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Executives

Ellen Roberts – VP, IR, Wilmington Trust

Don Foley – Chairman and CEO, Wilmington Trust

Bob Wilmers – Chairman and CEO, M&T Bank

Dave Gibson – CFO, Wilmington Trust

Rene Jones – CFO, M&T Bank

Analysts

Steven Alexopoulos – JP Morgan

Joe Finnick – Sandler O'Neil

Matthew Clark – KBW

Matt O'Connor – Deutsche Bank

Bob Ramsey – FBR Capital Markets

Patrick O'Brien – Brown Advisory

Ken Derby – Morgan Stanley

Sachin Shah – Capstone Global Markets

John Pancari – Evercore Partners

Blaine Marder – Loeb Capital Management

Peter MacArthur – WDEL

Collyn Gilbert – Stifel Nicolaus

Andrea Jao [ph] with Cowan

Mike Mayo – CLSA

Wilmington Trust (WL) Q3 2010 Earnings Call November 1, 2010 10:00 AM ET

Operator

Greetings and welcome to the third quarter 2010 Wilmington Trust Corp. conference call. [Operator Instructions.] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ellen Roberts, vice president of investor relations for Wilmington Trust. Thank you. You may begin.

Ellen Roberts

Thanks operator. Good morning everybody. Welcome and thank you for participating. We have two items to discuss this morning. First is Wilmington Trust's third quarter earnings, and the second is the definitive merger agreement between Wilmington Trust and M&T Bank.

Our agenda this morning features remarks from Don Foley, Wilmington Trust's chairman and chief executive officer; Bob Wilmers, M&T's chairman and chief executive officer; and Rene Jones, M&T's chief financial officer.

Also with us this morning are Wilmington Trust's chief financial officer, Dave Gibson, and M&T's director of investor relations, Don MacLeod. We'll begin this morning with remarks from Mr. Foley. After conclusion of his remarks, Mr. Foley will introduce Mr. Wilmers, who will be followed by Mr. Jones. At the conclusion of their remarks, everyone will be available for questions.

I want to remind you that slides and other reporting materials are available on both Wilmington Trust's and M&T's websites. That would be wilmingtontrust.com and mtb.com. I want to remind you that the call is being recorded, and the replay details are in our earnings news release and on both websites as well. I want to remind you that news reported maybe on this call and that all participants are permitted to ask questions.

And now I have to give you the forward-looking disclaimer, which as you might imagine is a little big longer than what we usually go through. I wanted to let you know that 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, market interest rates, fluctuations in equity or fixed income markets, higher than expected credit losses, changes in the market values of securities in our investment portfolio, and other factors described in disclosure documents we file publicly from time to time.

Our comments contain forward-looking statements relating to the proposed merger of Wilmington Trust Corporation and M&T Bank Corporation, including the expected date of closing and potential benefits of the merger. The actual results of the merger could vary materially as a result of a number of factors, including the possibility that competing offers will be made and the possibility that various closing conditions for the transaction may not be satisfied or waived.

In conjunction with the proposed merger, M&T will file with the U.S. Securities and Exchange Commission a registration statement on Form S-4 that will include a Wilmington Trust proxy statement that also constitutes a prospectus of M&T. Wilmington Trust will mail the proxy statement prospectus to its stockholders. Investors and security holders are urged to read the proxy statement prospectus regarding the merger when it becomes available and any other relevant documents filed with the SEC as well as any amendments and supplements to those documents because they will contain important information.

You may attain a free copy of the proxy statement prospectus when it's available and other documents related to this transaction filed with the SEC by Wilmington Trust and M&T at the SEC's website at www.sec.gov. The proxy statement, when it's available, and the other documents, also may be attained free of charge on Wilmington Trust's website at wilmingtontrust.com under the tab "Investor Relations" and then under the heading "SEC Filings" or at M&T's website at mtb.com, under the tab "About Us", and then under the heading "Investor Relations", and then under the heading "SEC Filings."

With that I will turn it over to Mr. Foley.

Don Foley

Good morning everyone and thank you for joining us today. I realize our news this morning, both in terms of our third quarter earnings and the definitive agreement with M&T, is not what you were expecting.

This is a difficult moment in our company's history. From a purely personal perspective, the challenges facing us during my first few months on the job here have often been far more difficult than I ever imagined they would be. Especially difficult and painful is the decision we're announcing today.

I certainly recognize that this action touches many, many lives. All I can say is that we've worked hard to evaluate all the facts and circumstances and meet our obligations to our shareholders as well as our clients, colleagues, and community. I know there hasn't been much time to digest all the details of this transactions, so Bob, Rene, Dave, and I will do our best to walk you through it.

Before I get to that, however, I want to speak to our third quarter performance, and provide some context for what led up to today's events. Our loss for the third quarter was $370 million, that's $4.06 per share.

This loss was primarily the result of two factors. First, we continue to see credit deterioration in our loan portfolio, reflecting the extent of our exposure to real estate construction lending and its concentration in Delaware.

Additional credit quality problems emerged during the quarter, and the provision for loan losses rose to $282 million, which was a 37% increase from the second quarter.

This brought us to a pre-tax loss of $265 million for the quarter, making the third quarter our sixth consecutive quarter of losses. This trend of losses triggered the need for us to establish a valuation allowance of $189 million against our deferred tax assets, and that caused us to record tax expense of $101 million for the quarter, which was the second factor in our third quarter loss.

These two factors, and the loan loss provision in the income tax expense, far exceeded our expectations. In addition, they completely obscured the positive aspects that occurred in the third quarter. In particular, our corporate client services and wealth advisor services businesses continued to show positive momentum.

In addition, core deposits remained stable, and the liquidity strengthened at the bank. Our capital ratios remained above the minimums required to be considered well-capitalized, but we have little assurance that our capital position will not erode further.

Regulatory capital ratios all declined in the neighborhood of 300 basis points or more from the second quarter. The tangible common equity ratio fell from 7.25% to 3.51%. And the tier one common ratio fell from 9.05% to 5.65%. These declines reflected the magnitude of our losses and the lack of additions to capital from retained earnings.

In addition, we downstreamed $200 million of capital from the corporation to Wilmington Trust Company, and our tangible book value declined to $3.84 at the end of the quarter.

That gives you a summary of our third quarter results. Credit quality clearly remains the big story, so let me say a few more things on that subject. The negative effects of the protracted recessionary environment in Delaware, and how these pressures are challenging the financial health of many of our borrowers, simply cannot be overstated.

In the third quarter evidence mounted that things were getting worse for some of our borrowers, and even some of our strongest clients began to feel the pressure. The financial conditions of more of our borrowers weakened, their cash flows tightened, and appraisals continued to show significant declines in collateral valuation.

These issues manifested themselves in our credit metrics to a significantly greater degree than in the second quarter. Geographically, the highest concentration of problem loans remained in southern Delaware, but there was also an increase in the percentage of problem loans in northern Delaware.

Most of our credit problems continued to be in the commercial real estate construction portfolio, but we started to see problems spread to the commercial, financial, and agricultural portfolio in the third quarter. There is much more detail on credit quality in our press release.

We've been working diligently over the past year to de-risk the portfolio. By the end of the third quarter we had evaluated more than 92% of our commercial real estate construction and mortgage loans and the trend line is not encouraging.

It appears to us that there is no significant economic or real estate recovery on the horizon. This gives us little assurance that our loan portfolio will strengthen significantly in the near term, and that our capital position will not erode further.

These risks increase the possibility of downgrades by the credit rating agencies and adverse regulatory actions. Either, or both of which, could compromise the value of our franchise, particularly in our two fee-based businesses, which continue to perform well. They are established leaders in their markets and they have solid growth prospects.

For all of these reasons, our board and management carefully studied Wilmington Trust's strategic options and we reviewed a wide range of alternatives. Ultimately, the board determined that the best option for our shareholders, as well as our clients and employees of Wilmington Trust, was a merger with M&T.

M&T is one of the strongest banks in the country, and has a history of superior earnings and credit performance across economic cycles. In M&T we've found a strong and stable partner for Wilmington Trust. Our respective operations and geographic footprints are highly complementary, and both have cultures that are committed to serving the communities in which we live and work.

I believe our two companies are an excellent strategic fit, and look forward to working with the people of Wilmington Trust and M&T to leverage the combined advantages of both companies on behalf of shareholders, customers, and staff.

And with that, I would like to turn things over to M&T's chairman and CEO, Bob Wilmers. Bob?

Bob Wilmers

Thank you Don. Now we'd like to discuss why we believe the merger that we announced this morning makes sense to us.

We believe the strategic fit between the two firms is unusually compelling. Both firms operate customer-focused community banking models with a focus on relationships rather than transactions. Both firms maintain large market shares in the geographies in which they operate, offering the advantages of scale or what we call "density."

Wilmington Trust has the largest deposit market share in its home state of Delaware, and a leading position in middle-market lending. M&T Bank is the leading bank in Maryland, with a very high deposit market share and a leading position in middle markets and small business lending.

But what makes this merger so special, almost unique, are the complementary strengths that each partner brings to the table. Wilmington Trust brings a comprehensive and well-regarded suite of trust investment and corporate client services that are an order of magnitude beyond what is offered by most community, or even super-regional, banks, including M&T.

These product offerings are national, and in some cases global, in scope. We will retain the Wilmington Trust name for these businesses and will look to their current senior management for continued leadership in delivering these capabilities across the M&T customer base.

And that's what M&T brings to this partnership. As I noted earlier, M&T is perhaps more than anything else a bank that is successful in its focus on serving middle-market and business banking customers across our footprint.

We engaged a research firm to survey middle-market companies in the cities and markets where we operate, and in all our communities more companies identified M&T as their lead, or most important, bank than any of our competitors. This includes Buffalo, Rochester, Syracuse, Binghamton, Harrisburg, Baltimore, and the state of Maryland overall. This shows the strength and breadth of our relationships within our communities plus, we believe, the confidence our customers have in M&T.

A critical factor of this merger will be leveraging those most-important of these bank relationships by introducing middle-market owner operators across our footprint to the high quality wealth management product set that Wilmington Trust offers.

Based on this morning's financial results, which Don Foley just spoke to, what Wilmington Trust also needs in the current environment is a strong and stable partner. This is the other element that M&T brings into the partnership. M&T's disciplined approach to capital allocation, credit, and risk management, combined with our focus on returns to our shareholders, has resulted in what has arguably been the best performance by a large bank through the financial crisis.

M&T's already-strong earnings momentum and tangible capital generation will be enhanced by its combination with Wilmington Trust. In the end, Wilmington Trust shareholders will receive M&T stock when the merger is consummated. We believe there's no better bank stock to own. In the slide deck we'll go through shortly, you'll see M&T's superior long-term earnings and dividend growth trends and our best-in-class returns to shareholders over the past decade.

Finally, we believe the two banks share a common set of values. These include respect for our experienced and long-tenured employees and our common commitment to being the best corporate citizen in the markets where we operate.

Over the past 23 years, we've completed more than 20 mergers and acquisitions. Over that time, we've become convinced that a combination with a partner who shares a common philosophy towards employees, customers, and communities offers the best chance for that combination to create value for our shareholders.

We believe we've found such a partner again in Wilmington Trust. To the further acknowledgement of this partnership, I've asked Don Foley to join M&T Bank Corporation's board of directors, and he has accepted.

Now, I'll ask Rene Jones to review the terms of today's transaction.

Rene Jones

Thanks Bob. For those of you following along on the website, or who have printed out copies of our investor relations deck, I'll begin my comments around slide 5.

M&T's merger with Wilmington Trust has been structured as an all-stock transaction. Wilmington Trust shareholders will receive 0.051372 shares of M&T common stock for each share of Wilmington Trust stock. Based on M&T's closing price last Friday, this values Wilmington Trust at $3.84 per share, equal to the September 30 tangible book value.

The exchange ratio was fixed so that Wilmington Trust shareholders will share in the economics of M&T stock from day one. The aggregate value of the transaction is $351 million. In addition, we are assuming Wilmington Trust's $330 million of TARP preferred stock.

Our internal rate of return on the transaction exceeds 20%, and we anticipate that the merger will be accretive to our earnings per share by 2012. On a GAAP basis, we expect that accretion to be in the high single-digit range for what we call our net operating earnings, which excludes the amortization of intangibles and any merger-related expenses. We'd expect accretion in 2012 to be in the low double-digit range.

Included in these projections is an estimate of our cost to retire TARP preferred stock in the future. Also, these projections include our assumptions for expense [datings] equal to 15% of Wilmington Trust non-interest operating expenses, to be achieved by combining the two organizations and to be fully phased in by the end of 2012.

I'll discuss this more in a few moments, but we had an opportunity to complete a fairly comprehensive due diligence review, including their loan and securities portfolios. Following that due diligence, we estimated the fair value mark for Wilmington Trust's loan portfolio of $1 billion, or about 13% of loans. I'll have more details on this in a few moments as well.

Our estimate of merger-related expenses, which includes systems integrations costs, as well as lease and contract buyouts, amounts to $159 million pre-tax, and as Bob noted, Wilmington Trust has a tremendous brand equity in its wealth advisory businesses, as Wilmington Trust. The regional banking business for the combined firm will operate as M&T Bank.

Turning to slide 6, the transaction is subject to approval by the shareholders of Wilmington Trust and will require the customary approvals from the regulators. We expect to close by mid-year 2011. The terms of the transaction include a $30 million breakup fee under a specified set of conditions and as Bob noted, Don Foley has agreed to join the M&T board of directors.

Slide 8 discusses our due diligence review from the Wilmington Trust loan portfolio. As you know, they had been engaged in a portfolio review which included a third party to make their recommendations regarding risk ratings and loss content.

Subsequently, in early October, a 40-person team of M&T credit line and workout personnel examined the loan documentation for some 450 borrowers with outstandings amounting to some $3 billion, or about 50% of the overall commercial portfolio. The review included all borrowers with outstandings greater than $10 million, all non-accrual loans greater than $2.5 million, all criticized loans greater than $5 million in outstandings, plus a sample of past criticized loans below the threshold were selected to ensure that a representative sample was taken within each asset category.

By category, we examined 43% of the C&I portfolio, 45% of the commercial mortgage portfolio, and 64% of the commercial construction portfolio. At the same time, our consumer lending team examined consumer and residential mortgage portfolios, assessing documentation standards, underwriting quality, and compliance with the regulatory requirements.

Following this analysis, M&T developed its own estimate of lifetime credit losses in the Wilmington Trust loan portfolio. Our estimate for the remaining future credit losses in the Wilmington Trust loan portfolio is shown on slide 9. Our estimate aggregates just over $1 billion, or 13% of Wilmington Trust's loan portfolio. After deducting the current Wilmington Trust loan loss allowance, M&T's credit mark comes to just over $500 million.

As part of our analysis, we thought it would be useful to look at the losses already taken on the portfolio by Wilmington Trust, looking back to the beginning of 2008. On that basis, our estimate of through the cycle losses comes to just under $1.5 billion, or 17% of the loans. Much of our mark is attributed to the construction and development portfolio.

As some of you know, we've had a few issues of our own on the eastern shore of Delaware and Maryland, and this helped inform our analysis. While much of this is behind us, for comparison purposes our estimate of through the cycle losses in M&T's Mid-Atlantic construction and development portfolio approximates 35.9%, slightly lower than the 40% shown here for Wilmington Trust.

Turning to slide 10, following the consummation of the merger and the de-risking of Wilmington Trust's balance sheet required by the accounting rules, we expect M&T's capital metrics to be comparable to, or slightly better than, those at the end of the recent quarter, where our tangible common equity ratio was 5.96%. We have estimated that this ratio will fall between that 5.96% to 6.4% by the time we consummate the transaction in mid-year 2011.

Similar to our recent Providence transaction, the de-risking of Wilmington Trust's balance sheet implies a minimal level of net charge-offs for the next several years, the outcome being that Wilmington Trust's income stream will accelerate M&T's tangible capital generation rate beyond our current level.

As noted, our financial analysis includes an estimate of the costs required to retire our TARP preferred stock at some point in the near future, and we have assumed no change to the M&T common stock dividend, which is currently paid at an annual rate of $2.80 per share.

These next several slides relate to Bob's comments about M&T's long-term performance and our performance through the financial crisis. They'll be very familiar to those of you who already know our story. For those Wilmington Trust shareholders who are less familiar with M&T, we thought some information about our financial performance might be helpful.

Slide 11 illustrates our best-in-class performance credit-wise versus our peer group of 15 of the largest regional and super-regional banks. The figures here reflect June year-to-date performance as these are calculated from the regulatory filings which have not yet been available for the third quarter.

Slide 12 represents M&T's long-term earnings and dividend growth. The earnings stream included here is what we call our net operating earnings, which excludes the amortization of intangibles and merger-related charges in the years where they occurred. We were certainly impacted by the financial crisis, but have remained solidly profitable throughout the financial crisis, and in fact last quarter was our 137th consecutive quarter without a loss. In addition M&T has maintained its dividends throughout the financial crisis, one of only two commercial banks in the [S&C] to do so.

Slide 13 presents the tangible capital generation through the operating earnings over the past 27 years. The key component of M&T's philosophy has been to return capital to the shareholders when it can't be deployed efficiently. 67% of the capital we've generated over the past 27 years has been returned to the shareholders through dividends or through share repurchase.

Slide 14 presents 10 years of annual total return to shareholders for the top 50 banks by market cap as of January 1, 2000. Interestingly, M&T's relative returns are the highest versus the peer group in what were arguably the two worst years economy-wise: 2000 and 2009. For other years, including during the bubble, we were solidly in the middle, but looking at the column all the way to the right, M&T's total return over the last decade was the highest, and we were the only bank to more than double their shareholder investment over that 10-year timeframe.

With slide 16, we get into the heart of the rationale for this merger. As Bob noted, M&T and Wilmington Trust have very different but complementary business models. The combined company will seek to leverage Wilmington Trust's position as the premier provider of wealth management client services.

As indicated, the company will retain the highly regarded Wilmington Trust name and leadership for trust, investment, and corporate services. We believe that the wealth advisory services that Wilmington Trust offers is a natural fit with M&T's deep relationships and with middle-market owner operators across our footprint.

Customers of the corporate client service business should value the fact that M&T, like Wilmington Trust, is not part of a global investment bank and will continue in a unique position as the leading independent [conflict] service provider. From the M&T perspective, we expect that the combined company will leverage M&T's position as the premier super community bank in upstate New York, Central Pennsylvania, and the Mid-Atlantic. We'll look to leverage our strengths in mass-market investment products and commercial insurance lines through Wilmington Trust branch networks.

Turning to slide 17, also from M&T's perspective, one appealing aspect of this merger is the fact that we'll garner scale and relevance in the trust and investment arena. Consummation of the merger will more than double M&T's trust revenue, that is, total fee revenues, from 15% to 34%.

At the same time, some of the fee categories that are more volatile, or which are facing headwinds from regulatory reform, or both, will now be a smaller piece of the combined pie. For example, mortgage banking as a percentage of fee revenues declined from 17% to 13%, and deposit service charges declined from 42% of fee revenues to 33%. Overall, fee revenues as a percentage of total revenues increases from 34% to 39%, putting us right at the median among our large regional bank peers.

From the retail banking perspective, Wilmington Trust complements M&T's already large Mid-Atlantic presence, and you'll see this on slide 18. As many of you know who follow us, it's part of the business philosophy to make ourselves relevant in the markets where we choose to operate by seeking and retaining large market share density. The combination with Wilmington Trust brings us leading deposit share in a market contiguous to our existing market.

In summary, as Bob noted, this transaction brings together two complementary financial institutions with similar community-focused business models and cultures. For the combined organization, the increased proportion of fee income will diversify our revenue stream while offering a transformational opportunity to grow the trust investment and corporate finance services.

We have further enhanced our scale in the Mid-Atlantic region. We completed a comprehensive due diligence of Wilmington Trust's balance sheet. Following the required purchase accounting mark, the earning streams coming from this de-risked balance sheet should enhance M&T's rate of capital generation. And finally, attractive economics arising from the transaction through high single-digit cap earnings accretion and lower double-digit accretion on a net operating basis by 2012 should benefit the shareholders and offer upside potential for Wilmington Trust shareholders through the ownership of M&T's stock.

I don't intend to cover the remainder of the slide deck, but for those of you who aren't familiar with one or the other of our two firms, these pages offer more information about both the M&T story, our commitment to our communities, our tenured employees, and our superior returns that we've generated over the past 27 or so years, and about Wilmington Trust and their commitment to their customers, communities, and employees in their storied history.

I'll now turn the call over to the operator to open it up and provide instructions for questions.

Question-and-Answer Session

Operator

Thank you sir. [Operator Instructions.] Our first question comes from Steven Alexopoulos with JP Morgan. Please state your question.

Steven Alexopoulos – JP Morgan

Rene, looking at your 2012 earnings accretion, is that over current Street estimates, or is that over your estimates? And then what do you assume the capital will be to exit TARP based on this footnote here?

Rene Jones

We tend to focus internally, so we don't really focus on Street estimates and focus on making forward earnings projections, so they're based on our internal expectations. And you know over periods of time rather than focus on any quarter we talk about the fact that our business has never been impaired down throughout the cycle and then as we look back we feel pretty confident that over time we can get back to a good normalized rate of earnings. So our estimates are over those.

With respect to the TARP, essentially what we've done there is you have to understand how we run our models. We assume that we recapitalize the company and include all the equity that's necessary to recapitalize, in this case Wilmington Trust, without using any of M&T's equity. At the end of the day, when we look at those ratios, we don't necessarily think that we need to do anything in terms of a public capital raid, but by keeping that embedded in the analysis what you end up getting is basically some excess cost that we believe is necessary to think about as we begin to think about paying back the TARP over time.

We've not yet approached the regulators, so it's very hard to answer your question, but we just think that now, given that we've got a larger amount of the TARP and also given that as we get our way towards the second quarter of 2011 we'll begin to get more clarity from the Federal Reserve on the exact rules around capital that it's probably a good time to think about setting out a plan to move forward there.

Steven Alexopoulos

Could I ask Don Foley a question? Could you give us a sense of how many parties you explored a potential sale to? Just curious if this was exclusive to M&T or was this an auction to the highest bidder?

Don Foley

As I indicated in my own presentation, there were numerous people that we had played over alternatives with them and that's probably as far as I can go at this time.

Steven Alexopoulos

Maybe just a followup then. Looking at where your stock is trading relative to M&T's offer price it seems the market thinks there might be some odds of another bidder coming in. Rene, I know it's a hard question, but is there any way you could address this sense of how much flexibility you might have, if any, to raise your bid here and still meet your financial hurdles? Or is this a case like Trustmark where this is your final bid based on what your accretion hurdles?

Rene Jones

First, Steven, you're really good at asking hard questions, so I'll give you that. No, I think we've got a firm, committed deal. Both parties are headed down this road, and from my perspective that's the way it should work out.

Operator

Our next question comes from Joe Finnick with Sandler O'Neil. Please state your question.

Joe Finnick – Sandler O'Neil

Steve asked my question on capital, but just a couple of others here if I could. Rene, on the DTA can you just refresh my memory on how the accounting works for that? Wilmington's going to establish the valuation allowance we saw in the earnings release this morning. Does the acquisition impact your ability to utilize the DTA now going forward?

Rene Jones

The short answer is that when we look at our analysis we cannot use all of the deferred tax assets, but we can use a fair proportion of it when it comes to our tangible common equity. And then we have assumed, although we haven't done all of the work there, that we would use none of it for our regulatory ratios. Of course over time you would get that because the regulatory rules require to look only one year forward, and we have a fair amount of DTA ourselves. So that's what we assumed.

Joe Finnick

And then for Don, the company obviously had credit issues with the decline in TC, book value, etc. The magnitude of the increase in non-performers still was pretty surprising. Can you talk at all about whether or not a specific event drove this quarter's results? Was there a regulatory exam? If not, what changed so dramatically in the last 90 days?

Don Foley

What we saw was an acceleration in the deterioration of the credit quality of many of our customers over this quarter. We received a lot in terms of the appraisal information that we gathered, all indicating that both the magnitude and the velocity of this credit deterioration was very significant for us.

Joe Finnick

And when was your last exam?

Don Foley

Our soundness exam started sometime at the end of June, beginning of July, and we're still going through the exit process at this point.

Operator

Our next question comes from Matthew Clark with KBW. Please state your question.

Matthew Clark – KBW

Any mark on the securities portfolio that we should know about?

Rene Jones

There was nothing really unusual. It's pretty plain vanilla. You've got in Wilmington's book 78% of the book is agency securities, so there's nothing unusual there. There's a very small amount of pooled trust preferred securities which - in fact there was a lot of overlap with the ones that we've inherited in past transactions so we were able to sort of synch up the marks, and there really wasn't anything material there. Any adjustments we made would be included in our marks, but nothing material.

Matthew Clark

Why might this be a taxable transaction, and maybe it's an easy answer.

Rene Jones

From my perspective both parties tried to think about what was best for the shareholders and came to that conclusion. I don't know if Dave, you want to -

Dave Gibson

I think it allows some of the shareholders to take a loss if they have a higher basis in the stock.

Operator

Our next question comes from Matt O'Connor with Deutsche Bank. Please state your question.

Matt O'Connor – Deutsche Bank

Rene, I was wondering if you could talk a little about the size of the balance sheet you think the combined company will be after the marks, and some de-risking and there's always some opportunity probably on both sides to shrink the less productive assets.

Rene Jones

Yeah, it's a good question Matt. I've thought about that and I think as we've got in the slide deck that gives you the pro forma balance sheet and the pro forma loan. But I do think that as you look at even some of M&T's porfolios we probably have $1 billion, $1.1 billion of non-performings. You've got another set here. Merely what's going to happen is you're going to see that that whole set of non-earnings assets essentially will run down over time.

It's funny, a lot of people keep asking about what's your loan growth, what's happening? Well, really what’s happening is we've got underlying loan growth, but it's being offset by the runoff in these portfolios, and I would expect the same here, but I think it actually helps you with your lift because you're taking off over time non-earnings assets and putting on earnings assets.

Matt O'Connor

So initially when the deal closes it will be somewhere in the $78 billion to $79 billion range and less a $1 billion in marks is the way to think about it? There's nothing more meaningful up front?

Rene Jones

Yeah, oh in terms of deleveraging?

Matt O'Connor

Yes.

Rene Jones

We'll have to think about that, but now, and remember in our last call we talked about the fact that we needed some fixed rate assets so we started retaining mortgages and we were going to retain a fair amount, so we have a lot of flexibility with discretionary assets, which kind of give us some leeway in terms of capital on a capital level.

Matt O'Connor

Okay, and then a little bit related and sorry for such a detail question, but if you have a preliminary estimate of good will created as well as the intangible assets that would be helpful.

Rene Jones

I don't, but I'll be in Boston on Thursday and I'll say it then.

Matt O'Connor

Okay, I'll see you there. And then a separate question for the Wilmington Trust side, I'm actually not as familiar with either company, so I apologize in advance here. But on the disallowance valuation that you took to GAAP capital, I just wondered if you could go through a little more detail on that. It seems like there's a lot of uncertainty on what drives these disallowance valuations among investors and analysts out there. So just some color would be helpful.

Rene Jones

I think there are a couple of large items in the valuation allowance. Essentially it's the significant loss that we had in the third quarter increased the DTA itself by over $71 million, $72 million, so just the loss itself that's now disallowed added to the number. Our current year taxes were just a little over $65 million, so essentially because of the loss and the continuous over 36 months our ability to have positive indicators of future earnings essentially are not there given the continuous credit issues that we had. We're essentially reversing all of that current year and in addition to that some of our previous estimates in terms of monetization were as we have gone through all the reconciliations and the tax return work those are off about $38 [million] or $39 [million].

Operator

Our next question comes from Bob Ramsey with FBR Capital Markets. Please state your question.

Bob Ramsey – FBR Capital Markets

Will there be much of an impact on net interest margin from the acquisition, or do the purchase accounting marks make it relatively neutral?

Rene Jones

I wouldn't expect a significant change in the margin. We're still kind of working our way through that as we get familiar with the book, but I think you've got it. If you look at the margin's a little lower today at Wilmington Trust, but when you put in place the sizable mark I think you'll see it move up. And then it represents maybe 1/7 or 1/6 of the book, so I don't expect a big change. I think we'll have to talk more about that as we get to somewhere around January to lay our thinking out.

Bob Ramsey

And then since my question is for Wilmington Trust - but were any of the loan marks charge-offs or provisioning that took place this quarter? Was that affected by the decision to sell, or would it have been the same if M&T was not involved today?

Dave Gibson

I think they would have been very consistent with our process and we didn't adjust any marks because of the transaction.

Bob Ramsey

And then I guess last question, back to Rene, is there any provision for an adjustment or any protection in the event that there is greater deterioration of the Wilmington Trust portfolio from now until the time of close?

Rene Jones

No, we wanted to have a very clean transaction, so I think the most important part about the work we did is that we had 11 days to do it. And you think about what we ended up doing is essentially our credit team - think about those samples, think about 64% of the construction loans. We do that sample so that we can then take it back and match that back to our grading system and then we have run the whole book through our process to come up with what the charge-offs and loss projections would be under M&T. So we've done a fairly extensive review, and we felt very comfortable with the work that we did.

Operator

Our next question comes from Patrick O'Brien with Brown Advisory. Please state your question.

Patrick O'Brien – Brown Advisory

Question is the 20% return on investment - do I just take the purchase price - $351 million - and add $330 million of TARP and multiply the two by 20%?

Rene Jones

[Laughter.] That seems awfully simplistic for the amount of time we spent on our internal finance. I guess the way I think about the internal rate of return is you maybe look at the modest expenses that we've got in there and you look at the earnings power of the two wealth management institutions, which are generating a fair amount of capital that does not need to be retained for your regulatory capital ratios, and we just run a cash flow model and it's pretty straightforward. So your up-front things would be the purchase price and the cost of the TARP would be in there over time. It's pretty standard.

Patrick O'Brien

With the construction loans, deterioration is no big surprise, but CS&A, what's going on there? It's awfully late in the cycle to suddenly discover problems in that portfolio.

Dave Gibson

Companies that have some touch to the construction business, I think there are companies that have to date been able to withstand and manage through this crisis and had enough cash flow to weather the storm, and I think the duration of that has begun to hurt more and more companies. Some of our related companies to the construction sides of the operating company that was in CS&A they had a holding company. We had companies that are in different kinds of heavy construction. The largest mover was actually not related construction work. It was about $26 million related to the poultry business, which sounds unusual but it's a very regional company that we've done business with for years that's suffering from commodity prices. So we've taken that to non-performing.

Patrick O'Brien

I hope that's not Frank Purdue.

Dave Gibson

[You're not expecting comment are you?] [Laughter.]

Operator

Our next question comes from Ken Derby with Morgan Stanley. Please state your question.

Ken Derby – Morgan Stanley

The 15% expense savings you guys expect, just to be clear, the base, does that include the OREO costs, or would that just be the core operating expenses?

Dave Gibson

No, I think the number's somewhere around $80 million. We just took the non-interest expense. There's no adjustments to it. So just a percentage of the non-interest expense.

Ken Derby

And also, just to be clear, going back to the original DTA question, is it possible for MTB to utilize its own profits to recognize or to write back so to speak the DTA that Wilmington took? Or does it actually have to be generated by Wilmington before you can utilize the DTA.

Dave Gibson

Well they combine them, but there are rules that limit the amount that you can use, and so there's a rule which basically allows you to take a certain amount as a percentage of the purchase price and then take it over 20 years. So it does matter how much you make, but there are certain limitations. So you can't necessarily use all of it. You use most of it, but you have to use it over time.

Operator

Our next question comes from Sachin Shah of Capstone Global Markets. Please state your question.

Sachin Shah – Capstone Global Markets

Just a couple of questions on approvals. What approvals are needed to complete the transaction, which state approvals are needed?

Dave Gibson

I think the normal approvals would be obviously our shareholders would have to approve the transaction and we would need regulatory approval in the normal course.

Rene Jones

And M&T's would be - we're regulated by the New York State banking department and the Federal Reserve.

Sachin Shah

So you don't need Delaware or Maryland or any of these specific states?

Rene Jones

We have a state charter bank in Delaware and we would need the state bank commissioner and the banking officer to approve it as well.

Sachin Shah

Okay. It was speculated just maybe a couple of weeks back that there were some conversations that some Canadian banks were interested in Wilmington. Just wanted to find out, can you just maybe elaborate on those discussions? You mentioned earlier there were some numerous alternatives. Were they alternatives to the direction that was agreed to today?

Dave Foley

I'm sorry. We can't comment on that.

Operator

Our next question comes from John Pancari with Evercore Partners. Please state your question.

John Pancari – Evercore Partners

Rene, those percentages on slide 8 of the loan category reviews, are they based on the number of loans, number of credits, or the credit balances.

Rene Jones

Balances.

John Pancari

And then the 8% mark on slide 9 on the commercial and commercial real estate, can you talk a little bit about how you came to that number and your confidence in that number, just some of the details that you looked at?

Dave Gibson

Sure. Again, I kind of talked about where we started, and then what we end up doing is we sort of map a review of the files, from the percentages you see in the previous slide, and essentially what we do is we map the grade. So the first thing that we do is we take all of the loans that are substandard, or FAS 114 loans, that are impaired, and we review the files to see how we feel about the marks that have been taken already on the FAS 114, and get comfortable with those. And then what we do is we use our sample to map over and on the pools of loans that are not already FAS 114 we kind of come up with an estimate.

So to give you some sense, if you look at the C&I book at M&T, over time the average loss that we experienced when we have a default was 28%. So for this portfolio it came out to about 35%, so we got a very good sense of - based on mix, industry, and a review of the files - the loss given the [fall] is probably slightly higher.

And then when you flip over to the real estate side, the first thing you notice is that about 52% of the real estate here is owner-occupied, and in the real estate space you're always focused on maturity risk and when you look at the layout of where the loans map, you actually see that the maturity risk is a little bit further out. So for example on the owner-occupied more than 50% of the portfolio comes up for maturity or refinance in 2014 and beyond. On the investor real estate side, about a third is coming up in '11 and '12, so we'll look and take that into consideration as we map through the process.

So I think overall we felt very comfortable with it, a very detailed process.

John Pancari

And then on that same one, you've got to assume that the third party that was tasked to look at this previously had also taken into account some of these factors, so can you talk about how your mark that you took on this portfolio compares in magnitude to what was recommended by the third party?

Dave Gibson

We started there as a base, and then we modified where we saw, depending on the particular credit. I guess the more important point is that when you're coming in from the outside and you don't necessarily have all the knowledge that in this case that Wilmington Trust would have, we tend to actually lump credit together so they're associated credits, so with something that's nonperforming in our analysis would have lumped that in, and we've been relatively conservative on that. So to really compare I think is kind of difficult.

Operator

Our next question comes from Blaine Marder with Loeb Capital Management. Please state your question.

Blaine Marder – Loeb Capital Management

Just to reiterate, you said you were comfortable in your due diligence, and therefore there was no other delinquency tests or walk aways in the merger agreement? I just wanted to clarify that.

Rene Jones

Yes. That's true.

Operator

Our next question comes from Peter MacArthur with WDEL.

Peter MacArthur – WDEL

I was looking to find out if you could lend any insight into the future of both the Wilmington Trust name and the Wilmington Trust workforce here in Delaware under this deal.

Rene Jones

I would start off by saying a couple of things. First of all, we've long been impressed with the Wilmington Trust brand and name and reputation, and when we got here and met them, one of the first things we thought, that the professionals and wealth and trust and advisory businesses were first rate and it's why we concluded the two things, that it would be a great partnership if they could help us upgrade and improve and accelerate the progress we've been making in our own trust and investment pool. The other thing is that what's unique about the transaction is that there's no overlap in the branch networks. So it really minimizes the amount of overlap and the job situation, so if you were to look at our cost saves in this transaction they would probably be the lowest of what we've seen in any of the transactions that we've done.

Bob Wilmers

We've also been very impressed with the people that run the wealth management operation.

Operator

Our next question comes from Collyn Gilbert with Stifel Nicolaus. Please state your question.

Collyn Gilbert – Stifel Nicolaus

I'm going to start by directing my question, Don, to you if you don't mind. I'm less familiar with Wilmington Trust in recent years, and just trying to understand the dynamics of your lending business. Obviously I know the region is seeing pressure, but it doesn't seem to be at the magnitude that you all are seeing within your porfolios. I know construction obviously has been a big driver, but can you talk a little bit about the underwriting process within Wilmington Trust and what was missing, or what went wrong? Just trying to ascertain the magnitude of marks and losses that we're seeing here.

Don Foley

The problem that we've been contending with for the last several quarters is the idea is that we have a tremendous concentration of our loan portfolio, particularly the construction portfolio, down in southern Delaware. We were trying to meet the needs of building contractors who were building single family homes for those people who were thinking of retirement before they actually migrated further south. There were certain advantages to that community to build housing in the Delaware market and they were attracted to it. We became major lenders to that particular class of investors, to that particular class of builders, and unfortunately in the '08, '09 timeframe the Delaware market for that particular type of housing dried up completely. And what we're seeing here is for a long time a lot of those contractors tried to maintain their position, they were working off of strong cash flows and so forth. I think at this particular point in time, since the recession seems to be dragging out as long as it is, that we're not seeing sparks that we would have expected to see by now in the commercial real estate area. That we're seeing increased stress in the portfolios that we did not anticipate back when we were involved in that underwriting process originally.

Collyn Gilbert

And the geographies within the commercial real estate portfolio, is that all in market or did you go out of market?

Don Foley

No, it's all in market. I think our major problem relates to the fact that we are so highly concentrated, particularly in our portfolio down in southern Delaware.

Collyn Gilbert

So commercial real estate outside of the construction, you mean just the traditional, owner-occupied, is still highly concentrated in southern Delaware where there's stresses?

Don Foley

That's correct.

Operator

Our next question comes from Sachin Shah with Capstone Global Markets. Please state your question.

Sachin Shah – Capstone Global Markets

Just wanted to follow up. Just kind of curious as to why the termination fee was $30 million, accretes to approximately just under 9% or 8.5%. How you came up with that. And is it both sides, is the reverse termination fee $30 million as well?

Dave Gibson

I think you need to recall that in addition to the share exchange that M&T is absorbing there is the TARP of $330 million for -

Sachin Shah

So in addition to the $351 million it's the $330 million TARP?

Dave Gibson

That's correct. So the number's closer to about 4% than the 9% you had before.

Sachin Shah

And just one last question - any timing on the property?

Dave Gibson

No, we've not set the timeline for all those things, but obviously we're going to have to file shortly and we'll have to lay that out.

Operator

Our next question comes from Andrea Jao [ph] with Cowan

Andrea Jao [ph] – Cowan

I have a two-part question about how the merger will impact Wilmington, the legacy Wilmington client base. The first part of my question is Wilmington has been able to offer some tax benefits to your clients because of Delaware regulations. I was wondering what would happen to that. The second part of my question is that Wilmington has a lot of capital markets focused niche businesses in its CCS segment, and that segment requires some focus because those businesses constantly evolve. So I was just wondering what kind of commitment M&T has to corporate client services that will need them. I know that you think there are so many revenue synergies but could you assume some attrition because of these two factors?

Don Foley

One of the primary drivers that we had was to protect the value of the franchise that we've built up here over the last 107 years. Delaware is a very attractive investment market, and it has driven a lot of people, particularly the high net-worth individuals and certain clients looking for the Delaware advantage to basically seek out someone who is an excellent service provider and offers enough product so that they can keep their cash in this particular market. And I believe that what we're talking about with M&T is the idea that we can expand that. Where we will have a broader distribution capability we will have tapped into a larger client base but we do not expect anything with regard to diminution of these particular areas, wealth and CCS. We believe that they've got a strong franchise to invest in their field and we believe that was one of the very attractive elements that attracted M&T to Wilmington Trust.

Bob Wilmers

We're proud to become such an integral part of the Delaware community and we hope that we merit the confidence that the Wilmington Trust has put in us and we also hope that with the talented group of people that they have in these areas that this business would be expanded.

Rene Jones

And finally, directly to your question on the unique status of having a bank domiciled in Delaware, we understand that value, we're very aware of it, and it's our intention that we wouldn't do anything to change the legal structure that would affect the clients. So all of that structure should remain, all that advantage structure should remain in place.

Operator

Our next question comes from Mike Mayo with CLSA

Mike Mayo – CLSA

A question for M&T. Can you give us some thoughts on how you valued Wilmington's $58 billion of assets under management? How do you think about the value you're getting in that part of the franchise?

Rene Jones

First of all, good way to put it, $58 million under management, but we look at it as individual businesses. And we can't get away from our ability to look at cash flows. We map out an expectation for the earnings. We think we've been relatively conservative, as you know, particularly in the money management business. With rates so low the earnings in those businesses are very low.

We do not have anywhere near the breadth that Wilmington Trust has in terms of assets and experience, but we have all of the businesses, and we do have an understanding of how they’ve been a bit challenged by the overall level of economy and where interest rates are.

So first thing that we did was we used a basic cash flow estimate based on what we thought would happen over the next five years. At M&T we're not really big on putting revenue synergies in our models. So we believe they're there, but we didn't really use too many of them. And then the next thing that we did was we just looked at comps, and multiples that are available, either on our own or through the help of investment bankers to get a sense of where those businesses have traded in the past.

Mike Mayo

So comps on sales as assets under management could be what, 2%, 3%, 4%, 5%? So I guess this is leading into my second question. If you value the assets under management that you're getting I guess that could be worth a good billion, if not more than that, implying that you're getting this franchise well below adjusted tangible book, which means there's a lot worse loan quality than anybody expected. So what I'm leading to is back to slide 9. I know you've kind of answered this question already, that the magnitude and velocity of the problems of the borrowers is picking up and also you did a lot of due diligence that gave you more conservative marks, but when you look at slide 9 and you see another billion dollars of write-downs or another 1/3 write-down in the construction loans, how can you have such a big write-down at this stage in the cycle for a regulated bank. Part of my question is to know about the specific transaction, but part of it is to understand if there's other banks out there that similarly have not taken down these write-downs.

Dave Gibson

It's hard for me to answer that. We come in, and we do our work, and we look at the relative size of the mark. I think the thing that strikes me is that when we look at the construction portfolio I think Don got this right. I guess when we came in our impressions would be that we would have expected to find maybe more loans outside of the footprint and in different places. As you would see it's been typical of where people have gotten into trouble. But at the end of the day their loan experience in that class, in those counties, is not all that different from ours. They just had a lot more of it. And it's very evident. I gave you our numbers. We think we were at 35.9% in our book. It's much smaller relative to our size in that space and we've got Wilmington Trust at 40%. I don't think that's much different, and of course we're trying to be a bit conservative here because it's not our book. So it's hard for me to answer your questions on the migration and how it's happened. I can just tell you what came out of our 11 days of work.

Mike Mayo

We come at it from the Wilmington side. I look forward to catching up with you.

Operator

Thank you. Ladies and gentlemen, there are no further questions.

Don Foley

As we've indicated in this call, the management and the board of Wilmington Trust carefully studied our strategic options and we reviewed a wide range of alternatives. We're impressed with M&T's knowledge of the local market, of their underwriting capabilities, and the opportunities they're affording us to lead in the wealth and the CCS businesses. There's either no, or very limited, overlap with regard to geography, product, distribution, different channels. They're going to use the Wilmington Trust name, particularly in the wealth and the CCS businesses, and we believe it is a good cultural fit.

The financial strength that they afford us, the risk management techniques that they'll be bringing, will only strengthen Wilmington Trust in this market that we serve. Given where we are, we believe the best course of action for our shareholders, clients, people of Wilmington is to move along on this particular transaction with M&T. Thank you very much. Bob?

Bob Wilmers

We're very excited about this transaction. At the end of the day, Wilmington Trust is a community bank. We're a community bank. And I think our cultures meld very well together. We're very excited about their talent and expertise in wealth management and their CCS operation. It's something that can add a lot to what we already have in the markets that we're already in. And they've got a lot of very talented people. On behalf of all my colleagues at M&T, we're very excited about getting together. Thank you.

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