WL Beats but Gets Downgraded

Wilmington Trust beats estimates, but gets a Moody’s downgrade

Wilmington Trust Corp. (WL) reported its 1Q09 financial results this morning. 1Q09 net income came in at $21.8 million or $0.26 per diluted share, compared to a net loss of $68.5 million $1.02 per diluted share in the prior quarter and net income of $41.4 million or $0.61 per diluted share in the prior-year quarter.

On an operating basis (excluding after-tax securities gains and write-downs), net income for 1Q09 was $17.4 million or $0.19 per diluted share, compared to a net loss of $6.1 million or $0.09 per diluted share for 4Q08. Operating earnings were substantially ahead of estimates, mainly due to a lower-than-expected provision expense which more than offset the decline in net interest income and non-interest income.

Credit metrics were mixed during the quarter, with period end non-performing assets increasing to 2.67% of loans (up 48 bps sequentially), while year-to-date net charge-offs at 0.22% of average loans (down 35 bps sequentially). During the reported quarter, WL decreased provisions for loan losses to $29.5 million from $67.5 million at the end of 4Q08. The loan loss reserve ratio increased to 1.77% from 1.63% at the end of 4Q08.

Tax-equivalent net interest income decreased 17.0% sequentially and 9.9% year-over-year to $79.0 million, as NIM [net interest margin] decreased 43 bps sequentially and 46 bps year-over-year to 2.91% at the end of 1Q09. Average loans decreased 1.0% sequentially but increased 10.2% year-over-year to $9.5 billion. Average deposits decreased 3.6% sequentially but remained almost flat compared to prior-year quarter to $7.9 billion.

Core non-interest income (excluding securities gains) decreased 3.6% sequentially but increased 0.3% year-over-year to $103.1 million during 1Q09.

Moody’s downgraded the rating of the company this morning based on concerns related to its real estate lending concentration and investments in bank-trust preferred securities.

We remain concerned with WL’s exposure to commercial real estate-construction loans (about 20% of the portfolio). Within the construction loan portfolio, 75% loans are for residential construction/ land development. Though WL lends mainly to smaller homebuilders in the Delaware Valley (60% of the portfolio) and not to national homebuilders, we expect a further deterioration in the credit quality on account of the ongoing weakness in sales. We are also concerned about the recent rating downgrades.

We are increasing our EPS estimates based on better-than-expected results, but maintaining our Sell recommendation on the shares mainly due to our concerns related to its large construction portfolio.

Read the full analyst report on WL