Wilmington Trust Announces 2010 Second Quarter Results

WILMINGTON, Del.--(BUSINESS WIRE)-- Wilmington Trust Corporation (NYSE: WL) reported a loss of $116.4 million for the 2010 second quarter. After dividends and accretion on preferred stock, the net loss available to common shareholders was $120.9 million, or $1.33 per share.

The primary cause of the loss was the amount of the provision for loan losses, which rose to $205.2 million, following increases in nonperforming loans, loan charge-offs, and loans with unfavorable risk ratings. Other contributing factors were $18.8 million of credit-related expenses and $7.7 million of securities losses.

The negative trends in credit reflected continuing economic pressures, particularly in southern Delaware, that weakened the financial condition of some borrowers and caused commercial real estate valuations to decline significantly. Management’s assessment of these factors and economic conditions overall led to an increase in the reserve for loan losses and other actions to reduce risk in the loan portfolio.

“My priority is to return our company to profitability and position our businesses for future growth, but first we must continue to deal with the lingering effects of a weak economy and housing market. Our second quarter results demonstrate we are doing that,” said Donald E. Foley, Wilmington Trust’s chairman and chief executive officer. “We are fully committed to working through our credit issues, relying on robust risk management tools and analyses.

“At the same time, we remain focused on our strong relationships with clients, and on capitalizing on opportunities to increase revenue from our advisory businesses,” Mr. Foley added. “We have the market positions, capital strength, and talented people to accomplish these objectives. While no one can predict when economic conditions will improve, we will manage our credit challenges effectively and, over the coming months, begin to position our company to capitalize fully on its many strengths.”

2010 SECOND QUARTER SUMMARY

• Net charge-offs were $131.2 million, an increase of $102.1 million from the 2010 first (trailing) quarter.
• The reserve for loan losses was $373.8 million, an increase of $74.0 million.
• Noninterest income rose to $100.9 million, an increase of 13%.
• Noninterest income accounted for 59% of total revenue (net interest income before the loan loss provision and noninterest income after amortization and excluding securities gains/losses).
• Corporate Client Services revenue was $51.3 million, another quarterly record high.
• Wealth Advisory Services trust and investment advisory revenue declined 4% from the trailing quarter, which was less than half the decline in the Dow Jones Industrial Index, the Standard & Poor’s 500 Index, and the NASDAQ for the same period.
• Economic pressures reduced demand for new loans, and loan balances decreased.
• Liquidity improved, as core deposits provided 83% of total funding, compared with 82% for the trailing quarter.
• The net interest margin improved to 3.15%, an increase of 12 basis points from the trailing quarter.
• The company’s capital position remained strong. All regulatory capital ratios continued to exceed those required by the Federal Reserve for banks to be considered well capitalized.
• The ratio of total risk-based capital to total risk-weighted assets was 16.65%, compared with the 10.00% required to be considered well capitalized.
• The amount of total risk-based capital was $1.64 billion. This was $656.9 million more than the amount required to be considered well capitalized.

Financial summary

ECONOMIC PRESSURES INCREASE THE PROVISION, RESERVE, AND CHARGE-OFFS

The financial condition of some borrowers weakened in the second quarter, especially in southern Delaware, where signs of economic recovery remain tentative. In addition, updated real estate appraisals received during the quarter revealed significant declines in collateral valuations. These factors led management to increase loan loss estimates, charge off more loans, downgrade risk ratings, and add $74.0 million to the reserve for loan losses.

Selected credit metrics

Commercial real estate/construction loans accounted for approximately two-thirds of the trailing quarter increase in net charge-offs. Most of these loans were for residential projects in southern Delaware, and largely for parcels of land in various stages of development.

Nonaccruing loans accounted for $479.9 million of nonperforming assets at June 30, 2010, compared with $468.9 million at March 31, 2010. During the 2010 second quarter, nonaccruing loans of approximately $119.4 million were charged off, and loans of approximately $130.0 million were added. Approximately one-half of the new nonaccruing loans were commercial real estate/construction loans. The remainder was split fairly evenly between the other two categories of commercial loans.

During the 2010 second quarter, property valued at $4.5 million was transferred to other real estate owned (OREO), and OREO valued at $6.6 million was sold or written down. This brought the OREO balance at June 30, 2010, to $44.2 million, which was $2.1 million lower than for the trailing quarter.

Loans past due 90 days or more were $66.5 million higher than at the end of the first quarter. Commercial, financial, and agricultural loans accounted for approximately one-half of this increase, and real estate-related loans accounted for most of the rest. Loans past due 90 days or more at June 30, 2010, included approximately $39.3 million of matured loans that are being renewed.

Loans 30 to 89 days past due decreased to $81.0 million from $108.3 million for the trailing quarter. This decrease reflected a combination of transfers to past due 90 days or more, transfers to nonaccruing status, returns to current status, and charge-offs.

Of the $1.45 billion of loans with substandard risk ratings at June 30, 2010, approximately $995.8 million, or 69%, continued to accrue interest. Of the $362.2 million trailing-quarter increase in loans with substandard risk ratings, approximately $333.2 million, or 92%, continued to accrue interest. The factors in the linked-quarter increase were:

• A $166.3 million increase in substandard commercial, financial, and agricultural loans.
• A $149.1 million increase in substandard commercial real estate/construction loans.
• A $48.3 million increase in substandard commercial mortgage loans.
• A $1.5 million decrease in substandard consumer and other retail loans.

“In addition to increasing the loan loss reserve, lowering risk ratings, and recognizing losses, we made management changes in the lending and credit review areas, added loan work-out staff, and continued aggressive work-out strategies. Also, to validate our own examination of the portfolio, we engaged an independent third-party credit review firm to take an objective look at our policies, procedures, and risk ratings, and their review and analysis supported our conclusions,” Mr. Foley said. “It is difficult to predict how quickly the economy and collateral values will stabilize and allow us to put these problems behind us. In the meantime, our rigorous scrutiny of credit risk continues.”

The financial statement section of this release contains additional information about credit quality and the composition of the reserve for loan losses.

LOAN BALANCES DECLINE; CORE DEPOSITS HELP IMPROVE LIQUIDITY

Loan demand remained weak, and loan balances declined on both a period-end and average-balance basis, in both the commercial and the retail portfolios. Management expects loan balances to decrease by an additional $200 million to $600 million by year-end 2010.

Liquidity continued to improve, as the percentage of funding from core deposits continued to increase. On average, non-core funding was $188.8 million lower than for the trailing quarter.

Loans, core deposits, and liquidity

The trailing-quarter decrease in total core deposits, on average, was mainly the result of a large decrease in noninterest-bearing demand deposits. Most of this decrease was associated with short-term deposits from a CCS client that were on deposit for most of the 2010 first quarter and, therefore, reflected in first quarter average balances. Near the end of the first quarter, the client distributed funds from the account, reducing its balance and creating a decline, on an average-balance basis, between the first and second quarters of 2010. CCS clients commonly make short-term transactional deposits, and changes in CCS client deposits do not necessarily indicate trends in new or lost business.

NET INTEREST MARGIN IMPROVES ON LOWER FUNDING COSTS

Net interest income was slightly higher than for the trailing quarter, and the net interest margin expanded by 12 basis points. The margin improvement reflected increases in commercial loan yields and decreases in the cost of funds.

Net interest income and net interest margin

The yields on some commercial loans were higher due to improvements in the 30-day Libor or other rate increases. At June 30, 2010, approximately 90% of commercial loans had floating rates; the pricing on approximately 40% of these loans was tied to the 30-day Libor.

The cost of funds was lower because the need for non-core deposits declined, due to the decrease in loan balances and the addition of cash from the common equity offering completed in the 2010 first quarter.

Management expects funding costs to increase modestly in the second half of 2010. For the third and fourth quarters of 2010, management expects the net interest margin to be in the 3.00% to 3.10% range, assuming no change in the short-term interest rate environment.

NONINTEREST INCOME INCREASES

Noninterest income for the 2010 second quarter was 13% higher than for the trailing quarter, mainly due to lower securities losses, higher Corporate Client Services revenues, and gains on the sale of residential mortgages (recorded in other noninterest income). For the first six months of 2010, noninterest income was $190.4 million, 1% lower than for the first half of 2009, reflecting higher year-to-date securities losses in 2010 than in 2009.

Noninterest income accounted for 59% of the company’s total revenue for the second quarter and for the first half of 2010.

Noninterest income

ANOTHER RECORD QUARTER FOR CORPORATE CLIENT SERVICES

Total Corporate Client Services (CCS) revenue was $51.3 million, which was 7% higher than for the trailing quarter. Global corporate trust services generated most of this increase. For the first six months of 2010, CCS revenue was $99.3 million, a 23% increase from the first half of 2009. More than half of this year-to-date increase came from retirement services.

CCS global corporate trust revenue for the 2010 second quarter was $25.3 million, an increase of 10% from the trailing quarter. For the first six months of 2010, global corporate trust revenue was $48.3 million, an increase of 19% from the first half of last year. This was due largely to demand for successor loan agency services, default administration and bankruptcy services, and services that support corporate debt issuances.

Fees for global corporate trust services are priced according to the level and complexity of services provided, and some fees may be extraordinary or one-time in nature. Management estimates that approximately $1.4 million of 2010 second quarter global corporate trust revenue may not recur.

CCS retirement services revenue was $21.5 million, the same as for the trailing quarter, as financial market declines offset the effects of additional plan contributions and new business. For the first six months of 2010, retirement services revenue was $43.0 million, an increase of 32% from the first half of last year. Much of the year-to-date growth was from services that support collective investment funds and from new and expanded relationships with large registered investment advisor firms.

CCS investment and cash management revenue was $4.5 million, an increase of $1.0 million from the trailing quarter. Approximately $700,000 of this amount was a one-time fee that management does not expect to recur. For the first six months of 2010, CCS investment and cash management revenue was $8.0 million, a 3% increase from the first half of last year.

MARKETS OFFSET WEALTH ADVISORY SERVICES BUSINESS DEVELOPMENT

Total Wealth Advisory Services (WAS) revenue was $40.9 million, a decrease of 7% from the trailing quarter. For the first six months of 2010, WAS revenue was $85.1 million, a 12% decrease from the first half of 2009. A combination of factors caused these decreases, including market volatility that affected the valuation of assets in client portfolios, fee waivers on money market mutual funds, and lower revenue from planning and other services.

WAS trust and investment advisory revenue was $33.2 million for the 2010 second quarter, which was 4% lower than for the trailing quarter. This decrease reflected declines in the financial markets that reduced asset valuations in client portfolios and offset the positive effects of new business. As a point of reference, the Standard & Poor’s 500 Index (S&P 500), which management regards as a reasonable proxy for the mix of equities in client portfolios, fell 12% during the same period.

For the first six months of 2010, trust and investment advisory revenue was $67.6 million, which was 8% higher than for the first half of last year. This growth reflected increases in asset valuations in client portfolios, as equity markets improved year-over-year.

WAS mutual fund fees for the 2010 second quarter were $1.2 million, an increase of $0.3 million from the trailing quarter, as yields on fund investments increased slightly. Low market interest rates continued to affect the yields on client investments in money market mutual funds, and management continued to waive fees on these funds. For the first six months of 2010, mutual fund fees were $2.1 million, a decrease of 84% from the first half of last year.

Fee waivers reduced WAS mutual fund revenue by approximately $4.0 million for the 2010 second quarter and by approximately $8.4 million for the first six months of 2010. Management does not expect to begin reinstating these fees until there is an increase in short-term market interest rates of at least 50 basis points.

Revenue from planning services was $6.5 million for the 2010 second quarter, a decrease of 26% from the trailing quarter. Planning revenue was $15.4 million for the first six months of 2010, a decrease of 27% from the first half of last year. Planning revenue was lower mainly because Wilmington Trust sold 80% of its ownership interest in management firm Grant Tani Barash & Altman (GTBA) to that firm’s principals in the 2010 first quarter. In 2009, revenue from GTBA was approximately $3.4 million per quarter.

CREDIT COSTS ADD TO NONINTEREST EXPENSE

Total noninterest expense was 17% higher than for the trailing quarter, mainly due to credit risk-related costs, as well as higher incentives and bonuses.

Noninterest expense

Costs associated with credit risk management efforts added approximately $18.8 million of expense in the 2010 second quarter, including approximately:

• $11.8 million for reserves against unfunded commitments to extend credit.
• $4.9 million of OREO write-downs and losses.
• $0.3 million of other OREO-related expense.
• $1.3 million of legal and other expense related to loan workout and recovery activities.
• $0.5 million for independent credit reviews.

Approximately $1.8 million of the increase in incentives and bonuses was associated with Mr. Foley’s compensation package. The rest of the increase was due mainly to accruals for staff retention incentives amid highly competitive employment market conditions.

The income tax benefit was higher than for the trailing quarter because the amount of the loss was higher. The effective tax rate for the 2010 second quarter was 36.64%, compared with 35.96% for the trailing quarter.

OTHER-THAN-TEMPORARY IMPAIRMENTS RESULT IN SECURITIES LOSSES

Securities losses for the 2010 second quarter were $7.7 million, compared with $17.8 million for the trailing quarter. During the 2010 second quarter, there were $0.1 million of securities gains and $7.8 million of securities losses, which resulted from other-than-temporary impairments of 9 of the 38 pooled trust-preferred securities (TruPS) in the company’s portfolio.

The 2010 second quarter write-down on these other-than-temporarily impaired (OTTI) TruPS was $11.3 million. Of this amount, $7.8 million was credit-related and recorded as securities losses. The remaining $3.5 million of the write-down was recorded in other comprehensive income, which reduced common stockholders’ equity by $2.2 million on an after-tax basis.

Pooled trust-preferred securities

The difference between the amortized cost of the pooled TruPS and their carrying value, which represents the non-credit-related portion of their impairment, was reflected in accumulated other comprehensive income and the tangible common equity ratio as of June 30, 2010.

None of the 9 single-issue TruPS in the company’s portfolio, which are from money center and large regional banks, was OTTI at June 30, 2010.

On a period-end basis, investment securities balances at June 30, 2010, were $768.4 million, slightly higher than at March 31, 2010. On average, balances for the 2010 second quarter were $750.6 million, which was 8% lower than for the trailing quarter. The difference between period-end and average balances was due mainly to decreases in government agency and mortgage-backed securities that occurred late in the 2010 first quarter and continued throughout the second quarter.

REGULAR QUARTERLY CASH DIVIDEND DECLARED

On July 21, 2010, the Board of Directors declared a regular quarterly cash dividend of $0.01 per common share. The dividend will be paid on August 16, 2010, to shareholders of record on August 2, 2010.

FINANCIAL STATEMENTS

Financial statements for the 2010 second quarter follow the narrative section of this release.

CONFERENCE CALL

Management will discuss 2010 second quarter results and outlook for the future in a conference call today at 10:00 a.m. (Eastern). Supporting materials, financial statements, and audio streaming will be available at www.wilmingtontrust.com.

FORWARD-LOOKING STATEMENTS

This release may contain forward-looking statements that reflect our current expectations about our performance. These statements rely on a number of assumptions, estimates, expectations, and assessments of potential developments, and are subject to various risks and uncertainties that could cause our actual results to differ from our expectations. Our ability to achieve the results reflected in these statements could be affected adversely by, among other things, changes in national or regional economic conditions; changes in market interest rates; fluctuations in equity or fixed income markets; changes in the market values of, or expected cash flows from, securities in our investment portfolio; significant changes in banking laws or regulations; changes in accounting policies, procedures, or guidelines; increased competition for business; higher-than-expected credit losses; the effects of acquisitions; the effects of integrating acquired entities; a substantial and permanent loss of either client accounts and/or assets under management at Wilmington Trust and/or affiliate money managers Cramer Rosenthal McGlynn and Roxbury Capital Management; changes in the regulatory, judicial, legislative, or tax treatment of business transactions; new litigation or developments in existing litigation; and economic uncertainty created by unrest in other parts of the world.

ABOUT WILMINGTON TRUST

Wilmington Trust Corporation (NYSE: WL) is a financial services holding company that provides Regional Banking services throughout the mid-Atlantic region, Wealth Advisory services to high-net-worth clients in 36 countries, and Corporate Client services to institutional clients in 89 countries. Its wholly owned bank subsidiary, Wilmington Trust Company, which was founded in 1903, is one of the largest personal trust providers in the United States and the leading retail and commercial bank in Delaware. Wilmington Trust Corporation and its affiliates have offices in Arizona, California, Connecticut, Delaware, Florida, Georgia, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, Pennsylvania, South Carolina, Vermont, the Cayman Islands, the Channel Islands, London, Dublin, Frankfurt, Luxembourg, and Amsterdam. For more information, visit www.wilmingtontrust.com.