Wilmington Remains Neutral

We continue to maintain our long-term “Neutral” recommendation on Wilmington Trust Corporation (WL). Though the company has been facing reduced client activity and higher credit costs due to sluggish economic recovery, its impending merger with M&T Bank Corp. (MTB - Analyst Report) will create a large lender in the eastern U.S., and the combined entity will become a large provider of wealth management.

In November last year, Wilmington had announced that M&T would acquire the company for a stock-for-stock deal for $351 million. As per the agreement, shareholders of the company will get 0.051372 shares of M&T common stock in exchange for each share of Wilmington stock they hold.

M&T would also assume responsibility for $330 million of TARP money. Hence, we believe that Wilmington will be able to overcome its difficulties after the acquisition and garner a larger market share.

Furthermore, given the increased client activity and savings growth, Wilmington continues to witness modest growth in deposits. Moreover, the company’s AUM has marked a record ascent since 2005 to $60.1 million in 2010. We expect these factors to drive further growth once the economy rebounds.

Additionally, despite the challenging economic conditions, Wilmington maintains a strong capital position. As of December 31, 2010, total risk-based capital ratio was 12.29%, Tier 1 risk-based capital ratio was 7.51%, and Tier 1 leverage capital ratio was 6.02%, all exceeding the regulatory requirements for classification as a well-capitalized institution.

On the flip side, there remains an increasing concern about Wilmington’s exposure to construction loans. Within the construction loan portfolio, which comprises 19% of loan portfolio as of December 31, 2010, the majority of loans are for residential construction/land development.

Over 55% of this project portfolio accounts for the Delaware region that is marred by increased losses owing to deteriorating credit quality as of December 31, 2010. Hence, with significant weakness being witnessed in residential construction activity, we anticipate increased levels of non-performing loans in the forthcoming quarters.

Rise in expense has been an obstacle to Wilmington’s earnings growth. Operating leverage has been minimal since 2005 driven by higher levels of expense, expansions, system improvements and the cost of increased compliance and risk management. These, in turn, have created pressure on the margin growth.

Wilmington currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. However, Signature Bank (SBNY - Snapshot Report), one of Wilmington’s closest competitors, retains a Zacks #3 Rank (short-term ‘Hold’ rating).

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