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Wilmington Trust Corporation (NYSE:WL)

Q1 2010 Earnings Call Transcript

April 23, 2010 10:00 am ET

Executives

Ellen Roberts – VP, IR

Ted Cecala – Chairman and CEO

Dave Gibson – CFO

Bob Harra – President and COO

Bill North – Chief Credit Officer

Bill Farrell – Head of Corporate Client Services

Analysts

Andy Stapp – B. Riley & Co.

Matt Schultheis – Boenning and Scattergood

Mac Hodgson – SunTrust Robinson Humphrey

Gerard Cassidy – RBC Capital Markets

Steve Moss – Janney Montgomery Scott

Justin Maurer – Lord Abbett

Chris McGratty – KBW

Tom Alonso – Macquarie

David West – Davenport and Co.

Brooke Vanderguy [ph] – Lionsback Capital [ph]

Leo Harmon – FMA

Charlie Ernst [ph] – Diamondback Capital [ph]

Operator

Greetings and welcome to the Wilmington Trust first quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Ellen Roberts, Vice President of Investor Relations. Thank you, Ms. Roberts. You may now begin.

Ellen Roberts

Thank Tracy. Good morning, everybody. Thanks for joining us this morning. I’d like to remind you that the supporting materials for this call are available on our Web site at www.wilmingtontrust.com. This call is being recorded. The replay details are in the earnings release and on our Web site, again, www.wilmingtontrust.com.

Our agenda this morning features remarks from our Chairman and Chief Executive Officer, Ted Cecala, also present are Bob Harra, who is our President, Chief Operating Officer and Head of the Regional Banking Business, our Chief Financial Officer, Dave Gibson; our Chief Credit Officer, Bill North; the Head of our Corporate Client Services Business, Bill Farrell; and the Head of our Wealth Advisory Services Business, Mark Graham.

We’ll start with remarks from Mr. Cecala, and then he will take questions at the conclusion of his formal remarks. I want to remind you that news reporters maybe attending maybe attending this call. And anybody is permitted to ask questions, and I just have to give you a brief forward-looking statement disclaimer.

Our comments may contain forward-looking statements that reflect our current expectations about our performance. Our ability to achieve the results reflected in these statements could be affected adversely by changes in national or regional economic conditions, changes in market interest rates, fluctuations in equity or fixed income markets higher than expected credit losses, changes in the market values of securities and our investment portfolio and other factors described in disclosure documents we file publicly from time-to-time.

With that I will turn it over to Ted.

Ted Cecala

Thanks, Ellen, and good morning. Thank you for joining us for this discussion of our results for the first quarter of 2010. I hope you have had a chance to review our earnings release. I don’t plan on repeating everything in the release, but will speak to the significant items for the quarter and afterwards I’ll respond to questions that you may have.

As we reported earlier today we recorded net loss for the quarter of $29 million. This was primarily due to the $77 million provision for loan losses and a charge of $18 million for other than temporary impairment on pooled trust preferred securities. These two items overshadowed other positive developments during the quarter, especially, our advisory businesses.

Corporate client services and Wealth Advisory Services results continue to mitigate the effect of economic pressures on our banking business. The expenses were well controlled and were less than 1% of the fourth quarter levels. We completed an offering of common stock during the quarter which raised $274 million and substantially increased our capital ratios. And I will review each of these areas in more detail over the course of this call.

In my discussion today, my performance comparisons will be against 2009 fourth quarter and I would like to begin by discussing the regional banking business. For the quarter, commercial loans on average declined $61 million, of that amount CF&A loans and construction loans declined 57 million and 37 million respectively.

This was offset by 2% increase in commercial mortgages, the increasing commercial mortgage loans is associated with performing construction loans moving into the commercial mortgage category, most of which will see refinancing in the secondary market.

Retail loans were down $98 million, reflecting continued run off of the indirect auto loan portfolio. In total, loans on average declined 159 million during the quarter. Of this, this decline in loans we saw a record high deposit levels which increased on average nearly $500 million this quarter.

Now I would like to provide an overview of credit quality, which will be followed with a more detail review by Dave Gibson later in the call. Non-accruing loans rose $13 million while nonperforming assets, which also include OREO and renegotiated loans, rose $32 million. By comparison, for the fourth quarter of last year, non-accruing loans rose $88 million and total non-performing assets increased $121 million.

Net charge-offs for the quarter were $29 million, that’s down from 33 million last quarter. And the reserve for loan losses increased by $48 million to $300 million reaching 3.44% of loan at the end of the quarter.

Turning now to our net interest margin, the net interest margin was 303, that’s down nine basis points from last quarter. The decline was driven by the loss of interest income due to declining loan balances and we added some government securities to the portfolio that have very well yields these securities have maturities of less than six months.

Before turning to our advisory businesses, I would like to take a minute to talk about the OTTI charge we recognized this quarter. As we have discussed in the past, our investment portfolio includes 38 pooled trust preferred and nine single issued securities. Of these securities, 23 of the pooled trust preferred issues were determined to be OTTI, resulting in a total write-down of $30 million, of this amount, $18 million was determined to be credit related and was recorded as a loss through our income statement.

The remaining amount was recorded in other comprehensive income and reduced stockholders equity by $8 million. The performance of the securities continue to be influenced by the current recession and stress on the underlying banks within our portfolio. It’s difficult to predict how the banks within these securities will perform in future quarters, but continued recessionary pressures could result in future losses.

Now, I would like to talk about our advisory businesses. As I mentioned at the beginning of today’s call, our Wealth Advisory and Corporate Client Services continued to mitigate the effects of the economy on the banking business.

In the Wealth Advisory business, revenues declined 7% or $3 million, the largest decline was reported in planning and other service fees which fell $2 million or 19%. This was primarily the result of us reducing our ownership position in the West Coast based Grant Tani Barash & Altman we reduced that to 10% during the quarter. Because the transaction closed in the middle of the quarter we won’t see the full effect of the change until the second quarter.

In 2009, revenue from GTBA was approximately $3.4 million per quarter. Core trust and investment advisory services declined 1%, less than $0.5 million for the quarter. Revenue from investment advisory business was muted by increased client preference for fixed income and instruments, exchange traded funds and other investment services on which pricing is lower than for equity investment management services.

At the same time sustained low interest rates translate into low money market mutual fund yields where we have late fees in order to maximize the return available to clients. These waivers reduce Wealth Advisory revenue by over $4 million during the quarter. While these events and circumstances reduce revenue we are encouraged by the business development efforts which are ahead of first quarter of last year by 34%.

Now, I’d like to turn to Corporate Client Services, where revenue was up 2% from last quarter. Retirement services keyed the first quarter growth fees from the segment rose $3 million and 19% and retirement services will provide custody and trust services for plan sponsors who manage unbundled retirement plan.

Revenue benefited from improved market valuations and new business. Collective investment funds continued to lead new business development as we increased distribution through registered investment advisors.

Global Corporate Trust Services declined $2 million or 8%, a decline from last quarter is due to a lower level of activity in the capital markets in the first quarter of this year.

To close out the advisory revenue discussion, Cramer Rosenthal McGlynn added over a billion dollars in assets under management. Also, Roxbury Capital Management posted a positive earnings quarter. It was the first positive earnings since the third quarter of 2008. In total, non-interest revenue represents over 59% of total operating revenue for the Company.

I just make a few brief comments on expenses. As I noted earlier, the expenses were well controlled through the quarter, an increase less than a million dollars or 1%. Staffing related expenses declined 600,000 or 1% and reflected lower incentive payments, fewer staff members in the smaller ownership position in GTBA. We remain focused on expense management.

And now before I wrap up, as I said earlier, I’m going ask Dave Gibson, our Chief Financial Officer to take you through some additional detail on our loan portfolio and credit metrics. Dave.

Dave Gibson

Thanks Ted. I’d like to start with the economy. While we believe that our region will perform better than the rest of the country we still see pockets of weakness for other than broad-based recovery. It appears that parts of New Jersey and Pennsylvania and our banking footprint have shown improvement, but that has not occurred in the same extent in Delaware, where we have the greatest exposure real estate.

The growth of our problem credits appeared to have moderated somewhat this quarter but we cannot conclude that this is a trend, criticized assets continue to grow during the quarter and we increased the reserve by $48 million. Reserve to loan ratio increased to 344 from 280 at year end.

Non-accruing loans were 13 million, and overall non-performing assets increased 32 million due to increases in OREO and restructured credits. This is the smallest increase in NPA since the third quarter of '08. Non-occurring construction credits declined 18 million as a result of charge-off and the movement of some properties into OREO.

There were no significant additions to non-accruing construction loans during the quarter. We did see small increases to non-accruing CF&A and commercial mortgages; the largest increase was for self-storage business where facilities have not fully leased out. This business had both commercial and mortgage debt.

In total, net charge-offs were 29 million, down 4 million from last quarter. That corresponds to a quarterly charge-off rate of 33 basis points, down from 37 basis point in the fourth quarter and was a 132 basis points annualized. Net charge-offs for all commercial loans decreased $5 million.

Within the commercial portfolio construction continued to comprise the largest portion of charge-offs and charge-offs for construction credits were primarily related to projects in southern Delaware and declined $1 million from the fourth quarter.

Within the CF&A portfolio, charge-offs included a number of businesses that reported the construction industry and declined $3 million. Consumer net charge-offs increased $1 million from the fourth quarter and were driven primarily by a loss on the single home equity loan.

With that, I will turn it back to Ted.

Ted Cecala

Thanks, Dave. Now, I’d like to talk about capital, as most of you are aware we completed an offering of common stock in the first quarter as this transaction added 274 million to common equity. Prior to the transaction, the company exceeded all of the minimum capital ratios to be considered well capitalized. This transaction significantly boosted all of our capital ratios and expanded our cushion over the regulatory minimums.

All regulatory capital ratios continued to exceed regulatory requirements for well capitalized with and without CCP fund. We have previously expressed our desire to pay back the CCP fund; we believe three things will need to happen first for us to do that. One is to increase capital to address potential stress scenarios. We have done that. Second is the Fed will need to complete their upcoming full scope safety and soundness examination. And third, non-performing assets growth will need to flatten out or decline for at least one quarter. As you can see we have accomplished the first of these.

To wrap up, while we see signs that Delaware’s economy may be stabilizing we remain cautious about the near-term outlook. Our advisory businesses are doing well. We are managing expenses carefully and our capital levels are very strong.

This concludes my remarks for the quarter. And I’ll be willing to answer any questions that you may have

Question-and-Answer Session

Operator

(Operator instructions). Our first question is coming from Andy Stapp of B. Riley & Co.

Andy Stapp – B. Riley & Co.

I missed part of call, so I apologize that I missed it, but what were early stage delinquencies? 89 days delinquencies?

Ted Cecala

We don’t disclose that in the quarter. One FAS due 90 days or more was to in the release, 39.7 million, up 9 million of the fourth quarter.

Andy Stapp – B. Riley & Co.

Okay. And what was the impact of the interest reversals on your net interest margins?

Bob Harra

Andy, this is Dave. I think when we balance the three things are happening with our margin, three things impacted. One is a non-accruing loan, the second is absolute reduction in our total loans and the third happens to be just the system leverage up in the investment portfolio for short-term and cash. The non-accruing loans were one or two basis points of the decline in the margin. The largest impact for our margin was just absolute decline in our loan balances.

Andy Stapp – B. Riley & Co.

And any impact from prepayment activity on mortgage-backed securities?

Bob Harra

No. We are very clear on that.

Andy Stapp – B. Riley & Co.

All right, thank you.

Operator

Thank you. Our next question is coming from Matt Schultheis of Boenning and Scattergood.

Matt Schultheis – Boenning and Scattergood

Good morning.

Ted Cecala

Morning.

Matt Schultheis – Boenning and Scattergood

I was hoping you could quantify how much of the increase in OREO was from loans that were already in non-performing status versus how many may have been performing before this quarter and just move straight to OREO.

Bob Harra

All of the loans that went into OREO were a non-accruing particularly this quarter.

Matt Schultheis – Boenning and Scattergood

And how much of this quarter’s provision was high really to new appraisals on collateral for loans that had already been identified as non-accruing and how much was for the new loans that you’ve identified, the new weaknesses?

Bob Harra

Well, I think the bulk of the increase in the reserve was not specific loans but they were more based on our methodology as we thought criticized assets grow somewhat during the quarter. We also saw the economic data not improved, did not necessarily get worse but did not improve. And we had some data though (inaudible) of increase due to appraisal, but our build up of the reserve is a general concern over the trend that we see there.

Matt Schultheis – Boenning and Scattergood

Okay. That’s it from me. Thank you very much.

Operator

Thank you. Our next question coming from Mac Hodgson of SunTrust Robinson Humphrey.

Mac Hodgson – SunTrust Robinson Humphrey

Hey, good morning.

Ted Cecala

Good morning, Mac.

Mac Hodgson – SunTrust Robinson Humphrey

Couple of questions. Maybe first talk on the TARP. I believe originally when you guys raised capital the thought was maybe apply or repay it after the first quarter. Are they being changed I don’t remember the expectation that you had to wait for the Fed review, you had dialogue with the regulators and they ask you to wait around a little bit, anything that changed?

Bob Harra

I think when we had our ongoing conversations with the Fed on a regular basis so I think in those conversations it was indicated to us that the Fed liked to have completed their next full scope exam, which is targeted to start June 28 so we heard that message and so we are waiting for that post scope exam.

Mac Hodgson – SunTrust Robinson Humphrey

And what was the expectation of when that would be completed, would it be completed in the third quarter?

Bob Harra

I think most likely the field work would be all completed, hopefully, before the third quarter was over, I can’t say that. All of the final written documents on all of that would be it might take a little bit longer than that to get the final written report.

Mac Hodgson – SunTrust Robinson Humphrey

And is there any, I think Susquehanna, obviously, repaid a portion of the TARP, recently, and they had been many I think in your regions, had there been adverse impact that’s holding on the TARP, I believe that maybe couple of times during the capital raise, are you guys having any problem, keeping or getting business and result in having on hang on the TARP?

Bob Harra

I don’t perceive that in and of itself. I think the capital raise did a great deal of positive for our clients just in terms of that’s our absolute capital levels and our TCE ratios and tier one common ratios are very strong and I think the TARP is less of an issue now.

Mac Hodgson – SunTrust Robinson Humphrey

Okay. And then second on margin, I’m assuming you expect the loan portfolio to continue to showing some, would that put more pressure on the margin and you expect the margin to be and there is more pressure on the near-term?

Ted Cecala

I would expect really, yes. Not significantly, but certainly, when we’re losing assets that are yielding 4% to 5% that can put pressure on the margin.

Mac Hodgson – SunTrust Robinson Humphrey

And then there is a comment in the press release on the Wealth Advisory Services business about still it sounds like an increasing preference to fixed income investments. I would have thought there was maybe more than movement into equity given off the some of the improvement in the equity side, given that what you guys have seen.

Ted Cecala

I’d say it’s been kind of flat to down, I think particularly we refer more to it, is it a new business that’s come in, we have focused to grow with the new business efforts on fixed income related things. So when you look at the impact of that new business it’s not quite the impact you see from a more fully allocated account that. The good news which is that’s beginning I think it’s not only level but as we look forward to continue to broaden so that we have some good future opportunities to raise those fees going forward. It’s been a relatively flat story versus a quarter or two ago when it was strongly I think in the fixed income category.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, great, appreciate it. Thanks.

Operator

Thank you. Our next question is coming from Gerard Cassidy of RBC Capital Markets.

Gerard Cassidy – RBC Capital Markets

Thank you. Good morning, guys. Ted, can you tell us some in terms of loan growth going forward, obviously, the construction loan portfolio was a big driver of loan growth during the early 2000. I’m assuming that’s not going to be the case once we get into 2011. What do you guys see for what the driver will be for loan growth maybe later this year, into 2011 and '12?

Ted Cecala

The exposure we have with real estate obviously have to come down and we’re working towards that though that part is going to unwind somewhat, we hope to fill that back on the balance sheet with some CS&A type of lending, some additional consumer lending as we start to try to reverse the trend in our consumer portfolio. So I look at it that way.

Gerard Cassidy – RBC Capital Markets

Okay. And then coming back to TARP, the repayment in TARP, I would assume by the end of this year your non-performing assets will be falling, so you will capture that other criteria that you need to show before you can pay back and if Dave’s right on just the process of the exam, is it fair to say that there could be a likelihood that TARP could be repaid in the fourth quarter of this year and if not first quarter of next year?

Ted Cecala

We are hopeful that we can repay as soon as possible. The capital position obviously is very strong. I think everybody is waiting for the peak in non-performing assets; they did come down somewhat in terms of the increase this quarter. Delaware though, the statistics don’t mirror what we see in southeastern Pennsylvania or New Jersey, were down on the bulk of our market, so, we’re hopeful that it will respond a little better as we get better weather for one thing, and as we head towards summer, we will see some activity, but we need to have that occur in order to feel comfortable that we reach the peak in our non-performing assets.

Gerard Cassidy – RBC Capital Markets

Okay. And then circling back I may have missed this; .I had to jump off the call, in talking about the OTTI, I heard the TARP’s were the reason for the charge, some of the OCI that may have been market related turn into actually credit related or what cause the jump up in the OTTI? I apologize if you had early explained it.

Bob Harra

No, Gerard, this is Dave. Fundamentally, we do a credit analysis for every underlying financial institutions and schools of over 1,000, but they were quite a number of new names that are third-party that we are doing this work added to the forecasted default list. So it was a fundamental credit issue and that was reflected in the charge. So we’ve got lot more names of smaller banks that have either deferred on their dividend payments or they in fact some have deferred on the TARP payments to preserve capital. And when they do that we presume that they will default and not repay their underlying preferred. So I think that was really the driver of the number of banks that got added to the list.

Gerard Cassidy – RBC Capital Markets

Okay. And then one final question on that. Do you guys have an estimate of when you look at your pooled trust of all the names that are in them what percentage now are not paying either preferred payments or TARP payments? I know there’s a lot of names in there –

Ted Cecala

I don’t have a specific percentage, Gerard, I’d have to go back to our analysis to see what percentages tends to be less of a indicator than what the dollar of the size of the institution is defaulting, in which instrument and where we are in the trenches of those instruments. So one instrument you could have a $2 million default and it puts you into OTTI charges and other instrument have a $10 million default it does not. So it’s very much security by security analysis but I wouldn’t say it’s a 50% I think it’s a pretty low percentage, but with the dollars are enough to do to make the credit losses to grow.

Gerard Cassidy – RBC Capital Markets

Thank you.

Operator

Our next question is coming from Steve Moss of Janney Montgomery Scott.

Steve Moss – Janney Montgomery Scott

Good morning, guys.

Ted Cecala

Good morning.

Steve Moss – Janney Montgomery Scott

Just wanted to ask with regards to the substandard watch list loans what is the loan composition?

Ted Cecala

In terms of the total?

Steve Moss – Janney Montgomery Scott

The title.

Ted Cecala

It’s sort of mixed between all of our commercial categories between CF&A construction and commercial mortgage, it’s in the substandard, it’s the largest are in construction CF&A and mortgage being the lowest, but they’re pretty equally weighted in terms of substandard, not included in the non-accruing portion which is obviously predominantly construction.

Steve Moss – Janney Montgomery Scott

So it’s in the substantially (inaudible)

Ted Cecala

Roughly.

Steve Moss – Janney Montgomery Scott

Okay. The other question I did have on the corporate client services business, what percentage of revenues are coming from bankruptcy related cases?

Bill Farrell

Steve, this is Bill Farrell. We don’t specifically break out the fees for the bankruptcy business, but it has been a steady contributor for us to capitalize year and a half or so and we don’t see an end to that in the near future, obviously. The other important piece of that is that it’s sort of other pieces of business like the opportunity to do, some investment management work and some collaterals trust work o it's not just the hourly billing for the bankruptcies themselves. Two of the prominent names that were still involved in would be GM and Lehman Bros. They have not come to a resolution at this point in time.

Steve Moss – Janney Montgomery Scott

And lastly, I know generally focus on the average balance sheet with regards to deposits, but the period end balance on non-interest bearing demand down quite a bit quarter-over-quarter, any color that that I know there’s definitely a fair amount from CCSI.

Ted Cecala

And that’s really the case as you see if you track the previous quarters, you can see going up and down on a quarter end in a $400 million to $500 million, it’s unusual for us. So that’s just the matter of at quarter end, managing down a little bit of those deposits that until now helped us with the FDIC insurance is now changing, going to averages. As we track balances after quarter end they did come back and the average still are a better indicator.

Steve Moss – Janney Montgomery Scott

Okay, thank you very much.

Operator

Thank you. Our next question is coming from Justin Maurer of Lord Abbett.

Justin Maurer – Lord Abbett

Good morning, guys.

Ted Cecala

Good morning.

Justin Maurer – Lord Abbett

Just some follow-up on the NIM outlook, can you give us any more kind of directional feel, obviously, there’s just coming off a solid week of bank earnings here seems like most guys although have had similar earning asset shrinkage do you guys have been able to offset at somewhat through lower cost earnings, can we get to kind of a level low here or to the earlier comment, do you expect still the contract based on loan volumes?

Bob Harra

Yes I think you’re exactly right in terms of we do still see some deposit repricing opportunities that will help offset some of the asset run off, but on balance, I think we were still few basis points that we could see that the margin come down, I don’t think our forecast don't say it would be significant but we will be balanced around in that 3% range.

Justin Maurer – Lord Abbett

And then maybe hopefully bottom in the second quarter or is it too tough to tell?

Ted Cecala

It’s pretty hard to tell. Our forecast show that, obviously there’s a lot going on in the balance sheet.

Justin Maurer – Lord Abbett

Okay. I just also follow-up on your TTI just based on the math you guys describe, you marked at about $0.36 and I know that’s comprise of much a different issues and what not, but are we to the tail end of that do you think, just because it seems like most of the issues that you guys and others have faced on this have largely been dealt with in 2009?

Ted Cecala

That’s our hope that we are. But I can’t predict the credit cycle and what are any more banks that are on the bubble, we don’t know if this quarter was reflective of just the yearend financial coming out and the company is dealing with the capital position. We did have a couple of new securities that were OTTI for the first time while the losses were fairly small in those securities that it’s an indication that there’s an opportunity to take additional losses on those and so I don’t think we’re done yet, we’re hopefully that will start to moderate as we look out.

Justin Maurer – Lord Abbett

And have you guys sold or are you contemplating on selling any of these or are these more just –

Ted Cecala

We contemplate that every option we have on the table. We have actually done some fishing expeditions and try to see a float of few key success there and there really is no interest at this point. So at this point we’re continuing to just hold the securities.

Justin Maurer – Lord Abbett

Right. And then similar question on the loan side. Have you guys sold much in the way of loans and or OREO and what are you kind of seeing as realized values relative to March, it seems like most banks are now talking about the stuff they’re able to move off is coming off at or maybe a little bit better than where they headed in March.

Bill North

Hey, Justin, this is Bill North. I guess as far as the OREO piece we’re seeing some activity. And it really whereas you had some we’ve seen book value plus realized and some obviously where we’ve seen a deficit, I don’t have an exact percentage for you on the whole book. I would tell you I think the properties that are residential in nature which happen to be probably the largest portion of what we have.

As we have found some resolution, it’s probably on average than a little bit under what we initially mark in that. I think in the size percentage probably somewhere between I will guess somewhere between 10% and maybe 20% worst case, below that. We have not done any loan sales in mass, we have a lot of activity over the past few months in terms of interested buyers and investors in some of the loans and some of the assets that we have. And that’s encouraging. So the capital is certainly been creed up over the past three months or four months and we struck a couple of deals we have a couple that kind of in process now and really all of these are residential real estate related and we look at that as pretty encouraging.

Justin Maurer – Lord Abbett

Okay. Any of the provision, was that, any of the sub moves OREO from NPA was whether additional marks taken or is that already certainly appropriate to the market?

Ted Cecala

We didn’t have a significant adjustment to the assets that went into OREO. We have actually had pretty decent experience once we get the position of the property in terms of what our marks are. We have seen valuations Bill was talking about change and slide a little bit as they’re going on their way to as repossessing the asset or once we have them I think our valuations have been pretty good

Justin Maurer – Lord Abbett

Okay, thank you.

Operator

Thank you. Our next question is coming from Chris McGratty of KBW.

Chris McGratty – KBW

Hi, good morning, guys.

Ted Cecala

Good morning.

Chris McGratty – KBW

You guys were (inaudible) correctly loans are getting continued to decline for the near-term. Maybe you can speak to when you see the overall size of the balance sheet stabilizing. And then taking asset further in terms of normalize or anything, what do you guys think an achievable return on assets of the bank in a couple of years?

Ted Cecala

It’s hard to predict when the balance sheet is going to stabilize in terms of loan write-off, as I said earlier, we are going to continue to purposefully reduce our exposure to the real estate sector. And begin to add some on the consumer side of the business. You can continue to see the balance sheet shrink over the balance of the year. So far as return on assets obviously once our provisioning returns to a more normal rate given the economy we should have a return on assets that are significantly higher than the rest of the industry because of our fee-based businesses.

Chris McGratty – KBW

Can you maybe talk about what your assumptions are for kind of normalized credit costs, historically you guys are heading in ROI, 150 to 170 range, back in early 2000, I guess what are your assumptions for credit costs normalize?

Ted Cecala

That’s really going to depend on the economy. The economy gets better in a hurry obviously, some of the provisioning that we’ve done might be reflected as a fairly large reserve which would mitigate some future provision. I really doubt that companies who want to unwind their reserves for loan losses. So I think that would be a positive. And then obviously the fee businesses do not require the capital as the banking business requires. So if things return to where they were provisioning could be in the $15 million to $20 million of a quarter range that would probably be higher than where it was in previous years. It’s just the hard question to answer just because we just don’t’ have that crystal ball that goes out that far.

Chris McGratty – KBW

Okay, thanks.

Operator

Thank you. Our next question is coming from Tom Alonso of Macquarie.

Tom Alonso – Macquarie

Most of my questions have been answered. I just had a sort of what do you think it is as holding back that Delaware economy relative to some of your other markets?

Ted Cecala

It’s a function of couple things. One it went into the recession a little later than the other parts of the country. So far for us we have always been very proud of the fact that we had a dominant market share of the commercial banking business in Delaware and that obviously is going to hold that back a little bit in terms of the recovery. We just need to have some more consistent performance. We have seen some pockets that look very encouraging but at the same time we just can’t declare any victory whatsoever.

Tom Alonso – Macquarie

Okay, fair enough, thanks guys.

Operator

Thank you. Our next question is coming from David West of Davenport and Co.

David West – Davenport and Co.

Hi, good morning. When you talked earlier about some of the 80C portfolio getting moved into the commercial or to the CRE category, what the typical loan terms and maturity of that new more permanent ones?

Ted Cecala

You are saying that the loan that went from construction into the current mortgage loan what the terms will be?

Bill North

This is Bill North. I mean they can vary a bit, but traditionally, I think in the case of any that move in this quarter because of the project types are five-year term, usually on a 25-year amortization, that’s what we’re looking for.

David West – Davenport and Co.

And it was mentioned do you think some of these loans can impact the refinance into the secondary market, is that what I heard?

.

Ted Cecala

Yes, yes, we think so. The secondary market has continued to show more signs of life, almost every month, and we’ve got all little list of things that we think can meet the criteria and move. And obviously, our clients we talk to them about what makes the most sense in terms of doing some of that. So yes, I think they can find a new home in the secondary market.

David West – Davenport and Co.

Very good. Dave, I guess a question for you Wilmington Trust historically has been very asset sensitive. Could you just give us an update on them, how do you deal the company’s position in that regard?

Bob Harra

Well, that has not changed. We continue to be pretty asset-sensitive about now on our net interest income and in on our fees because of the waivers that we have been implementing for our money funds so that higher short rates would be positive both to our margins and to our fee income. We always said that the first 50 days going to change is probably not going to have significant impact to us, because it’s some of the floor pricing that we've implemented, but probably could have an impact on our fees but anything after that 50 would be we’re forecasted would be pretty strongly asset sensitive.

David West – Davenport and Co.

Very good, very helpful. And then lastly, housekeeping, I may have missed the period and share number but is it approximately $91 million?

Bob Harra

Approximately $91,198,000

David West – Davenport and Co.

Thank you very much.

Bob Harra

To be approximate.

David West – Davenport and Co.

Thank you.

Operator

Thank you. Our next question is coming from Brooke Vanderguy [ph] of Lionsback Capital [ph]

Brooke Vanderguy – Lionsback Capital

Hey, good morning guys

Ted Cecala

Good morning.

Brooke Vanderguy – Lionsback Capital:

Most of the questions are asked and answered. Just on the 90-day past due I jumped off the call, but just the sequential increase in CRE construction is that one or two projects or is that more growing on? Thanks.

Ted Cecala

It’s a few and really I just like to note that basically almost everything in that category this quarter relates to situations that are matured, but current flow of payments and we just take it a little further in line and what we want to have in front of us, before we underwrite the deal and talk about an extension or renewal so what sit now there is all there because of a maturity, but that all payments are current and we are going through the underwriting process, as we speak.

Brooke Vanderguy – Lionsback Capital

Okay. And I don’t know if you’ve tried a dimension as before but as the overall level with NPAs may not be dropping, terribly quickly, but the mix actually could change more dramatically, as the construction and development falls out, what would the loss expectations to be, what remains, in other words, will it be safe to assume that the loss is you are likely to see are going to be dramatically less going forward as the C&D runs off?

Ted Cecala

Well, that’s a good dimension, multi dimensional question. I think we historically have seen the greatest loss content and obviously, construction and land development loans, we’re hopeful that we’re seeing the biggest bulk of those that we’re going to the non-performing or sitting in non-performing and we reserved appropriately for them. Some of those are active projects and we’re hopeful that those reserves are not necessary, but problems we could see charge offs go up, but not provisioning as they’re pretty well reserved against. Our loss experience on the commercial mortgage, commercial mortgage has been very good so obviously, as we look at loss content for those kinds of assets they are much smaller because they are typically income producing properties.

Bob Harra

And on the consumer side just to jump over to that that balance have gone done so a lot of the older loans have come due and matured so what you see remaining on our balance sheet or some of the new loans that have some higher credit standards associated with them, so that should be a plus for us and as we extend that portfolio and everything would be underwritten to those higher standards, that should be okay. The only thing that’s in there is some home equity loans that seem to pop up once in a while but beyond that I think the consumer portfolio is in pretty good shape.

Brooke Vanderguy – Lionsback Capital

Great, thanks very much.

Operator

Thank you. Our next question is coming from Mac Hodgson of SunTrust Robinson Humphrey.

Mac Hodgson – SunTrust Robinson Humphrey

Hi, I just had a couple of follow-ups. Following back on Gerard’s question on the 90 plus past due you mentioned that was driven by view commercial real estate construction loans that mature that have paid off and then you guys are obviously working on some extension, with these types of loans that would qualify TDRs, if they hadn’t paid off then go and do an extension may be just walk me through?

Ted Cecala

Yes, Mac, that is indeed anticipation, the profiles of these credits are necessary credits with issues or problems, it’s simply, in today’s world, we want to have all the information and it’s complete, ability to underwrite this deal early before we do that so and the credits in question, the anticipation is not that easy extension to going to be with the type of terms and conditions and changes that would create a TDR.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, great. And then just couple quick capital related questions. Dave, you have capital ratio by chance at the bank level. And then I was also curious you had kind of cash or liquidity in the holding company at the end of the quarter?

Bob Harra

Mac, I don’t know that I have capital, the bank’s capital only it shows, and I certainly I can get that to you, shuffling on bunch of papers where I can certainly get that to you.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, do you have the cash by chance or –

Bob Harra

Cash at the holding company is, you want cash and short term securities or –?

Mac Hodgson – SunTrust Robinson Humphrey

Yes, basically, liquidity?

Bob Harra

Liquidity?

Mac Hodgson – SunTrust Robinson Humphrey

Yes.

Bob Harra

$300 million or so can be challenging.

Mac Hodgson – SunTrust Robinson Humphrey

Should it not have been higher given the capital raise, I believe that’s below your TARP amount, right?

Bob Harra

We are having a little –

Ted Cecala

We don’t have a parent company, only statements is part of this

Bill North

Yes we can follow this

Bob Harra

I can get those numbers

Mac Hodgson – SunTrust Robinson Humphrey

Yes, thanks.

Operator

Thank you. Our next question is coming from Leo Harmon of FMA

Leo Harmon – FMA

Hi, good morning, guys. Wanted to try to get more color around your reserve methodology. It certainly seems like all the incremental data around credit loss content and flows of in fields and collateral values are either stabilizing or improving yet reserves per unit of those was a thing or are moving up and trying to get a sense of whether or not it’s just a (inaudible) of having a shorter look back when you reserve your model to see that and so kind of when the (inaudible) what that kind of issue?

Ted Cecala

I will try to tackle, a very complex question, but the short answer hopefully, that the reserve methodology is really three major components. One is obviously for impaired loans which are those are non-accruing type credits that we do specific impairment analysis and as those impaired loans grow somewhat and/or collateral values come down within that those buckets reserving would increase because of that.

The second fee component would be performing loans that are criticized and non-criticized that in terms of the actual loss content or experience that we have seen in those buckets of loans and that’s driven by historical loss rates and much more heavily weighted on the more recent experience of losses so as short losses will grow, your projected reserves will grow as well

And the last bucket are what we call qualitative factors which include all of those more subjective trend that we see whether they would be evaluation, they will be economic indicators, there is seven or eight of those types of factors that we used and the trend extend out negative phases that would cause us and increase those reserve amount relative to this qualitative number. So the combination of all of those is really what drives that reserve number. And that’s a long answer.

Leo Harmon – FMA

Okay. And then on the second question can you talk a little bit about usage and line utilization at the customer level and what kind of trends you guys are seeing there?

Bill North

It’s Bill North. It’s been really larger continuation of what I have said we have seen over the past three quarters to five quarters which is utilization gap and obviously we don’t know the reason why (inaudible) economy is, probably the one area that’s probably a little (inaudible) over the last quarter or so would be the auto dealers and the use f their floor plan facilities as they touch bottom and positioned themselves doing better and thinking in a little bit higher inventory levels and some of that usage has bounced up but that’s not a huge part of our portfolio, but I think we have really on average yet to see a material increase in the average users under the short term type revolving facilities.

Leo Harmon – FMA

Thank you.

Operator

Thank you. Your next question is coming from Charlie Ernst [ph] of Diamondback Capital [ph].

Charlie Ernst – Diamondback Capital

Good morning, guys

Ted Cecala

Good morning.

Charlie Ernst – Diamondback Capital

Can you just talk a little bit about the bond yield was done massively in the quarter and its had a pretty low level now, can you just talk about how you are thinking about that portfolio and whether you have anything shortened it?

Ted Cecala

Sorry, that’s really due to we had some inflows though a lot of short deposits throughout the quarter from our CCS business and we invested those into really short treasury and agencies which brought down on those averages, give up in the ending balance sheet you can see the, those balances will be leaving, so it depends on if we get a lot of this transaction cash in and out we obviously talk with our business folks and CCS to make sure we know the duration of that cash and we may just park the money in very short treasuries which drives down that yield, so it depends on that flow, okay.

Charlie Ernst – Diamondback Capital

So how much of an effects and the margin with that?

Ted Cecala

It was a couple of basis points I think.

Charlie Ernst – Diamondback Capital

Okay, because I mean if you look at where you were on your bonds and your short-term earning asset, you had a positive like 45 bps carry last quarter and now you had a negative, I don’t know, 20 years or so which obviously seems like it probably had a pretty decent impact on the margin. Secondly, can you just pass it out your OREO expenses what they were in the quarter?

Ted Cecala

And when you say OREO expenses I include a lot of stuff in that numbers, including appraisals and the actual cost of taxes and that kind of thing. I think an approximate number is about a million dollars.

Charlie Ernst – Diamondback Capital

Okay. And then you broke out sort of revenue impact from Grant Tani going away, can you also mention what the expenses, what about –

Ted Cecala

Yes, on average, Grant Tani had a revenue of about $3.4 million a quarter of Q4 and the expenses were around $3 million per quarter. So not a huge profit impact to us.

Charlie Ernst – Diamondback Capital

And then lastly, probably you did addressed but I might have missed that the other Wealth Advisory Services, would that from Grant Tani going away, is that why that revenue line–?

Ted Cecala

In the planning line, yes.

Charlie Ernst – Diamondback Capital

And then retirement was very strong in the quarter. Can you add just a little bit of color there?

Bill Farrell

Yes, Charlie, this is Bill Farrell. And it was truly across the board in our retirement business. We had a combination of new business that was brought on last year which really can benefit of in the current year, you have the market being up and remember for CPS, it’s a market-based C on the asset side and you have inflows, people just contributing to their plan. In addition to that our collective fund line up continue to grow, inflow had an additional inflows also. So you had all those components working together to help create that increases.

Charlie Ernst – Diamondback Capital

All right, great, thanks guys.

Operator

Thank you. Our last question is coming from Justin Maurer of Lord Abbett.

Justin Maurer – Lord Abbett

Sorry, guys, to beat the credit horse here. Just trying to understand, and correct me if I am wrong, just looking at NPA migration, just taken beginning, NPA less ending or vice versa net charge-offs back and it’s 61 million, I don’t know, I know in the press release you had a couple of different pockets that you guys talked about commercial mortgage and construction and so on, but does that, just in terms of inflows, is that about a right number or is that lower than that?

Ted Cecala

In terms of absolute inflows?

Justin Maurer – Lord Abbett

Yes.

Ted Cecala

My number was in the 45 to 59 inflow, I am not going to –

Ted Cecala

Okay, not too part of. Which and just again just a simple calculation NPA migration that’s the lowest has been in over a year, $150 million prior quarter, $115 million and so on. The earlier question was square that with the provision of 77 million and I hear you when you talk about the difference things that you have to look out to kind of come up with what the provision should be, but unless you guys think that the loss severity of that stuff is substantial, I understand there has been some great migration in downward as well in that and may not be in NPA yet, but, can you kind of help us square those two numbers I guess?

Bill Farrell

Because it’s just seems overly harsh particularly if the highest loss content that everybody identifies is in the CMD and if you guys the numbers paired out if you feel like you are largely kind of through the worst of that stuff, I would think any of the things coming in the door would certainly have less loss severity to it

Ted Cecala

We are just trying to be cautious.

Justin Maurer – Lord Abbett

Okay, appreciate it

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing comments

Ted Cecala

Thank you for participating in today’s call. Obviously, we look forward to the Delaware economy starting to perk up a little bit more and join the rest of the region, we believe that once that occurs, obviously, have some different impact on our numbers, fee businesses continue to do very well and we continue to pay close attention to our expenses. So all this will pass as the recovery takes forward it becomes more broad-based and we get back to more normalized environment, but again we have to get through this. Thank you very much. Look forward to talking to you next quarter.

Ellen Roberts

Thanks everybody. Good bye.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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Source: Wilmington Trust Corporation Q1 2010 Earnings Call Transcript
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