2nd UPDATE: M&T To Acquire Ailing Wilmington Trust In $351 Million Deal

Wilmington Trust Corp. (WL), a once stellar trust bank that lost its way, said Monday it would sell itself for less than book value and for roughly half the price its shares fetched on Friday.

M&T Bank Corp. (MTB) said it will buy the Wilmington Trust bank, best known for its focus on wealthy clients, for $3.84 a share. On Monday, shares of Wilmington Trust tumbled 42% but remained well above the acquisition price, trading at $4.13. The stock had fallen 39% this year through last week.

Shares of M&T rose 3.3% to $77.20.

The $351 million stock deal comes on the heels of Wilmington Trust's $365.3 million third-quarter loss, also announced Monday, driven by increasing losses from bad construction loans.

Wilmington Trust had shocked shareholders earlier this year with the revelation that its loan book was in considerable trouble, and it abruptly changed chief executives, choosing a nonbanker, director Donald Foley, to run the company.

Wilmington's losses have continued to mount even as the banking industry has seen improvements in troubled loans in recent quarters. The bank operates under an "informal agreement" with its main regulator, the Federal Reserve, Chief Financial Officer David Gibson said in an interview with Dow Jones Newswires. The loan losses are "a focus of our regulators," he said.

On Monday, the bank said it wrote off $145 million in bad loans in the third quarter, up from $22 million a year earlier. Nonperforming assets, mostly loans for which repayment is doubtful, rose 150% to almost $990 million.

Very few of the bank's soured construction loans were tied to Wilmington Trust's private banking customers, Gibson said. He and Foley blamed the length of the economic slump for the sharp increase in loan losses.

M&T CFO Rene Jones said in a conference call Wilmington Trust's experience "is not all that different from ours" in the same markets. "They just have a lot more" construction loans than M&T.

But some investors saw it differently. Jeffrey Bronchick, chief investment officer at Los Angeles investment advisory firm Reed Conner & Birdwell LLC, said, "They just blew themselves up the old-fashioned way by making stupid, stupid credit decisions." His firm sold its roughly 160,000 shares after the second-quarter results.

M&T approached Wilmington Trust in early October, an M&T spokesman said. Foley said after discussions with "several potential partners" the board decided that the M&T deal was the best option for its shareholders, clients and staff.

He wouldn't elaborate. But he appears to have bucked advances by at least one other private equity investor; Gerald J. Ford of the Ford Financial Fund said he "attempted to contact the company and indicated interest" to no avail. "Nobody returned our call."

M&T said it would keep Wilmington Trust's name for the trust business and consolidate the retail banking operation, slashing costs by 15% and writing down Wilmington Trust's loans by 13%. M&T, of Buffalo, N.Y., has $68.2 billion in assets and extensive operations in the mid-Atlantic region. Wilmington Trust has $10.4 billion in assets.

M&T will assume the Treasury Department's $330 million Troubled Asset Relief Program investment in Wilmington Trust.

Janney Montgomery Scott analyst Rick Weiss wrote in a research report, "At first blush, we like the deal. Wilmington Trust has not realized its true earnings potential for at least the past decade and would have performed better under a more energetic management team."

Boenning & Scattergood analyst Matthew Schultheis said, "I think this is the best-case scenario" for Wilmington Trust.

Wilmington Trust's third-quarter loss widened from $5.9 million a year earlier. The latest period included $100.7 million in tax expense. Revenue increased 14% to $170.3 million on higher income from nonlending businesses. The bank's loan-loss provisions surged to $281.5 million from $38.7 million a year earlier and $205.2 million in the second quarter.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; [e-mail]

(Tess Stynes and David Benoit in New York contributed to this story.)