Wilmington Plummets; to be Acquired - Analyst Blog

Wilmington Trust Corporation (WL) reported a third quarter 2010 loss of $369.9 million or $4.06 per share compared with $120.9 million or $1.33 per share in the prior quarter and $10.4 million or 15 cents per share in the year-ago quarter. The results substantially lagged behind the Zacks Consensus Estimate of a loss of 43 cents per share.

Wilmingtonalso announced that it will merge with M&T Bank Corporation (MTB). Under the terms of the deal, shareholders will get 0.051372 shares of M&T for each Wilmington share. The stock-for-stock agreement is valued at about $351 million and will close by mid-2011. The deal has already been approved by the board of directors of both the companies, and is now subject to the consent of Wilmington's shareholders and regulatory approval.

Wilmington's results for the reported quarter reflected an increase in non-interest income. However, this was substantially offset by lower net interest income, higher loan loss provisions and reflected increased levels of nonperforming loans and charge-offs and credit risk rating downgrades, primarily due to the persistent weakness in the commercial construction portfolio.

Behind the Headlines

Wilmington's total revenue of $170.3 million was down 3.2% from the prior quarter but increased 12.4% from the prior-year quarter. Total revenue missed the Zacks Consensus Estimate of $179.0 million.

Net interest income before provision for loan losses was down 9.5% from the prior quarter and 15.4% from the prior-year quarter to $67.7 million. Net interest margin fell 37 basis points (bps) from the prior quarter and 41 bps year over year to 2.78%. The decline in NIM was attributable to decreases in loan balances.

Average earning assets rose to $9.71 billion from $9.57 billion in the prior quarter but fell from $9.98 million in the year-ago quarter. The rate of total earning assets also declined to 3.69% from 4.05% in the prior quarter and 4.23% in the year-ago quarter.

Non-interest income increased 1.7% sequentially and 48.5% year over year to $102.6 million.

Wilmington's total non-interest expense was $153.4 million, down 0.5% from the prior quarter but up 20.8% from the year-ago quarter. The sequential decrease was mainly due to a $1.9 million decline in expenses associated with the employees.

Wilmington's average core deposit balances were $6.89 billion, up 1.9% from the prior quarter and 2.9% from the year-ago quarter. Loan demand continued to be weak, resulting in total average loan balance to decline 3.4% from the prior quarter and 8.5% from the year-ago quarter to $8.31 billion.

Credit Quality

Wilmington's credit quality continued to deteriorate significantly. Net charge-offs increased 10.4% sequentially to $144.9 million mainly due to a spike in commercial real estate/construction loans. Net charge-off ratio was 1.74%, up 21 bps from the prior quarter and 150 bps from the year-ago quarter.

Non-accruing loans were $906.0 million, up 88.8% from the prior quarter and 146.5% from the year-ago quarter. The provision for loan losses soared to $281.5 million from $205.2 million in the prior quarter and $38.7 million in the year-ago quarter. At the end of the reported quarter, total nonperforming assets grew 76.6% from the prior quarter and 148.7% year over year to $988.6 million.

As of September 30, 2010, the reserve for loan losses was $510.4 million as compared with $373.8 million as of June 30, 2010 and $201.8 million as of September 30, 2009. The loan loss reserve ratio rose to 6.28% at the end of the quarter as compared with 4.46% as of June 30, 2010 and 2.24% as of September 30, 2009.

Capital Evaluation

As of September 30, 2010, total assets under management were $58.4 billion, up 9.6% from the prior quarter and 11.7% from the year-ago quarter. Total assets under administration were $149.7 billion, up 4.8% from the prior quarter and 6.3% from the year-ago quarter.

However, at the end of the reported quarter, book value per share declined to $8.13 from $12.20 as of June 30, 2010 and $14.29 as of September 30, 2009. Also, Wilmington's capital ratios fell during the reported quarter, with Tier 1 common capital ratio of 5.65% (down 135 bps year over year) and tangible equity to tangible asset ratio of 3.51% (down 209 bps year over year).

Our Take

Recently, Wilmington's business has been severely marred by the ongoing weakness and volatility in the economy that reduced client activity and increased the credit and other cost of operations. Moreover, upheavals related to its real estate lending concentration have hampered the company's growth model.

However, Wilmington's merger with M&T will create a large lender in the eastern U.S. and a substantial provider of wealth management. The company will also benefit from the geographical expansion.

Both Wilmington and M&T currently retain a Zacks #3 Rank, which translates into a short-term ‘Hold' rating. Also, we maintain a long-term Neutral recommendation for both the shares.

 
WILMINGTON TRST (WL): Free Stock Analysis Report
 
Zacks Investment Research