Wilmington Trust merger tied to Sussex loans

One of Delaware’s oldest and once-presumed financially solid banks was forced into a merger with another bank, and a local legislator wants to know the reasons why.

“It just seems like someone wasn’t watching what was going on. A lot of loans were put out to different LLCs [limited liability corporations], and a bank with such a large financial portfolio was sinking so much into commercial real estate loans, much of which was in Sussex County,” said Sen. George Bunting, D-Bethany Beach.

He said Wilmington Trust’s employees, who had invested in the bank for years, would be most hurt financially. Bunting said he does not hold stock in the bank.

On Nov. 1, Wilmington Trust Corp. and M&T Bank Corp. announced an agreement to merge, ending the existence of Wilmington Trust. Under the terms of the agreement, Wilmington Trust common stock shareholders will receive shares of M&T common stock in exchange for shares of Wilmington Trust common stock they own in a stock-for-stock transaction valued at $351 million. M &T will also assume $330 million in Troubled Asset Relief Program preferred stock.

Bunting said as a result of the merger, Wilmington Trust stockholders are taking a financial beating.

According to Commercial Mortgage Alert, Wilmington Trust offered loans valued $130.6 million of loans in two pools. One pool has an outstanding balance of $76.3 million, about half of which is distressed. The other pool consists of $54.3 million in loans in varying stages of distress.

“The bulk of the collateral is raw land and residential developments in Delaware. The loans were made to two Delaware developers hit hard by the economic downturn: Preston Schell and Michael Zimmerman. The portfolio’s average loan balance is $1.6 million,” a Commercial Mortgage Alert document stated.

In an interview, Preston Schell said Wilmington Trust asked him if would allow the bank to seek a buyer of his loan. Last month he told the Cape Gazette he had approved the bank’s plan.

Schell on Monday, Dec. 6, declined to comment on the status of the loan sale because of an agreement with Wilmington Trust and his desire to keep personal financial matters between himself and the bank. Wilmington Trust spokesman Bill Benintende said Dec. 6, the bank merger is still pending and he would not comment on sale of loan portfolios.

Zimmerman did not return phone calls. A commercial mortgage loan is similar to a residential mortgage except the collateral is a commercial building or other business real estate.

In addition, commercial mortgages are typically taken on by businesses instead of individual borrowers. The borrower may be a partnership, incorporated business or limited company, so assessment of the creditworthiness of the business can be more complicated. Some commercial mortgages, in the event of default in repayment, the creditor can seize only the collateral and has no further claim against the borrower for any remaining deficiency.

Bunting said he received information in mid-October that the federal government had been considering closing Wilmington Trust. On Oct. 14, Bunting sent a letter to the Federal Reserve Board asking it to look into the bank’s actions and also asking the board to have the FBI investigate for any criminal wrongdoing. He said it appears there was “a lot of bad mismanagement.”

Bunting said the bank had been warned a few years ago its portfolio was unbalanced because it had given too many commercial real estate loans to Sussex County-based projects. Bunting said Federal Reserve officials have told him they are investigating Wilmington Trust, but he doesn’t know how in-depth the probe is.

“We don’t discuss supervisory matters,” said Barbara Hagenbugh, Federal Reserve Board spokeswoman, when asked about the investigation.

Bunting, who served as a board member for Calvin B. Taylor Bank in Maryland, said one of a bank board’s responsibilities is to provide inside knowledge about a community to ensure sound loan decisions.

He said other than damage to their reputations, partners in the limited liability corporations are likely to walk away without any financial loss or debt obligations.

“But stockholders who relied on that bank to be so solid have taken a hit,” Bunting said.

He admits there’s always a risk of losing money when dealing with stocks. But he said in signing off on too many large commercial loans, Wilmington Trust appeared to have lost its traditionally conservative position, which exposed stockholders to unnecessary risk.

“I hope the Federal Reserve follows through on it to find out what happened and to clear the air. If it was mismanagement, fine. But if there was preferential treatment or criminal wrongdoing, then the FBI should be involved. The public needs to know what happened and how it happened,” Bunting said.