Wilmington Trust Corp.'s fourth-quarter earnings fell, and analysts said that since the company had no exposure to subprime mortgages, the decline is indicative of deeper and more systemic credit problems that many midsize banks can expect to face over the next year.
Analysts said the results at Wilmington and other midsize banking companies show that the credit crisis is beginning to penetrate construction loan portfolios.
"Wilmington is not even a construction lender in markets like Florida and Nevada that have been hard hit, but the housing market in their footprint of Delaware, Pennsylvania, and New Jersey has weakened as well," said Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets.
Ted T. Cecala, Wilmington's chairman and chief executive, said during a conference call Friday that housing in the Delaware region has slowed, "but we haven't seen rapid price deflation like other areas of the country."
The company's profit from lending fell 1.4%, to $91.1 million, despite 2% loan balance growth, to $8.37 billion. Mr. Cecala said credit quality in Wilmington's lending portfolio remains stable. "We are a relationship lender working with well-established local builders," he said during the conference call.
He also said his company had no exposure to subprime mortgages, collateralized debt obligations, or structured investment vehicles. Mr. Cassidy said the majority of banks are not exposed to these products. "Most banks worry about commercial real estate lending, commercial lending, and consumer lending, and those areas are just starting to feel pressure from the credit crisis," he said. "Those areas are just starting to deteriorate."
Wilmington's fourth-quarter net income fell 4.4%, to $44 million, or 65 cents a share, from a year earlier, beating the average analyst estimate by a penny, according to Thomson Financial. Noninterest income rose 11%, to $102.7 million.
The results included a $3.2 million charge related to the November settlement of the antitrust lawsuit American Express Co. brought against Visa Inc. As a member of Visa's banking network, Wilmington Trust must pay a portion of the litigation-related loss. Analysts expect the proceeds from Visa's initial public offering to offset the litigation costs.
Jared Shaw, an analyst at KBW Inc., lowered estimates for Wilmington Trust "on the assumption it will not be immune to the trends we are seeing in both the national and regional market," and the impact of interest rate cuts.
Mr. Cassidy said Wilmington is "asset-sensitive" and will feel the crunch as the Federal Reserve lowers rates. "This will slow revenue growth, and that will continue in 2008," he said. "The big issue for Wilmington and the banking industry is credit quality. The cost of credit is going up, and we expect credit deterioration in their loan portfolio."
Mr. Cecala said in an interview that Wilmington is getting "dynamic" growth from its wealth advisory services and corporate client services businesses. Wealth advisory services fees increased 15% from a year earlier, and revenue from corporate client services rose 12%.
The company will continue efforts to expand its wealth advisory services domestically, as well as its corporate client services, both here and abroad, through acquisitions, Mr. Cecala said. But he said it probably will not make investment management acquisitions now that it has moved to an open architecture investment platform.
In June, Wilmington bought Boston wealth manager Bingham Legg Advisers LLC. Mr. Cecala said it will look to add "teams or small firms" through acquisitions. Nothing is in Wilmington's "gun sights," he said, but attractive regions for possible buyouts include Chicago and the Pacific Northwest.
