Wilmington Bust

The state’s premier bank prided itself on personal relationships with local builders. Then it over-extended itself. Now Wilmington Trust is being taken over by an out-of-state concern. Does that mean a new way of doing business?

Illustration by Deanna StaffoThe developer slides into a booth in a local brewpub, then begins talking about all that has happened at Wilmington Trust the past few months.

He sketches charts and graphs on the back of a place mat, talking about things like debt coverage ratios and rates of return. His pen flies.

He should know about Wilmington Trust. For more than a decade he, like dozens of other developers and builders have done for decades, relied on the bank to finance his projects. He talks in broad strokes about how the confidence of the early 2000s led ambitious developers, thrilled at the prospect of thousands of baby boomers retiring to Sussex County, to buy farms—3,000-acre properties sometimes—to make into housing developments. He recalls about how it was so easy, with so much growth anticipated, to go to Wilmington Trust for start-up capital. The lending officers there were his friends, partners in his dreams.

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He rips the place mat into pieces. “Then the music stopped,” he says. “Developers stopped selling, and their projects became devalued. Suddenly, too few guys were controlling most of the money, and they needed the bank to stand behind them. When they got there, they realized that the tap had been shut off.”

He points to an open space near the restaurant’s bar. “If you put the top 20 commercial real estate developers in Delaware over there right now, stick a javelin through them and shake it all up, I guarantee you that a billion dollars in Wilmington Trust debt will fall on the floor.”

On November 1, Wilmington Trust Corp. agreed to sell itself to M&T Bank, a Buffalo, New York-based institution with extensive operations in the Mid-Atlantic. M&T acquired Wilmington Trust for $351 million in stock at $3.84 a share—a 46 percent discount from the price a few days before, when the bank’s market value was $650 million—and agreed to absorb the $330 million bailout given to Wilmington Trust by the Federal Reserve Bank. Once the transaction is complete—expected by the middle of the year—M&T Bank will acquire and re-name 48 bank locations and a few hundred ATM locations in Delaware.

The New York Times called the purchase “one of the biggest take-unders in recent Wall Street memory.” Everyone from bank stockholders to financial leaders have called it nothing short of a fire sale, a desperate act by an institution unwilling to circle its wagons during hard times. Yet some experts consider the sale a strategic move that will bolster the one sagging component of an otherwise financially sound institution.

No matter how the transaction is analyzed, the once unimaginable has become fact: The shock wave of the recession was strong enough to topple even one of the most solid local institutions.

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So what happens now?

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Although the eventual foothold M&T will make on Delaware soil is anyone’s guess, its track record in neighboring states is proving to be very strong. The bank’s commercial lending business extends to Pennsylvania, Maryland, Virginia and Washington, D.C., and it has a commercial lending team and investment staff in Wilmington.

The numbers look good too. In the fourth quarter of 2010, M&T’s commercial loan and commercial real estate loan portfolios recorded a $1.2 billion growth from the previous quarter.

“To Wilmington Trust’s strong corporate trust and wealth advisory businesses, M&T brings strength, stability and a strong credit culture,” says Woody Collins, president and COO of M&T Bank’s Mid-Atlantic division. “Together we’ll serve the needs of our customers, have ample capital and be ready to lend. We are planning to do in Delaware what we have done successfully in other communities.”.”

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In order to understand the full measure of what Wilmington Trust’s sale means—especially in real estate development—it helps to compare the bank’s century of achievement against the recent failure of its commercial loan portfolio.

In 1903 DuPont President T. Coleman du Pont and other business leaders founded Wilmington Trust to provide banking and trust services to Delaware’s growing business community. By 1912 the bank’s assets exceeded $4 million, making it the largest bank in the state. During the Great Depression, when more than 5,000 American banks closed, Wilmington Trust assets exceeded $100 million. Throughout World War II, it sold defense bonds.

During the past 50 years, Wilmington Trust had strengthened its regional banking, corporate and wealth advisory services. In 1993 Salomon Brothers named it, dollar for dollar, the most profitable bank in the United States.

At the turn of the new century, when the return on the equity of its loan portfolio was high, Wilmington Trust and a few dozen real estate developers joined in what amounted to a billion-dollar hunch: that aging baby boomers, nearing retirement, would want to move to Sussex. There, they would enjoy a downsized life in luxury condominiums with easy access to beaches, shopping and entertainment. Plans for thousands of single-family homes and condominiums began to surface in Millsboro, Lewes, Dagsboro, Ocean View and Rehoboth Beach.

When the housing market collapsed in 2008, Wilmington Trust held several development loans—all well into the millions—that the crash had made worthless. By the end of the third quarter of last year, Wilmington Trust saw its non-performing loans total $988.6 million, a jump of 77 percent from the previous quarter. Its stock dropped 90 percent in value from 2007 to the end of last year.

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Prior to being named chief executive officer of Wilmington Trust on June 3—to replace the retiring Ted T. Cecala—Donald E. Foley had been a member of the board of directors since 2006. He came to the job with 37 years of experience in global financial and risk management for several Fortune 500 companies. In a statement soon after he took over, Foley said his immediate priorities included managing the bank’s credit risk, returning the bank to profitability and “leveraging our successful business model.”

But before he even tried out the office furniture, Foley found himself knee-deep in the big muddy of a financial free fall. Nearly three weeks after he took over, a national analyst’s report downgraded Wilmington Trust stock, predicting that the bank would likely write off more loans than previously expected. In reaction to the report, Wilmington Trust shares fell to $11.56. On the same day, the bank announced that it had lost $116.4 million in the second quarter of 2010, due mainly to a $205.2 million loan loss provision associated with underperforming loans. By the third quarter, the bank reported a loss of $365.3 million.

Recent figures indicate things at the bank won’t get better anytime soon. On January 28 it reported a $209.3 million loss for the fourth quarter, a $720.1 million total loss for the year.

“You want to know how it is out there now? I’ll tell you how it is,” the developer says. “It used to be that every commercial development loan Wilmington Trust did was based on their saying, ‘We’re family.’ And, yes, some of us may have overstepped a loan or two, but when your brother is down, you don’t pull the rug out from under him.

“They used to pride themselves on relationship banking. Now all of those relationships are gone. The question for the future of commercial real estate development in Delaware now is, Is M&T the guys in the white hats, or are they the guys in the black hats?”

The bad news didn’t end with the bank’s merger with M&T. Within weeks of the sale, a class action complaint was filed on behalf of all purchasers of the common stock, who accused the bank of selling on the cheap. The suit alleges that Wilmington Trust overstated its income and asset quality by failing to record adequate loan-loss provisions after the real estate market deteriorated.

The fallout has extended to bank employees and the greater community. On February 9, M&T Bank announced it would lay off 721 Wilmington Trust employees—all but three in Delaware—reducing the workforce by 26 percent. Because most layoffs are expected to happen at the downtown Wilmington headquarters, the loss of tax revenue could be up to $1 million, further hurting a city that recently had to cut 30 jobs.

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“What went wrong was the economy,” says Alan Levin, secretary of the Delaware Economic Development Office. “The bank has operated the same way since it began in 1903, and during that time, it weathered the Depression, two world wars and recessions. But this recession was real estate-based, and it wasn’t going away in a year.”

In an ironic twist, the bedrock principle that built Wilmington Trust may have turned out to have been the cause of its demise.

“During the periods of recession, Wilmington Trust always had money, and when other banks would pull up their ranks and slam the door, they continued to conduct loan business,” says Tommy Cooper, chairman of the Delaware State Chamber of Commerce. “One of the bank’s virtues—which hurt them—was the fact that they stuck with too many builders too long and tried to help them out of problems. Historically, it always worked for the bank. If it had been your normal year or year and a half recession, they would look like heroes. But calling this thing that we’ve all been through a recession? It was more like a depression.”

Cooper points out that the whole country was caught up in the growth of the big bubble from 2002 till 2006, so it’s no wonder such failures happen.

“If you want to apply it to human traits, one of the seven deadly sins is greed. People forgot where they came from,” he says. “It was as if the faucet was turned off, and all of these way-overbuilt communities in Sussex County and other parts of Delaware were created on the basis that the faucet would never turn off.”

“It’s the nature of the bubble. No one thinks of it as a bubble until it bursts,” says Paul Morrill, executive director of the Committee of 100, a Wilmington-based organization that promotes economic development in the state. “Sussex County had been one of the boom areas of real estate development—until it wasn’t. Relationship banking is a positive thing. All banks advertise it, and that was certainly true at Wilmington Trust. But, in retrospect, maybe that philosophy, combined with the psychology of the bubble, was not a good thing. Circumstances are different now, and that calls for a different approach to lending.”

Though many say the sale of Wilmington Trust could have been prevented if the housing market had remained strong, many agree that the bank is at fault for putting all of its eggs in one basket.

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“A large portion of their loans were commercial loans financing home construction in Southern Delaware, particularly for retirement communities,” says Dr. Helen Bowers, an associate professor of finance at the Alfred Lerner College of Business and Economics at the University of Delaware. “The decline in home values and the value of retirement savings caused the demand in this market to dry up. At the time, they thought that making those loans was good business because, in prior years, there was strong demand for retirement homes. However, after the housing bubble burst, Wilmington Trust’s lack of diversification exacerbated their problems. Being concentrated in a small niche of the real estate market put them at more risk.”

Just when the integrity of Wilmington Trust has been affected enough by the backlash of its recent sale, litigation and job losses, another threat looms: the potential for client run-off. Very often, the sale of a bank can affect consumer confidence, which may lead some customers to search for a less volatile place to put their money or acquire a loan. “In February, one of our branches in Sussex County opened up 45 separate accounts from one business owner who had just come from Wilmington Trust,” says Richard Wright, executive vice president and director of retail banking for WSFS.

According to WSFS records, deposits at the bank grew 16 percent last year, and its commercial and industrial loan portfolio grew 14 percent in 2010 from the previous year. Those spikes could be attributable, Wright says, to local bank takeovers and sales.

“Wachovia becoming Wells Fargo, Wilmington Trust being merged into M&T Bank—these changes put WSFS in a position to take advantage of something like this,” Wright says. “In Delaware, people are parochial as to who they do business with. Wilmington Trust has been a leader in the community for the past many years. There is an aura about that institution, and you don’t have that anymore when you put an M&T sign up and run it out of Buffalo.”

For an institution that has defined itself by personal goodwill and handshakes for more than a century, the bank has stopped communication at a time when it may be most crucial. Wilmington Trust officials have turned down requests for media interviews to prevent interfering with “a matter of ongoing litigation,” according to a spokesperson. Instead, the bank has been using the transcript of a conference call Foley participated in at the time of the bank’s sale as its party line.

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“We have strengthened our credit risk management practices, and our provisioning and reserve levels reflect the increased risk in our loan portfolio,” Foley said during the call. “However, there is no significant economic or real estate recovery on the horizon in our markets. Therefore, we have little assurance that our loan portfolio will strengthen significantly in the near term, or that our capital will not erode further.”

Given the wild ride of this recession, many of those in the business of economic forecasting have destroyed their crystal balls, but all reports point to the fact that Wilmington Trust has hitched its wagon to one of the nation’s most successful commercial lenders.

As of December, M&T Bank, with its $68 billion in assets, had compiled a $52 billion loan portfolio, with only 2 percent of it tied up in underperforming loans. Further, M&T has extensive operations in the mid-Atlantic, including 443 employees at a football field-sized bank operations center in Millsboro.

Housing leaders in the state remain cautiously optimistic about the future of real estate development. According to Jennifer Casey, executive director of the Delaware Home Builders Association, builders in Sussex are moving forward with home construction and sales at a pace consistent with the economy. Further, she says that M&T has indicated to the association that it is interested in pursuing lending opportunities in Delaware.

“Wilmington Trust was a home-grown, Delaware-based lender who participated actively in our communities,” Casey says. “The friends and associates who worked for (the bank) are missed, and the centralization of M&T’s services is disappointing, but we are hopeful that M&T will continue to support Delaware businesses through their lending and involvement in the future.”

Statistics are proving that the housing picture in Sussex is beginning to improve. Andrew Ratner, vice president for the Rehoboth office of Prudential Gallo Realtors, says he’s seeing a slow and steady resurgence in the sale of single-family homes in eastern Sussex.

According to Ratner, sales of homes east of U.S. 113 have jumped 14 percent from the darkest days of the 2008 recession. A decrease in the number of new homes being built has made buying more attractive.

“The average cost of a home here now is $406,000 when, in 2006, at the height of the housing boom, it was about $490,000,” Ratner says. “People have a little more confidence than they did two years ago, and as consumer confidence builds, so does the housing market.

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“It’s going to take time to fully recover. No one ever knows the true picture, but Sussex County has always been and will continue to be a very desirable place to be.”

“Everything will get back to relationships,” Levin says. “There’s a void that needs to be cleared up, and I think the move was made to see that customers continue to be properly served. The relationships Wilmington Trust has with developers are a jewel, and M&T realizes that. Real estate will eventually come back to Delaware. The developers will eventually build again.”

“My sense is that it will not take a mountain of great news in order to kick-start the economy in Delaware, which should improve the availability of commercial lending,” Morrill says. “The people in the development community are still hurting, but even they are expressing optimism. Yes, if you’re comparing the lending atmosphere to 2007, sure it’s tougher. But I haven’t gotten any indication that a deal with good economics can’t be made.

“I really don’t view it as a grim economic situation,” Morrill says. “Banks have worked through the worst of situations. They’ll learn to lend to projects with good economics.”

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