Wilmington Reports Huge Losses

Wilmington Trust Corporation () reported fourth quarter 2010 net loss of $213.8 million or $2.35 per share compared with $369.9 million or $4.06 per share in the prior quarter and $15.7 million or 23 cents per share in the year-ago quarter. The results substantially lagged behind the Zacks Consensus Estimate of a loss of 51 cents per share.

For fiscal year 2010, Wilmington’s net loss stood at $738.3 million or $8.45 per share compared with $22.7 million or 33 cents per share in the year-ago period. This also compares unfavorably with the Zacks Consensus Estimate loss of $6.44 per share.

During the quarter, Wilmington had announced that it will merge with M&T Bank Corporation (MTB - Analyst Report). The stock-for-stock agreement is valued at about $351 million and is expected to close by the second quarter of 2011.

Wilmington’s results for the reported quarter were mainly hurt by lower net interest income, higher non-interest expenses, lower loan growth, increased levels of nonperforming loans and net charge-offs. However, an increase in non-interest income was among the positives.

Behind the Headlines

Wilmington’s total revenue for the quarter was $163.6 million, down 3.9% from the prior quarter and 8.2% from the prior-year quarter. Total revenue also missed the Zacks Consensus Estimate of $175.0 million.

For full-year 2010, the company’s total revenue came in at $623.8 million compared with $680.9 million in 2009 and also missed the Zacks Consensus Estimate of $699.0 million.

Net interest income before provision for loan losses was down 11.5% from the prior quarter and 23.1% from the prior-year quarter to $59.9 million. Net interest margin (NIM) fell 45 basis points (bps) from the prior quarter and 79 bps year over year to 2.33%.

The decline in NIM was the result of a decline in loan balances, liquidity additions funded by increases in core deposits and national brokered CD balances and an increase in non-accruing loans.

Average earning assets rose to $10.25 billion from $9.71 billion in the prior quarter and $9.95 billion in the year-ago quarter. However, rate of total earnings assets declined to 3.22% from 3.69% in the prior quarter and 4.10% in the year-ago quarter.

Non-interest income improved 1.1% sequentially and 3.4% year over year to $103.7 million.

Wilmington’s total non-interest expense was $202.6 million, up 32.1% from the prior quarter and 52.7% from the year-ago quarter. The increase was mainly attributable to merger-related costs, rise in the reserve for unfunded loan commitments and legal and other costs associated with loan workouts, recoveries, and dispositions.

Wilmington’s average core deposit balances were $7.08 billion, up 2.6% from the prior quarter and 5.0% from the year-ago quarter. Loan demand continued to be weak, resulting in total average loan balance to decline 7.4% from the prior quarter and 16.1% from the year-ago quarter to $7.52 billion.

Credit Quality

Though Wilmington’s credit quality continued to deteriorate, it was a mixed bag during the quarter. Net charge-offs increased 41.6% sequentially to $205.2 million mainly due to a surge in commercial construction loans. Net charge-off ratio was 2.58%, up 84 bps from the prior quarter and 221 bps from the year-ago quarter.

Non-accruing loans were $1,009.6 million, up 11.4% from the prior quarter and 121.6% from the year-ago quarter. At the end of the reported quarter, total nonperforming assets grew 15.8% from the prior quarter and 120.7% year over year to $1,145.0 million.

Though provision for loan losses declined to $135.6 million from $281.5 million in the prior quarter, it increased from $82.8 million in the year-ago quarter. Similarly, as of December 31, 2010, the reserve for loan losses was $440.8 million compared with $510.4 million as of September 30, 2010 and $251.5 million as of December 31, 2009.

The loan loss reserve ratio was 5.86% at the end of the quarter compared with 6.28% as of September 30, 2010 and 2.80% as of December 31, 2009.

Capital Evaluation

As of December 31, 2010, Wilmington’s total assets under management were $60.1 billion, up 2.9% from the prior quarter and 7.9% from the year-ago quarter. Total assets under administration also rose 2.1% from the prior quarter and 2.9% from the year-ago quarter to $152.9 billion.

However, at the end of the reported quarter, book value per share declined to $5.76 from $8.13 as of September 30, 2010 and $14.17 as of December 31, 2009. Also, Wilmington’s capital ratios fell during the reported quarter, with Tier 1 common capital ratio of 3.75% (down 190 bps sequentially and 315 bps year over year) and tangible equity to tangible asset ratio of 1.53% (down 198 bps sequentially and 389 bps year over year).

Our Take

Wilmington has been facing reduced client activity and higher credit costs due to sluggish economic recovery. However, its merger with M&T will create a large lender in the eastern U.S. and the combined entity will become a large provider of wealth management. Also, the company is poised to benefit from its geographical expansion.

Wilmington currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.