30, 2004 (in millions) 2004 2003 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 4.9 $ 4.9 $ 0.5 $ 0.4 $ 0.7 $ 0.7 Interest cost 6.6 8.2 0.9 0.8 1.9 1.8 Expected return on plan assets (8.5) (10.3) -- -- -- -- Amortization of transition obligation/(asset) (0.6) (0.7) -- 0.1 -- -- Amortization of prior service cost 0.6 0.7 0.3 0.2 -- -- Recognized actuarial (gain)/loss 0.6 -- 0.4 0.1 0.6 0.4 - -------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 3.6 $ 2.8 $ 2.1 $ 1.6 $ 3.2 $ 2.9 ========================================================================== Employer contributions $ 12.0 $ 15.0 $ 0.4 $ 0.3 $ 2.8 $ 2.4 Expected annual contribution $ 12.0 $ 0.5 $ 3.7
We sponsor a postretirement health care plan that provides a prescription drug benefit. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides a subsidy for such prescription drug benefits. Neither the accumulated postretirement benefit obligation nor periodic postretirement benefit cost reflect any amount associated with this subsidy. 15 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 NOTE 9 - TEMPORARILY IMPAIRED INVESTMENT SECURITIES - --------------------------------------------------- At September 30, 2004, our investment portfolio had temporarily impaired investment securities with an estimated market value of $872.9 million and unrealized losses of $12.7 million. The improvement from the previous quarter was due to a decline in market interest rates offered on securities with durations similar to those of the investment securities we own, precipitated by employment concerns, a softer economy, and a perception by the markets that the Federal Open Market Committee will effect a slow, measured pace of interest rate hikes. These factors have caused a rise in market values across all sectors of investments. The following table shows the estimated market value and gross 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 September 30, 2004 Other securities: U.S. Treasury and government agencies $ 96.8 $ 0.3 $ -- $ -- $ 96.8 $ 0.3 Preferred stock 48.4 0.1 12.5 1.8 60.9 1.9 Mortgage-backed securities 427.0 5.9 164.3 3.6 591.3 9.5 Other debt securities 85.5 0.5 38.4 0.5 123.9 1.0 - ------------------------------------------------------------------------------------------------------------------ Total temporarily impaired securities $ 657.7 $ 6.8 $ 215.2 $ 5.9 $ 872.9 $ 12.7 ===========================================================================
NOTE 10 - ACCOUNTING PRONOUNCEMENTS - ----------------------------------- FIN No.46R: On December 24, 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities (FIN 46R or the Interpretation)," 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 should consolidate the entity. This Interpretation replaces Interpretation No. 46, "Consolidation of Variable Interest Entities (FIN 46)," which was issued on January 17, 2003. FIN 46R requires that an enterprise review its degree of involvement in an entity to determine if consolidation of the entity is required or if disclosures are required about an enterprise's level of involvement in the entity. Public companies must apply either FIN 46 or FIN 46R to entities considered to be special-purpose entities for periods ending after December 15, 2003. Application by public companies for all other types of entities is required in financial statements for periods ending after March 15, 2004. The application of this Interpretation did not have a material impact on the Corporation's consolidated earnings, financial condition, or equity, nor has there been any requirement for disclosure under the Interpretation. 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 APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial statements. The requirements of SFAS No. 148 are effective for financial statements for fiscal years ended and interim periods beginning after December 15, 2002. We use the "intrinsic value" approach to accounting for stock-based compensation as permitted under APB Opinion No. 25. We have adopted the disclosure provisions of SFAS No. 148. The disclosure provisions had no impact on our consolidated earnings, financial condition, or equity. On March 31, 2004, the FASB issued an exposure draft that would eliminate the use of the intrinsic value method of accounting for stock-based compensation for fiscal years beginning after December 15, 2004. At its October 13, 2004, board meeting, the FASB decided that the final Statement will be effective for any interim or annual period beginning after June 15, 2005. 16 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. COMPANY OVERVIEW - ---------------- Wilmington Trust is a financial services holding company with a diversified mix of three businesses - Wealth Advisory Services, Corporate Client Services, and Regional Banking - which we deliver primarily through three 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 our activities beyond Delaware and Pennsylvania. Wilmington Trust FSB offices are located in California, Florida, Georgia, Maryland, Nevada, and New York. Wilmington Trust and our affiliates also have offices in the Cayman Islands, the Channel Islands, and London, and other affiliates in Dublin and Milan. Through our subsidiaries, we engage in fiduciary, wealth management, investment advisory, financial planning, insurance, broker-dealer, and deposit taking services; residential, consumer, commercial, and construction lending services; and business management and family office services. 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 clients in the state of Delaware, and commercial clients throughout the Delaware Valley region. In our commercial banking business, we target family-owned or closely held businesses with annual sales of up to $250 million where there are opportunities to develop advisory as well as lending relationships. Wilmington Trust and our subsidiaries are subject to regulation by 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. In addition to our wholly owned subsidiaries, we hold ownership interests in two affiliate money managers: - - Cramer Rosenthal McGlynn, LLC (CRM), which is a New-York based value-style manager; and - - Roxbury Capital Management, LLC (RCM), which is a Santa Monica-based growth-style manager. For the purposes of business discussion, we report income and assets from CRM and RCM separately. For the purposes of required segment reporting, we combine results from CRM and RCM into one segment. For more information about segment reporting, please refer to "Note 5" of the "Notes to Consolidated Financial Statements" in this report. SUMMARY OF RESULTS FOR THE 3 MONTHS AND 9 MONTHS ENDED SEPTEMBER 30, 2004 - ------------------------------------------------------------------------- Net income for the 2004 third quarter was $34.4 million, equal to the year-ago third quarter amount. Earnings per share for the 2004 third quarter, on a diluted basis, were $0.50, opposite $0.52 for the same period last year. 17 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 Here is a summary of our 2004 third quarter highlights: - - Results from the Regional Banking business were robust. Loan balances rose for the 14th consecutive quarter, and credit quality remained strong. - - The net interest margin stabilized at 3.51%. - - Good sales momentum in the Wealth Advisory business offset weakness in the financial markets, and revenue rose 4.2%. - - Corporate Client Services revenue increased 4.9% opposite sluggish capital markets activity. - - We continued to invest in our future by expanding our presence in existing markets, replacing outdated technology, and hiring more people. - - We completed the acquisition of Grant Tani Barash & Altman (GTBA), a Beverly Hills-based business management firm that serves high-net-worth clients. Beginning with the 2004 fourth quarter, GTBA's revenue and expenses will be consolidated in WAS results and included in our financial statements. We expect the addition of GTBA to be modestly accretive to our 2004 earnings. - - We completed our acquisition of the minority interest in Balentine. Original terms of the 2002 acquisition agreement entitled certain Balentine principals to receive Wilmington Trust stock payments in 2005, 2006, and 2007, and cash for their minority interests in the firm. The parties elected to accelerate the stock and cash payments, and we completed the transaction on July 1, 2004. - - We reissued 967,000 shares of our stock in connection with the acceleration of the Balentine transaction. This increased the number of our shares outstanding, and reduced third quarter 2004 earnings per share by approximately $0.01. Third quarter 2004 results brought net income for the first 9 months of 2004 to $106.6 million, which was 10.6% higher than for the comparable period last year. Earnings per share, on a diluted basis, were $1.57 for the first 9 months of 2004, which was an increase of 8.3%. With three-quarters of the year complete, here are the factors that have driven our 2004 performance to date: - - Our commercial loan balances have risen successively since the second quarter of 2001. This is due to the health of the Delaware Valley regional economy, our relationship management focus, our ability to remain the banking leader in Delaware, and our success at gaining more market share in southeastern Pennsylvania. - - Total loan balances are up 6.3% from the end of 2003, and amounted to $6.62 billion at September 30, 2004. Commercial balances are up 7.9% year to date, and retail balances are up 3.2% year to date, even though we continue to sell all new fixed-rate residential mortgage balances into the secondary market. - - Once the interest rate environment stabilized, so did our net interest margin. The end of June 2004 marked the first time since 1994 that we experienced a full 12-month cycle without a change in market interest rates. The falling rate environment of the past 3 years put considerable pressure on our margin. Beginning with the third quarter of 2002, our margin fell for 5 consecutive quarters. The rate of decline ranged from 11 basis points to 17 basis points, until the fourth quarter of 2003, when the margin rose 7 basis points to 3.52%. It has remained in the 3.51% to 3.53% range since then, and was 3.52% for the first 9 months of 2004. - - Our disciplined approach to underwriting manifested itself in the strength of our credit quality opposite loan growth. On an annualized basis, our net charge-off ratio at September 30, 2004, was 21 basis points, compared with 23 basis points at the same time last year. The percentage of loans rated "pass" by our internal risk rating analysis topped 96% for the first time in the 2004 second quarter, and remained above 96% in the 2004 third quarter. - - The financial markets continue to mask the full impact of the good sales momentum we have seen in our Wealth Advisory Services business. Sales for the first 9 months of 2004 are 18.9% higher than for the first 9 months of last year. Wealth Advisory revenue, at $114.0 million, is up 11.4%. In comparison, the Standard and Poor's 500 Index was up 0.24% for the first 9 months of 2004, while the Dow Jones Industrial Average and the NASDAQ Composite Indices recorded declines for the same period. 18 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 - - Revenue from the Corporate Client Services business for the first 9 months of 2004 was $53.6 million, which was 12.1% higher than for the comparable period last year. The entity management and retirement services components of the Corporate Client business remain strong, while weakness in the capital markets, which stemmed from legislative and regulatory changes, has hampered the Corporate Client growth rate overall. - - Results at both affiliate money managers continue to improve. Managed assets at value-style manager Cramer Rosenthal McGlynn are at their highest level in the firm's history, and income is more than double what it was for the first 9 months of 2003. At growth-style manager Roxbury Capital Management, the return to profitability continues to gain momentum. - - We continue to make strategic investments in each of our businesses to position our company for future growth. We have added staff, expanded in key markets, and improved our technological capabilities. We also have augmented compliance and risk management functions in order to fulfill the requirements of the Sarbanes-Oxley Act. Our noninterest expenses reflect these investments, and totaled $252.5 million for the first 9 months of 2004, which was an increase of 8.9% from the first 9 months of 2003. On an annualized basis, third quarter 2004 results produced a return on average assets of 1.48% and a return on average stockholders' equity of 15.71%. In comparison, annualized results at September 30, 2003, produced returns of 1.58% and 17.64%, respectively. In April 2004 we announced our 23rd consecutive year of increases in the cash dividend. We raised the quarterly cash dividend by 5.6% from $0.27 per share to $0.285 per share, or $1.14 per share on an annualized basis. STATEMENT OF CONDITION - ---------------------- This section discusses changes in the balance sheet for the period between December 31, 2003, and September 30, 2004. All balances referenced in this section are period-end balances unless otherwise noted. ASSETS - ------ Total assets at September 30, 2004, were $9.63 billion, which was 9.2% more than at the end of 2003. Earning assets totaled $8.81 billion, an increase of 8.7%, and accounted for 91.5% of total assets. The rise in earning assets included a $390.7 million increase in loan balances, and a $328.3 million increase in federal funds sold and securities purchased under agreements to resell (federal funds sold). The amount of federal funds sold increased due to cash management activity. Much of the cash management activity was associated with Corporate Client Services clients who use paying-agent services. It is not unusual for these clients to deposit funds with us for short periods of time, particularly over period-ends. That is why we consider average balances for a period to be a more accurate depiction of balance sheet trends than period-end balances. At September 30, 2004, the period-end balance of federal funds sold and securities purchased under agreements to resell was $332.1 million. In comparison, the average balance for the first nine months of 2004 was $20.6 million, which was $12.1 million lower than for the first nine months of 2003. At September 30, 2004, period-end loan balances accounted for 75.1% of earning assets, compared with 72.8% at the end of September 2003. On average, loan balances for the first 9 months of 2004 accounted for 77.2% of earning assets, compared with 77.6% for the first 9 months of 2003. 19 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 INVESTMENT SECURITIES - --------------------- At September 30, 2004, the size of the investment portfolio was $1.86 billion, slightly less than the $1.88 billion at December 31, 2003. On a percentage basis, the composition of assets within the investment portfolio remained relatively unchanged, as the following table illustrates.
COMPOSITION AT PERIOD-END 2004 Q3 2003 Q4 2003 Q3 - ------------------------- ------- ------- ------- Mortgage-backed securities and collateralized mortgage obligations 51% 52% 49% U.S. treasuries 10% 11% 17% Corporate issues 16% 14% 13% U.S. government agencies 13% 13% 11% Money market preferred stocks 7% 8% 7% Municipal bonds 1% 1% 1% Other 2% 1% 2%
At September 30, 2004, approximately 98% of the mortgage-backed securities in the portfolio were invested in fixed-rate instruments with terms of 15 years or less. We believe we can manage duration and risk more efficiently by investing in mortgage-related instruments than by retaining individual residential mortgage loans on our balance sheet. At September 30, 2004, the average life of mortgage-backed instruments in the investment portfolio was 4.0 years, and the duration was 3.88. The corresponding life and duration at December 31, 2003, were 4.50 and 4.50, respectively. At September 30, 2004, the average life of the total investment portfolio was 6.06 years and the duration was 2.62. In comparison, at December 31, 2003, the average life was 5.67 years and the duration was 2.81. The changes in average life and duration reflected the rising interest rate environment. Most of the changes were associated with callable agency securities, and our assumption that these instruments will be held to maturity because of the higher rates. LOAN BALANCES - ------------- Results from the Regional Banking business for the 2004 third quarter were robust. Total loan balances at September 30, 2004, were 6.2% higher than at December 31, 2003, and reached $6.62 billion. We continued to be the leading full-service bank in Delaware, and our loan balances continued to grow in southeastern Pennsylvania. On average, loan balances for the first 9 months of 2004 were $6.42 billion. This was 7% more than the $6.00 billion reported for the first 9 months of 2003. We regard average balances for a period, rather than period-end balances, as the more accurate indicator of trends in our Regional Banking business. The Regional Banking business benefited from the health of the broadly diversified economy in the Delaware Valley, which is where we focus our banking activities. Unemployment rates remain lower and other economic indicators for Delaware and southeastern Pennsylvania remain stronger than for other parts of the United States. We define the Delaware Valley region as including the state of Delaware; geographically adjacent areas along the I-95 corridor from Princeton, New Jersey, to Baltimore; and Maryland's Eastern Shore. Within this region, we target family-owned or closely held businesses with annual sales of up to $250 million. Our retail banking activities target the state of Delaware. During the 2004 third quarter, we expanded by opening a commercial loan production office in Bel Air, Maryland, which is located between Wilmington and Baltimore. Many of our Delaware clients, especially auto dealers, are already active in this area. By having a physical presence there, we will be better able to serve their growing needs and to establish new relationships. 20 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 COMMERCIAL LOANS - ---------------- Commercial loan balances accounted for 82.2% of the 9-month growth in total loan balances, and reached $4.37 billion at September 30, 2004. This was an increase of $321.0 million, or 7.9%. Within the commercial portfolio, nearly half of the 9-month growth was in traditional commercial and industrial (C and I) loans. Demand for C&I loans came from throughout the Delaware Valley region, and was not concentrated in any one locale or industry sector. Contractors, building suppliers, light manufacturing companies, and auto dealers were among the clients who increased their borrowings. The rest of the 9-month growth occurred in commercial mortgage and commercial real estate and construction balances. This reflected the strength of the housing market throughout the region, and burgeoning development in southern Delaware, along with activity in the Ocean City, Maryland, area. Borrowings spanned a range of residential, retail, agricultural, and hotel projects. In southern Delaware, a growing influx of year-round residents has spawned considerable housing demand and related development. Kiplinger's ranks Delaware among the top retirement destinations in the United States. According to the U.S. Census Bureau, Delaware is the fifth most popular state among residents aged 65 or older. RETAIL LOANS - ------------ Retail loans at September 30, 2004, totaled $2.24 billion. This was higher by $69.7 million, or 3.2%, than at December 31, 2003. We achieved this growth rate even though residential mortgage balances fell by $49.8 million, or 10.2%. As noted earlier, we prefer to manage mortgage-related risk in our investment portfolio, instead of retaining individual residential mortgage loans as assets. Although we remain among the leading mortgage originators in Delaware, we sell all new fixed-rate production into the secondary market. Prepayments and refinancings also contributed to the 9-month decline in residential mortgage balances. Consumer loan balances increased $105.5 million during the first 9 months of 2004, which more than offset the residential mortgage balance decline. Targeted efforts to increase home equity and small business lending contributed to the consumer loan increase. Indirect auto lending also increased. Dealer-generated loan originations in the 2004 third quarter were 35% higher than for the year-ago third quarter. For the first 9 months of 2004, dealer-generated originations were 20% ahead of the comparable year-ago period. Loans secured with liquid collateral increased marginally during the first 9 months of 2004, and totaled $619.4 million at September 30. In general, these loans are extended to Wealth Advisory clients. RESERVE FOR LOAN LOSSES - ----------------------- The reserve for loan losses increased from $89.9 million at December 31, 2004, to $91.3 million at September 30, 2004, and was influenced by continued growth in loan balances and strength in credit quality. The loan loss reserve ratio was 1.38% at September 30, 2004, which was 6 basis points lower than at December 31, 2003. The loan loss reserve ratio declined due to the high percentage of loans rated "pass" by our internal risk-rating analysis, and the lower provision for loan losses. The provision was lowered primarily because approximately $1.4 million was recovered during the 2004 third quarter on two previously charged-off loans. For more information about credit quality, please refer to the "Asset Quality" section of this report. 21 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 GOODWILL - -------- Goodwill rose from $243.2 million at December 31, 2003, to $325.6 million at September 30, 2004. The increase occurred primarily because we completed our acquisition of the minority interest in Balentine. LIABILITIES - ----------- Total liabilities increased by 9.0% during the first 9 months of 2004 and reached $8.74 billion. Most of the increase resulted from borrowings that were used to fund loan growth. DEPOSIT BALANCES - ---------------- Changes in deposit balances reflect trends in the retail banking business, which is concentrated in the state of Delaware, as well as in funding strategies that we employ when loan demand exceeds core deposit balances. As a rule, core deposits represent client-driven balances, and indicate trends in our Regional Banking business. Other balances are driven by funding needs. At September 30, 2004, core deposit balances totaled $4.81 billion, which was $134.2 million, or 2.9%, more than at December 31, 2003. Increases of $142.0 million in noninterest-bearing demand deposits and $50.8 million in local certificates of deposit (CDs) over $100,000 were offset partially by declines in interest-bearing savings and demand deposit balances and CDs under $100,000. Noninterest demand deposit balances are used by Corporate Client Services clients who use our cash management and paying agent services. It is not unusual for these clients to deposit funds with us for short periods of time, particularly over period-ends. For that reason, we believe average deposit balances offer a better indicator of core deposit trends in our Regional Banking business than period-end balances. On average, core deposit balances for the first 9 months of 2004 were $4.49 billion, compared with $4.32 billion for the first 9 months of 2003. Changes in other deposits and short-term borrowings reflect funding strategies. Other deposits include national CDs of $100,000 and over, which are purchased funds and not indicative of client activity. Decisions on whether to use national CDs or short-term borrowings typically are made based on the most favorable rate. Between December 31, 2003, and September 30, 2004, other deposits increased $277.9 million, and short-term borrowings rose $313.4 million. These funds were used to support loan growth. For more information about funding sources, please refer to the "Liquidity" section of this report. STOCKHOLDERS' EQUITY - -------------------- Stockholders' equity at September 30, 2004, was $890.5 million. This was an 11.2% increase from the December 31, 2003, amount of $800.8 million. For more information about this increase, please refer to the "Capital Resources" section of this report. INCOME STATEMENT - ---------------- This section compares the Corporation's income and expenses for the third quarter and first 9 months of 2004 with those of the corresponding periods of 2003. For the third quarter of 2004, net income was $34.4 million, which was equal to the year-ago third quarter amount. Earnings per share, on a diluted basis, were $0.50 for the 2004 third quarter, compared with $0.52 for the year-ago third quarter. 22 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 For the 2004 third quarter, the growth in net interest income was robust. The Wealth Advisory and Corporate Client Services businesses recorded single-digit increases, due to the impact of weakness in the financial markets and the capital markets industry, respectively. This slowdown in the pace of advisory fee revenue was exacerbated by a 15.6% increase in noninterest expenses, as we continued to make investments in each of our businesses. Our results were much more positive on a year-to-date basis. Net income for the first 9 months of 2004 totaled $106.6 million, which was 10.6% more than for the corresponding year-ago period. Earnings per share, on a diluted basis, were $1.57, which was 8.3% more than for the first 9 months of 2003. Year-to-date results reflected stability in the net interest margin, credit quality that reduced the provision for loan losses, double-digit increases in Wealth Advisory and Corporate Client revenue, and considerable improvement in the results from the 2 affiliate money managers. SOURCES OF INCOME - ----------------- We generate 2 kinds of revenue: - - Net interest income. Net interest income is the difference between the interest revenue we receive on earning assets, such as loans and investments, and the interest we pay on liabilities, such as deposits and short-term borrowings. Net interest income is generated primarily by banking and funding activities. - - Noninterest income. Noninterest income consists primarily of income from the advisory businesses, which comprise Wealth Advisory Services, Corporate Client Services, and the two affiliate money managers, Cramer Rosenthal McGlynn and Roxbury Capital Management. Noninterest income also includes service charges on deposit accounts, loan fees and late charges, card fees, securities gains (or losses), and other noninterest income. Our 2 sources of revenue generate a diversified stream of income that enables us to deliver consistent profitability and growth, with low volatility, in a variety of economic conditions. INTEREST INCOME AND EXPENSE, NET INTEREST INCOME, AND NET INTEREST MARGIN - ------------------------------------------------------------------------- Continued loan growth and the rising interest rate environment held the net interest margin steady; narrowed the disparity between the yield on earning assets and the cost of funds used to support those assets; and contributed to the highest rate of quarterly growth in net interest income (before the provision for loan losses) in more than 4 years. Net interest income, before the provision, was $74.0 million for the 2004 third quarter, an 8.7% improvement from the year-ago third quarter. For the first 9 months of 2004, net interest income totaled $218.0 million, an increase of 5.5% from the comparable period in 2003. Comparing the 2004 third quarter with the 2003 third quarter, interest income rose $7.3 million, while the increase in interest expense was $1.4 million. These results caused interest income for the first 9 months of 2004 to increase $2.3 million, opposite a $9.0 million decline in interest expense for the same period. Several key yields and rates reversed their long-standing trends during the 2004 third quarter. After 13 consecutive quarters of declines, the yield on total earning assets rose 6 basis points from its year-ago third quarter level, while the cost of funds used to support earning assets did not change. The yield on loan balances fell 4 basis points, while the cost of core deposits decreased 5 basis points. The yield on commercial loans rose 22 basis points. These factors helped stabilize the net interest margin at 3.51% for the third quarter of 2004, and 3.52% for the first 9 months of 2004. This was 6 basis points higher than for the third quarter of 2003, but 8 basis points lower than for the first 9 months of 2003. 23 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 To compute the net interest margin, the Corporation divides annualized net interest income on a fully tax-equivalent (FTE) basis by average total earning assets. On an FTE basis, net interest income for the 2004 third quarter was $75.0 million, compared with $69.3 million for the 2003 third quarter. Total earning assets were $8.42 billion, on average, for the 2004 third quarter, which was $467.5 million, or 5.9%, higher than for the year-ago third quarter. For the first 9 months of 2004, net interest income on an FTE basis was $221.3 million, compared with $210.3 million for the first 9 months of 2003. Total earning assets were $8.31 billion, on average, for the first 9 months of 2004, compared with $7.76 billion, on average, for the first 9 months of 2003. Since June 30, 2004, the Federal Reserve has raised market interest rates 3 times for a total of 75 basis points, but only the first 25-basis-point increase was in place for the entire third quarter. Following the Federal Reserve's lead, we raised our prime lending rate on June 29 from 4.00% to 4.25%; to 4.50% on August 10; and to 4.75% on September 21. Assets are repricing at a faster pace than liabilities, however, and we remain asset-sensitive. The following tables present comparative net interest income data and rate/volume analyses for the third quarters and first 9 months of 2004 and 2003. 24 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 QUARTERLY ANALYSIS OF EARNINGS
2004 Third Quarter 2003 Third Quarter --------------------------------------------------------------------- (in millions; rates on Average Income/ Average Average Income/ Average tax-equivalent basis) balance expense rate balance expense rate - ------------------------------------------------------------------------------------------------------------- Earning assets Federal funds sold and securities purchased under agreements to resell $ 28.5 $ 0.1 1.48% $ 35.6 $ 0.1 1.12% U.S. Treasury and government agencies 449.6 4.0 3.53 517.1 4.1 3.22 State and municipal 12.7 0.3 8.75 16.2 0.3 8.99 Preferred stock 121.2 2.3 7.42 120.7 2.2 7.39 Mortgage-backed securities 960.4 9.9 4.08 961.2 8.8 3.64 Other 322.2 2.5 3.04 249.9 1.8 2.88 - ------------------------------------------------------------- --------------------- Total investment securities 1,866.1 19.0 4.02 1,865.1 17.2 3.71 -------------------------------------------------------------------- Commercial, financial, and agricultural 2,403.3 27.6 4.51 2,202.2 23.5 4.18 Real estate-construction 718.1 9.0 4.93 624.9 7.0 4.37 Mortgage-commercial 1,186.4 14.7 4.85 1,039.4 13.5 5.08 - ------------------------------------------------------------- --------------------- Total commercial loans 4,307.8 51.3 4.67 3,866.5 44.0 4.45 -------------------------------------------------------------------- Mortgage-residential 440.2 6.6 6.02 573.9 9.5 6.63 Consumer 1,164.1 17.2 5.84 1,031.3 17.1 6.58 Secured with liquid collateral 616.8 4.6 2.93 583.6 3.8 2.52 - ------------------------------------------------------------- --------------------- Total retail loans 2,221.1 28.4 5.07 2,188.8 30.4 5.51 -------------------------------------------------------------------- Total loans net of unearned income 6,528.9 79.7 4.81 6,055.3 74.4 4.85 -------------------------------------------------------------------- Total earning assets $ 8,423.5 98.8 4.62 $ 7,956.0 91.7 4.56 ==================================================================== Funds supporting earning assets Savings $ 368.4 0.2 0.21 $ 368.8 0.1 0.13 Interest-bearing demand 2,297.1 3.0 0.52 2,244.7 2.2 0.39 Certificates under $100,000 763.9 3.8 1.95 817.6 5.2 2.50 Local CDs $100,000 and over 189.0 0.7 1.40 128.4 0.5 1.60 - ------------------------------------------------------------- --------------------- Total core interest- bearing deposits 3,618.4 7.7 0.84 3,559.5 8.0 0.89 National CDs $100,000 and over 1,937.1 7.2 1.48 1,780.9 6.7 1.48 - ------------------------------------------------------------- --------------------- Total interest-bearing deposits 5,555.5 14.9 1.06 5,340.4 14.7 1.09 --------------------------------------------------------------------
25 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004
2004 Third Quarter 2003 Third Quarter ----------------------------------- ---------------------------------- (in millions; rates on Average Income/ Average Average Income/ Average tax-equivalent basis) balance expense rate balance expense rate - ------------------------------------------------------------------------------------------------------------------------------ Federal funds purchased and securities sold under agreements to repurchase 1,289.8 5.4 1.62 1,115.2 4.0 1.39 U.S. Treasury demand 3.8 -- 1.54 20.0 -- 0.76 - ----------------------------------------------------------------------- ---------------------- Total short-term borrowings 1,293.6 5.4 1.62 1,135.2 4.0 1.38 ------------------------------------------------------------------------------ Long-term debt 403.2 3.5 3.44 405.4 3.7 3.63 - ----------------------------------------------------------------------- ---------------------- Total interest-bearing liabilities 7,252.3 23.8 1.29 6,881.0 22.4 1.29 ------------------------------------------------------------------------------ Other noninterest funds 1,171.2 -- -- 1,075.0 -- -- - ----------------------------------------------------------------------- ---------------------- Total funds used to support earning assets $ 8,423.5 23.8 1.11 $7,956.0 22.4 1.11 ============================================================================== Net interest income/yield 75.0 3.51 69.3 3.45 Tax-equivalent adjustment (1.0) (1.2) ------- ------- Net interest income $ 74.0 $ 68.1 ======= =======
In order to ensure the comparability of yields and rates and their impact on net interest income, average rates are calculated using average balances based on historical cost and do not reflect the market valuation adjustment required by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 26 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 YEAR-TO-DATE ANALYSIS OF EARNINGS
Year-to-Date 2004 Year-to-Date 2003 ------------------------------------ ------------------------------------ (in millions; rates on Average Income/ Average Average Income/ Average tax-equivalent basis) balance expense rate balance expense rate - ------------------------------------------------------------------------------------------------------------------------- Earning assets Federal funds sold and securities purchased under agreements to resell $ 20.6 $ 0.2 1.25% $ 32.7 $ 0.3 1.27% U.S. Treasury and government agencies 448.3 11.6 3.49 502.5 12.5 3.40 State and municipal 13.9 0.9 8.67 16.5 1.1 8.99 Preferred stock 120.3 6.7 7.42 118.3 6.6 7.49 Mortgage-backed securities 986.1 30.3 4.05 832.0 26.4 4.27 Other 305.8 6.8 2.97 239.5 5.5 2.99 - -------------------------------------------------------------------- ----------------------- Total investment securities 1,874.4 56.3 3.99 1,708.8 52.1 4.10 --------------------------------------------------------------------------- Commercial, financial, and agricultural 2,363.4 77.1 4.29 2,202.6 73.2 4.39 Real estate-construction 726.1 25.4 4.60 587.1 19.8 4.46 Mortgage-commercial 1,153.1 42.2 4.81 1,034.1 42.3 5.39 - -------------------------------------------------------------------- ----------------------- Total commercial loans 4,242.6 144.7 4.49 3,823.8 135.3 4.67 --------------------------------------------------------------------------- Mortgage-residential 460.3 20.9 6.05 608.9 30.8 6.74 Consumer 1,111.1 49.5 5.93 1,030.3 51.7 6.70 Secured with liquid collateral 605.7 12.2 2.64 560.9 11.5 2.71 - -------------------------------------------------------------------- ----------------------- Total retail loans 2,177.1 82.6 5.04 2,200.1 94.0 5.69 --------------------------------------------------------------------------- Total loans net of unearned income 6,419.7 227.3 4.67 6,023.9 229.3 5.04 --------------------------------------------------------------------------- Total earning assets $ 8,314.7 283.8 4.51 $ 7,765.4 281.7 4.82 =========================================================================== Funds supporting earning assets Savings $ 373.3 0.4 0.16 $ 365.2 0.5 0.17 Interest-bearing demand 2,294.5 7.3 0.42 2,145.5 7.0 0.44 Certificates under $100,000 768.6 11.6 2.01 847.7 17.7 2.79 Local CDs $100,000 and over 152.6 1.7 1.45 139.7 1.9 1.80 - -------------------------------------------------------------------- ----------------------- Total core interest-bearing deposits 3,589.0 21.0 0.78 3,498.1 27.1 1.03 National CDs $100,000 and over 2,046.9 19.4 1.25 1,941.2 23.2 1.58 - -------------------------------------------------------------------- ----------------------- Total interest-bearing deposits 5,635.9 40.4 0.95 5,439.3 50.3 1.23 ---------------------------------------------------------------------------
27 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004
Year-to-Date 2004 Year-to-Date 2003 --------------------------------------- -------------------------------- (in millions; rates on Average Income/ Average Average Income/ Average tax-equivalent basis) balance expense rate balance expense rate - ---------------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 1,108.1 12.3 1.46 961.0 11.0 1.51 U.S. Treasury demand 9.3 0.1 0.89 12.2 0.1 0.88 - ------------------------------------------------------------------------ -------------------- Total short-term borrowings 1,117.4 12.4 1.46 973.2 11.1 1.50 --------------------------------------------------------------------------- Long-term debt 406.4 9.6 3.15 325.5 10.0 4.10 - ------------------------------------------------------------------------ -------------------- Total interest-bearing liabilities 7,159.7 62.4 1.15 6,738.0 71.4 1.41 --------------------------------------------------------------------------- Other noninterest funds 1,155.0 -- -- 1,027.4 -- -- - ------------------------------------------------------------------------ -------------------- Total funds used to support earning assets $ 8,314.7 62.4 0.99 $7,765.4 71.4 1.22 =========================================================================== Net interest income/yield 221.4 3.52 210.3 3.60 Tax-equivalent adjustment (3.4) (3.6) ------- ------- Net interest income $ 218.0 $ 206.7 ======= =======
In order to ensure the comparability of yields and rates and their impact on net interest income, average rates are calculated using average balances based on historical cost and do not reflect the market valuation adjustment required by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 28 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
------------------------------------------------------------------------------- For the three months ended Sept. 30, For the nine months ended Sept. 30, ------------------------------------ ------------------------------------- 2004/2003 2004/2003 Increase (Decrease) Increase (Decrease) due to change in due to change in ----------------------------------- ------------------------------------- (in millions) Volume (1) Rate (2) Total Volume (1) Rate (2) Total - ------------------------------------------------------------------------------------------------------------------------------- Interest income: Federal funds sold and securities purchased under agreements to resell $ -- $ -- $ -- $ (0.1) $ 0.0 $ (0.1) U.S. Treasury and government agencies (0.5) 0.4 (0.1) (1.2) 0.3 (0.9) State and municipal * (0.1) 0.1 -- (0.2) 0.0 (0.2) Preferred stock * 0.1 0.0 0.1 0.2 (0.1) 0.1 Mortgage-backed securities 0.1 1.0 1.1 5.4 (1.5) 3.9 Other * 0.5 0.2 0.7 1.4 (0.1) 1.3 - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities 0.1 1.7 1.8 5.6 (1.4) 4.2 ------------------------------------------------------------------------------ Commercial, financial, and agricultural * 2.1 2.0 4.1 5.3 (1.4) 3.9 Real estate-construction 1.0 1.0 2.0 4.7 0.9 5.6 Mortgage-commercial * 1.9 (0.7) 1.2 4.8 (4.9) (0.1) - ------------------------------------------------------------------------------------------------------------------------------- Total commercial loans 5.0 2.3 7.3 14.8 (5.4) 9.4 ------------------------------------------------------------------------------ Mortgage-residential (2.2) (0.7) (2.9) (7.5) (2.4) (9.9) Consumer 2.2 (2.1) 0.1 4.1 (6.3) (2.2) Secured with liquid collateral 0.2 0.6 0.8 0.9 (0.2) 0.7 - ------------------------------------------------------------------------------------------------------------------------------- Total retail loans 0.2 (2.2) (2.0) (2.5) (8.9) (11.4) ------------------------------------------------------------------------------ Total loans net of unearned income 5.2 0.1 5.3 12.3 (14.3) (2.0) - ------------------------------------------------------------------------------------------------------------------------------- Total interest income $ 5.3 $ 1.8 $ 7.1 $ 17.8 $ (15.7) $ 2.1 ------------------------------------------------------------------------------ Interest expense: Savings $ 0.0 $ 0.1 $ 0.1 $ 0.0 $ (0.1) $ (0.1) Interest-bearing demand 0.1 0.7 0.8 0.5 (0.2) 0.3 Certificates under $100,000 (0.3) (1.1) (1.4) (1.7) (4.4) (6.1) Local CDs $100,000 and over 0.2 0.0 0.2 0.2 (0.4) (0.2) - ------------------------------------------------------------------------------------------------------------------------------- Total core interest-bearing deposits 0.0 (0.3) (0.3) (1.0) (5.1) (6.1)
29 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004
---------------------------------------------------------------------------- For the three months ended Sept. 30, For the nine months ended Sept. 30, ----------------------------------- ----------------------------------- 2004/2003 2004/2003 Increase (Decrease) Increase (Decrease) due to change in due to change in ------------------------------------ ----------------------------------- (in millions) Volume (1) Rate (2) Total Volume (1) Rate (2) Total - ----------------------------------------------------------------------------------------------------------------------- National CDs $100,000 and over 0.6 (0.1) 0.5 1.3 (5.1) (3.8) - ----------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 0.6 (0.4) 0.2 0.3 (10.2) (9.9) ---------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 0.6 0.8 1.4 1.7 (0.4) 1.3 Long-term debt 0.0 (0.2) (0.2) 2.5 (2.9) (0.4) - ----------------------------------------------------------------------------------------------------------------------- Total interest expense $ 1.2 $ 0.2 $ 1.4 $ 4.5 $(13.5) $ (9.0) ---------------------------------------------------------------------------- Changes in net interest income $ 4.1 $ 1.6 $ 5.7 $ 13.3 $ (2.2) $ 11.1 ============================================================================
* Variances are calculated on a fully tax-equivalent basis, which includes the effects of any disallowed interest expense. 1 Changes attributable to volume are defined as a change in average balance multiplied by the prior year's rate. 2 Changes attributable to rate are defined as a change in rate multiplied by the average balance in the applicable period of the prior year. A change in rate/volume (change in rate multiplied by change in volume) has been allocated to the change in rate. 30 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 NONINTEREST INCOME - ------------------ The table below shows changes in the mix between net interest and noninterest income. It demonstrates that: - - Our sources of income are diversified and balanced. - - Advisory income is the predominant source of noninterest income. Advisory and total noninterest income as a percentage of combined net interest and noninterest income
FOR THE PERIOD ENDED 2004 Q3 2003 Q3 2004 YTD 2003 YTD - -------------------- ------- ------- -------- -------- Advisory income (after amortization) 40.1% 40.7% 41.5% 39.3% Total noninterest income 49.4% 51.5% 50.7% 50.0% ---- ---- ---- ---- Net interest income (after provision) 50.6% 48.5% 49.3% 49.9% ---- ---- ---- ----
ASSETS UNDER MANAGEMENT - ----------------------- A portion of the revenue from our advisory businesses is derived from the levels of assets under management. The assets we manage include assets in personal trusts that are structured around wealth planning, preservation, and transition considerations. These assets are invested in a mix of instruments. Changes in the level of managed assets at Wilmington Trust reflect trust distributions and terminations as well as business flows and financial market movements. In addition to revenue associated with managing assets, the Wealth Advisory business generates revenue from a variety of planning and other services. In contrast, asset management is the primary business of the 2 affiliate money managers. Changes in managed assets at these 2 firms reflect business flows as well as financial market movements. The following table compares changes in assets under management. Changes in assets under management (AUM)*
AUM AT PERIOD-END (IN BILLIONS) 2004 Q3 2003 Q4 2003 Q3 - ------------------------------- ------- ------- ------- Wilmington Trust $24.6 $24.4 $23.6 Cramer Rosenthal McGlynn $ 5.8 $ 4.7 $ 4.0 Roxbury Capital Management $ 2.9 $ 3.2 $ 3.1 ----- ----- ----- Total $33.3 $32.3 $30.7 ----- ----- -----
The following table compares changes in the investment mix of managed assets at Wilmington Trust (excluding the affiliate money managers). Changes in the investment mix of managed assets at Wilmington Trust*
INVESTMENT MIX AT PERIOD-END 2004 Q3 2003 Q4 2003 Q3 - ---------------------------- ------- ------- ------- Equities 42% 55% 52% Fixed income 25% 25% 27% Cash and equivalents 13% 9% 11% Mutual funds 8% 7% 6% Other assets 12% 4% 4%
* Assets under management include estimates for values associated with certain assets that lack readily ascertainable values, such as limited partnership interests. 31 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 WEALTH ADVISORY SERVICES - ------------------------ Income from the Wealth Advisory Services (WAS) business was $37.0 million for the third quarter, and $114.0 million for the first 9 months of 2004. Compared to the corresponding periods in 2003, these were increases of 4.2% and 11.4%, respectively. Sluggish financial markets continued to stymie WAS results overall, and masked the impact of strong sales momentum. Third quarter 2004 WAS sales were 28.5% higher than for the year-ago third quarter. For the first 9 months of 2004, sales were 18.9% ahead of the year-ago amount. Markets outside of Delaware continued to gain traction and generate a higher percentage of sales. As noted earlier, the sources of WAS revenue include asset management, financial planning, and other services. To offer insight into what is driving WAS revenue for any given period, we group the sources of revenue into three categories: - - Trust and investment advisory fees. This is the largest component of WAS revenue. These fees are generated by the asset management and investment consulting services we provide, and they are based on market valuations. - - Mutual fund fees. Approximately 87% of these fees are tied to money market mutual funds, and do not reflect equity market movements. - - Planning and other service fees. These fees are generated by the sophisticated planning services in which we specialize, including financial planning, retirement planning, and wealth transition planning. Estate settlement, tax preparation, and other services also generate these fees. These fees are not tied to asset valuations. Instead, they are based on the level and complexity of the services provided, and they can vary widely in amount. Some portions of these fees may recur annually; others may be nonrecurring. These fees reflect client demand at any point in time, and it is not unusual for them to fluctuate up or down from period to period. Revenue from trust and investment advisory services was $27.4 million for the 2004 third quarter, and $81.1 million for the first 9 months of 2004. These were increases of 10.0% and 14.4%, respectively, from the comparable year-ago periods. The increases in trust and investment advisory revenue reflected higher demand for our investment consulting services, and outpaced changes in the financial markets. Opposite the percentage increases we recorded, the three major equity market indices recorded single-digit increases for the comparable 52-week period. For the first 9 months of 2004, the Standard and Poor's 500 Index was up 0.24%, while the Dow Jones Industrial Average and the NASDAQ Composite Indices declined. Fees from planning and other services were $4.6 million for the 2004 third quarter, which was $400,000 less than for the year-ago third quarter. As noted above, fees from planning and other services are unpredictable, and demand for these services was much stronger in the 2004 first and second quarters than in the third. The growth in these fees during the first half of 2004 is what accounted for the 22.8% increase in these fees for the first 9 months of 2004 versus the first 9 months of 2003. The decline in mutual fund fees for the third quarter and first 9 months of 2004, opposite the comparable periods in 2003, reflected increasing client demand for investments that generate higher returns. Beginning with the 2004 fourth quarter, revenue from the acquisition of Grant Tani Barash & Altman will be reported in the other service fees component of WAS revenue. CORPORATE CLIENT SERVICES - ------------------------- Revenue from the Corporate Client Services (CCS) business was $17.2 million for the third quarter and $53.6 million for the first 9 months of 2004. Compared to the corresponding periods in 2003, these were increases of 4.9% and 12.1%, respectively. The capital markets environment was uncharacteristically weak during the 2004 third quarter, and this weakness hampered the growth rate of the CCS business overall. In the CCS business, we provide specialized trust and administrative functions in the niche markets of capital markets services, entity management services, and retirement services. Capital markets and entity management services are priced according to complexity, and are performed on a fee-for-service basis. In general, fees for retirement services are based on the value of the retirement plan assets for which we serve as trustee. Most CCS services are performed under multiyear contracts. 32 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 In addition to the trust and administrative functions, we provide cash management services for some CCS clients. Fees associated with these services are tied to asset values. For the 2004 third quarter and first 9 months, approximately 25% of total CCS revenue was tied to asset valuations, compared with approximately 23% for the corresponding year-ago periods. CCS CAPITAL MARKETS SERVICES - ---------------------------- Our capital markets services support the structured finance industry, including such transactions as asset-backed securitizations, issues of trust-preferred securities, capital equipment leasing, and structures associated with companies in distressed financial condition. For the first 9 months of 2004, revenue from capital markets services totaled $23.3 million, which was 8.9% higher than for the comparable period in 2003. On a third quarter 2004 versus 2003 basis, however, capital markets revenue fell 5.3%, and reflected changing dynamics in various parts of the structured finance industry. Some parts of the industry remained strong. For the 2004 third quarter, sales of services that support trust-preferred securities were 17.1% higher, and sales of services that support asset-backed securitizations were 19.1% higher, than for the year-ago third quarter. At the same time, there was a decrease in recurring revenue from services for asset-backed securitizations. This occurred because more contracts are maturing in a shorter span of time than in the past. Prior to the downward turn in market interest rates that began 3 years ago, the duration of most contracts was 5 to 10 years. As interest rates fell, investors sought durations of 2 to 5 years, which means that many of the contracts are now reaching maturity and ceasing to generate revenue. A significant part of the structured finance industry, the market for cross-border and capital equipment leasings, stagnated while investors awaited the outcome of proposed tax legislation. For the year-ago third quarter, sales of services that support leasing transactions were nearly $530,000. In comparison, for the current-year third quarter, these sales amounted to less than $300,000. The corporate tax bill that Congress passed on October 11 eliminated favorable tax treatments for cross-border and municipal equipment leasing structures. CCS ENTITY MANAGEMENT SERVICES - ------------------------------ In this part of the CCS business, we provide administrative services for legal entities in jurisdictions that offer favorable legal and tax environments. These services include accounting, regulatory and tax filings, providing independent directors for an entity, and other activities. Our growing ability to provide services in multiple jurisdictions is helping us grow this part of the business, as it enables us to attract more multinational corporations who want to establish trusts and entities in more than one location, but use a single provider to do so. Entity management services revenue was $5.8 million for the third quarter, and $16.8 million for the first 9 months of 2004. These were increases of 11.5%, and 9.1%, respectively, from the corresponding periods in 2003. Higher revenue from services provided in Europe accounted for much of the growth. CCS RETIREMENT SERVICES - ----------------------- In the retirement services component of the CCS business, we provide trust and custody services for institutional defined contribution benefit plans, such as 401(k) and other retirement plans. Third quarter 2004 sales of trustee services for defined contribution plans were nearly double the amount recorded for the year-ago third quarter. Retirement services revenue for the 2004 third quarter was 20.8% higher than for the year-ago third quarter. Revenue for the first 9 months of 2004 was 25.4% higher than for the comparable year-ago period. New business development contributed to the growth. 33 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 CRAMER ROSENTHAL MCGLYNN - ------------------------ At value-style affiliate money manager Cramer Rosenthal McGlynn (CRM), assets under management reached $5.8 billion, surpassing the record set at June 30, 2004, by $300 million, or 5.4%. Managed assets were higher by $1.8 billion, or 45.0%, than at September 30, 2003. In comparison, as noted earlier, the three major equity market indices recorded declines for the comparable 52-week period. For the 2004 third quarter, income from our investment in CRM was nearly double the year-ago third quarter amount. For the first 9 months of 2004, income from CRM was more than double the amount for the same period in 2003. The amount of income recorded from CRM is based on our ownership interest in the firm, which was 77.24% at September 30, 2004. In comparison, we held a 69.14% interest in CRM at September 30, 2003, and at December 31, 2003. CRM's results are not consolidated in our financial statements. Despite the high percentage of our position, we do not hold a controlling interest in CRM. CRM principals retain certain management controls, including veto powers over a variety of matters. ROXBURY CAPITAL MANAGEMENT - -------------------------- Roxbury Capital Management's (RCM) return to profitability continued to gain momentum. Income from our investment in the growth-style affiliate was $300,000 for the 2004 third quarter, and $700,000 for the first 9 months of the year. In comparison, we recorded a $100,000 loss from RCM for the year-ago third quarter, and a $2.3 million loss for the first 9 months of 2003. RCM's results reflected continued stringent expense management and the popularity of its small- and mid-capitalization products, which generate higher fees than other investment products. Outflows from its core large-capitalization product caused overall assets under management to decline. Results recorded for RCM represent our ownership interest in the firm. At September 30, 2004, our interest consisted of 41.23% of RCM's common shares and 30% of its gross revenue. In comparison, at September 30, 2003, our interest consisted of 41.04% of RCM's common shares and 30% of its gross revenue. At December 31, 2003, our interest consisted of 41.23% of RCM's common shares and 30% of its gross revenue. NONINTEREST EXPENSE - ------------------- Noninterest expense reflects the costs that we incur in the course of normal operations. It includes expenses associated with employment, occupancy, supplies, advertising, third-party providers, and other items. Noninterest expenses totaled $86.9 million for the third quarter of 2004, and $252.5 million for the first 9 months of 2004. These were increases of 15.6% and 8.9%, respectively, from the corresponding year-ago periods. These increases were in line with our plan and reflected a number of steps we have taken throughout 2004 to position our company for continued growth. The largest expense increases were recorded in salaries and wages, which were $2.3 million higher than for the year-ago third quarter, and $6.1 million higher than for the first 9 months of 2003. These increases resulted from staff additions we made to strengthen each of the company's businesses and to comply with increasing regulatory requirements. On a full-time equivalent basis, there were 73 more staff members at September 30, 2004, than at the same time last year. In our Regional Banking business, we added commercial lending staff in Maryland and Pennsylvania, and opened a commercial loan production office in Bel Air, Maryland, as noted earlier. In Delaware, we added retail banking staff to develop new products and business strategies. The Wealth Advisory business has expanded its investment management team and added other staff in New York and Baltimore. The Corporate Client business has added sales and support staff in Europe and the United States. Company-wide, we have hired additional staff in order to comply with the Sarbanes-Oxley Act and related regulatory requirements. To a certain extent, the larger staff size accounted for increases in incentives and bonuses. In the 2004 third quarter, these expenses also reflected certain incentives that are earned semiannually. Higher pension expense and health insurance costs accounted for the rise in employment benefits costs. 34 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 The increases in furniture, equipment, and supplies expense were attributable to technology projects. We upgraded our desktop operating system, which added depreciation costs. At the end of May 2004, we completed our conversion to a third-party trust accounting system, which added approximately $1 million in quarterly expenses, beginning with the 2004 third quarter. Training on the new systems caused travel, entertainment, and training expenses to increase. The increases in servicing and consulting fees were due to strong demand for multi-manager investment consulting capabilities, which led to additional payments to third-party investment advisors. These increases also included costs associated with Sarbanes-Oxley compliance that were approximately $444,000 in the 2004 third quarter and approximately $719,000 for the first 9 months of 2004. Other noninterest expenses increased due to a combination of higher legal, audit, insurance, and courier costs, and higher banking and trust differences. HEADCOUNT - --------- At September 30, 2004, our full-time equivalent (FTE) headcount was 2,375. In comparison, at September 30, 2003, FTE headcount was 2,302. At December 31, 2003, FTE headcount was 2,307. INCOME TAXES - ------------ Income tax expense totaled $19.2 million for the 2004 third quarter and $58.9 million for the first 9 months of 2004. These were increases of 2.1% and 14.4%, respectively. Our effective tax rate for the 2004 third quarter was 35.8%, compared with 35.1% for the 2003 third quarter. For the first 9 months of 2004, our effective tax rate was 35.4%, compared with 34.6% for the first 9 months of 2003. The changes reflected higher state income taxes due to increased income, especially from the affiliate money managers. LIQUIDITY - --------- We manage liquidity to ensure that our cash flows are sufficient to support our operating, investing, and financing activities. Liquidity management enables us 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. As noted earlier, our sources of funding include deposit balances; cash that is generated by the investment and loan portfolios; short- and long-term borrowings, which include national certificates of deposit in amounts of $100,000 and more as well as term federal funds; internally generated capital; and other credit facilities. Among our sources of available funds is the Federal Home Loan Bank of Pittsburgh, of which Wilmington Trust Company is a member. Wilmington Trust Company has $1.2 billion in maximum available borrowing capacity secured by collateral. In addition, at September 30, 2004, we had $75 million in available borrowing capacity through lines of credit that we maintain with two major U.S. financial institutions. In April 2003 we added another source of funding by issuing $250 million of long-term subordinated debt. The issue was for general corporate purposes, and we initially invested the proceeds in mortgage-backed securities. We expect our investment portfolio to generate approximately $600 million of cash over the next 12 months from maturities and income. At September 30, 2004, the balance of the investment portfolio was $1.86 billion. For the 2004 third quarter, the proportion of funding provided by core deposits was 56.6%, compared with 64.2% for the 2003 third quarter and 62.75% for the 2003 fourth quarter. 35 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 We are a guarantor for 77.24% of a line-of-credit obligation of affiliate money manager Cramer Rosenthal McGlynn (CRM). The line of credit is at LIBOR plus 2%, totals $5 million, and is scheduled to expire on December 6, 2004. At September 30, 2004, the balance of this line of credit was zero. Our guaranty portion reflects our ownership interest in CRM at September 30, 2004. We monitor our existing and projected liquidity requirements continuously, and we believe that our standing in the national markets will enable us to obtain additional funding in a timely and cost-effective manner, should the need arise. A significant change in our financial performance or credit ratings could reduce the availability of funding, or increase the cost of such funding. ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION - --------------------------------------------------------- We seek to maintain stable credit quality by using a disciplined approach to lending and adhering to strict underwriting standards. We make the vast majority of our loans within the Delaware Valley region, and we rarely make commercial loans outside of our target client market of family-owned or closely held businesses with annual sales of up to $250 million. This geographic focus enables us to remain cognizant of economic and other external factors that may affect credit quality, as does our focus on client relationships. Credit quality remained strong throughout the third quarter and first 9 months of 2004. Key measures of credit quality remained in line with historic levels. The percentage of loans rated "pass" by our internal risk rating analysis topped 96% for both the second and third quarters of 2004, and remained higher than at September 30, 2003, and December 31, 2003. The composition of the loan portfolio remained well diversified and relatively unchanged, as the following table illustrates.
LOAN PORTFOLIO COMPOSITION FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3 - ----------------------------------------------- ------- ------- ------- Commercial/financial/agricultural 37% 37% 36% Commercial real estate construction 11% 11% 11% Commercial mortgage 18% 17% 17% Residential mortgage 7% 8% 9% Consumer 18% 17% 18% Secured by liquid collateral 9% 10% 9%
Of the various measures of credit quality, we regard the net charge-off ratio as the most accurate indicator. For the 2004 third quarter, the net charge-off ratio was 6 basis points, and net charge-offs totaled $4.1 million. Compared with the year-ago third quarter, this was an increase of 3 basis points and $2.1 million. Compared with the year-ago fourth quarter, this was a decrease of 4 basis points and $2.3 million. For the first 9 months of 2004, net charge-offs totaled $10.2 million. This was $300,000 less than for the first 9 months of 2003. On an annualized basis, the net charge-off ratio was 21 basis points at September 30, 2004, compared with 23 basis points at September 30, 2003. For the full-year 2003, the net charge-off ratio was 27 basis points. The following table provides 9- and 12-month comparisons of changes in net charge-offs.
NET CHARGE-OFFS FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3 - ------------------------------------ ------- ------- ------- Net charge-off ratio 6 basis points 10 basis points 3 basis points Net charge-offs $4.1 million $6.4 million $2.0 million
We continue to pursue repayment even after loans are charged off. During the 2004 third quarter, we recovered approximately $1.4 million from 2 previously charged-off loans. 36 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 The following table presents 9- and 12-month comparisons of other risk elements of credit risk.
NONPERFORMING ASSETS FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3 - ----------------------------------------- ------- ------- ------- Nonaccruing loans (in millions) $ 60.7 $ 45.4 $ 50.2 Loans past due 90 days or more (in millions) $ 7.6 $ 5.6 $ 7.3 Total (in millions) $ 68.3 $ 51.0 $ 57.5 Percentage of period-end loans 1.03% 0.82% 0.94% Other real estate owned (in millions) $ 0.2 $ 1.4 $ 1.6
The increases in nonaccruing loans were due mainly to a single relationship with a Delaware Valley-based client who is in the dining and recreation business. During the 2004 third quarter, we transferred approximately $23 million associated with this relationship to nonaccrual status. The declines in other real estate owned reflected the successful work out during the past 12 months of a Maryland beach resort residential project that first was classified as OREO in December 2002. The following table compares how loans past due 90 days or more were dispersed throughout the loan portfolio on a percentage basis.
LOANS PAST DUE 90 DAYS OR MORE FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3 - --------------------------------------------------- ------- ------- ------- Commercial loan portfolio 69% 39% 59% Residential mortgage portfolio 18% 37% 24% Consumer loan portfolio 13% 24% 17%
Changes in the reserve and provision for loan losses reflected loan growth, credit quality, and the aforementioned loan recoveries. The following table compares 9- and 12-month changes in these measures of credit quality.
FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3 - -------------------- ------- ------- ------- Provision for loan losses (in millions) $ 2.9 $ 5.0 $ 5.7 Reserve for loan losses (in millions) $ 91.3 $ 89.9 $ 91.2 Loan loss reserve ratio 1.38% 1.44% 1.50%
For the first 9 months of 2004, the provision for loan losses totaled $11.6 million. This was $5.0 million less than for the first 9 months of 2003. The reserve for loan losses reflects our best estimate, based on subjective judgments regarding how collectible loans within the portfolio are, of known and inherent estimated losses. In calculating the reserve, we evaluate micro- and macro-economic factors, historical net loss experience, delinquency trends, and movements within the internal risk rating classifications, among other things. We reassess the reserve on a quarterly basis as part of the regular application of the reserve methodology. The process that we use to calculate the reserve has provided a high degree of reserve adequacy over an extended period of time, and we believe that it is sound. To accommodate growth in loan balances, we allocated a portion of the reserve to new loans within the parameters of the reserve methodology. At September 30, 2004, in light of the levels of past due, nonaccruing, and problem loans, we believe that the reserve for loan losses was a reasonable assessment of estimated and inherent losses in the loan portfolio. The portion of the reserve allocated to new loans was relatively unchanged. At September 30, 2004, approximately $6.1 million, or 6.7%, of the reserve for loan losses was unallocated. In comparison, approximately $6.1 million, or 6.8%, of the reserve was unallocated at December 31, 2003. At September 30, 2003, approximately $6.1 million, or 6.7%, of the reserve was unallocated. At September 30, 2004, our quarterly internal analysis of credits showed that more than 96% of the loans in the portfolio were rated pass for the second consecutive quarter. The percentage of loans with pass ratings has been higher than 92% since 1998, and higher than 37 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 95% since 2000. The internal analysis has four classifications, which are: - - Pass, which identifies loans with no current potential problems; - - Watchlist, 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. The following table compares 9- and 12-month changes in the internal risk rating analysis.
FOR THE PERIOD ENDED 2004 Q3 2003 Q4 2003 Q3 - -------------------- ------- ------- ------- Pass 96.74% 95.83% 95.81% Watchlist 1.81% 2.58% 2.53% Substandard 1.21% 1.27% 1.25% Doubtful 0.24% 0.32% 0.41%
We monitor the entire loan portfolio continually 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 regular analyses of all past-due loans and the identification of loans that we doubt will be repaid on a timely basis. 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 us to anticipate increases in nonperforming assets, credit losses, and the provision for loan losses. At September 30, 2004, we identified approximately $5.5 million of loans that we doubted would be repaid on a timely basis, even though those loans were performing in accordance with their terms or were less than 90 days past due. This compares with $28.5 million of such loans at December 31, 2003, and $26.6 million of such loans at September 30, 2003. CAPITAL RESOURCES - ----------------- During the first 9 months of 2004, our capital continued to increase and our capital ratios continued to exceed the Federal Reserve Board's minimum guidelines. The annualized capital generation rate for the first 9 months of 2004 was 6.33%, compared with an annualized rate of 5.95% for the first 9 months of 2003 and a rate of 8.7% for the 2003 full year. Stockholders' equity rose 11.2%, or $89.7 million, to $890.5 million. Between December 31, 2003, and September 30, 2004, additions to capital included: - - $50.7 million, which reflected earnings of $106.6 million net of $55.9 million in cash dividends; - - $14.2 million from the issue of common stock under employment benefit plans; and - - $48.4 million in common stock issued in connection with the payment of a portion of the purchase price for Balentine & Company, LLC, our investment counseling firm. 38 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 These additions were offset partially by $32.6 million in reductions, which consisted of: - - $3.7 million in unrealized losses on securities, net of taxes; - - $19.6 million for the repurchase of shares; - - $0.2 million in foreign currency exchange adjustments; - - A reclassification adjustment of $0.1 million for derivative and securities gains included in net income, net of income taxes. During the 2004 third quarter, we bought back 122,854 of our shares, at an average price of $36.34 and a total cost of $4.5 million. During the first 9 months of 2004, we bought back a total of 543,275 shares at an average price of $36.13 and a total cost of $19.6 million. Since the current 8-million-share program began in April 2002, we have bought back a total of 627,644 shares at a total cost of $22.08 million. Also during the 2004 third quarter, we reissued 1,106,625 shares of our stock. The size of the stock reissue included our acquisition of the minority interest in Balentine. The original terms of the acquisition entitled certain Balentine principals to receive payments in the form of Wilmington Trust stock in 2005, 2006, and 2007, and cash for their limited liability company interests. In June, the parties elected to accelerate the stock and cash payments, and the transaction was completed on July 1, 2004. Our capital ratios continued to exceed the Federal Reserve Board's minimum guidelines for both well-capitalized and adequately capitalized institutions. These guidelines are intended to reflect the varying degrees of risk associated with different on- and off-balance sheet items. The following table compares our ratios to the guidelines.
ADEQUATELY WELL- CAPITALIZED CAPITALIZED CAPITAL RATIO SEPT. 30, 2004 DEC. 31, 2003 MINIMUM MINIMUM ------------- -------------- ------------- ------- ------- Total risk-based capital 11.97% 12.45% 8% 10% Tier 1 risk-based capital 7.17% 7.46% 4% 6% Tier 1 leverage capital 6.04% 6.34% 4% 5%
On April 15, 2004, our Board of Directors raised the quarterly cash dividend from $0.27 to $0.285 per share. This was an increase of 5.6%. We have paid cash dividends on our common stock every year since 1908; paid quarterly cash dividends every year since 1916; and increased the cash dividend every year since 1982. We review our capital position and make adjustments as needed to assure that our capital base is sufficient to satisfy existing and impending regulatory requirements, meet appropriate standards of safety, and provide for future growth. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS - ---------------------------------------------------------- In our day-to-day operations, we employ 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. Some of these instruments, such as stand-by and performance letters of credit, unfunded loan commitments, unadvanced lines of credit, and interest rate swaps, do not appear on our balance sheet. We include other instruments, such as long-term debt obligations, on our balance sheet. We employ interest rate swaps so that clients may convert floating-rate loan payments to fixed-rate loan payments without exposing our company to interest rate risk. In these arrangements, we retain the credit risk associated with the potential failure of counter-parties. We also use interest rate swaps to manage interest rate risk associated with our issues of long-term subordinated debt. 39 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 At September 30, 2004, we had entered into a total of $999.8 million of interest rate swaps as follows: - - $312.4 million of swaps were associated with loan clients for whom we exchanged floating rates for fixed rates. - - To offset the exposure from changes in the market value of those swaps, we made $312.4 million of swaps with other financial institutions that exchanged fixed rates for floating rates. - - We swapped $375.0 million associated with our long-term subordinated debt issues with other financial institutions. We have 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, our operations center in downtown Wilmington, Delaware, which was completed in 1998. Many of our branch offices in Delaware, and all of our offices outside Delaware, are leased. Lease commitments for these locations, net of sublease arrangements, totaled $55.7 million at September 30, 2004. At September 30, 2004, we were guarantor of an obligation of affiliate money manager Cramer Rosenthal McGlynn (CRM). The guaranty is for 77.24%, which represents our current ownership interest in CRM, of a $5 million line of credit, which is scheduled to expire on December 6, 2004. At September 30, 2004, the liquidity exposure we had that was associated with letters of credit, unfunded loan commitments, and unadvanced lines of credit was $2.93 billion. The following table summarizes the obligations referenced above and the periods over which they extend.
MORE CONTRACTUAL OBLIGATION PAYMENTS DUE BY LESS THAN 1 - 3 3 - 5 THAN 5 PERIOD (IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS - -------------------------------------- ------ --------- ------ ------ ------ Long-term debt obligations $578.0 $ 22.8 $ 75.8 $198.9 $280.5 Operating lease obligations $ 55.7 $ 8.0 $ 22.6 $ 15.1 $ 10.0 Guaranty obligations $ 5.0 $ 5.0 -- -- -- ------ --------- ------ ------ ------ Total $638.7 $ 35.8 $ 98.4 $214.0 $290.5 ------ --------- ------ ------ ------
The long-term debt obligations in the table above refer to our two outstanding subordinated debt issues and our 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 Roxbury Capital Management (RCM). The second debt issue, 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 our balance sheet. In addition, the acquisition agreements for CRM and RCM permit principal members and certain key employees of each firm, subject to certain restrictions, to put their interests in their respective firms to our company. For more information on these acquisition agreements, please refer to "Note 1" of the "Notes to Consolidated Financial Statements" in our 2003 Annual Report to Shareholders. INFLATION - --------- Our 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. 40 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 OTHER INFORMATION - ----------------- ACCOUNTING PRONOUNCEMENTS - ------------------------- Please refer to "Note 10" to the "Consolidated Financial Statements" in this report for a discussion of the impact of recent accounting pronouncements on our financial condition and results of operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------ Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us 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. We evaluate 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. We base our estimates on historical experience and other factors and assumptions that we believe 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. We believe the following critical accounting policies affect our more significant judgments and the estimates we use to prepare the consolidated financial statements, and relate to the reserve for loan losses, stock-based employee compensation, and impairment of goodwill. Reserve for loan losses: We maintain a reserve for loan losses that is our 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, we give 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 we use 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. We believe that we use the best information available to make determinations about the reserve, and that we have established our existing reserve for loan losses in accordance with generally accepted accounting principles. If circumstances differ substantially from the assumptions used in making those determinations, future adjustments to the reserve may be necessary, and our financial results could be affected. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our banking affiliates' reserve for losses on loans. These agencies may require us 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: We account for our 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. 41 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 Since our 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, we have disclosed, in the notes to the financial statements contained herein and in our Annual Report to Shareholders, what the earnings impact would have been had we elected the "fair value" approach under SFAS No. 123. Future earnings would be impacted if any change in generally accepted accounting principles were to limit the continued use of the "intrinsic value" approach. On March 31, 2004, the FASB issued an exposure draft, that would eliminate the use of the intrinsic value method of accounting for stock-based compensation for fiscal years beginning after December 15, 2004. At its October 13, 2004, board meeting, the FASB decided that the final Statement will be effective for any interim or annual period beginning after June 15, 2005. Impairment of goodwill: Through a series of acquisitions, we have accumulated goodwill with a net carrying value of $325.6 million at September 30, 2004. 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 warranted 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, which would result in 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 our books is related to certain of our affiliate asset manager acquisitions. A decline in the fair value of the investment in any of these firms could result in an impairment expense. SUBSEQUENT EVENT - ---------------- On October 1, 2004, we completed the acquisition of 90% of Grant Tani Barash & Altman (GTBA), a Beverly Hills-based business management firm that serves high-net-worth clients. The services GTBA performs for its clients include bookkeeping, investment advice, cash flow management, budgeting, tax preparation, tax planning, insurance consultation, and other services. The firm employs approximately 40 staff members. The balance of the ownership in GTBA is retained by its principals. We and those principals will be able to purchase additional ownership interests in GTBA from an owner upon the occurrence of a number of specified events, including the termination of employment, death, disability, or retirement of the owner. GTBA is managed by a board of five managers, composed of three people we designate and two people designated by GTBA's principals. 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 us, 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 of this report. Forward-looking statements are based on current expectations and assessments of potential developments. Our 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. 42 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE SENSITIVITY AND MARKET RISK - ----------------------------------------- We consider interest rate risk to be our most significant market risk. Interest rate risk is the exposure to adverse changes in our net income as a result of changes in interest rates, both in the level of change and in the pace at which it occurs. Fluctuations in interest rates impact net interest income, which is an important determinant of our financial performance. By managing our interest rate risk, we seek to maximize the growth of net interest income on a consistent basis by minimizing the effects of fluctuations associated with changing market interest rates. In other words, our objective is for growth in net interest income to be generated by changes in loans and deposits, not by changes in market interest rates. At the same time, our intent is to prevent market interest rate changes from reducing net interest income by 10% or more within any 12-month period. To assess interest rate risk, we consider a number of balance sheet risks and market variables, which include: - - The mix of assets, liabilities, and off-balance sheet instruments; - - Their respective repricing and maturity characteristics; - - The level of market interest rates; and - - Other external factors. We use computer-based modeling to quantify these variables and simulate their impact on net interest income. The simulations compare multiple interest rate scenarios against a stable interest rate environment. As a rule, the model employs scenarios in which rates gradually move up or down 250 basis points over a period of 12 months. One of the external factors that we take into consideration is the inability of certain interest rates to decline further. One such example is the targeted federal funds rate, which was 1.75% at September 30, 2004. With the rate at 1.75%, we considered a declining scenario of 250 basis points to be unreasonable, since a decline of that magnitude would create negative interest rates in the model. Instead, as of September 30, 2004, the declining rate scenario employed a gradual downward move of 175 basis points, at which point the federal funds rate would equal zero. The rising rate scenario remained able to accommodate a 250-basis-point upside move. The following table presents how the simulation model projected the impact of gradual and sustained interest rate changes on net interest income over 12-month periods beginning September 30, 2004, and December 31, 2003.
IMPACT OF CHANGING INTEREST RATES FOR THE 12 MONTHS FOR THE 12 MONTHS ON NET INTEREST INCOME BEGINNING 9/30/04 BEGINNING 12/31/03 - --------------------------------- ----------------- ------------------ Gradual 250 basis point increase 4.85% 6.14% Gradual 100 basis point decrease N/A (5.33)% Gradual 175 basis point decrease (6.92)% N/A
The preceding paragraphs contain certain forward-looking statements regarding the anticipated effects on our net interest income that may result from hypothetical changes in market interest rates. The assumptions we use 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 our 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. We review our 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. 43 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 OTHER RISKS - ----------- FINANCIAL MARKET RISK - --------------------- Financial market risk is the risk of exposure to adverse changes in our noninterest income as a result of changes to the economic valuation of assets which we manage or hold in custody on behalf of clients. Such changes in valuation could be driven by the equity markets, the fixed income markets, or both. Certain components of the noninterest income from the Wealth Advisory Services business and the Corporate Client Services business are based on fees that are tied directly to the market valuation of assets that we manage or hold in custody on behalf of clients. Income from the affiliate managers is based entirely on financial market valuations. The following table presents changes in the percentage of noninterest income for the Wealth Advisory Services (WAS) and Corporate Client Services (CCS) businesses that were associated directly with financial market valuations. Percentage of WAS and CCS income based on financial market valuations
FOR THE PERIOD ENDED 2004 Q3 2004 YTD 2003 Q3 2003 YTD - ------------------------- ------- -------- ------- -------- Wealth Advisory Services 55.5% 53.3% 52.6% 52.0% Corporate Client Services 25.0% 25.2% 22.6% 23.0%
For more information about the percentage of noninterest income that is tied to financial market valuations, please refer to the section on "Noninterest income" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. OPERATIONAL RISK - ---------------- Operational risk is the risk of unexpected losses attributable to human error, systems failures, fraud, or inadequate internal controls and procedures. This risk is mitigated through a system of internal controls that are designed to keep operating risk at a level appropriate to our standards, in view of the risks inherent in the markets and businesses in which we are engaged. The system of internal controls includes policies and procedures that require the proper authorization, approval, documentation, and monitoring of transactions. Each business unit is responsible for complying with our policies and applicable regulations, and is responsible for establishing specific procedures to do so. In connection with our efforts to comply with Section 404 of the Sarbanes-Oxley Act, we have documented the internal controls over financial reporting, and have evaluated the design effectiveness of these controls for each of our business areas. This documentation includes a narrative, flow chart, and risk control matrix for each process cycle within the business area, as well as walk-through documentation for use by our independent auditors. We evaluate the process documentation and test the primary controls on a quarterly basis, and remediate where necessary. Appropriate managers in each business unit are to certify to the Chairman of the Board and Chief Executive Officer and the Chief Financial Officer each quarter about the effectiveness of the internal controls within each of their areas. 44 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 FIDUCIARY RISK - -------------- Fiduciary risk is the risk of loss that may occur if we were to breach a fiduciary duty to a client. To limit this risk, we have established policies and procedures to reduce the risk that obligations to clients would not be discharged faithfully or in compliance with applicable legal and regulatory requirements. These policies and procedures provide guidance and establish standards related to the creation, sale, documentation, and management of investment products, trade execution, and counterparty selection. Business units have the primary responsibility for adhering to the policies and procedures applicable to their businesses. ITEM 4. CONTROLS AND PROCEDURES. Our Chairman of the Board and Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Securities Exchange Act Rule 13a-14. Based on that evaluation, the Chairman of the Board and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information about the Corporation (including our consolidated subsidiaries) required to be included in the periodic filings we make with the Securities and Exchange Commission. There was no change in our internal control over financial reporting during the third quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. ----------------- We and our subsidiaries are subject to various legal proceedings that arise from time to time in the ordinary course of their businesses and operations. Some of these proceedings seek relief or damages in amounts that may be substantial. Because of the complex nature of some of these proceedings, it may be a number of years before they ultimately are resolved. While it is not feasible to predict the outcome of these proceedings, management does not believe the ultimate resolution of any of them will have a materially adverse effect on our consolidated financial condition. Further, management believes that some of the claims may be covered by insurance, and has advised its insurance carriers of the proceedings. 45 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. On July 1, 2004, we issued 967,000 shares of our common stock to the principals of Balentine & Company, LLC and certain other parties in acceleration of the purchase price for that company under our Merger Agreement with them dated as of October 23, 2001. Those shares were not registered under the Securities Act of 1933 in reliance on the exemption provided under Section 4(2) thereunder. ISSUER PURCHASES OF EQUITY SECURITIES The following table shows our purchases of our equity securities during the third quarter.
(d) Maximum (c) Total Number Number (or of Shares Approximate (or Units) Dollar Value) Purchased of Shares (or (a) Total (b) as Part of Units) that May Number of Average Publicly Yet Be Shares (or Price Paid Announced Purchased Under Units) per Share Plans or the Plans or Period Purchased (or Unit) Programs Programs - ------------------- ---------- ---------- --------------- --------------- Month #1 July 1, 2004 - July 31, 2004 104,326 $ 36.34 104,326 7,390,884 Month #2 August, 1, 2004 - August 31, 2004 18,528 $ 36.30 18,528 7,372,356 Month #3 September 1, 2004 - September 30, 2004 -- -- -- 7,372,356 ---------- --------- ------------ --------------- Total 122,854 $ 36.34 122,854 7,372,356 ---------- --------- ------------ ---------------
In April 2002, we announced a plan to repurchase 8 million shares of our stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. 46 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit Number Exhibit - ------- ------- 3.1 Amended and Restated Certificate of Incorporation of the Corporation(1) 3.2 Amended and Restated Bylaws of the Corporation(2) 10.63 Amended and Restated Limited Liability Company Agreement of Grant Tani Barash & Altman, LLC dated as of October 1, 2004 among Grant, Tani, Barash & Altman, Inc., GTBA Holdings, Inc., Warren Grant, Jane Tani, Corey Barash, and Howard Altman(3)(4) 10.64 Amended and Restated 2002 Long-Term Incentive Plan of Wilmington Trust Corporation(3) 10.65 Form of Stock Option Agreement(3) 10.66 Form of Restricted Stock Agreement(3) 10.67 Form of Restricted Stock Unit Agreement(3) 31 Rule 13a-14(a)/15d-14(a) Certifications (3) 32 Section 1350 Certification (3)
- ---------- (1) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 30, 1996. (2) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 27, 2003. (3) Filed herewith. (4) 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 has been marked by an asterisk [*]. We filed current a current report on Form 8-K on July 16, 2004, under Item 12 reporting our financial condition and results of operations for the second quarter of 2004. 47 Wilmington Trust Corporation Form 10-Q for the quarterly period ended September 30, 2004 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WILMINGTON TRUST CORPORATION Date: November 9, 2004 /s/ Ted T. Cecala ---------------------------------------------- Name: Ted T. Cecala Title: Chairman of the Board and Chief Executive Officer (Authorized Officer) Date: November 9, 2004 /s/ David R. Gibson ---------------------------------------------- Name: David R. Gibson Title: Executive Vice President and Chief Financial Officer (Principal Financial Officer) 48 EX-10.63 3 w68089exv10w63.txt AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT 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 HAS BEEN MARKED BY AN ASTERISK [*] AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF GRANT TANI BARASH & ALTMAN, LLC DATED AS OF OCTOBER 1, 2004 AMONG GRANT, TANI, BARASH & ALTMAN, INC., GTBA HOLDINGS, INC., WARREN GRANT, JANE TANI, COREY BARASH, AND HOWARD ALTMAN EXHIBIT 10.63 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 HAS BEEN MARKED BY AN ASTERISK [*] ================================================================================ AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF GRANT TANI BARASH & ALTMAN, LLC DATED October 1, 2004 ================================================================================ TABLE OF CONTENTS
Page ARTICLE 1 DEFINED TERMS......................................................................... 2 ARTICLE 2 GENERAL PROVISIONS.................................................................... 13 Section 2.1. Formation, Name and Continuation...................................................... 13 Section 2.2. Term.................................................................................. 13 Section 2.3. Registered Agent and Office; Principal Place of Business.............................. 13 Section 2.4. Fiscal Year........................................................................... 14 ARTICLE 3 PURPOSE AND POWERS OF THE LLC......................................................... 14 Section 3.1. Purpose............................................................................... 14 Section 3.2. Powers of the LLC..................................................................... 14 ARTICLE 4 MEMBERS............................................................................... 14 Section 4.1. Voting................................................................................ 14 Section 4.2. Meetings of Members................................................................... 14 Section 4.3. Quorum................................................................................ 14 Section 4.4. Action by Consent..................................................................... 15 Section 4.5. Telephonic Meetings................................................................... 15 Section 4.6. Non-Voting Members.................................................................... 15 ARTICLE 5 MANAGERS AND OFFICERS................................................................. 15 Section 5.1. Managers.............................................................................. 15 Section 5.2. Designated Managers................................................................... 16 Section 5.3. Resignation or Removal of a Manager................................................... 16 Section 5.4. Vacancies............................................................................. 16 Section 5.5. Meetings.............................................................................. 16 Section 5.6. Quorum................................................................................ 17 Section 5.7. Action by Consent..................................................................... 17 Section 5.8. Telephonic Meetings................................................................... 17 Section 5.9. Managers as Agents; Limitation on Power of Members.................................... 17 Section 5.10. Duty of Managers...................................................................... 17 Section 5.11. Officers.............................................................................. 17 Section 5.12. Approval of Annual Budget............................................................. 18 Section 5.13. Powers of the Board; Powers of Officers............................................... 18 Section 5.14. Reimbursement......................................................................... 19 ARTICLE 6 CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS, DISTRIBUTIONS AND ALLOCATIONS................ 20 Section 6.1. Capital Contributions................................................................. 20 Section 6.2. Capital Accounts...................................................................... 20 Section 6.3. Distributions of Cash................................................................. 20
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Page Section 6.4. Allocations of Profits and Losses for Tax Purposes.................................... 21 Section 6.5. Special Allocations................................................................... 22 Section 6.6. Allocations under Code Section 704(c)................................................. 22 Section 6.7. Transfer of LLC Interests............................................................. 23 ARTICLE 7 TRANSFER OF LLC INTERESTS, PUT AND CALL OPTIONS, CHANGE OF CONTROL AND ADMISSION OF ADDITIONAL MEMBERS ...................................................................................... 23 Section 7.1. Assignability of Interests............................................................ 23 Section 7.2. Put Options........................................................................... 23 Section 7.3. Call Options.......................................................................... 26 Section 7.4. Right of First Refusal................................................................ 29 Section 7.6. Substitute Members.................................................................... 31 Section 7.7. Recognition of Transfer by LLC........................................................ 32 Section 7.8. Order of Puts and Calls and Right of First Refusal.................................... 32 Section 7.9. Indemnification....................................................................... 32 Section 7.10. Issuance of Additional LLC Interests.................................................. 32 Section 7.11. Assignment of Holdings' Rights and Obligations........................................ 32 ARTICLE 8 BOOKS AND RECORDS..................................................................... 33 Section 8.1. Books, Records and Financial Statements............................................... 33 Section 8.2. Accounting Method..................................................................... 33 Section 8.3. LLC's Independent Accounting Firm..................................................... 33 ARTICLE 9 TAX MATTERS........................................................................... 34 Section 9.1. Tax Matters Member.................................................................... 34 Section 9.2. Right to Make Tax Elections; Tax Classification....................................... 34 ARTICLE 10 LIABILITY, EXCULPATION AND INDEMNIFICATION............................................ 35 Section 10.1. Liability............................................................................. 35 Section 10.2. Exculpation........................................................................... 35 Section 10.3. Indemnification....................................................................... 35 Section 10.4. Expenses.............................................................................. 36 ARTICLE 11 NON-COMPETITION; CONFIDENTIALITY...................................................... 36 Section 11.1. Confidential Information.............................................................. 36 Section 11.2. Non-Competition....................................................................... 38 Section 11.3. Non-Solicitation...................................................................... 39 Section 11.4. Specific Performance.................................................................. 39 ARTICLE 12 CERTAIN COVENANTS..................................................................... 40 Section 12.1. Compliance with Laws; Maintenance..................................................... 40 Section 12.2. Business Arrangements................................................................. 41 Section 12.3. Client Agreements..................................................................... 41
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Page ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION.............................................. 41 Section 13.1. No Dissolution........................................................................ 41 Section 13.2. Events Causing Dissolution............................................................ 41 Section 13.3. Notice of Dissolution................................................................. 42 Section 13.4. Liquidation........................................................................... 42 Section 13.5. Termination........................................................................... 43 Section 13.6. Claims of the Members................................................................. 43 ARTICLE 14 REPRESENTATIONS AND WARRANTIES........................................................ 43 Section 14.1. Representations and Warranties of Natural Person Principals........................... 43 Section 14.2. Representations and Warranties of Grant Tani and Holdings............................. 43 Section 14.3. Representations and Warranties of All Members......................................... 44 ARTICLE 15 MISCELLANEOUS......................................................................... 44 Section 15.1. Amendments............................................................................ 44 Section 15.2. Power of Attorney..................................................................... 44 Section 15.3. Notices............................................................................... 45 Section 15.4. Waivers............................................................................... 47 Section 15.5. Binding Effect........................................................................ 47 Section 15.6. Severability.......................................................................... 47 Section 15.7. Counterparts.......................................................................... 47 Section 15.8. Governing Law......................................................................... 47 Section 15.9. Captions.............................................................................. 47 Section 15.10.Gender................................................................................ 47 Section 15.11.Third Party Beneficiaries............................................................. 48 Section 15.12.Remedies Cumulative................................................................... 48 Section 15.13.Integration........................................................................... 48
Schedule 1 Capital Contributions, Membership Points and LLC Interests Schedule 1(uuu) Pro Forma Financial Statements and Valuation Examples Schedule 5.1 Bonus Plan Schedule 5.11 LLC Officers Exhibit A Form of Put Notice Exhibit B Form of First Refusal Notice Exhibit C Form of Call Notice Exhibit D Form of Client Agreement iv AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF GRANT TANI BARASH & ALTMAN, LLC This Amended and Restated Limited Liability Company Agreement (the "Agreement") of Grant Tani Barash & Altman, LLC (the "LLC") is dated as of October 1, 2004, among GRANT, TANI, BARASH & ALTMAN, INC., a California corporation ("Grant Tani"), GTBA HOLDINGS, INC., a Delaware corporation ("Holdings"), Warren Grant ("Grant" or the "Second Member"), JANE TANI ("Tani"), COREY BARASH ("Barash") and HOWARD ALTMAN ("Altman"). This Agreement amends and restates in its entirety the LLC's Operating Agreement dated as of March 10, 2004, previously executed by Grant Tani and the Second Member (the "Original LLC Agreement"). BACKGROUND A. The Principals own all of the outstanding shares of capital stock of Grant Tani. B. The LLC has heretofore been formed as a limited liability company under the Delaware Limited Liability Company Act, 6 Del. C. Sections 18-101 et seq., as amended from time to time (the "Delaware Act"), by filing a Certificate of Formation of the LLC with the Office of the Secretary of State of Delaware on February 24, 2004 (the "Certificate"). C. Both Grant Tani and the Second Member contributed certain assets to the LLC and then executed the Original LLC Agreement. D. Pursuant to an Assignment and Assumption Agreement dated October 1, 2004, prior to the transactions contemplated by the Limited Liability Company Interest Purchase Agreement (as that term is hereinafter defined) Grant Tani contributed all of its assets, including the goodwill of its business (excluding any right of Grant Tani to receive a reversion of surplus assets from the Grant, Tani, Barash & Altman, Inc. Defined Benefit Plan), to the LLC (which assumed all of Grant Tani's liabilities, except those liabilities relating to the Grant, Tani, Barash & Altman, Inc. Defined Benefit Plan and/or the Grant, Tani, Barash & Altman, Inc. 401(k) Plan) in exchange for which the LLC issued Grant Tani an LLC Interest consisting of 99.99 Membership Points (as that term is hereinafter defined). E. After the execution of the Assignment and Assumption Agreement, Grant Tani, the Principals and Holdings consummated Closing (as that term is hereinafter defined) under the Limited Liability Company Interest Purchase Agreement, pursuant to which Holdings purchased from Grant Tani an LLC Interest consisting of 90 Membership Points. F. The parties desire to amend and restate the Original LLC Agreement in its entirety and to operate the LLC as a limited liability company under the Delaware Act on the terms and conditions herein. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1 DEFINED TERMS Unless the context otherwise requires, the terms defined in this Article 1 shall, for the purposes hereof, have the following meanings: a. "Accounting Period" means each Fiscal Year and each other period (1) beginning on the first Business Day following a day on which a Member (i) is admitted to the LLC, (ii) completely withdraws from the LLC, (iii) makes a capital contribution to the LLC, (iv) withdraws a portion of his or her Capital Account balance or (v) increases or decreases his or her Membership Points and (2) ending on the earliest thereafter to occur of December 31 or a Business Day on which any of the events in clauses (i)-(v) above occurs. b. "Affiliate" means, with respect to any Person: (1) any other Person directly or indirectly owning, controlling or holding with the power to vote 25% or more of the outstanding voting securities of that Person; (2) any Person directly or indirectly controlling, controlled by or under common control with that Person; (3) any officer, director or partner of that Person; and (4) if the Person is an officer, director or partner, any company for which that Person acts in that capacity. The term "control" means the possession, directly or indirectly, of the power, whether or not exercised, to direct or cause the direction or management or policies of any Person, whether through ownership of voting securities or otherwise. c. "Board" means the LLC's Board of Managers selected in accordance with, and with the power and authority set forth in, Article 5. d. "Business Day" means a day Wilmington Trust Company is open for business. e. "Call" has the meaning assigned to that term in Section 7.3(a). f. "Call Notice" has the meaning assigned to that term in Section 7.3(a). g. "Capital Account" means, with respect to any Member, the capital account established and maintained for that Member on the LLC's books in accordance with Section 1.704-1(b)(2)(iv) of the Treasury Regulations. h. "Carrying Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (1) The initial Carrying Value of an asset a Member contributes to the LLC shall be the Fair Market Value of that asset, as determined by the contributing Member and the Board; (2) The Carrying Value of all of the LLC's assets shall be adjusted to equal their respective Fair Market Values, as determined by the Board, as of the following -2- times: (a) the acquisition of an additional LLC Interest by any new or existing Member; (b) the distribution by the LLC to a Member of property as consideration for an LLC Interest; and (c) the liquidation of the LLC within the meaning of Section 1.704-(b)(2)(ii)(g) of the Treasury Regulations; provided that adjustments pursuant to clauses (a) and (b) above shall be made only if the Board reasonably determines that those adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the LLC; (3) The Carrying Value of any asset the LLC distributes to any Member shall be the Fair Market Value of that asset on the date of distribution; and (4) The Carrying Value of the LLC's assets shall be increased or decreased to reflect any adjustments to the adjusted bases of those assets pursuant to Code Section 734(b) or Code Section 743(b), but only (a) if an election under Code Section 754 is in effect and (b) to the extent those adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations; provided that Carrying Values shall not be adjusted pursuant to this clause (4) to the extent the Board determines that an adjustment pursuant to clause (2) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this clause (4). If the Carrying Value of an asset has been determined or adjusted pursuant to clause (1), (2) or (4) hereof, that Carrying Value shall thereafter be adjusted by the Depreciation taken into account with respect to those assets for purposes of computing Profits and Losses. i. "Cause," with respect to a Person, means any of the events set forth below, provided that a Person shall have 20 days after written notice of any such event to cure such an event that is curable: (1) A breach of any material provision of Article 11 hereof; (2) The failure of a Person to perform substantially that Person's duties with the LLC or the Management Company other than any such failure resulting from incapacity due to physical or mental illness; (3) The engaging by a Person in illegal conduct, dishonest conduct, conduct that is a breach of that Person's fiduciary duty or gross misconduct; or (4) Any disqualification, suspension or revocation of any applicable registration or license of a Person as a result of a final, non-appealable proceeding by the California State Board of Accountancy, any other state accounting board, the U.S. Securities and Exchange Commission, any state securities commission or any self-regulatory authority or court with jurisdiction over the LLC or the Management Company. j. "Certificate" has the meaning assigned to that term in Recital B hereto. -3- k. "Change of Control" means (1) the acquisition by any Person or group of Persons of beneficial ownership (as the 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 Holdings or Wilmington Trust Corporation, a Delaware corporation that owns all of Holdings' outstanding shares of capital stock ("WTC"), entitled to vote for the election of directors ("Voting Shares"); (2) the acquisition by any Person or any group of Persons (other than Holdings, WTC or any of their respective Affiliates) of 50% or more of the Membership Points in the LLC owned by Holdings or any of its Affiliates immediately prior to such acquisition; (3) the merger or consolidation of WTC with one or more other Persons as a result of which the holders of the outstanding Voting Shares of WTC immediately before the merger or consolidation hold less than 50% of the Voting Shares of the surviving or resulting Person; (4) the merger or consolidation of the LLC with one or more other Persons (other than Holdings or WTC or one or more of their respective Affiliates) as a result of which the holders of the outstanding Membership Points immediately before the merger or consolidation hold less than 50% of the total outstanding Membership Points (or equivalent) of the surviving or resulting Person; (5) the transfer of all or substantially all of Holdings', WTC's or the LLC's assets, other than to an Affiliate of Holdings or WTC; or (6) a proxy contest for the election of directors of WTC that results in Persons constituting the Board of Directors of WTC immediately before the initiation of that proxy contest ceasing to be a majority of the Board of Directors of WTC upon the conclusion of that proxy contest; provided that neither (x) any transfer of the capital stock or assets of Holdings or WTC to, or the merger or consolidation of Holdings or WTC with or into, (A) an entity that both prior to and also after that transfer, merger or consolidation had been and will be consolidated with Holdings or WTC for federal income tax purposes or (B) any newly formed, wholly owned subsidiary of Holdings or WTC that will be consolidated with Holdings or WTC for federal income tax purposes, nor (y) a transfer of LLC Interests by one or more Principals to one or more Permitted Transferees shall be deemed to be a Change of Control for purposes hereof. l. "Client" means, at any time, any Person who is at that time a customer or client of the LLC or a Subsidiary (either directly or by participating as a partner, member, shareholder or other equity holder of a Person to which the LLC or a Subsidiary provides business management services, including, without limitation, bookkeeping, cash flow management, budgeting, tax planning, insurance consultation and/or investment planning). m. "Closing" has the meaning assigned to that term in the Limited Liability Company Interest Purchase Agreement. n. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any corresponding federal tax statute enacted hereafter. A reference to a specific section of the Code refers to that section as well as any corresponding provision of any federal tax statute enacted hereafter, as that section is in effect on the date of application of the provisions hereof containing that reference. -4- o. "Confidential Information" has the meaning assigned to that term in Section 11.1(b). p. "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 that 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 that Fiscal Year or other period, Depreciation shall be an amount that bears the same ratio to that beginning Carrying Value as the federal income tax depreciation, amortization or other cost recovery deduction for that Fiscal Year or other period bears to that beginning adjusted tax basis; provided that, if the federal income tax depreciation, amortization or other cost recovery deduction for that year is zero, Depreciation shall be determined with reference to that beginning Carrying Value using any reasonable method the Board selects. q. "Derivative Share" means the portion of the outstanding LLC Interests of the LLC represented by the indirect, pecuniary interest of a shareholder of Grant Tani in Grant Tani LLC's Interest, which shall be determined, at any time, in accordance with the following formula: Derivative Grant Tani's The percentage of the Share = LLC Interest in x outstanding shares of the LLC Grant Tani held by that individual r. "Disability" has the meaning set forth in a policy or policies of disability insurance, if any, the LLC or the Management Company obtains for the benefit of itself and/or its employees. If there is no definition of "disability" applicable under any such policy or policies, then a Person shall be considered "Disabled" upon the first to occur of: (1) that Person's being adjudged incompetent by a court of competent jurisdiction; (2) that Person's being determined to be 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 acceptable to the LLC or the Management Company; or (3) that Person's being certified as permanently disabled under the provisions of the Social Security Act, as amended from time to time. s. "Election Period" has the meaning assigned to that term in Section 7.4(a). t. "Employment Agreement" means an employment agreement between the Management Company and a Principal as in effect from time to time. u. "Exchange Act" means the Securities Exchange Act of 1934, as amended. v. "Fair Market Value" means the amount for which an asset could be sold in an arms'-length transaction by one who desires to sell, but is not under any urgent requirement to -5- 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. w. "Family" means any member of a Person's immediate family, as defined in Rule 16a-1 of the Exchange Act, and all aunts, uncles, nieces, nephews and first and second cousins of that Person. x. "Final Election Period" has the meaning assigned to that term in Section 7.4(a). y. "First Refusal Notice" has the meaning assigned to that term in Section 7.2(d). z. "Fiscal Year" has the meaning assigned to that term in Section 2.4. aa. "Free Cash Flow" means, for any Accounting Period, (1) the Profits (determined without deduction of any Depreciation) for that period, excluding Profits resulting from or in connection with any Realization Event, less (2) all distributions during that period pursuant to Section 6.3(b). In no event shall Free Cash Flow for any Accounting Period be less than the LLC's consolidated revenues for that period (excluding cash generated by or in connection with any Realization Event) plus cash previously set aside as reserves for contingencies, working capital, debt service, taxes, insurance and/or other costs and expenses in connection with the LLC's business that the Board reasonably determines in good faith is no longer needed for the LLC's business, less the sum of (A) all cash expenditures the LLC made during that period (including operating expenses, principal and interest payments on any indebtedness of the LLC and lease payments on capitalized leases) and (B) funds the Board has reasonably determined in good faith to set aside during that period as such reserves. bb. "GAAP" means U.S. generally accepted accounting principles consistently applied with prior periods. cc. "Good Reason" means, with respect to any Principal employed by the LLC or the Management Company: (1) a reduction by the LLC or the Management Company in that Principal's title or salary as the foregoing is in effect on the date hereof; (2) the LLC's or the Management Company's requiring that Principal, without his or her consent, to be based at any office or location more than 25 miles outside the Los Angeles, California Metropolitan Statistical Area; (3) without the written consent of a Principal, the assignment to that Principal of duties inconsistent in any material respect with that Principal's position, authority, duties or responsibilities as in effect on the effective date of that Principal's employment by the LLC or the -6- Management Company, or any other action by the LLC or the Management Company, which assignment, in each instance, results in a material diminution in that position, authority, duties or responsibilities; or (4) the material breach by the Management Company of that Principal's Employment Agreement. Good Reason shall not include a Principal's death or Disability. The LLC or the Management Company shall have an opportunity to cure any claimed event of Good Reason within 30 days of notice from the Principal. dd. "Grant Tani Entities" means the LLC, Grant Tani, the Management Company and any Subsidiary (present or future) of any of the foregoing, and the term "Grant Tani Entity" means any one of the foregoing Grant Tani Entities. ee. "Holdings Change of Control Purchase Price" means an amount equal to the sum of (1) the Valuation multiplied by a fraction, the numerator of which is the number of Membership Points held by Holdlings and its Permitted Transferees and the denominator of which is the number of Membership Points outstanding on the Purchase Closing Date, less (2) what the Principals who exercise their right under Section 7.5(b) would have received under Section 3.1(b) of the Limited Liability Company Interest Purchase Agreement had only such Persons elected to receive an accelerated payment under those sections. The Holdings Change of Control Purchase Price shall be calculated by using the Valuation as of the end of the year immediately prior to the exercise of the rights described in Section 7.5(b). ff. "Initial Principal" means Grant, Tani, Barash or Altman. gg. "Limited Liability Company Interest Purchase Agreement" means the Limited Liability Company Interest Purchase Agreement dated as of April 2, 2004 among Grant Tani, Grant, Tani, Barash, Altman and Holdings, as it may be amended from time to time. hh. "Liquidating Trustee" has the meaning assigned to that term in Section 13.3. ii. "LLC Interest" means a beneficial interest in the LLC, consisting of an interest in Profits (i.e., an interest representing a claim to a portion of (i) Profits earned by the LLC after issuance of that LLC Interest, (ii) Free Cash Flow thereafter and (iii) under certain circumstances, distributions on the LLC's liquidation, all based on the interestholder's Membership Points) and in the LLC's capital (reflected by the interestholder's Capital Account balance). jj. "LLC Value" means the Valuation for the last completed Fiscal Year prior to the event giving rise to the calculation of LLC Value. kk. "Majority Vote" means (i) with respect to the Members, the written approval of, or the affirmative vote by, a majority in interest of the Members determined with reference to their Membership Points set forth on Schedule 1 hereto, and (ii) with respect to the Principals, the written approval of, or the affirmative vote by, a majority in interest of the Principals -7- determined with reference to their Membership Points set forth therein. For purposes of determining a Majority Vote, Membership Points owned by Non-Voting Members are not voted and are not counted in the calculation of the total Membership Points outstanding or the Membership Points held by the Principals for purposes of such vote. ll. "Management Company" means Grant, Tani, Barash & Altman Management, Inc., a Delaware corporation owned directly or indirectly by Holdings. mm. "Management Operating Agreement" means the management operating agreement dated the date hereof between the LLC and the Management Company. nn. "Manager" means a member of the Board. oo. "Members" means the Persons listed on Schedule 1 hereto and any additional Persons admitted as Members pursuant to the terms of this Agreement. pp. "Membership Points" means, as of any date, with respect to a Member, the number of Membership Points set forth opposite that Member's name on Schedule 1 hereto, as adjusted from time to time pursuant hereto and as in effect on that date. qq. "Metropolitan Statistical Area" of a city means that city's metropolitan statistical area as defined by the United States Office of Management and Budget. rr. "Non-Voting Member" means a Member owning an LLC Interest but, pursuant to Section 4.6, not having the right to vote his or its Membership Points. ss. "Note" has the meaning assigned to that term in Section 7.3(c). tt. "Offer" has the meaning assigned to that term in Section 7.4(a). uu. "Offered Membership Points" has the meaning assigned to that term in Section 7.4(a). vv. "Offer Notice" has the meaning assigned to that term in Section 7.4(a). ww. "Officer" has the meaning assigned to that term in Section 5.11. xx. "Original LLC Agreement" has the meaning assigned to that term in the Preamble hereto. yy. "Other Principals" has the meaning assigned to that term in Section 7.2(b). zz. "Permitted Transferee" means Holdings and any other Person consolidated with Holdings for federal income tax purposes and, with respect to any natural person, the parents, siblings, spouse, children (by birth or adoption) or spouses of children of that person (in any such case who are age 21 or over) and any trust, partnership, limited partnership, limited liability -8- partnership or limited liability company created by or for one or more of the aforementioned individuals (including those who are under age 21) of which a Principal is the voting trustee, general partner, managing member or otherwise possesses the power to vote the LLC Interest held by that entity. aaa. "Person" means any individual, partnership, limited liability company, corporation, association, trust, joint venture or governmental, business or other entity. bbb. "Pre-Tax Net Income" means the LLC's pre-tax net income calculated in accordance with GAAP, except that only [*]% of revenues generated from clients directly referred to the LLC by a staff member of WTC or any of its Affiliates shall be included in calculating Pre-Tax Net Income (which amount in the case of a dispute shall be determined by the Board). ccc. "Principals" means Grant, Tani, Barash, Altman and other employees of the LLC or the Management Company subsequently admitted to the LLC as Members in accordance herewith, and the term "Principal" means any one of the foregoing Principals. ddd. "Profits" and "Losses," for each Fiscal Year or Accounting Period mean an amount equal to the LLC's taxable income or loss, respectively, for that 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: (1) Any income of the LLC exempt from federal income tax and not otherwise taken into account in computing Profits or Losses shall be added to that taxable income or loss; (2) Any expenditures of the LLC described in Code Section 705(a)(2)(B) or treated as such expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Treasury Regulations, and not otherwise taken into account in computing Profits and Losses, shall be subtracted from that taxable income or loss; (3) 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 that property, notwithstanding that its adjusted tax basis differs from its Carrying Value; (4) In lieu of depreciation, amortization and other cost recovery deductions otherwise taken into account in computing taxable income or loss, there shall be taken into account Depreciation; and (5) Notwithstanding any other provisions of this definition, any items that are specially allocated pursuant to Section 6.5 or that result from an adjustment to basis of -9- one or more Members pursuant to Code Section 734(b) or 743(b) shall not be taken into account in computing Profits or Losses. eee. "Purchase Closing Date" means the date upon which LLC Interests are purchased and paid for pursuant to Article 7 hereof. fff. "Purchase Price" means, in the case of a purchase of an LLC Interest from a Principal or his or her Permitted Transferees or from Grant Tani (in the case of a purchase of the Derivative Share attributable to that Principal as a shareholder of Grant Tani), an amount equal to (a) the LLC Value multiplied by (b) a fraction, the numerator of which is the number of Membership Points associated with the LLC Interest to be purchased and the denominator of which is the number of all Membership Points outstanding on the related Purchase Closing Date. The Purchase Price shall be calculated by using the LLC Value as of the end of the Fiscal Year immediately prior to the exercise of the Put or the event giving rise to the Call. ggg. "Purchaser" has the meaning assigned to that term in Section 7.4(c). hhh. "Put" has the meaning assigned to that term in Section 7.2(b). iii. "Put Notice" has the meaning assigned to that term in Section 7.2(d). jjj. "Realization Event" means (1) any sale of all or substantially all of the LLC's assets, (2) any merger or consolidation of the LLC with or into another entity or, unless otherwise approved by the Board, of another entity with or into the LLC or (3) any dissolution or winding up of the LLC. kkk. "Remaining Principals" has the meaning assigned to that term in Section 7.4(a). lll. "Restricted Area" has the meaning assigned to that term in Section 11.2. mmm. "Restricted Period" has the meaning assigned to that term in Section 11.2. nnn. "Retirement" with respect to a natural person Principal means when that Principal reaches age 65; provided that Retirement shall not occur with respect to a Principal who continues to work for the LLC or the Management Company after reaching age 65 unless the Board notifies him or her that it objects to his or her continued participation in the LLC and the Management Company. Retirement with respect to a Principal who continues to participate in the LLC and the Management Company after reaching that age shall occur upon the earlier of (1) notification from the Board that it objects to that Principal's continued participation or (2) the voluntary cessation of the Principal's employment by the LLC and the Management Company. ooo. "Second Member" has the meaning assigned to that term in the Preamble hereto. ppp. "Subsidiary" or "Subsidiaries" means any corporation, partnership or other organization, whether incorporated or unincorporated, of which more than twenty-five percent -10- (25%) of either the equity interests in, or the voting control of, that corporation, partnership or other organization is beneficially owned by a Person, directly or indirectly, through Subsidiaries or otherwise, or of which a Person serves as the general partner or managing member. qqq. "Tax Matters Member" has the meaning assigned to that term in Section 9.1(a). rrr. "Term," with respect to a Principal, has the meaning assigned to that term in that Principal's Employment Agreement. sss. "Transfer" has the meaning assigned to that term in Section 7.1(a). ttt. "Treasury Regulations" means the income tax regulations, including temporary regulations, promulgated under the Code, as those regulations may be amended from time to time (including corresponding provisions of succeeding regulations). uuu. The "Valuation" will be based on a formula that weights the LLC's gross revenue and Pre-Tax Net Income at $[*] and applies a multiple based on the annual compound growth rate of each from the amounts reflected on Grant Tani's pro forma financial statements for the year ended December 31, 2003, which are attached hereto as part of Schedule 1(uuu). For all purposes in calculating the Valuation, Grant Tani's gross revenues for the year ended December 31, 2003 shall be deemed to be $[*] and its pre-tax net income for the year ended December 31, 2003 shall be deemed to be $[*]. The gross revenue multiple will be between [*] and [*] based on a range of annual compound growth rate of revenues. The Pre-Tax Net Income multiple will be between [*] and [*], based on a range of annual compound growth rates of Pre-Tax Net Income. The multiples will be determined by calculating the annual compound growth rates of the LLC's gross revenues and Pre-Tax Net Income according to the following formula:
Pre-Tax Net Annual Compound Growth Gross Revenue Multiple Income Multiple - ---------------------- ---------------------- --------------- [*] or less [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] or greater [*] [*]
Annual compound growth in revenues or Pre-Tax Net Income between [*]and [*] shall be interpolated proportionately. The Valuation will be determined for each calendar year in accordance with GAAP and the accounting principles and practices historically used by Grant Tani in preparing the Financial Statements, provided that the following items will be excluded: (1) extraordinary, non-recurring items of revenue (including any fees received for services previously provided to Burger Business, LLC) and expense; and (2)[*]. For purposes of -11- determining the Valuation, expenses of the LLC do not include the cost of support services generally available from WTC, but do include the cost of the benefits described in Section 7.1 of the Limited Liability Company Interest Purchase Agreement and the costs and fees paid the Management Company under the Management Operating Agreement. For years after 2003, the Valuation will be calculated by reference to the LLC's financial statements prepared in accordance with GAAP and separately audited by an independent accounting firm selected by the Principals and acceptable to Holdings, which acceptance will not be unreasonably withheld, and such other books and records as are sufficient to identify the items in the proviso in the preceding sentence. The following is a sample calculation of the Valuation at the end of the second calendar year following Closing assuming annual compound growth of revenues of [*] and annual compound growth of Pre-Tax Net Income of [*]: Gross Revenue = $[*] Interpolated gross revenue multiple = [*] Valuation based on gross revenue = $[*] Pre-Tax Net Income = $[*] Interpolated Pre-Tax Net Income multiple = [*] Valuation based on Pre-Tax Net Income = $[*] Earnout valuation = [*] * $[*] + [*] * $[*] = $[*] Earnout payment = [*] * $[*] = $[*] Included in Schedule 1(uuu) are additional examples of computations related to the Valuation. Notwithstanding the foregoing or anything to the contrary herein, for purposes of determining the Valuation, for any period beginning after January 1, 2004 until Closing, Grant Tani's financial statements, prepared on an accrual basis in accordance with GAAP (including, without limitation, an appropriate accrual for the Bonus Plan that is Schedule 5.1 to this Agreement) and separately audited by an independent accounting firm selected by the Principals and acceptable to Holdings (which acceptance shall not be unreasonably withheld), and such other books and records as are sufficient to identify the items in the proviso in the first sentence of the third paragraph of this Section 1(uuu) for Grant Tani, shall be used in place of the LLC's financial statements. vvv. "Voting Members" means all Members, other than Non-Voting Members. www. "WTC" has the meaning assigned to that term in Section 1(k). -12- xxx. "WTC Clients" means investment management, custody and personal trust clients of WTC or any of its Affiliates. For this purpose, the LLC and its Subsidiaries are not considered to be Affiliates of WTC. ARTICLE 2 GENERAL PROVISIONS Section 2.1. Formation, Name and Continuation. The name of the LLC is "Grant Tani Barash & Altman, LLC." The LLC's business will be conducted with reference to its affiliation with WTC as the Board designates from time to time and may be conducted under any other name or names the Board designates from time to time. The parties hereto enter into this Agreement pursuant to the provisions of the Delaware Act and for the purposes described herein. The rights and liabilities of the Members shall be as provided in the Delaware Act for members, except as provided herein. The name, mailing address, initial capital contribution and Membership Points of each Member shall be listed on Schedule 1 hereto. The LLC's Secretary shall update any schedule from time to time necessary to reflect accurately the information therein. Any amendment or revision to a schedule made in accordance with this Agreement shall not be deemed an amendment hereto. Any reference in this Agreement to a "schedule" shall be deemed to be a reference to a schedule hereto as amended and in effect from time to time, unless expressly noted otherwise. Section 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 Delaware and shall continue in perpetuity, unless dissolved in accordance with the provisions hereof. The existence of the LLC as a separate legal entity shall continue until the Certificate's cancellation. Section 2.3. Registered Agent and Office; Principal Place of Business. a. The LLC's registered agent and office in Delaware shall be WTC, Rodney Square North, New Castle County, Delaware 19890. The Board may at any time designate another registered agent and/or registered office. b. The LLC's principal place of business initially shall be at 9100 Wilshire Boulevard, Suite 1000 West, Beverly Hills, California 90212. c. The Board may, at any time and from time to time: (1) change the location of the LLC's principal place of business and establish an additional place or places of business of the LLC as it may determine; (2) change the location of the LLC's books and records; (3) change the LLC's registered office in Delaware; and (4) change the LLC's resident agent for service of process in Delaware. -13- Section 2.4. Fiscal Year. Except as the Board determines otherwise, the LLC's fiscal year for accounting purposes and taxable year ("Fiscal Year") shall be the calendar year, except for the short year in the years of the LLC's formation and termination and as otherwise required by the Code. ARTICLE 3 PURPOSE AND POWERS OF THE LLC Section 3.1. Purpose. The LLC is formed for the 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; provided that the LLC is not formed for the purpose of and shall not engage in any business that would be impermissible for WTC or any of its Affiliates under federal or state banking law, as those laws may be amended from time to time. Section 3.2. Powers of the LLC. The LLC shall have all power and authority granted under the Delaware Act to take all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purpose set forth in Section 3.1. ARTICLE 4 MEMBERS Section 4.1. Voting. Members shall have the power to vote only as provided by this Article 4 and as required by law. Unless otherwise provided in this Agreement or by law, any vote of Members shall be determined by a Majority Vote. Section 4.2. Meetings of Members. The Board, the LLC's President or Members holding LLC Interests representing at least five Membership Points may call a meeting of Voting Members. Meetings of Voting Members shall be held at the LLC's principal place of business upon at least 10 days' written notice to all Voting Members. The notice shall state the purpose or purposes of the meeting with reasonable particularity and shall contain a description of the items to be acted upon. Any notice required hereunder may be waived in writing by the Person to whom notice should have been sent, whether before or after the meeting, and attendance at any meeting waives the 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 was not lawfully called or convened. Section 4.3. Quorum. At any meeting of Voting Members, the presence of Members owning LLC Interests representing a majority of the Membership Points, other than LLC Interests representing 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 -14- 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 Voting Members. Section 4.4. Action by Consent. Any action of Voting Members may be taken without a meeting if the Voting Members required to consent to the action to be taken, if the action had been taken at a meeting of Voting Members, consent to the action in writing and the Board and all Members are given at least five days' prior written notice of the proposed action. The written consents shall be filed with the records of the Members' meetings. Those actions by consent shall be treated for all purposes as actions taken at a meeting. Section 4.5. Telephonic Meetings. Voting Members may participate in a meeting of Voting Members by means of a conference telephone or similar communications equipment if all Voting Members participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 4.6. Non-Voting Members. Any Member shall become a Non-Voting Member until his or her LLC Interest has been purchased in full in accordance with Article 7 if that Member (a) is terminated from employment with the LLC or the Management Company for Cause, (b) voluntarily resigns from employment with the LLC or the Management Company without Good Reason, (c) is a Member during the periods described in Sections 7.2(e) and 7.3(d) or (d) is so determined by the Board to be a Non-Voting Member by reason of Cause. The estate or other successor of any Member that dies, dissolves or otherwise ceases to exist shall become a Non-Voting Member until his, her or its LLC Interest has been purchased in full in accordance with Article 7. In accordance with Section 7.6, the Board may admit a substitute Member as a Non-Voting Member. Non-Voting Members do not have the right to receive notice of meetings of Voting Members or to participate in those meetings. ARTICLE 5 MANAGERS AND OFFICERS Section 5.1. Managers. The management of the LLC's business shall be vested in the Board, which shall consist of five Managers, all of whom must be Voting Members or employees, officers or directors of Voting Members or of Holdings or one of its Affiliates. Unless otherwise specified herein, 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 present having one vote. Notwithstanding the foregoing, subject to the Board's authority to approve the LLC's budget as set forth in Section 5.12 hereof, the Principals shall set the salary and benefits of the employees of the LLC and their Subsidiaries, including setting (a) the amount of the bonus under the Bonus Plan attached hereto as Schedule 5.1 (the "Bonus Plan"), (b) the annual increase in base salaries and (c) the terms of generally applicable benefit plans (including health coverage, -15- group life and disability insurance and retirement, including any benefits the LLC seeks to obtain from WTC pursuant to Section 7.1 of the Limited Liability Company Interest Purchase Agreement and Section 12.2(b) of this Agreement); provided, however, that a Manager whose compensation is being approved shall not be entitled to vote with respect to that matter. Without limiting the foregoing, the initial Principals shall be entitled to aggregate salaries totaling $[*] (to be increased annually by not more than [*]% and not less than the annual rate of inflation as determined by the increase in the California Consumer Price Index), to be allocated among them as they determine by Majority Vote of the Principals. Section 5.2. Designated Managers. a. Until (1) March 31, 2009 and (2) thereafter provided that they own combined LLC Interests and Derivative Shares with an aggregate of at least 3% of the then outstanding Membership Points, the Principals shall be entitled to designate or redesignate two of the five Managers by Majority Vote of the Principals (or at least 40% of the Managers if the number of Managers is adjusted) by written notice to the Board of their designee. The Designated Managers must be Principals. b. Holdings and its Affiliates shall be entitled to appoint the remainder of the five Managers (or at least 60% of the Managers if the number of Managers is adjusted) by written notice to the Board of their designees. c. The initial Managers of the LLC shall be Warren Grant and Howard Altman, who shall be deemed designated by the Principals pursuant to Section 5.2(a), and Rodney P. Wood, David R. Gibson and Alan K. Bonde, who shall be deemed designated by Holdings and its Affiliates pursuant to Section 5.2(b). A Manager shall hold office until the Manager resigns, Retires, dies or is removed. Section 5.3. Resignation or Removal of a Manager. a. Any Manager may resign by delivering to the LLC a signed notice indicating his or her intent to resign and the effective date of his or her resignation. b. The Board by Majority Vote may remove any Manager (1) for Cause or (2) if the Manager becomes subject to a Disability. A Manager shall be automatically removed if he or she becomes a Non-Voting Member. Those Persons who are entitled to designate a Manager and who hold the number of Membership Points necessary to designate a Manager may remove and replace that Manager previously designated by them at any time upon written notice to the LLC. Section 5.4. Vacancies. If a Manager resigns or is removed from the Board, the Persons who previously designated that Manager may designate another Person to serve as Manager at any time after the resignation or removal by written notice to the LLC. Section 5.5. Meetings. The Board shall hold regular quarterly meetings at such places and times as the Board determines from time to time, provided reasonable notice of the first -16- regular meeting following any such determination is given to Managers absent at the meeting fixing regular meetings. When called by the President or by Managers holding at least 25% of the votes on the Board, the Board may hold special meetings at such places and times as are designated in the call of the meeting, upon at least ten days' notice given by the President, 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 meeting, and attendance at any meeting waives the 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 was not lawfully called or convened. Section 5.6. Quorum. At any meeting of the Board, the presence of three Managers 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 10 days' notice to all Managers. Section 5.7. Action by Consent. Any action of the Board may be taken without a meeting if the Managers required to consent to the action to be taken, if the action had been taken at a meeting of the Board, consent to the action in writing. The written consents shall be filed with the records of the Board meetings. Those actions by consent shall be treated for all purposes as actions taken at a meeting. Section 5.8. Telephonic Meetings. Managers may participate in Board meetings by conference telephone or similar communications equipment, as long as all Managers participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence at the meeting in person. Section 5.9. Managers as Agents; Limitation on Power of Members. To the extent of their powers set forth herein, the Managers are agents of the LLC for purposes of the LLC's business, and the actions of the Managers taken in accordance with those powers shall bind the LLC. No Member, in that Person's capacity as Member, acting individually or with all Members, and no Managers representing less than the number of Managers necessary for Board action under Sections 5.1 or 5.7, may bind the LLC. The Managers representing the number of Managers necessary for Board action under Article 5 may bind the LLC. Section 5.10. Duty of Managers. A Manager is required to act in good faith in a manner he or she reasonably believes to be in the best interest of the LLC and shall be deemed to owe the same fiduciary duty to the LLC as a director of a Delaware corporation is deemed to owe the corporation under Delaware law. Section 5.11. Officers. The Board may appoint agents and employees of the LLC who are designated as officers of the LLC (each, an "Officer"). The Officers shall at all times include a President and a Secretary and may from time to time include a Chairman, a Vice Chairman, one or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant -17- Secretaries and such other Officers as the Board may approve. The initial Officers shall be as set forth on Schedule 5.11. Subject to Section 5.13(d)(5), 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 the LLC's behalf, subject to the direction of the Board, and to have such other duties as the Board may approve, provided that the delegation of any such power and 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 the LLC's behalf as provided herein. The Secretary shall record the actions of the Board, certify this Agreement and any related document or instrument, certify Board resolutions, incumbency and other matters of the LLC, and have such other ministerial duties as the Board may specify from time to time. Section 5.12. Approval of Annual Budget. The Board alone shall have the power to approve the LLC's annual budget. If the LLC's annual budget is not approved in its entirety by the Board under this Section 5.12, 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. The Officers shall not exceed the LLC's annual budget by more than 10% without seeking prior approval of the Board of any further expenses of the LLC. Section 5.13. Powers of the Board; Powers of Officers. a. Subject to the provisions hereof and of the Delaware Act requiring the approval of Members, the Board's powers on behalf and in respect of the LLC shall be all powers and privileges permitted to be exercised by managers of the LLC under the Delaware Act (including Section 18-402 of the Delaware Act), including the authority, power and discretion to manage and control the business operations, affairs and properties of the LLC, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the LLC's business operations. Notwithstanding the foregoing, subject to the Board's right to approve the LLC's budget as set forth in Section 5.12 hereof, the Principals shall have the right and power, by Majority Vote of the Principals, to hire and terminate employees of the LLC who are not Principals and determine salaries, bonuses and other employee benefits for the employees of the LLC (including any benefits the LLC seeks to obtain from WTC pursuant to Section 7.1 of the Limited Liability Company Interest Purchase Agreement or Section 12.2(b) of this Agreement). b. 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 or any one or more of them. c. The Board hereby delegates to the respective Officers the respective powers delegated to officers of a corporation under Delaware's General Corporation Law, subject, except as otherwise provided herein, to the powers of a board of directors of a corporation under Delaware law. Any documents signed by such Officers with the foregoing delegation shall be binding on the LLC as if signed by the number of Managers required to approve that action. The Board reserves the right to rescind the delegation of any such powers at any time in its sole discretion. -18- d. Notwithstanding the foregoing, prior to January 1, 2009, without the approval of at least one Manager who is a Principal, (i) Holdings shall not sell, transfer or assign any of its LLC Interests except to a Person that is an affiliate of Holdings, and (ii) the Board has no authority to: (1) issue new LLC Interests; (2) admit new Members; (3) in a single transaction or series of related transactions, consolidate or merge the LLC or any Subsidiary of the LLC with or into another Person (whether or not the LLC or that Subsidiary is the surviving Person), sell, assign, transfer, lease, convey or otherwise dispose of all or any substantial part of the property or assets of the LLC or any Subsidiary of the LLC, or liquidate, dissolve or wind up, or undertake any similar transaction or authorize, announce, make proposals or seek offers for, or enter into any binding or nonbinding arrangements, understandings or agreements with respect to any transaction or transactions with a similar effect to the foregoing, except in all cases with, into, or to any Person that is an Affiliate of the LLC or Holdings; (4) file a voluntary petition or otherwise initiate proceedings (i) to have the LLC adjudicated insolvent, or (ii) seeking an order for relief of the LLC as a debtor under the United States Bankruptcy Code (11 U.S.C. Sections 101 et seq.); file any petition seeking any composition, reorganization, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy laws or any other present or future applicable federal, state or other statute or law relating to bankruptcy, insolvency or other relief for debtors with respect to the LLC; or seek, consent or fail to contest the appointment of any trustee, receiver, conservator, assignee, sequestrator, custodian, liquidator (or other similar official) of the LLC or of all or any substantial part of the property or assets of the LLC, or make any general assignment for the benefit of creditors of the LLC, or admit in writing the inability of the LLC to pay its debts generally as they become due, or declare or effect a moratorium on the LLC's debt or take any action in furtherance of any proscribed action; or (5) determine that an event of Cause or a Disability has occurred with respect to a Principal hereunder. e. The Principals shall report to an officer of WTC at the level of executive vice president or above. Section 5.14. Reimbursement. The LLC shall reimburse each Manager and Officer for all reasonable and necessary out-of-pocket expenses that Manager or Officer incurs on the LLC's behalf according to terms the Board approves, except that the LLC will not be required to reimburse any out-of-pocket travel expenses of a Manager or Officer who has been designated by Holdings. The Board's sole determination of which expenses may be reimbursed to a Manager or an Officer and the amount of those expenses shall be conclusive. Any such reimbursement -19- shall be treated as an expense of the LLC that shall be deducted in computing Profits and Losses and, if made to a Manager or Officer that also is a Member, shall not be deemed a distributive share of Profits or a distribution or return of capital to such Manager or Officer. ARTICLE 6 CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS, DISTRIBUTIONS AND ALLOCATIONS Section 6.1. Capital Contributions. In exchange for the capital contribution set forth opposite their names on Schedule 1 hereto, Holdings and the Second Member have each received an LLC Interest with the number of Membership Points set forth therein. Section 6.2. Capital Accounts. Each Member shall have a Capital Account, which shall not bear interest. No Member has the right to demand a return of that Member's capital contributions (or the balance of that Member's Capital Account). In addition, no Member has the right to (a) demand and receive any distribution from the LLC in any form other than cash or (b) bring an action of partition against the LLC or its property. Section 6.3. Distributions of Cash. a. Within 15 days after the availability of the year-end audit for each Fiscal Year, the Board shall cause the LLC to distribute Free Cash Flow to the Members in proportion to the average of their respective Membership Points held as of the close of each Accounting Period in that Fiscal Year. b. Notwithstanding Section 6.3(a), the Board shall cause the LLC to make interim distributions of Free Cash Flow to the Members within 30 days after the end of each of the four quarters in each Fiscal Year, in proportion to the average of their respective Membership Points held as of the close of each Accounting Period in such quarter; all such distributions in any Fiscal Year shall be deemed advances against the distribution required by Section 6.3(a) for that year. If any such distribution is determined to be excessive by the Board, the Members shall repay, without interest, the excessive portion of the distribution within 30 days after being notified by the Board in writing of that determination. c. The LLC is authorized to withhold from distributions, or with respect to allocations, to the Members and to pay over to any foreign, federal, state or local government any amount required to be so withheld pursuant to the Code or any provision of any foreign, federal, state or local tax law. All amounts so withheld, and all amounts withheld pursuant to the Code or any provision of any foreign, federal, state or local tax law with respect to any payment, distribution or allocation to the LLC, shall be treated for all purposes hereof as amounts distributed pursuant to this Section 6.3 to the affected Member, or all of the Members, as the case may be. -20- d. Notwithstanding any provision to the contrary herein, the LLC shall not make a distribution to any Member on account of its LLC Interest if that distribution would (1) cause that Member to have a deficit balance in his, her or its Capital Account or (2) violate Section 18-607 of the Delaware Act or other applicable law. e. The proceeds of a sale of all or substantially all of the LLC's assets shall be distributed pursuant to Section 13.4(a) as if they were proceeds of the LLC's liquidation. f. If any LLC Interest is transferred during any Accounting Period, Free Cash Flow for that period that is distributable to the holder thereof shall be distributed in accordance with Section 6.7 (by substituting "Accounting Period" for "Fiscal Year"). Section 6.4. Allocations of Profits and Losses for Tax Purposes. a. After giving effect to the special allocations provided in Section 6.5, and except as otherwise provided in Section 6.4(c), Profits for any Fiscal Year or Accounting Period shall be allocated to the Members as follows: (1) First, to each Member in an amount equal to the excess, if any, of (i) the cumulative Losses allocated to that Member pursuant to Section 6.4(b) for all prior Fiscal Years and prior Accounting Periods in the current Fiscal Year over (ii) the cumulative Profits allocated to that Member pursuant to this Section 6.4(a) for all such prior Fiscal Years and Accounting Periods; provided that, if the Profits of the current Fiscal Year or Accounting Period are less than the sum of such excess for all Members, those Profits shall be allocated to each Member in proportion to his, her or its share of that sum; and (2) Second, to the Members in proportion to their respective Membership Points as of the end of that Fiscal Year or Accounting Period, as the case may be. b. After giving effect to the special allocations provided in Section 6.5, and except as otherwise provided in Section 6.4(c), Losses for any Fiscal Year or Accounting Period shall be allocated to the Members as follows: (1) First, to each Member in an amount equal to the excess, if any, of (i) the cumulative Profits allocated to that Member pursuant to Section 6.4(a) for all prior Fiscal Years and prior Accounting Periods in the current Fiscal Year over (ii) the cumulative Losses allocated to that Member pursuant to this Section 6.4(b) for all such prior Fiscal Years and Accounting Periods; provided that, if the Losses of the current Fiscal Year or Accounting Period are less than the sum of such excess for all Members, those Losses shall be allocated to each Member in proportion to his, her or its share of that sum, and provided further that no current Fiscal Year Losses shall be allocated to any Member to the extent that allocation would cause that Member to have a deficit in his, her or its Capital Account; -21- (2) Second, to the Members in proportion to their respective Membership Points as of the end of that Fiscal Year or Accounting Period, as the case may be, until the Capital Account balance as of that time of any Member is reduced to zero; and (3) Third, to the Members in proportion to their respective Capital Account balances as of the end of that Fiscal Year or Accounting Period, as the case may be. c. Notwithstanding Sections 6.4(a) and 6.4(b), Profits and Losses from the sale of all or substantially all of the LLC's assets, and Profits and Losses from a deemed sale of assets in connection with the liquidation of the LLC (as described in Section 13.4(b)), shall be allocated among the Members in proportion to distributions pursuant to Sections 13.4(a)(2) through (4). Section 6.5. Special Allocations. a. The provisions of the Treasury Regulations under Code Section 704(b) relating to the qualified income offset, minimum gain chargeback, minimum gain chargeback with respect to nonrecourse debt, allocation of nonrecourse deductions and allocation of items of deduction, loss or expenditure relating to nonrecourse debt hereby are incorporated herein by this reference and shall be applied to the allocation of items of income, gain, loss or deduction of the LLC. However, the Members do not intend to incorporate, by reference or otherwise, the "deficit restoration obligation" described in Section 1.704-1(b)(2)(ii)(c) of the Treasury Regulations. b. If items of income, gain, loss or deduction are allocated to one or more Members pursuant to Section 6.5(a), subsequent items of income, gain, loss or deduction shall first be allocated to the Members in a manner designed to result in each Member's receiving an allocation of Profits and Losses through the time of that subsequent allocation equal to what that Member would have received in the absence of Section 6.5(a). Section 6.6. Allocations under 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 LLC's capital shall, solely for tax purposes, be allocated among the Members to take account of any variation between the LLC's adjusted basis in that property 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 Section 1.704-1(b)(2)(iv)(f) of the Treasury Regulations shall take account of any variation between the LLC's adjusted basis in that 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 Sections 6.6(b) or (c) shall be made by the Members in any manner that reasonably reflects the purposes and intent hereof. Allocations pursuant to Sections 6.4, 6.5 and 6.6 are solely for purposes of -22- federal, state and local income taxes and shall not affect, nor in any way be taken into account in computing, any Member's Capital Account balance, Free Cash Flow or other items or distributions pursuant to any provision hereof. Section 6.7. Transfer of LLC Interests. If an LLC Interest is transferred during any Fiscal Year (including to the LLC or another Member), the Profits or Losses attributable to that LLC Interest for that Fiscal Year shall be allocated, and the Free Cash Flow for that year distributable to the holder thereof shall be distributed, between the transferor and the transferee in any manner permitted by law as to which they agree; provided, however, that, if the LLC does not receive, on or before January 31 of the year following the Fiscal Year in which the transfer occurs, written notice from the transferor and the transferee stating the manner in which the parties have agreed to allocate those Profits or Losses and distributions of Free Cash Flow, then all such Profits or Losses and distributions of Free Cash Flow shall be allocated between or made to the parties based on the percentage of the year each of them was, according to the LLC's books and records, the holder of the transferred LLC Interest. ARTICLE 7 TRANSFER OF LLC INTERESTS, PUT AND CALL OPTIONS, CHANGE OF CONTROL AND ADMISSION OF ADDITIONAL MEMBERS Section 7.1. Assignability of Interests. a. Except as otherwise provided in this Article 7, no LLC Interest may be sold, assigned, transferred, pledged, hypothecated, given, exchanged, optioned 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 his, her or its LLC Interest and/or the Derivative Share of Grant Tani's LLC Interest attributable to that Member to any one or more Permitted Transferees who agree to be bound by the terms and conditions hereof; provided that, notwithstanding anything to the contrary contained herein, the transferring Member shall retain the vote with respect to the LLC Interest so Transferred to Permitted Transferees; provided, however, that if the Transferee is Holdings or is consolidated with Holdings for federal income tax purposes, the Transferee shall become a Voting Member. Section 7.2. Put Options. a. Except as provided in the next paragraph of this Section 7.2(a), on or before February 28 of each year beginning in 2005, the Board shall notify each Principal and each Member of the LLC Value as of December 31 of the immediately preceding year. The Board shall also furnish a certified copy of a balance sheet, income statement and cash flow statement of the LLC for each Fiscal Year and statement of that Member's Capital Account balance as of the end of that Fiscal Year, all of which shall be audited by, and shall receive the unqualified -23- opinion of, the LLC's independent accounting firm, as if the LLC were independent and not affiliated with Holdings, to each Member promptly after that financial information is available. If the LLC's financial statements are unavailable until after February 28 of a year beginning in 2005, the Board shall notify, on or before February 28 of that year, each Principal and each Member of the estimated LLC Value as of December 31 of the immediately preceding year and shall notify each Member of the actual LLC Value as promptly as possible after those financial statements become available. If the Purchase Closing Date has occurred, each of the Principals, his or her Permitted Transferees and Grant Tani, as the case may be, exercising Put rights with respect to his, her or its LLC Interests and the purchaser(s) of such LLC Interests, as the case may be, shall remit to the other(s) the amount(s) necessary to reflect appropriately the difference between the LLC Value and the estimated LLC Value. b. Subject to the terms, conditions and limitations of this Section 7.2, each Principal (on behalf of himself or herself and/or his or her Permitted Transferees) (but not Grant Tani, other than in accordance with the next sentence) may exercise an option to sell all or any portion of his, her or its LLC Interest and associated Membership Points at the Purchase Price therefore by delivery of a notice in the form of Exhibit A. In addition, subject to the terms, conditions and limitations of this Section 7.2, if a Principal, as a shareholder of Grant Tani, exercises an option to sell all or any portion of his or her Derivative Share of Grant Tani's LLC Interests attributable to that Principal, then Grant Tani shall exercise an option to sell that portion of its outstanding LLC interests represented by the Derivative Share attributable to that Principal (each such exercise by a Principal or Grant Tani is referred to herein as a "Put") at the Purchase Price therefor by delivery of a notice in the form of Exhibit A. Upon exercise of a Put under this Section 7.2(b) by a Principal, the other Principals (the "Other Principals") shall first have the right (in proportion to their Membership Points or in such other proportions as the Other Principals may determine) to purchase from that Principal, that Principal's Permitted Transferees and/or Grant Tani, as the case may be, all of that Principal's and his or her Permitted Transferees' LLC Interests and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal with respect to which the Put has been exercised (or such portion as the Other Principals agree to purchase). If the Other Principals do not elect to purchase all of such LLC Interests and associated Membership Points, Holdings shall thereupon become obligated to purchase any such remaining LLC Interests and associated Membership Points. c. Notwithstanding anything contained in Section 7.2(b) to the contrary, unless otherwise agreed to by Holdings: (1) an Initial Principal (on behalf of himself, herself, his or her Permitted Transferees and/or the Derivative Share of Grant Tani's LLC Interest attributable to that Principal) may not exercise a Put prior to January 1, 2010; (2) a Principal other than an Initial Principal (on behalf of himself, herself, his or her Permitted Transferees and/or the Derivative Share of Grant Tani's LLC Interest attributable to that Principal) may not exercise a Put until such Principal has been a Member for at least five years; and (3) Puts may not be exercised by a Principal in any year with respect to LLC Interests and associated Membership Points representing more than 50% of the Membership Points of the LLC owned by that Principal, his or her Permitted Transferees and/or the Derivative Share of Grant Tani's LLC -24- Interest attributable to that Principal and, with respect to an Initial Principal, the lesser of that amount and more than 50% of the Membership Points of the LLC owned by that Initial Principal, his or her Permitted Transferees and/or the Derivative Share of Grant Tani's LLC Interest attributable to that Initial Principal at Closing (as defined in the Limited Liability Company Interest Purchase Agreement); provided, however, if a Put is not exercised in full by a Principal or his or her Permitted Transferees or with respect to the Derivative Share of Grant Tani's LLC Interest attributable to that Principal for any year beginning in the first year in which that Put is first exercisable, the unexercised portion may be exercised at the time a Put is exercised for any subsequent year. For purposes of illustration, if, during 2010, an Initial Principal, his or her Permitted Transferees and Grant Tani exercised a Put for LLC Interests associated with only 10% of the Membership Points held by them at Closing relating to that Principal, that Principal, his or her Permitted Transferees and Grant Tani would then be permitted during 2011 to exercise a Put in respect of LLC Interests associated with 90% of the Membership Points held by them at Closing relating to that Principal. d. A Principal (on behalf of himself, herself, his or her Permitted Transferees and/or the Derivative Share of Grant Tani's LLC Interest attributable to that Principal) may exercise a Put if, on or before March 31 of the year in which the exercise occurs, Holdings and each Other Principal receives an irrevocable notice of exercise of the Put substantially in the form of Exhibit A hereto (a "Put Notice") stating that he or she is electing to exercise the Put and specifying the LLC Interests and associated Membership Points to be sold pursuant to the Put. On or before 60 days after receipt of a Put Notice, the Other Principals may exercise their right of first refusal to purchase all of that Principal's and his or her Permitted Transferees' LLC Interests and associated Membership Points and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal with respect to which the Put has been exercised (or such portion as the Other Principals agree to purchase) by providing written notice to the Principal and/or the Principal's Permitted Transferees, as the case may be, and Holdings in the form of Exhibit B (the "First Refusal Notice"). If that right is exercised, that Principal, that Principal's Permitted Transferees and Grant Tani shall be obligated to sell to the Other Principals all of those LLC Interests and associated Membership Points (or such portion as the Other Principals agree to purchase). If the Other Principals do not elect to purchase all of those LLC Interests and associated Membership Points (or if Holdings has not received any notice from the Other Principals of their intention to purchase all of those LLC Interests and associated Membership Points) within the 60-day period described in this Section 7.2(d)), Holdings shall purchase any such remaining LLC Interests and associated Membership Points. The Purchase Closing Date for a purchase pursuant to this Section 7.2(d) shall be within 60 days following the earlier of (1) the expiration of the 60-day time period contained in the preceding paragraph or (2) the delivery of the First Refusal Notice by the Other Principals of their exercise in part or in whole of their rights of first refusal. On the Purchase Closing Date, each of Holdings and the Other Principals, as applicable, shall pay the Purchase Price, in proportion to the amount of LLC Interests and associated Membership Points being purchased by that Person, to the Member by certified check or wire transfer of immediately available funds against delivery of the LLC Interests and associated Membership Points, free and clear of all -25- liens, security interests and other encumbrances, and any other documents or instruments of transfer as they may reasonably request. e. On the last day of the month in which a Put is exercised by a Principal (on behalf of himself, herself, his or her Permitted Transferees and/or the Derivative Share of Grant Tani's LLC Interest attributable to that Principal), those Persons shall cease to have any rights as a Member with respect to the LLC Interests so Put other than (1) the right to receive the Purchase Price on the Purchase Closing Date and (2) the right to receive distributions and allocations with respect to those LLC Interests through the Purchase Closing Date. Without limiting the generality of the foregoing, the LLC Interests to be purchased on the Purchase Closing Date shall not have any voting rights during that period. Section 7.3. Call Options. The following provisions with respect to the purchase and sale of an LLC Interest of a Principal (and his or her Derivative Share) and his or her Permitted Transferees shall apply following the Principal's death, Disability, Retirement, termination of a Principal's employment with the LLC, a transfer required by operation of law or other involuntary transfer of an LLC Interest. a. In the event of the death, Disability or Retirement of a Principal, the Other Principals shall have the right (in proportion to their respective Membership Points or in such other proportions as the Other Principals may determine), exercisable by providing written notice, within 60 days of that event, to the Principal, the Principal's estate, the Principal's Permitted Transferees and/or Grant Tani, as the case may be, and Holdings in the form of Exhibit C (a "Call Notice"), to purchase (a "Call") from that Principal, that Principal's estate, that Principal's Permitted Transferees and/or Grant Tani, as the case may be. If that right is exercised, that Principal, that Principal's estate, that Principal's Permitted Transferees and/or Grant Tani, as the case may be, shall be obligated to sell to the Other Principals all or any portion of that Principal's and his or her Permitted Transferees' LLC Interests and associated Membership Points and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal (or that portion as the Other Principals agree to purchase). If the Other Principals do not elect to purchase all of those LLC Interests and associated Membership Points, Holdings shall have the right, exercisable by providing a Call Notice to the Principal, that Principal's estate, that Principal's Permitted Transferees and/or Grant Tani, as the case may be, within the 60-day period following receipt of notice from the Other Principals declining to purchase all or any portion of those LLC Interests and associated Membership Points and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal (or, if Holdings has not received any notice from the Other Principals regarding their intent to purchase any portion of those LLC Interests and associated Membership Points within the 60-day period following the first 60-day period), to purchase some or all of those remaining LLC Interests and associated Membership Points. If that right is exercised, that Principal, that Principal's estate and Permitted Transferees and Grant Tani shall be obligated to sell to Holdings all of those remaining LLC Interests and associated Membership Points (or that portion that Holdings agrees to purchase). Notwithstanding anything to the contrary herein, the Other Principals and Holdings shall not be obligated to purchase any or all of that Principal's and his or her Permitted Transferees' LLC -26- Interests and associated Membership Points or the Derivative Share of Grant Tani's LLC Interest attributable to that Principal, and any rights granted by this Section 7.3(a) may be exercised in whole or in part. The aggregate purchase price for all of that Principal's and his or her Permitted Transferees' LLC Interests and associated Membership Points and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal purchased pursuant to this Section 7.3(a) shall be the Purchase Price thereof. Each of Holdings and the Other Principals shall pay the Purchase Price in proportion to the amount of LLC Interests and associated Membership Points being purchased by that Person. The Purchase Closing Date for a purchase pursuant to this Section 7.3(a) shall be within 60 days following the earlier of (1) the expiration of the relevant 60-day time period(s) contained in the preceding paragraph or (2) the delivery of the Call Notice by Holdings. At the closing of the purchase from the Principal, the estate of the deceased Principal, the Principal's Permitted Transferees and/or Grant Tani, Holdings and/or the Other Principals shall deliver to the Principal, the personal representative of the deceased Principal's estate, his or her Permitted Transferees and/or Grant Tani, as the case may be, the Purchase Price by certified check or wire transfer of immediately available funds against delivery of the LLC Interests and associated Membership Points, free and clear of all liens, security interests and other encumbrances, and any other documents or instruments of transfer as they may reasonably request. Holdings and the Other Principals may purchase life insurance or disability insurance on any Principal. Each Principal shall cooperate with Grant Tani and the Other Principals in obtaining that insurance, including taking any required physical examinations. b. Within 60 days following (1) the date the Principal's employment with the LLC or the Management Company is terminated other than by reason of death, Disability or Retirement; (2) the date the Principal becomes a Non-Voting Member pursuant to Section 4.6(d); or (3) a transfer required by operation of law or other involuntary transfer of a Principal's or his or her Permitted Transferee's LLC Interests and associated Membership Points or the Derivative Share of Grant Tani's LLC Interest attributable to that Principal, the Other Principals (in proportion to their Membership Points or in such other proportions as the Principals may determine) may exercise a Call with respect to all or any portion of that Principal's and that Principal's Permitted Transferees' LLC Interests and associated Membership Points and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal. If some or all of those LLC Interests and associated Membership Points are transferred by operation of law or by means of any other involuntary transfer, that Person shall cause its transferees to comply with all of the requirements of this Section 7.3 as though they were parties hereto. A Call may be exercised by the Other Principals providing a Call Notice to the Principal, the estate of the deceased Principal, the Principal's Permitted Transferees and/or Grant Tani, as applicable, within 60 days after that event, of their intent to purchase all or any portion of the Principal's and that Principal's Permitted Transferees' LLC Interests and associated Membership Points and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal. If the Other Principals do not exercise a Call with respect to all of those LLC Interests and associated Membership Points in accordance with the preceding sentence (or if Holdings has not received any notice from the Other Principals of their intent to purchase any portion of those LLC Interests and associated -27- Membership within the 60-day period described in this Section 7.3(b)), Holdings shall have an additional 60 days to exercise a Call with respect to all or any portion of the LLC Interests and associated Membership Points for which the Other Principals do not exercise a Call by providing a Call Notice to the Principal, the estate of the deceased Principal, his or her Permitted Transferees and/or Grant Tani, as the case may be. Notwithstanding anything to the contrary contained herein, the Other Principals and Holdings shall not be obligated to exercise any Call, and any right granted in this Section 7.3(b) may be exercised in whole or in part. If a Call is exercised as a result of (1) a Principal's employment with the LLC or the Management Company being terminated without Cause or by reason of voluntary resignation of his or her employment with the LLC or the Management Company; or (2) a transfer required by operation of law or other involuntary transfer of a Principal's or his or her Permitted Transferees' LLC Interests and associated Membership Points and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal, the purchase price payable by the Other Principals and/or Holdings to that Principal, the estate of the deceased Principal, his or her Permitted Transferees and/or and Grant Tani for their LLC Interests and associated Membership Points and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal shall be the Purchase Price. If a Principal's employment with the LLC or the Management Company is terminated by the LLC or the Management Company for Cause or if the Principal becomes a Non-Voting Member pursuant to Section 4.6(d), then, notwithstanding anything else to the contrary herein, the Purchase Price payable by the Other Principals and/or Holdings to that Principal, the estate of the deceased Principal, his or her Permitted Transferees and/or Grant Tani for their LLC Interests shall be 90% of the Purchase Price that would otherwise apply. The Purchase Closing Date under this Section 7.3(b) shall be within 60 days following the earlier of (1) the expiration of the relevant 60-day time period(s) contained in the first paragraph of this Section 7.3(b) or (2) the delivery of the Call Notice by Holdings. At the closing of the purchase from the Principal, the estate of the deceased Principal, the Principal's Permitted Transferees and/or Grant Tani, Holdings and/or the Other Principals shall deliver to the Principal, the estate of the deceased Principal, his or her Permitted Transferees and/or Grant Tani, as the case may be, the Purchase Price or 90% of the Purchase Price, as the case may be, by certified check or wire transfer of immediately available funds against delivery of the LLC Interests and associated Membership Points, free and clear of all liens, security interests and other encumbrances, and any other documents or instruments of transfer as they may reasonably request. c. Notwithstanding the foregoing, if a Call is exercised with respect to the LLC Interests and associated Membership Points of a Principal or his or her Permitted Transferees and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal who has voluntarily resigned his or her employment with the LLC or the Management Company other than by death, Disability or Retirement or for Good Reason or whose employment by the LLC or the Management Company is terminated for Cause or if the Principal becomes a Non-Voting Member pursuant to Section 4.6(d), the portion of the Purchase Price payable to that Principal, the estate of the deceased Principal, his or her Permitted Transferees and Grant Tani shall be paid -28- by delivery of a three-year promissory note of the purchaser(s) of those LLC Interests and associated Membership Points to the selling Principal, the estate of the deceased Principal, his or her Permitted Transferees and Grant Tani, which shall bear interest at the "applicable federal rate" determined under Section 1274(d) of the Code for three-year instruments (a "Note"), payable quarterly, and the principal of which shall be payable three years after the Purchase Closing Date. d. On the last day of the month in which a Call is exercised, the Principal who has died, become Disabled or Retired, the estate of the deceased Principal, his, her or its Permitted Transferees and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal shall cease to have any rights as a Member with respect to the LLC Interest for which Calls have been exercised, other than (1) the right to receive the Purchase Price on the Purchase Closing Date and (2) the right to receive distributions and allocations with respect to that LLC Interest through the Purchase Closing Date. Section 7.4. Right of First Refusal. a. If Holdings desires to sell any or all of Holdings' LLC Interests to a third party (other than a Permitted Transferee) and Holdings receives an offer from a third party that would permit Holdings to do so, Holdings shall give notice ("Offer Notice") to the LLC and the Principals within 15 days of receipt of that offer ("Offer"), which Offer Notice shall set forth the name and address of the third party, the amount of the Membership Points associated with the LLC Interests to be sold, the proposed purchase price and the other terms and conditions of the Offer. The Principals shall have the option, exercisable by notice to Holdings, within 60 days of the date of the Offer Notice ("Election Period"), to purchase, pro rata in proportion to the number of Membership Points they then hold directly and their Derivative Share then held through Grant Tani, all (but not less than all) of Holdings' LLC Interests and associated Membership Points subject to the Offer ("Offered Membership Points") at the same price and on substantially the same terms specified in the Offer except as provided in Section 7.4(c); provided, however, (i) that, if one or more of the Principals does not elect to purchase his or her full proportionate amount of the Offered Membership Points, then the balance may be purchased by each of the other Principals ("Remaining Principals") in an amount equal to the balance multiplied by a fraction, the numerator of which is the number of Membership Points then held by a Remaining Principal and the Derivative Share of Grant Tani's LLC Interest attributable to that Principal and the denominator of which is the number of Membership Points then held by all of the Remaining Principals and the Derivative Share of Grant Tani's LLC Interest attributable to the Remaining Principals, or in such other proportions as they may agree, and (ii) that the Remaining Principals and Grant Tani must exercise their option to purchase all of the Offered Membership Points pro rata, or in such other proportions as such Remaining Principals and Grant Tani may agree, within ten days ("Final Election Period") after expiration of the Election Period. b. If neither the Principals, the Remaining Principals nor Grant Tani elect to purchase all of the Offered Membership Points, Holdings may, notwithstanding the other -29- provisions of this Article 7, within 180 days after expiration of the last applicable Election Period, transfer all (but not less than all) of the Offered Membership Points to the third party upon the same terms and conditions of the Offer; provided, however, that no such transfer may be made to that third party unless the third party executes and delivers to the LLC a written agreement, in form and substance satisfactory to the Board, agreeing to be bound by the provisions of this Agreement, in which event the third party shall become a Voting Member with the number of Membership Points associated with the Offered Membership Points. c. The closing of any purchase under this Section 7.4 shall be held at a place and date specified by the purchaser(s) of the Offered Membership Points ("Purchaser(s)"), but not more than 60 days after expiration of the last applicable Election Period. At that closing, the Offered Membership Points shall be delivered by Holdings to the Purchaser(s) thereof, free and clear of all liens, security interests and other encumbrances, and the Purchaser(s) shall pay the purchase price for the Offered Membership Points, and Holdings shall have right to receive distributions and allocations with respect to those Offered Membership Points through the Purchase Closing Date. If some or all of the Principals and/or Grant Tani are the Purchaser(s), the purchase price shall be payable in cash by the Purchaser(s) even if some of the consideration provided in the Offer was in a form other than cash, in which case that Purchaser(s) and Holdings shall in good faith ascribe a value to that non-cash consideration. If that Purchaser(s) and Holdings cannot agree on the value of the non-cash consideration, they shall retain an independent appraiser, mutually acceptable to that Purchaser(s) and Holdings, and the average of the high and low values ascribed to the non-cash consideration by the appraiser shall be the value. The fees of that appraiser shall be split equally between the Purchaser(s) (pro rata in proportion to number of Membership Points held by each such Purchaser) and Holdings. d. If all of Holdings' LLC Interests and associated Membership Points are purchased by a third party, then that third party shall succeed to all of Holdings' rights and obligations under this Agreement. If Holdings transfers part of its LLC Interests and associated Membership Points to that third party pursuant to this Section 7.4, the Principals, Grant Tani, Holdings and that third party shall make appropriate adjustments to the terms of this Agreement to entitle that third party to exercise Holdings' rights under Sections 7.2 and 7.3 proportionately with Holdings, and to otherwise grant that third party rights similar to Holdings' other rights under this Agreement. Section 7.5 Change of Control. a. In the event of a Change of Control, each of the Principals and/or their Permitted Transferees shall have the right, which must be exercised within six months after that Change of Control, to put to Holdings or WTC's successor all or a portion of the LLC Interests and associated Membership Points held by that Principal and/or Permitted Transferee, including their Derivative Shares. Upon exercise of a put under this Section 7.5(a), Holdings or its successor, as the case may be, shall thereupon become obligated to purchase the LLC Interests and associated Membership Points with respect to which the put has been exercised. The Purchase Closing Date under this Section 7.5(a) shall be within 60 days following the delivery of the notice by a -30- Principal and his, her or its Permitted Transferees, and those Persons (including Grant Tani with respect to Derivative Shares) shall have the right to receive distributions and allocations on the LLC Interests to be purchased through the Purchase Closing Date. At the Purchase Closing Date, Holdings or WTC's successor, as the case may be, shall deliver to Grant Tani, the Principal and/or his, her or its Permitted Transferees, as the case may be, the Purchase Price by certified check or wire transfer of immediately available funds against delivery of the LLC Interests and associated Membership Points, free and clear of all liens, security interests and other encumbrances, and any other documents or instruments of transfer as Holdings' or WTC's successor may reasonably request. b. In the event of a Change of Control prior to January 1, 2009, if some of the Principals do not elect to receive the accelerated payments pursuant to Section 3.1(b) of the Limited Liability Company Interest Purchase Agreement and less than all of the Principals and their Permitted Transferees exercise the put right provided for in Section 7.5(a), the Principals who or that have not exercised their put pursuant to Section 7.5(a) shall have the right to purchase all, but not less than all, outstanding LLC Interests then held by Holdings and/or its Permitted Transferees or WTC's successor, as the case may be, from those Persons, including those LLC Interests that were put under Section 7.5(a). This right to purchase may be exercised by some or all of such Principals by providing written notice to Holdings and Holdings' Permitted Transferees or WTC's successor, as the case may be, within eight months after the Change of Control of their intent to purchase all, but not less than all, outstanding LLC Interests from Holdings and/or its Permitted Transferees or WTC's successor, as the case may be. The Purchase Closing Date under this Section 7.5(b) shall be within 30 days following the delivery of the notice by those Principals. At the Purchase Closing Date, those Principals shall deliver to Holdings and/or its Permitted Transferees or WTC's successor, as the case may be, the Holdings Change of Control Purchase Price by certified check or wire transfer of immediately available funds against delivery of the LLC Interests, free and clear of all liens, security interests and other encumbrances, and any other documents or instruments of transfer they may reasonably request. Holdings and/or its Permitted Transferees or WTC's successor, as the case may be, shall have the right to receive distributions and allocations with respect to those LLC Interests through the Purchase Closing Date. Section 7.6. Substitute Members. Any Transfer of LLC Interests other than pursuant to this Article 7 shall nevertheless not entitle the transferee, unless already a Member, to become a Member or be entitled to exercise or receive any right, power or benefit of a Member other than the right to share in profits and losses, receive distributions and allocations of income, gain, loss, deduction or credit or similar item to which the 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 that transferee as a Non-Voting Member. That transferee shall not become a substitute Member without having first executed an instrument 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 -31- to cover all reasonable expenses of the LLC in connection with that transferee's admission as a substitute Member. Section 7.7. Recognition of Transfer by LLC. No Transfer of a Member's LLC Interest or any part thereof 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 this Article 7 with respect to that 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 distributions to the transferee of any such invalid Transfer. Upon the valid transfer of a Member's LLC Interest, that Person shall cease to be a Member, and the LLC's books and records, including Schedule 1, shall be revised to reflect that event. Section 7.8. Order of Puts and Calls and Right of First Refusal. With respect to Sections 7.2, 7.3 and 7.4, the first to occur of (1) the delivery of a Put Notice under Section 7.2(d); (2) the delivery of the first Call Notice under Section 7.3(a) or (b); or (3) the delivery of an Offer Notice under Section 7.4, shall govern the rights and obligations of the parties with respect to the LLC Interests subject to the Put Notice, the Call Notice or the Offer Notice. Notwithstanding the foregoing, the delivery of a put notice under Section 7.5(a) or a call notice under Section 7.5(b) shall govern the rights and obligations of the parties with respect to LLC Interests. Section 7.9. 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 that Transfer shall be liable to indemnify and hold the LLC and the other Members harmless from all costs, liabilities and damages any such indemnified Person may incur (including, without limitation, incremental tax liability and attorneys' fees and expenses) as a result of that Transfer or attempted Transfer and efforts to enforce the indemnity granted hereby. Section 7.10. Issuance of Additional LLC Interests. a. Subject to Sections 7.1, 7.2, 7.3 and 7.4, the Board may admit new Members to the LLC, issue additional LLC Interests and grant options to purchase LLC Interests upon terms and conditions it may establish from time to time, which terms may include the rights, if any, that a holder of those LLC Interests will have relating to the matters discussed in this Article 7. As a condition to the admission of a new Member, that Member must become a party to this Agreement. b. Upon the issuance of additional LLC Interests with associated Membership Points to a Member, an Officer shall make the appropriate revisions to Schedule 1. Section 7.11. Assignment of Holdings' Rights and Obligations. Holdings may assign any or all of its rights and delegate any or all of its obligations under this Article 7 to one or more of its Affiliates. -32- ARTICLE 8 BOOKS AND RECORDS Section 8.1. Books, Records and Financial Statements. The LLC's Secretary shall prepare and maintain, or cause to be prepared and maintained, the LLC's books of account. Those books of account and all financial records of the LLC initially shall be kept at its office located at 9100 Wilshire Boulevard, Beverly Hills, California 90212. The Secretary shall also cause the following documents to be transmitted at the times hereinafter set forth: a. To each Member, as soon as available, a balance sheet, income statement and cash flow statement of the LLC, and a statement of that Member's Capital Account balance, as of the end of the preceding Fiscal Year, all of which shall be audited by the LLC's independent accounting firm; b. To each Member, as soon as available and in any event within 30 days after the end of each of the first three quarters of each of the LLC's Fiscal Years, a balance sheet, income statement and cash flow statement of the LLC, and a statement of that Member's Capital Account balance, as of the end of that quarter; c. To each Member, as soon as available from the LLC's accountants, a copy of the annual federal and state income tax return of the LLC and a Schedule K-1 indicating that Member's taxable income or loss for that Fiscal Year; d. To each Member, at least ten days prior to each date on which any federal or state estimated income tax payment is due, a schedule setting forth the LLC's estimated taxable income allocable to that Member for the current Fiscal Year; and e. To Holdings, within five 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 that quarter. Section 8.2. Accounting Method. The LLC's books and records shall be kept on an accrual basis for financial reporting and tax purposes. All records shall be maintained in accordance with GAAP and shall reflect all LLC transactions and be appropriate and adequate for the LLC's business. Section 8.3. LLC's Independent Accounting Firm. The LLC's independent accounting firm shall be selected by the Principals and shall be acceptable to Holdings, which acceptance will not be unreasonably withheld. -33- ARTICLE 9 TAX MATTERS Section 9.1. Tax Matters Member. a. The LLC's initial "tax matters partner" designated under Code Section 6231(a)(7) and Section 301.6231(a)(7)-1 of the Treasury Regulations (the "Tax Matters Member") shall be the Second Member, who shall be a Member at all times he or she is serving as the Tax Matters Member. Each Member, by executing this Agreement, consents to that designation of the Tax Matters Member and agrees to execute, certify, acknowledge, deliver, swear to, file and record at the appropriate public offices all documents necessary or appropriate to evidence such consent. b. The Tax Matters Member shall have the power to manage and control, on the LLC's behalf, 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. In furtherance of the foregoing, the Tax Matters Member shall have all of the powers and responsibilities of that position provided in the Code and shall (1) promptly furnish the Internal Revenue Service with information sufficient to cause each Member to be treated as a "notice partner" as defined in Code Section 6231(a)(8), (2) within ten 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 or deduction, mail a copy of that notice to each Member and (3) not file any action or suit, extend any statute of limitations or settle any action or suit relating to the LLC's tax matters without first notifying each Member. Reasonable expenses incurred by the Tax Matters Member, in his capacity as such, shall be treated as LLC expenses hereunder and will be deducted in computing the Run Rate. c. The Board may at any time hereafter designate from among the Members a new Tax Matters Member. Section 9.2. Right to Make Tax Elections; Tax Classification. a. The Board may, in its discretion, make or revoke, on the LLC's behalf, elections for federal income tax purposes permitted under the Code, including an election in accordance with Code Section 754. Upon request of the Board, each Member shall supply the information necessary to give effect to such an election. b. Each Member intends that the LLC be classified for federal tax purposes as a partnership that is not a "publicly traded partnership" treated as a corporation under Code Section 7704(a), and each Member shall at all times use commercially reasonable efforts to maintain the LLC's classification as such. The LLC shall not elect to be classified as other than a partnership for federal tax purposes. -34- ARTICLE 10 LIABILITY, EXCULPATION AND INDEMNIFICATION Section 10.1. Liability. Except as otherwise provided herein, any document referred to or incorporated herein or by the Delaware Act, 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 debt, obligation or liability of the LLC solely because he or she is a Member. Except as otherwise expressly provided herein, any document referred to or incorporated herein or by the Delaware Act, a Member, in his, hers, or its capacity as such, shall have no liability in excess of (1) the amount of that Member's capital contributions, (2) that Member's share of any assets and undistributed Profits of the LLC and (3) the amount of any distributions wrongfully distributed to that Member. Section 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 that Officer or Manager in good faith on the LLC's behalf and in a manner reasonably believed to be in the best interests of the LLC and within the scope of authority conferred on that Officer or Manager hereby, except that an Officer or Manager shall be liable for any such loss, damage or claim incurred by reason of that Officer's or Manager's bad faith, gross negligence, reckless disregard of his or her duties hereunder, willful misconduct or breach of the provisions hereof or in connection with any transaction for which that Officer or Manager or any Affiliate thereof received an improper personal benefit. b. An Officer or Manager shall be protected fully in relying in good faith upon the LLC's records and upon information, opinions, reports or statements presented to the LLC by any person as to matters the Officer or Manager reasonably believes are within that 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. Section 10.3. Indemnification. To the fullest extent permitted by applicable law, the LLC shall indemnify each Officer and Manager for any loss, damage or claim incurred by that Officer or Manager by reason of any act or omission that Officer or Manager performed or omitted in good faith on behalf of the LLC and in a manner reasonably believed to be in the best interests of the LLC and within the scope of authority conferred on that Officer or Manager or hereby, except that no Officer or Manager shall be entitled to be indemnified in respect of any loss, damage or claim incurred by that Officer or Manager by reason of bad faith, gross negligence, reckless disregard of his or her duties hereunder, willful misconduct or breach of the -35- provisions hereof with respect to those acts or omissions or in connection with any transaction for which that Officer or Manager or any Affiliate thereof received an improper personal benefit. Notwithstanding the foregoing: (a) 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 (b) nothing contained herein shall limit any indemnification or other rights of the LLC or any Member under the Limited Liability Company Interest Purchase Agreement or any document referred to or incorporated therein. Section 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, that Officer or Manager incurs in defending any claim, demand, action, suit or proceeding (that advance to be made prior to the final disposition of that claim, demand, action, suit or proceeding), including, without limitation, claims, demands, actions, suits or proceedings with respect to which that 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 that, if those allegations were true, would not entitle that Officer or Manager to indemnification hereunder, upon receipt by the LLC of an undertaking by or on behalf of that Officer or Manager to repay that amount if it is determined that that Officer or Manager is not entitled to be indemnified as authorized in Section 10.3. ARTICLE 11 NON-COMPETITION; CONFIDENTIALITY Section 11.1. Confidential Information. a. Each Member and each Principal acknowledges and agrees that (1) the "business management" industry is an intensely competitive business, (2) as a result of his, her or its association with the Grant Tani Entities, he, she or it has had access to, and is and will be in possession of, Confidential Information, all is which is of vital importance to the success of the Grant Tani Entities, Holdings, WTC and WTC's Affiliates, and (3) the use by that Member or Principal for his, her or its own account or the disclosure by any Member or Principal to any existing or potential competitor of a Grant Tani Entity, Holdings, WTC or WTC's Affiliates of Confidential Information would place the Grant Tani Entities, Holdings, WTC or WTC's Affiliates at a serious competitive disadvantage and cause irreparable harm to the business of the Grant Tani Entities, Holdings, WTC or WTC's Affiliates. b. Each Member and each Principal acknowledges and agrees that "Confidential Information" includes, without limitation: (1) trade secrets relating to the business practices of any of the Grant Tani Entities, Holdings, WTC or WTC's Affiliates and other information pertaining to the goodwill of any of the Grant Tani Entities, Holdings, WTC or WTC's Affiliates or to Clients or WTC Clients; -36- (2) "non-public personal information," as that phrase is defined in Section 509 of Title V of the Gramm-Leach-Bliley Act and Federal Regulation P promulgated thereunder by the Federal Reserve Board, of natural person Clients or WTC Clients, except that, for purposes of this Agreement, that term shall extend to all such clients, present and former. "Non-public personal information" means (i) personally identifiable client financial information, including, without limitation, information provided to, or obtained by, any of the Grant Tani Entities or Holdings, WTC or WTC's Affiliates confidentially or on a non-public basis, and (ii) any list, description or other grouping of clients (and publicly available information pertaining to them) that is derived using any personally identifiable financial information that is not publicly available; (3) proprietary financial products of any of the Grant Tani Entities, Holdings, WTC or WTC's Affiliates, embodying the unique trade know-how and operational methods of any of the Grant Tani Entities, Holdings, WTC or WTC's Affiliates, and, without limitation, all trade know-how, secrets, operational methods, pricing, investment policies, procedures, personnel, concepts, format, style, techniques, proprietary software, business strategies, business management strategies and other financial information, and other business affairs of any of the Grant Tani Entities, Holdings, WTC or WTC's Affiliates that are unique to any of the Grant Tani Entities, Holdings, WTC or WTC's Affiliates and are made known to or learned by that Member heretofore or hereafter; and (4) lists of WTC Clients. c. Each Member and each Principal acknowledges and agrees that (1) Confidential Information is and shall remain the sole and exclusive property of the appropriate Grant Tani Entity or Holdings, WTC or WTC's Affiliates, as the case may be, and that Member or Principal does not have and shall not have any right, title or interest therein by virtue of his or her status as an executive of the LLC or of the Management Company, a Member or a Principal and (2) Confidential Information is not readily accessible to competitors of the Grant Tani Entities, Holdings, WTC or WTC's Affiliates, as the case may be. d. By reason of Sections 11.1(a), (b) and (c) above, each Member and each Principal covenants that he, she or it shall not directly or indirectly reveal, divulge or make known to any Person other than any of the Grant Tani Entities, Holdings, WTC or WTC's Affiliates or use for his, her or its own account, or for the account of any Person other than the Grant Tani Entities, Holdings, WTC or WTC's Affiliates, (1) until that Member or Principal ceases to be a Member or a party to this Agreement, respectively, and for a period of five years thereafter, any Confidential Information relating to Holdings, WTC or WTC's Affiliates or WTC Clients; (2) until that Member or Principal ceases to be a Member or a party to this Agreement, respectively, and thereafter, any Confidential Information not permitted to be revealed, divulged, or made known under Holdings', WTC's, WTC's Affiliates' or any of the Grant Tani Entities' policies to comply with all applicable U.S. federal and state privacy laws in effect, including, without limitation, Title V of the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and any and all applicable regulations implementing either Act or a successor Act; and (3) until that Member or -37- Principal ceases to be a Member or a party to this Agreement, respectively, and for a period of five years thereafter, any Confidential Information not included in clauses (1) and (2) of this subsection. e. Each Principal (1) shall comply, until that Principal ceases to be a party to this Agreement, with all reasonable procedures each Grant Tani Entity, Holdings, WTC or any of WTC's Affiliates may adopt from time to time to preserve the confidentiality of the Confidential Information; (2) acknowledges that the absence of any legend indicating the confidentiality of any materials will not give rise to an inference that the contents thereof or information derived therefrom are not confidential; and (3) shall immediately following the termination of that Principal's employment with the LLC or the Management Company or membership in the LLC return to each Grant Tani Entity, Holdings, WTC or that WTC Affiliate, as the case may be, all materials that Grant Tani Entity, Holdings, WTC or any WTC Affiliate provides that Principal during the Term, all works created by that Principal or others in the course of his or her employment duties during the Term and all copies thereof. Notwithstanding the foregoing, the limitations imposed on that Principal pursuant to this Section 11.1 shall not apply to that Principal's (y) compliance with legal process or subpoena or (z) statements in response to inquiry from a court or regulatory body; provided that, to the extent permitted by law, that Principal gives the appropriate Grant Tani Entity, Holdings, WTC or WTC's Affiliate reasonable prior written notice of that process, subpoena or request and uses reasonable efforts to obtain confidential treatment of the Confidential Information (except that, with respect to an examination by a regulatory authority with jurisdiction over any of the Grant Tani Entities, the Principal need only provide the appropriate Grant Tani Entity prompt notice that the examination will occur or is occurring). f. For purposes of this Section 11.1 only, a Principal shall be considered to be "a party to this Agreement" when that Principal is a Member, when one or more of that Principal's Permitted Transferees are Members or when that Principal holds a Derivative Share through Grant Tani. Section 11.2. Non-Competition. With respect to a natural person Principal, until the termination of a Principal's employment with the LLC, the Management Company and each of their Subsidiaries (the "Restricted Period"), that Principal shall not, for whatever reason, whether for his or her account or for the account of any other Person, without the prior written consent of the LLC and the Management Company, as a shareholder, employee, partner, member, board member, consultant, independent contractor, representative or otherwise, engage in any business competitive with any business conducted by any of the Grant Tani Entities at any time during the Restricted Period, in the Metropolitan Statistical Area of Los Angeles, California (the "Restricted Area"). Notwithstanding the foregoing, nothing herein shall prohibit that Principal from being a shareholder or equity holder in any publicly-traded entity whose business is competitive with, the business heretofore conducted, or conducted at any time during the Restricted Period and in the Restricted Area, by any of the Grant Tani Entities, as long as that Principal does not hold more than a three percent equity interest in that publicly-traded entity. -38- Section 11.3. Non-Solicitation. Until one year after the date of termination of each Principal's employment with the LLC, the Management Company and each of their Subsidiaries, that Principal shall not, directly or indirectly, for whatever reason, whether for his or her own account or the account of any Person, without the prior written consent of the LLC and the Management Company: a. solicit, either directly or indirectly, or otherwise induce or attempt to induce any WTC Client to use the family office or business management services of any Person other than Holdings, WTC, WTC's Affiliates or the Grant Tani Entities and will otherwise treat the list of Clients as if it were Confidential Information; or b. solicit or hire any Person who is, or was during the 12 months prior to the time of that Principal's termination of employment, employed by or associated with a Grant Tani Entity, Holdings, WTC or a WTC Affiliate as an executive, officer, employee, manager, salesman, consultant, independent contractor, representative or other agent or induce that Person to terminate his or her employment relationship with any Grant Tani Entity or to enter into employment with any other Person. The restrictions set forth in Section 11.2 and this Section 11.3 shall not apply (1) to a Principal whose employment with the LLC and each of its Subsidiaries or by the Management Company is terminated by the LLC and such Subsidiaries or by the Management Company without Cause or by that Principal for Good Reason, (2) to a Principal if a Change of Control occurs and Holdings and its Permitted Transferees or its successor, as the case may be, purchase all of that Principal's LLC Interests (including his or her Derivative Share and the LLC Interests held by his or her Permitted Transferees) pursuant to the terms of Section 7.5(a) or (3) if the LLC is liquidated and its business is not continued by a successor entity. Nothing in Section 11.3(a) or (b) shall permit a Principal to use Confidential Information made available by Holdings, WTC or any of WTC's Affiliates to the Grant Tani Entities (including, without limitation, WTC Client lists) for any purpose other than the pursuit of the Grant Tani Entities business objectives or those of Holdings, WTC or WTC's Affiliates. Section 11.4. Specific Performance. a. The Members and the Principals acknowledge that it is fair and reasonable that they make the covenants and undertakings set forth above, and have done so with the benefit of the advice of counsel. In addition, the Members and the Principals acknowledge that any breach or attempted breach by any of them of the provisions of this Article 11 will cause irreparable harm to Holdings, WTC, their respective Affiliates and each Grant Tani Entity, for which monetary damages will not be an adequate remedy. Accordingly, Holdings, WTC, their respective Affiliates and each Grant Tani Entity shall be entitled to apply for and obtain injunctive relief (temporary, preliminary and permanent) to restrain the breach or threatened breach of, or otherwise to specifically enforce, any provision of this Article 11, without the requirement to post a bond or provide other security. Nothing herein shall be construed as a -39- limitation or waiver of any other right or remedy that may be available to Holdings, WTC, their respective Affiliates or a Grant Tani Entity for that breach or threatened breach. For emergency relief (including temporary and preliminary injunctive relief), an application may be made in any court of competent jurisdiction. The Members and Principals further agree that the subject matter and duration of the restrictions covered herein are reasonable in light of the facts as they exist today. If any restriction contained in this Article 11 is deemed unreasonable by a court, it shall, to the extent permitted by applicable law, be reduced to the maximum restriction that is enforceable under such law. b. The restrictions set forth in Section 11.1 shall apply to Permitted Transferees who own LLC Interests. ARTICLE 12 CERTAIN COVENANTS Section 12.1. Compliance with Laws; Maintenance. The LLC and its Subsidiaries shall and the Board shall cause the LLC to comply in all material respects with all laws and regulations applicable to the LLC and its Subsidiaries (including, without limitation, all foreign, federal and state laws and regulations relating to public accountants, preparation of tax returns and investment advisers, and all foreign, federal and state laws and regulations applicable to the LLC and its Subsidiaries as an Affiliate of a bank, a thrift or a bank or thrift holding company). Without limiting the generality of the foregoing, neither the LLC nor any of its employees shall: a. Audit, attest, certify or compile financial information of Clients; b. Advertise, market, solicit or otherwise hold out the LLC or any of themselves as certified public accountants or public accountants, whether orally or in writing, in correspondence or on business cards, signs, advertisements, letterhead, publications directed to clients, financial or tax documents of Clients, or otherwise; c. Offer investment advice, either directly or through publications or writings, in any jurisdiction in which the LLC and the Management Company are not registered or licensed as an investment adviser or in another capacity that would allow such advice to be lawfully rendered; or d. Accept any referral or other fee for recommending an investment adviser, insurer, accountant, broker-dealer, trustee or other service provider to any Client. In addition, the LLC shall not serve as a trustee for or general partner or managing member of any Person. -40- The LLC and its Subsidiaries shall maintain in full force and effect its limited liability company or other existence, rights and franchises and all other rights, licenses and registrations owned or possessed by them. Section 12.2. Business Arrangements. a. Holdings will cause to be provided to the LLC client related services that are available for the use of Holdings' other Affiliates, including external asset management, custom-built insurance products and marketing materials on a reasonable and fair basis and cost. Holdings will also make available the full array of support services on the same basis as are made available to Holdings' affiliated asset managers, including internal asset management, human resources, marketing, financial reporting, tax and estate planning, compliance and information technology, as the LLC may request from time to time. b. The LLC shall have the right to elect, on or prior to six months after the Closing Date, to have the officers and employees of the LLC and its Subsidiaries participate in some or all of WTC's then-existing employee benefit plans (other than WTC bonus or incentive plans) at the LLC's cost; provided, however, that (i) once the election to participate or not participate in a particular plan is made it cannot be changed without Holdings' written consent, which shall not be unreasonably withheld, (ii) those officers and employees are otherwise eligible to participate in those plans in accordance with their terms, and (iii) nothing herein shall entitle such an officer or employee to participate in a plan where participation is not based solely on eligibility criteria set forth in the plan. The LLC shall have a reasonable opportunity to participate in any new employee benefit plans made available to employees of WTC or its Affiliates generally. Section 12.3. Client Agreements. The LLC shall enter into a written agreement, in a form substantially similar to Exhibit D hereto except as that form may be revised to incorporate revisions requested by the California Department of Corporations, with each client to or for whom it provides investment advice (including suggesting investment advisers or investment managers or monitoring investments), whether by itself, as a general partner or managing member of any entity or otherwise. Neither the LLC nor any employee of the Management Company shall provide investment advice to any client who has not executed such an agreement. ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION Section 13.1. No Dissolution. The LLC shall not be dissolved by the admission of additional Members in accordance with the terms hereof. Section 13.2. Events Causing Dissolution. The LLC shall be dissolved and its affairs shall be wound up upon the occurrence of any of the following events: -41- a. The determination of the Board and the vote of Members holding 95% or more of the Membership Points; b. The occurrence of a Realization Event; or c. The entry of a decree of judicial dissolution under Section 18-802 of the Delaware Act. Section 13.3. Notice of Dissolution. Upon the LLC's dissolution, the person or persons appointed to carry out the winding up of the LLC (the "Liquidating Trustee") shall promptly notify the Members of that dissolution. Section 13.4. Liquidation. Upon dissolution of the LLC: a. The proceeds of liquidation shall be distributed, as realized, in the following order and priority: (1) First, to the LLC's creditors, including Members who are creditors and the Liquidating Trustee, to the extent otherwise permitted by law, in satisfaction of the LLC's liabilities (whether by payment or making reasonable provision for payment thereof), other than liabilities for distributions to Members; (2) Next, to Members to the extent of liabilities for distributions to Members previously declared; (3) Next, to all Members, up to the amount of their Capital Account balances, in proportion thereto; and (4) The remainder, to all Members in proportion to their respective Membership Points. b. If the Liquidating Trustee determines that it is not feasible to liquidate all of the LLC's assets, then the Liquidating Trustee (1) shall cause the Fair Market Value of the assets not so liquidated to be determined and (2) shall distribute those assets in kind to the Members pursuant to Section 13.4(a). For purposes of that section, a distribution of any such asset in kind to a Member shall be considered a distribution of an amount equal to that asset's Fair Market Value as of the date of distribution thereof. Each such asset shall be treated as if it were sold for that Fair Market Value, and the resulting Profits or Losses shall be allocated among the Members in accordance with Article 6. -42- Section 13.5. Termination. The LLC shall terminate when all of its assets, after payment of or provision for all of its debts, liabilities and obligations, have been distributed to the Members as provided for in this Article 13, and the Certificate has been canceled in the manner required by the Delaware Act. Section 13.6. Claims of the Members. For purposes of this Article 13, the Members shall look solely to the LLC's assets for the return of their capital contributions. If the assets of the LLC remaining after payment of or provision for all of the LLC's debts, liabilities and obligations are insufficient to return those capital contributions, the Members shall have no recourse against the LLC or any other Member. ARTICLE 14 REPRESENTATIONS AND WARRANTIES Section 14.1. Representations and Warranties of Natural Person Principals. Each Principal who is a natural person hereby represents and warrants to Holdings, the other Principals and the LLC with respect to himself or herself: a. He or she has full legal capacity and authority to execute, deliver and perform his or her obligations hereunder. This Agreement has been duly executed and delivered by him or her and constitutes his or her legal, valid and binding obligation, enforceable against him or her in accordance with its terms, except as may be limited by (x) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and fraudulent transfer or similar laws now or hereafter relating to creditors' rights generally or (y) general principles of equity, whether asserted in a proceeding in equity or at law. b. No approval, authorization, consent, license, clearance or order of, declaration or notification to, or filing, registration or compliance with, any government or regulatory authority that has not been obtained is required to permit him or her to enter into this Agreement. Section 14.2. Representations and Warranties of Grant Tani and Holdings. Each of Grant Tani and Holdings hereby represents and warrants to the Principals and the LLC on behalf of itself: a. It is an entity duly organized, validly existing and in good standing under California law in the case of Grant Tani and Delaware law in the case of Holdings, and has all requisite corporate power and authority to own, lease and operate its properties and carry on its business as now being conducted. b. It has all requisite corporate power and authority to execute, deliver and perform its obligations hereunder. The execution, delivery and performance hereof and the consummation of the transactions contemplated hereby have been duly approved and authorized by all necessary corporate action of Grant Tani or Holdings, as the case may be. This Agreement -43- has been duly executed and delivered by Grant Tani or Holdings, as the case may be, and constitutes the legal, valid and binding obligation of Grant Tani or Holdings, as the case may be, enforceable against it in accordance with its terms, except as may be limited by (x) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and fraudulent transfer or similar laws now or hereafter relating to creditors' rights generally or (y) general principles of equity, whether asserted in a proceeding in equity or at law. c. No approval, authorization, consent, license, clearance or order of, declaration or notification to, or filing, registration or compliance with, any governmental or regulatory authority that has not been obtained is required in order to permit Grant Tani or Holdings, as the case may be, to enter into this Agreement. Section 14.3. Representations and Warranties of All Members. Each Member hereby represents and warrants to the LLC and each other Member and acknowledges that (1) he, she or it is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended, (2) he, she or it has such knowledge and experience in financial and business matters that he, she 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, (3) he, she or it is able to bear the economic and financial risks of an investment in the LLC for an indefinite period of time, (4) he, she or it 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, (5) the LLC 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 and the provisions of this Agreement have been complied with and (6) the execution, delivery and performance of this Agreement by him, her or it do not require him, her or it to obtain any consent or approval that has not been obtained, and do not contravene or result in a default under any existing law or regulation applicable to him, her or it, or any agreement or instrument to which he, she or it is a party or by which he or it is bound. ARTICLE 15 MISCELLANEOUS Section 15.1. Amendments. Except as provided otherwise herein, any amendment to this Agreement shall be adopted and be effective as an amendment hereto if it is approved by Members holding at least 95% of the then outstanding Membership Points in writing. Section 15.2. Power of Attorney. Each Member hereby constitutes and appoints the LLC's President as the true and lawful representative and attorney-in-fact of that Member, in his, her or its name, place and stead, to make, execute, sign and file any amendment to the Certificate and other instruments, documents and certificates that may from time to time be required by the laws of the United States of America, the State of Delaware, any other state or country or any political subdivision or agency thereof, in which the LLC does business to effectuate, implement and continue the valid and subsisting existence or qualification to do business of the LLC or in connection with any tax returns, filings or related matters, in each case consistent with the -44- provisions hereof. Each Member acknowledges that such appointment is coupled with an interest. The Board may at any time replace the LLC's President with another individual as attorney-in-fact if the Board determines that a replacement would be in the LLC's best interests. Section 15.3. Notices. a. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be sent as provided below: (1) If to Grant Tani, to: Grant, Tani, Barash & Altman, Inc. 9100 Wilshire Boulevard Suite 1000 West Beverly Hills, CA 90212 Attention: Warren Grant with a copy to: Glassman, Browning & Saltsman, Inc. 360 North Bedford Drive Suite 204 Beverly Hills, CA 90210 Attention: Roger Browning, Esquire (2) If to Holdings, to: GTBA Holdings, Inc. Rodney Square North 1100 North Market Street Wilmington, DE 19890 Attention: David R. Gibson, Executive Vice President with a copy to: GTBA Holdings, Inc. Rodney Square North 1100 North Market Street Wilmington, DE 19890 Attention: Gerard A Chamberlain, Esquire, Vice President -45- (3) If to the LLC, to: Grant Tani Barash & Altman, LLC 9100 Wilshire Boulevard Suite 1000 West Beverly Hills, CA 90212 Attention: Warren Grant with a copy to: Glassman, Browning & Saltsman, Inc. 360 North Bedford Drive Suite 204 Beverly Hills, CA 90210 Attention: Roger Browning, Esquire and a copy to: GTBA Holdings, Inc. Rodney Square North 1100 North Market Street Wilmington, DE 19890 Attention: Gerard A. Chamberlain, Esquire Vice President (4) If to a Principal, to that Principal's attention at: Grant Tani Barash & Altman, LLC 9100 Wilshire Boulevard Suite 1000 West Beverly Hills, CA 90212 b. All notices and other communications required or permitted hereunder addressed as provided in this Section 15.3: (1) shall be effective upon delivery if delivered personally against proper receipt and (2) shall be effective upon receipt if sent by (A) certified or registered mail with postage prepaid or (B) Federal Express or similar courier service with courier fees paid by the sender. The parties hereto may change their respective addresses for the purposes of notices to that party from time to time by a similar notice specifying a new address. No such change shall be deemed to have been given unless it has been sent and received in accordance with this Section 15.3. -46- Section 15.4. Waivers. Any waiver of any term or condition or of the breach of any covenant, representation or warranty hereof 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 that term, condition, covenant, representation or warranty or any other term, condition, covenant, representation or warranty. No failure or delay at any time or times to enforce or require performance of any provision hereof shall operate as a waiver of or affect in any manner a party's right at a later time to enforce or require performance of that provision or of any other provision hereof; provided that no such waiver, unless by its terms it explicitly provides to the contrary, shall be construed to effect a continuing waiver of the provision being waived. No 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 that waiver is claimed in all other instances or for all other purposes to require full compliance. Section 15.5. 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. Section 15.6. Severability. The invalidity or unenforceability of any provision hereof shall not affect the other provisions hereof, and this Agreement shall be construed in all respects by interpreting that invalid or unenforceable provision as nearly to the original meaning as possible so as to make it valid and enforceable or, if that is not possible or permitted by applicable law, by omitting that invalid or unenforceable provision. Section 15.7. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 15.8. Governing Law. This Agreement shall be construed under and governed by Delaware law, without giving effect to the choice or conflicts of law provisions thereof. Holdings hereby agrees to submit to the jurisdiction of the courts of the State of California and the courts of the United States of America located in the Central District in the State of California in any action or proceeding arising out of or relating to this Agreement. Each of the Principals, Grant Tani and the LLC hereby agrees to submit to the jurisdiction of the courts of the State of Delaware and to the courts of the United States of America located in Delaware in any action or proceeding arising out of or relating to this Agreement. Section 15.9. Captions. The captions in this Agreement are for convenience only and shall not affect the construction or interpretation of any term or provision hereof. Section 15.10. 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. -47- Section 15.11. Third Party Beneficiaries. No person who is not a party to this Agreement shall be entitled to any rights or benefits hereunder; provided that Holdings, WTC and their respective Affiliates, each Grant Tani Entity and each Subsidiary of a Grant Tani Entity is a third-party beneficiary of Sections 11.1, 11.2, 11.3 and 11.4. Section 15.12. Remedies Cumulative. The rights and remedies provided herein are cumulative, and the use of any one right or remedy by any party shall not preclude or waive its right to use any and all other remedies. Section 15.13. Integration. This Agreement (as it may be amended from time to time) and the exhibits and schedules hereto constitute the entire agreement among the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, express or implied, with respect thereto. -48- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. GRANT, TANI, BARASH & ALTMAN, INC. By: /s/ Warren Grant ------------------------------ Title: GTBA HOLDINGS, INC. By: /s/ David R. Gibson ------------------------------ Title: Executive Vice President /s/ Warren Grant (SEAL) ---------------------------------- WARREN GRANT /s/ Jane Tani (SEAL) ---------------------------------- JANE TANI /s/ Corey Barash (SEAL) ---------------------------------- COREY BARASH /s/ Howard Altman (SEAL) ---------------------------------- HOWARD ALTMAN By its execution below, Wilmington Trust Corporation guarantees the obligations of GTBA Holdings, Inc. under this Amended and Restated Limited Liability Company Agreement. WILMINGTON TRUST CORPORATION By: /s/ David R. Gibson ------------------------------ Name: David R. Gibson Title: Executive Vice President -49- EX-10.64 4 w68089exv10w64.txt AMENDED AND RESTATED 2002 LONG-TERM INCENTIVE PLAN AMENDED AND RESTATED 2002 LONG-TERM INCENTIVE PLAN OF WILMINGTON TRUST CORPORATION EXHIBIT 10.64 AMENDED AND RESTATED 2002 LONG-TERM INCENTIVE PLAN OF WILMINGTON TRUST CORPORATION 1. PURPOSE. The Amended and Restated 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, consulting 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 1 Committee. Compensation Committee members may participate in meetings by conference 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 4,000,000 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. ANNUAL RETAINER. a. 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 shall be paid the first half of his or her Annual Retainer in Wilmington Trust stock. Each director also may elect to receive the 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. b. DEFERRAL OF PAYMENT OF ANNUAL RETAINER. (1) Subject to timing rules as the Committee may establish, a director may irrevocably elect to defer receipt of all or any number of the shares of stock representing the Annual Retainer and receive a credit under his or her Stock Unit Account of an equivalent number of Stock Units. Any such deferral election must be made in a time period the Committee may designate from time to time. (2) A director's Stock Unit Account shall be credited with a number of Stock Units equal in value to the amount of any cash dividends or stock distributions that would be payable with respect to those Stock Units if those Stock Units had been outstanding shares of Wilmington Trust Stock ("dividend equivalents"). The number of Stock Units credited with respect to cash dividends shall be determined by dividing the amount of cash dividends that would be payable by the Fair Market Value of Wilmington Trust Stock as of the date those cash dividends would be payable. 7 (3) Distribution of Stock Units. The Stock Units in a director's Stock Unit Account shall be distributed, or commence to be distributed, to the Participant only in the form of Wilmington Trust Stock (with fractional shares being payable in cash) upon that director's termination of service as a director in a lump sum payment or in periodic payments over time in accordance with procedures the Committee may establish. A director shall be entitled to receive a distribution of one share of Wilmington Trust Stock for each Stock Unit credited to his or her Stock Unit Account and cash equal to the Fair Market Value of any fractional Stock Unit credited to his or her Stock Unit Account. 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. 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 8 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 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 9 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 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 10 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 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 11 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 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. 12 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. 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 13 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: (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; 14 (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, 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. 15 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. 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 16 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. "Stock Unit" means a unit of value, equal at any relevant time to the Fair Market Value of a share of Wilmington Trust Stock, established by the Committee as a means of measuring the value of a director's Stock Unit Account. x. "Stock Unit Account" means the bookkeeping account maintained by the Committee or its delegate on behalf of each Participant who is credited with Stock Units and dividend equivalents thereon pursuant to Section 9(b). y. "Subsidiary" means a company more than 50% of the equity interests of which Wilmington Trust beneficially owns, directly or indirectly. z. "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. aa. "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. bb. "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. cc. "Wilmington Trust Stock" means Wilmington Trust's common stock, par value $1 per share. 17 EX-10.65 5 w68089exv10w65.txt FORM OF STOCK OPTION AGREEMENT FORM OF STOCK OPTION AGREEMENT EXHIBIT 10.65 STOCK OPTION AGREEMENT ---------------------- THIS STOCK OPTION AGREEMENT is made and entered into as of the date set forth in the attachment hereto between WILMINGTON TRUST CORPORATION, a Delaware corporation (the "Corporation"), and ___________ whose name is set forth on the attachment hereto ("_________"). BACKGROUND A. The Corporation has determined that its interests will be advanced by providing an incentive to _____________ to acquire a proprietary interest in the Corporation and, as a stockholder, to share in its success, with added incentive to work effectively for and in the Corporation's interests. B. Unless otherwise provided herein, capitalized terms used herein shall have the meanings given to them in the Corporation's ________________ Plan (the "Plan"). NOW, THEREFORE, in consideration of the foregoing, the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Grant. Subject to the provisions of the Plan, ______________ hereby is granted, as a matter of separate agreement and not in lieu of salary or any other compensation for services, the right and option (the "Option") to purchase up to the number of full shares of the Corporation's common stock set forth in the attachment hereto, which may be authorized but unissued shares or previously issued shares which the Corporation has re-acquired and holds in its treasury. The Option shall be an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to the number of shares so reflected on the attachment hereto and a non-statutory stock option with respect to the number of shares so reflected on the attachment hereto. 2. Price. The purchase price of each of the shares described in Paragraph 1 above shall be set forth in the attachment hereto. 3. When Exercisable. The Option may not be exercised prior to _____________ from the date hereof. Thereafter, and from time to time, ________________ may exercise the Option, in whole or in part, at any time within a period of ___ years after the date set forth in the attachment hereto, subject to earlier termination as provided in Paragraph 6 below. 4. How Exercisable. _____________ may exercise the Option by delivering written notice to the Corporation specifying the number of shares to be acquired. That notice shall be accompanied either by (a) a check in full payment of the Option price per share, (b) delivery of full shares of the Corporation's common stock duly owned by _______________ (and for which ________________ has good title, free and clear of any liens or encumbrances) in negotiable form and having a Market Value Per Share on the date of exercise equal to the Option price of the shares being acquired (which may include shares to be issued in connection with the exercise of the Option, subject to such rules as the Committee deems appropriate), (c) any combination of cash and such shares equal in value to the exercise price, or (d) delivery of other consideration that the Committee deems appropriate (including payment in accordance with a cashless exercise program under which, if _______________ so instructs, shares may be issued directly to _____________'s broker or dealer upon receipt of the full exercise price from the broker or dealer). Until that payment, ______________ shall have no rights in the stock being acquired. ______________ acknowledges that all shares acquired by him or her pursuant hereto are and will be acquired for investment only and not for distribution. _____________ shall provide the Corporation with a written representation, signed by him or her, to that effect upon request. 5. Transfer. The Option is not transferable by _____________ otherwise than by will or pursuant to the laws of descent and distribution or, in certain circumstances, pursuant to a qualified domestic relations order, as defined in the Internal Revenue Code of 1986, as amended, or the Employee Retirement Income Security Act of 1974, as amended. 6. Termination of Option. a. If _________________'s employment is terminated for any reason other than retirement, death, or disability, whether by resignation or discharge, the Option shall be cancelled effective as of the date that employment is terminated. b. In the case of _______________'s death, the Option shall terminate in accordance with the terms and conditions of the Plan. c. If ______________'s employment terminates due to disability or retirement, the Option shall, at _______________'s election, vest immediately if not already vested, and shall be exercisable until the earlier of the expiration date of the Option or _______ years after the date of the disability or retirement. If _____________ has died before then, the Option shall be exercisable only by the person or persons to whom ________________'s rights under the Option passed under ________________'s will or by the laws of descent and distribution. d. In the event of a Change in Control, the Option shall, to the extent it is outstanding and unexercised, become exercisable in accordance with the terms and conditions of the Plan. 7. Plan Provisions Control Award Terms; Modifications. The Option is granted pursuant and subject to the terms and conditions of the Plan, the provisions of which are incorporated by reference herein. If any provision hereof conflicts with any provision of the Plan as constituted on the Date of Grant, the terms of the Plan shall control. The Option shall not be modified after the Date of Grant except by written agreement between the Corporation and ________________; provided, however, that such modification (a) shall not be inconsistent with the Plan and (b) shall be approved by the Committee. In all other respects, all questions relating to the validity, interpretation, construction, and enforcement hereof shall be governed by Delaware law. 8. Taxes. The Corporation shall be entitled to withhold (or secure payment from ______________ in lieu of withholding) the amount of any withholding or other tax required to be withheld or paid by the Corporation by law with respect to any shares issuable hereunder, or upon a disqualifying disposition of shares received pursuant to the exercise of the portion of the Option, if any, which is an incentive stock option under Section 422 of the Code. The Corporation may defer issuance of shares upon the exercise of the Option unless the Corporation is indemnified to its satisfaction against any liability for any such tax. The amount of that withholding or tax payment shall be determined by the Committee or its delegate. _______________ may satisfy his or her tax withholding obligation by: (a) paying cash to the Corporation and/or (b) delivering to the Corporation a number of shares of the Corporation's stock or withholding from the Option, at the appropriate time, a number of shares, in either case sufficient, based upon the Market Value Per Share of those shares, to satisfy those tax 2 withholding requirements. The Committee shall be authorized, in its sole discretion, to establish rules and procedures relating to any such withholding methods it deems necessary or appropriate (including, without limitation, rules and procedures relating to elections to have shares withheld upon exercise of the Option) to meet those withholding obligations. 9. Continuation in Employment. Nothing herein shall be deemed to confer on _______________any right to continue in the employ of the Corporation or any of its subsidiaries or to interfere in any way with the right of the Corporation or any of its subsidiaries to terminate his or her employment at any time. 10. Notice of Disposition of Shares. _________________ agrees that, if he or she disposes of any shares acquired on the exercise of the Option (including a disposition by sale, exchange, gift, or other transfer of legal title) within 12 months after the date any portion, thereof is exercised, ________________ shall notify the Corporation promptly. 11. Counterparts. This Stock Option Agreement may be executed in one or more counterparts, and when the Corporation and __________________ have each executed at least one counterpart, this Stock Option Agreement shall be deemed valid and in full force and effect as of the date set forth on the attachment hereto. IN WITNESS WHEREOF, by the Corporation's execution hereto and __________________'s execution of the attachment hereto, the parties have executed and delivered this Stock Option Agreement as of the date first written on the attachment hereto. WILMINGTON TRUST CORPORATION By:___________________________________ 3 ATTACHMENT TO STOCK OPTION AGREEMENT DATED ------------------------------------------------------- All of the terms and conditions of the Stock Option Agreement dated _______________ to which this Attachment is attached are incorporated by reference as fully as if set forth herein. Date of Grant: ______________________ Staff Member: ________________________ Incentive Stock Option for: __________ Shares Non-Statutory Stock Option for: ______________ Shares Exercise price per share: $_______________ _______________________________________________(SEAL) Signature ______________________________________________ (PRINCIPAL RESIDENCE) ______________________________________________ EX-10.66 6 w68089exv10w66.txt FORM OF RESTRICTED STOCK AGREEMENT FORM OF RESTRICTED STOCK AGREEMENT EXHIBIT 10.66 RESTRICTED STOCK AGREEMENT -------------------------- The parties to this RESTRICTED STOCK AGREEMENT (this "Agreement"), dated ______________, are WILMINGTON TRUST CORPORATION, a Delaware corporation (the "Company"), and _______________________________ ("_____________"). BACKGROUND ---------- A. The Company has adopted _____________________, as amended (the "Plan"), for the benefit of __________________ of the Company and its subsidiaries. B. The Company desires to grant shares of the Company's common stock to ________________ subject to certain transfer and forfeiture restrictions set forth in this Agreement, as well as the provisions of the Plan. Those restrictions shall lapse in accordance herewith. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. RESTRICTED SHARES. ----------------- 1.1 Grant of Restricted Shares. -------------------------- (a) As of the date of this Agreement (the "Date of Grant"), the Company grants to ______________ the number of shares of its common stock set forth in the attachment hereto (the "Restricted Shares"), subject to the restrictions set forth in Paragraph 1.2 hereof, the terms and conditions of the Plan, and the other terms and conditions hereof. If and when the restrictions set forth in Paragraph 1.2 expire in accordance with the terms of this Agreement without forfeiture of the Restricted Shares, and upon the satisfaction of all other applicable conditions with respect to the Restricted Shares, those shares shall no longer be considered Restricted Shares for purposes hereof. (b) As soon as practicable after the Date of Grant, the Company shall, at its sole discretion, either: (i) direct that a stock certificate or certificates representing the applicable Restricted Shares be registered in the name of ______________. Such certificate or certificates shall be held in the custody of the Company or its designee until the expiration of the applicable Restricted Period (as defined in Paragraph 1.3). If the Company directs that a stock certificate or certificates representing the Restricted Shares be issued, on or before the date of the execution hereof____________ shall have delivered to the Company one or more stock powers endorsed in blank relating to the Restricted Shares. Each certificate for the Restricted Shares shall bear the following legend (the "Legend"): The ownership and transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including those relating to forfeiture) of _____________________ and a Restricted Stock Agreement entered into between the registered owner and Wilmington Trust Corporation. Copies of the Plan and Agreement are on file in the executive offices of the Company in Wilmington, Delaware. In addition, the stock certificate or certificates for the Restricted Shares shall be subject to stop-transfer orders and other restrictions as the Company may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Company's common stock is then listed, and any applicable federal or state securities laws. The Company may cause a legend or legends to be placed on that certificate or certificates to make appropriate reference to those restrictions. (ii) in lieu of directing that a stock certificate or certificates representing the Restricted Shares be issued, the Company may direct that the Restricted Shares be issued in book entry form, subject to the restrictions set forth herein. (c) As soon as administratively practicable following the vesting of any portion of the Restricted Shares, and upon the satisfaction of all other applicable conditions relating to the Restricted Shares (including, without limitation, the payment by __________ of all applicable withholding taxes), the Company shall deliver or cause to be delivered to ______________ a certificate or certificates for the applicable Restricted Shares that shall not bear the Legend. 1.2 Restrictions. ------------ (a) _________________ shall have all rights and privileges of a stockholder with respect to the Restricted Shares, including the right to vote and receive dividends or other distributions with respect to the Restricted Shares, except that the following restrictions shall apply: (i) _______________ shall not be entitled to delivery of the certificate or certificates for any portion of the Restricted Shares until that portion of those - 2 - Restricted Shares has vested without a forfeiture of the Restricted Shares and upon the satisfaction of all other applicable conditions; (ii) none of the Restricted Shares may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of until those Restricted Shares have vested; (iii) all shares of common stock distributed as a dividend or distribution, if any, with respect to the Restricted Shares before those Restricted Shares have vested shall be subject to the same restrictions as the Restricted Shares; and (iv) all of the Restricted Shares which have not yet vested shall be forfeited and returned to the Company and all rights of ______________ with respect to the Restricted Shares shall terminate in their entirety on the terms and conditions set forth in Paragraph 1.4. (b) Any attempt to dispose of Restricted Shares or any interest in the Restricted Shares in a manner contrary to the restrictions set forth herein shall be void and of no effect. 1.3 Restricted Period and Vesting. ----------------------------- (a) Subject to the provisions of this Section 1.3 and Sections 1.4, 1.5, and 1.6, the restrictions set forth in Paragraph 1.2 shall apply for a period (the "Restricted Period") beginning on the Date of Grant and ending on the _______ anniversary of the Date of Grant. (b) Notwithstanding the provisions of Sections 1.3(a), the Restricted Shares shall be deemed vested and no longer subject to forfeiture under Section 1.4 in accordance with the schedule set forth in the attachment hereto. (c) Upon ______________'s death, Disability, Normal Retirement, or Other Retirement, or in the event of a Change in Control (as that term is defined in the Plan), all Restricted Shares shall be deemed vested. 1.4 Forfeiture. ---------- (a) Subject to Section 1.6 below, if, during the Restricted Period, (i) ___________'s employment with the Company and its subsidiaries is terminated for any reason other than Normal Retirement, death, or disability, (ii) there occurs a material breach hereof by ___________, or (iii) _______________ fails to meet the tax withholding obligations described in Section 1.5(b), all rights of ________________ to the Restricted Shares that have not vested in accordance with Section 1.3 as of the date of that termination shall terminate immediately and be forfeited in their entirety. - 3 - (b) In the event of any forfeiture under this Paragraph 1.4, any certificate or certificates representing the forfeited Restricted Shares shall be canceled to the extent of any Restricted Shares that are forfeited. 1.5 Withholding. ----------- (a) The Compensation Committee (as that term is defined in the Plan) or its designee shall determine the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any income recognized by the Executive relating to the Restricted Shares. (b) ________________ shall be required to meet any applicable tax withholding obligation in accordance with the provisions of the Plan. ___________may satisfy his or her tax withholding obligation by: (1) paying cash to the Company and/or (2) delivering to the Company a number of shares of the Company's stock or having the Company withhold from ___________, at the appropriate time, a number of shares, in either case sufficient, based upon the market value per share of those shares, to satisfy those tax withholding requirements. (c) The Compensation Committee shall be authorized, in its sole discretion, to establish rules and procedures relating to the use of shares of ____________'s common stock to satisfy tax withholding obligations as it deems necessary or appropriate to facilitate and promote the conformity of the Executive's transactions under the Plan and this Agreement with Rule 16b-3 under the Securities Exchange Act of 1934, as amended, if that Rule is applicable to transactions by _______________. 1.6 Compensation Committee's Discretion. Notwithstanding any provision hereof to the contrary, the Compensation Committee shall have discretion under the Plan to waive any forfeiture of the Restricted Shares as set forth in Paragraph 1.4, the Restricted Period, and any other conditions set forth herein. 2. REPRESENTATIONS OF _________________. ------------------------------------ ______________ hereby represents to the Company that ______________has read and fully understands the provisions of this Agreement and the Plan and his or her decision to participate in the Plan is completely voluntary. Further, _____________ acknowledges that ______________ is relying solely on his or her own advisors with respect to the tax consequences of this restricted stock award. 3. NOTICES. ------- All notices or communications under this Agreement shall be in writing, addressed as follows: - 4 - To the Company: Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Gerard A. Chamberlain, Esquire To ____________________, the address set forth in the attachment hereto. Any such notice or communication shall be (a) delivered by hand (with written confirmation of receipt) or sent by a nationally recognized overnight delivery service (receipt requested) or (b) be sent certified or registered mail, return receipt requested, postage prepaid, addressed as above (or to such other address as such party may designate in writing from time to time), and the actual date of receipt shall determine the time at which notice was given. 4. ASSIGNMENT; BINDING AGREEMENT. ----------------------------- This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of __________ and the assigns and successors of the Company, but neither this Agreement nor any rights hereunder shall be assignable or otherwise subject to hypothecation by ______________. 5. ENTIRE AGREEMENT; AMENDMENT; TERMINATION. ---------------------------------------- This Agreement represents the entire agreement between the parties with respect to the subject matter hereof. The provisions of the Plan are incorporated by reference in this Agreement in their entirety. In the event of any conflict between the provisions of this Agreement and the Plan, the provisions of the Plan shall control. This Agreement may be amended at any time by written agreement of the parties hereto. 6. GOVERNING LAW. ------------- This Agreement and its validity, interpretation, performance, and enforcement shall be governed by the laws of Delaware other than the conflict of laws provisions of those laws. 7. SEVERABILITY. ------------ Whenever possible, each provision herein shall be interpreted in a manner so to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, then (a) that provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law and (b) all other provisions hereof shall remain in full force and effect. - 5 - 8. NO RIGHT TO CONTINUED EMPLOYMENT OR PARTICIPATION; EFFECT ON OTHER PLANS. ------------------------------------------------------------------------ This Agreement shall not confer upon __________ any right with respect to continued employment by the Company or its subsidiaries or continued participation in the Plan, nor shall it interfere in any way with the right of the Company and its subsidiaries to terminate __________'s employment at any time. Payments received by ______________ pursuant to this Agreement shall not be included in the determination of benefits under any pension, group insurance, or other benefit plan of the Company or any Subsidiaries in which ______________ may be enrolled or for which _______________ may become eligible, except as may be provided under the terms of those plans or by the Board of Directors. 9. NO STRICT CONSTRUCTION. ---------------------- No rule of strict construction shall be implied against the Company, the Compensation Committee, or any other person in the interpretation of any term of the Plan, this Agreement, or any rule or procedure established by the Compensation Committee. 10. USE OF THE WORD "_____________". ------------------------------- Wherever the word "_____________" is used in any provision hereof under circumstances in which the provision should logically be construed to apply to the executors, administrators, or person or persons to whom the Restricted Shares may be transferred by will or the laws of descent and distribution, the word "______________" shall be deemed to include those person or persons. 12. CAPITALIZED TERMS. ----------------- Capitalized terms not otherwise defined herein shall have the meaning assigned them in the Plan. 11. FURTHER ASSURANCES. ------------------ _______________ agrees, upon demand of the Company or the Compensation Committee, to do all acts and execute, deliver, and perform all additional documents, instruments, and agreements (including, without limitation, stock powers with respect to shares of the Company's common stock issued as a dividend or distribution on Restricted Shares) that may be reasonably required by the Company or the Compensation Committee, as the case may be, to implement the provisions and purposes of this Agreement and the Plan. 12. CERTAIN DEFINITIONS. ------------------- a. "Cause" means termination for, as the Compensation Committee determines in its sole and absolute discretion, ______________'s personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful - 6 - violation of any law, rule, or regulation (other than traffic violations or similar offences), or a final cease-and-desist order. b. "Disability" means any physical or mental injury or disease of a permanent nature that renders _______________ incapable of meeting the requirements of the employment or other work he or she performed immediately before that disability commenced. The Compensation Committee or its designee shall make the determination of whether _____________ is disabled and when _______________ becomes disabled in its sole and absolute discretion. c. "Normal Retirement Date" means the date on which ________________ terminates active employment with the employer he or she was employed with when he or she was last granted Restricted Shares on or after attaining age 65, but does not include termination for Cause. d. "Other Retirement Date" means a date, on or after ______________ attains age 55 but earlier than _______________'s Normal Retirement Date, that the Compensation Committee in its sole and absolute discretion or its designee approves and designates to be the date upon which __________________ retires for purposes hereof, but does not include termination for Cause. IN WITNESS WHEREOF, by the Corporation's execution hereof and ______________'s execution of the attachment hereto, the parties have duly executed this Agreement as of the date first written above. WILMINGTON TRUST CORPORATION By: __________________________________ Title: __________________________________ - 7 - ATTACHMENT TO RESTRICTED STOCK AGREEMENT DATED ----------------------------------------------------------- All of the terms and conditions of the Restricted Stock Agreement dated ________ to which this Attachment is attached are incorporated by reference as fully as if set forth herein. Date of Award: ________________ Name of Executive: ________________ Number of Shares: ________ Vesting Date Vested Amount __________________ __________ __________________ __________ __________________ __________ Address: ______________________________ (SEAL) ______________________________ (PRINCIPAL RESIDENCE) ______________________________ EX-10.67 7 w68089exv10w67.txt FORM OF RESTRICTED STOCK UNIT AGREEMENT FORM OF RESTRICTED STOCK UNIT AGREEMENT EXHIBIT 10.67 RESTRICTED STOCK UNIT AGREEMENT ------------------------------- THIS RESTRICTED STOCK UNIT AGREEMENT (this "Agreement") is entered into as of ________, 20__ between Wilmington Trust Corporation, a Delaware corporation (the "Company"), and __________, a ___________ of the Company ("___________"). BACKGROUND ---------- A. The Company intends to make a grant under its ___________________ Plan, as in effect on the date hereof and as it may be amended from time to time hereafter (the "Plan"), by providing to ______________ restricted stock units that are subject to vesting based on length of continued employment and/or financial performance goals. B. ________________ desires to receive those restricted stock units in accordance with the Plan and this Agreement. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the Company and _____________, intending to be legally bound hereby, agree as follows: 1. Certain Definitions. ------------------- Each capitalized term used in this Agreement shall have the meaning ascribed to that term in the Plan unless otherwise defined herein. The following capitalized terms shall have the meanings set forth below: a. "Date of Grant" for any RSU means the date specified as such in Exhibit A for that RSU. b. "Deferred Issuance Date" has the meaning given to that term in Section 3(d). c. "Dividend Units" has the meaning given to that term in Section 4. d. "Effective Date" has the meaning given to that term in Section 1(a)(4). e. "FDI Act" has the meaning given to that term in Section 1(a). f. "Fiscal Year" means a fiscal year of the Company, and "Fiscal" followed by a calendar year shall mean the Fiscal Year ending in that calendar year (e.g., "Fiscal 2004" means the Fiscal Year of the Company ending December 31, 2004). g. "NYSE" has the meaning given to that term in Section 4. h. "RSU" means a Restricted Stock Unit under which ___________ shall have the right to receive one Share and Dividend Units accruing as a result of that RSU, upon vesting or, if applicable, on the Deferred Issuance Date. i. "Shares" means the shares of Common Stock issuable upon the vesting of an RSU or Dividend Unit or, if applicable, on the Deferred Issuance Date. j. "___________ Account" has the meaning given to that term in Section 2(b). k. "Third Party" means a person or entity or a group of persons or entities acting in concert not wholly-owned by WTC or the Company, directly or indirectly. 2. Grant of RSUs; Restrictions. --------------------------- a. Subject to all of the terms and conditions of the Plan and this Agreement (and subject to execution of this Agreement by ______________), the Company grants to _______________ the RSUs listed in the Attachment to this Agreement. b. Each RSU shall be recorded in an RSU bookkeeping account the Company maintains in ____________'s name (the "________________ Account"). The Company's obligations under this Agreement shall be unfunded and unsecured, and no special or separate fund shall be established and no other segregation of assets shall be made. The rights of _____________ under this Agreement shall be no greater than those of a general unsecured creditor of the Company. ____________ shall have no rights as a stockholder of the Company by virtue of any RSU unless and until that RSU vests and resulting Shares are issued to ________________, and (1) All terms and conditions provided in the Plan and all those provided in this Agreement shall apply to each RSU and any Dividend Units accrued under Section 4; 2 (2) No RSU or Dividend Unit accrued under Section 4 may be sold, transferred, pledged, hypothecated, or otherwise encumbered or disposed by __________; and (3) Each RSU and Dividend Unit accrued under Section 4 shall remain restricted and subject to forfeiture unless and until that RSU has vested in ______________ in accordance with the Plan and this Agreement. 3. Vesting. ------- a. Annual Vesting. The RSUs granted hereunder shall vest in ______ installments on the ___ day of _____ of each of _______ successive Fiscal Years, with the first such vesting to be made on the ___ day of _____ of Fiscal ______. Associated Dividend Units shall vest annually as provided in Section 4(b). b. Other Vesting. (1) Vesting Based on Performance Goals. The Committee may establish performance goals for the Company or _____________, the attainment of which would result in the accelerated vesting of all RSUs granted hereunder as well as all Dividend Units. Those performance goals, if any, are set forth in Exhibit A. Following the end of each Fiscal Year, the Committee shall determine whether the Company or _______________ has attained those performance goals, and, if so, all such RSUs and Dividend Units shall vest in accordance with the Committee's determination. (2) Optional Vesting. The Committee also may at any time and from time to time determine that any other RSUs and Dividend Units shall become vested based on factors the Committee may determine in its sole discretion (including, without limitation and by way of example only, performance of ___________'s business line, the Company's performance, benefits of providing additional long-term incentive compensation to _____________ in light of the competitive market for ______________'s services, severance arrangements, etc.). If the Committee makes any such determination, then such additional RSUs and/or Dividend Units the Committee may specify in that determination shall become vested at the time the Committee specifies. 3 (3) Change of Control. If a Change of Control occurs, all RSUs and Dividend Units shall vest immediately. c. Effects of Vesting. With respect to each RSU and Dividend Unit that vests, the Company shall, within a reasonable time after the later of (1) vesting or (2) the Deferred Issuance Date (as defined herein), if any, issue one Share to _______________ without restrictions under the Plan or this Agreement. Any such issuance shall be subject to all laws (including, without limitation, those governing withholding of taxes and those governing securities and the transfer thereof). d. Election for Deferred Issuance. _____________ may elect to defer the issuance of all but not less than all of the Shares and Dividend Units in his or her ______________ Account to be awarded for services performed in a Fiscal Year by executing and delivering to the Company a written deferral election in such form as the Company may prescribe (and containing such terms and conditions as the Company may establish in that form), in each case not later than ____ of the year prior to that Fiscal Year or such other date that the Company may establish for delivery of that election. The date established by that election in accordance with those terms and conditions shall be the "Deferred Issuance Date." ANY SUCH DEFERRED ISSUANCE DATE SHALL NOT BE REVOCABLE BY _____________ OR THE COMPANY. 4. Dividend Units; Vesting. ----------------------- With respect to each RSU that has not been forfeited, whether or not vested (but only until the underlying Shares are issued), the Company shall, with respect to any cash dividends paid on Shares (based on the same record and payment date as dividends paid on Shares) accrue into the __________________ Account the number of whole Shares ("Dividend Units") as could be purchased with the aggregate dividends that would have been paid with respect to that RSU if it were an outstanding Share (together with any other cash accrued in the ___________ Account after that time) at the price per Share equal to the closing price on the New York Stock Exchange (the "NYSE") (or a comparable price, if the Shares are not then listed on the NYSE) on the date of the dividend payment. Those Dividend Units thereafter (a) will be treated as RSUs for purposes of future dividend accruals pursuant to this Section 4; and (b) will vest in such amounts (rounded to the nearest whole Dividend Unit) at the same time as the RSUs with respect to which those Dividend Units were received. Any remaining portion of that dividend not used because it would purchase less than a whole Share shall be accrued in the _____________ Account as cash. Any dividends or distributions on Shares paid other than in cash shall accrue in the 4 ______________ Account and shall vest at the same time as the RSUs in respect of which they are made (in each case in the same form, based on the same record date, and at the same time as that dividend or other distribution is paid on that Share). 5. Forfeiture. ---------- Except as provided for vesting on termination of employment following a Change of Control as contemplated in Section 3(b)(3) or vesting as part of a severance arrangement as contemplated in Section 3(b)(2), upon termination of ___________'s employment (regardless of whether caused by resignation, termination by the Company, death, disability, or otherwise), each RSU, Dividend Unit, and other remaining accrued dividends in the _____________ Account, in each case that has not previously vested, shall be forfeited by ___________ to the Company. ___________ thereafter shall have no right, title, or interest whatsoever in those unvested RSUs, Dividend Units, and accrued dividends, and __________ shall immediately return to the Company's Secretary any and all documents representing those forfeited items. All vested RSUs, Dividend Units, and dividends thereon (whether or not deferred pursuant to Section 3(d)), shall immediately be paid or issued, as the case may be, to _____________. 6. No Continuation of Employment. ----------------------------- This Agreement shall not give ______________ any right to employment or continued employment, and the Company may terminate _____________ or otherwise treat _____________ without regard to any effect that termination may have upon _______________ hereunder. 7. Terms Subject to Plan. --------------------- Notwithstanding anything in this Agreement to the contrary, each and every term, condition, and provision of this Agreement shall be, and shall be construed as, consistent in all respects with all terms, conditions, and provisions of the Plan. If any term, condition, or provision of this Agreement is or is alleged to be inconsistent with the Plan in any respect, the Plan shall govern in all circumstances and that inconsistent or allegedly inconsistent term, condition, or provision hereof shall be construed to be consistent with the Plan in all respects. 5 8. Entire Agreement; Amendments. ---------------------------- This Agreement contains all of the terms and conditions with respect to the subject matter hereof, and no amendment, modification, or other change hereto shall be of any force or effect unless and until set forth in a writing executed by ______________ and the Company (in each case except for amendments the Company is expressly authorized to make without Employee's consent hereunder or under the Plan). 9. Governing Law. ------------- This Agreement shall be governed by and construed in accordance with Delaware law, without giving effect to principles of conflicts of law. If any dispute arises with respect to this Agreement or any matter hereunder, (a) that dispute shall be submitted to the federal or state courts sitting in the State of Delaware, with each party waiving any defense to that venue; and (b) each party irrevocably waives its right to a jury trial. 10. Taxes. ----- _________________ shall be liable for any and all taxes, including withholding taxes, arising out of this grant or the vesting of RSUs or the distribution of Shares hereunder. ____________ may satisfy his or her tax withholding obligation by: (a) paying cash to the Company and/or (b) delivering to the Company a number of shares of the Company's stock or having the Company withhold from ________ at the appropriate time, a number of shares, in either case sufficient, based upon the market value per share of those shares, to satisfy those tax withholding requirements. IN WITNESS WHEREOF, by the Corporation's execution hereof and _______'s execution of the attachment hereto, the parties have duly executed this Agreement as the date first written above. WILMINGTON TRUST CORPORATION By:_________________________ Title:______________________ 6 ATTACHMENT TO RESTRICTED STOCK UNIT AGREEMENT --------------------------------------------- All of the terms and conditions of the Restricted Stock Unit Agreement dated ________ to which this Attachment is attached are incorporated by reference as fully as if set forth herein. Date of Grant RSUs Performance Goals - ------------- ---- ----------------- __________________________ (SEAL) __________________________ (PRINCIPAL RESIDENCE) __________________________ EX-31 8 w68089exv31.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS RULE 13a-14(a)/15d-14(a) CERTIFICATIONS EXHIBIT 31 CERTIFICATIONS I, Ted T. Cecala, Chairman of the Board and Chief Executive Officer of Wilmington Trust Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 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 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 and material weaknesses 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. /s/ Ted T. Cecala Date: November 9, 2004 ------------------------------------------------- Ted T. Cecala Chairman of the Board and Chief Executive Officer 1 CERTIFICATIONS I, David R. Gibson, Executive Vice President and Chief Financial Officer of Wilmington Trust Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 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 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 function): (a) All significant deficiencies and material weaknesses 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. /s/ David R. Gibson Date: November 9, 2004 ---------------------------------------------------- David R. Gibson Executive Vice President and Chief Financial Officer 2 EX-32 9 w68089exv32.txt SECTION 1350 CERTIFICATION SECTION 1350 CERTIFICATIONS EXHIBIT 32 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002 The undersigned certify that, to their knowledge, the Form 10-Q of Wilmington Trust Corporation (the Corporation) for the third quarter of 2004 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 the Corporation. /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 1 -----END PRIVACY-ENHANCED MESSAGE-----