Wilmington Trust to be sold to Buffalo bank

Wilmington Trust Corp., founded by du Pont family members in 1903 and profitable every year until 2008, is selling out at a fire-sale price to M&T Bank Corp., headquartered in Buffalo, because of crippling losses on construction loans for southern Delaware retirement communities.

In a deal announced Monday, M&T Bank agreed to pay $351 million - just $3.84 per share - in stock for the Delaware powerhouse, which was worth $2.6 billion three years ago. Not included in the price was M&T's assumption of the $330 million Wilmington Trust still owes the federal government from the 2008 bank bailout.

In what could be a jolt to regional self-esteem, M&T is the second Buffalo bank to scoop up a large and troubled Philadelphia-area lender. In April, First Niagara Financial Group Inc. bought Harleysville National Corp., which was forced into a merger by steep losses on residential construction loans in Southeast Pennsylvania.

Wilmington Trust, which said its substandard loans soared during the last year to nearly $2 billion, or 24 percent of its portfolio, from $828 million, or 9 percent of its portfolio, found itself backed into a corner during the third quarter.

"It appears that there is no significant economic or real estate recovery on the horizon," Don Foley, Wilmington Trust's chief executive, said during a teleconference with analysts. "This gives us little assurance that our loan portfolio will strengthen significantly in the near term and our capital position will not erode further," he said.

The recession hit Delaware later than many other states, delaying Wilmington Trust's problems, Foley said.

But there is more to it. As the housing downturn and subsequent recession ravaged banks in 2008 and 2009, Wilmington Trust continued to boost construction lending as a portion of its overall portfolio and delayed the recognition of loan losses.

That happened despite a drop in home sales in Sussex County, Delaware's southernmost county, to 2,500 in 2007 from about 4,500 in 2005, according to published data. Sussex County is home to many of the Delaware retirement communities that went bust.

A year ago, a Wilmington Trust spokesman chided an Inquirer reporter for highlighting the bank's elevated level of troubled loans without pointing out the bank's historical strategy of working with borrowers to avoid losses. That process takes time, leading to higher troubled-loan ratios.

But this year, after longtime chief executive Ted T. Cecala retired abruptly in June, Wilmington Trust aggressively started writing off loans.

Second-quarter charge-offs were $135 million, more than in the previous four quarters combined. Wilmington Trust released third-quarter results Monday, and the charge-offs were even greater, at $148 million. Its quarterly loss of about $370 million caused steep declines in measures of its financial health.

The outlook remains grim. Based on 11 days spent analyzing Wilmington Trust's loans in early October, M&T said it expected an additional $1 billion of losses on the $8.1 billion loan portfolio. Wilmington Trust already has set aside about $500 million.

Analysts were puzzled by the magnitude of the additional expected loss. "How can you have such a big write-down at this stage in the cycle for a regulated bank?" Mike Mayo, of the brokerage and investment firm CLSA, asked during Monday's call.

Foley's explanation, in an interview, for the bank's lag in facing losses was that "our base of clients is in a much more difficult position than they were even one or two quarters ago."

In M&T, Wilmington Trust has a buyer with relatively few loan problems. Its doubtful loans totaled $1.1 billion at the end of September, 2 percent of its $50.8 billion loan portfolio. By contrast, 11 percent, or $906 million, of Wilmington Trust's $8.1 billion in loans were in that category.

M&T entered the Pennsylvania market in 2000, when it bought Keystone Financial Inc. of Harrisburg.

The bank has a significant presence in Harrisburg and York, but it has not expanded in Philadelphia's suburbs, where it has 25 branches with $648 million in deposits. Those branches account for 21 percent fewer deposits than in 2000.

If the deal closes as expected next summer, M&T will rename Wilmington Trust's branches and assume the top spot for deposits in Delaware.

Wilmington Trust Corp.

Founded: 1903 by T. Coleman

du Pont.

Headquarters: Wilmington.

Businesses: Retail and commercial banking, wealth advisory services, corporate client services.

Third-quarter net loss:

$369.9 million.

2009 net loss: $4.4 million.

Employees: 2,898.

52-week stock price range: $3.95-20.23.

Monday's close: $4.21.

M&T Bank Corp.

Founded: 1856.

Headquarters: Buffalo, N.Y.

Businesses: Retail and commercial banking.

Third-quarter net income:

$192 million.

2009 net income: $379.9 million.

Employees: 14,000.

52-week stock price range: $60.39-96.15.

Monday's close: $77.47.

SOURCES: The companies, Bloomberg News

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