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M&T Snaps Up Distressed Lenders as Prey Becomes Predator

M&T Bank Corp. (MTB)’s $3.7 billion takeover of Hudson City Bancorp, the largest bank deal announced this year, solidifies the Buffalo, New York-based lender’s status as a hunter instead of the hunted.

M&T Chief Executive Officer Robert Wilmers has added about $40 billion to both its loan and deposit books since 2008 through at least four acquisitions, according to data compiled by Bloomberg. With Hudson City, M&T probably will rank 14th by assets and 11th by deposits among U.S. commercial banks.

Wilmers has converted M&T from a takeover target in the years following the financial crisis into an acquirer. After on- and-off merger talks with Banco Santander SA broke down in 2010, M&T pursued struggling lenders and didn’t sacrifice its balance sheet for earnings growth, said Gerard Cassidy, an analyst with RBC Capital Markets.

“It has given them the ability to buy distressed companies at bargain-basement prices and repair those companies to their old luster,” said Cassidy, who works in Portland, Maine, and rates M&T outperform. “A number of the other banks were growing for growth’s sake. It was kingdom-building, building of egos, and M&T just doesn’t do that.”

The latest deal is M&T’s largest among those with announced values, data compiled by Bloomberg show. The biggest U.S. banks, including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC) and Citigroup Inc., have had to step back from buying lenders in the wake of the crisis because of regulations that prohibit them from holding 10 percent or more of the nation’s deposits.

M&T Shares

Since the beginning of 2008, M&T has been the fourth-best performer in the KBW Bank Index (BKX), returning 10 percent to shareholders. The bank’s shares are trading at more than 2 times tangible book value, which measures what investors are willing to pay for after removing intangible items such as goodwill and brand names that have little value in a liquidation.

M&T gained 4.6 percent to $89.82 yesterday in New York and has advanced about 18 percent this year.

The lender’s price to tangible book value is the third- highest in the 24-company KBW Bank Index behind Bank of New York Mellon Corp. and U.S. Bancorp, the Minneapolis-based lender run by CEO Richard Davis, who has called his banking strategy of taking deposits and making loans “boring.”

‘Distressed’ Banks

“We look for good value for our shareholders, and if that means there’s something distressed about it, we’ll look at that,” Wilmers, 78, said in a telephone interview. “More often we look at something distressed because if there’s a bidding contest going on, we usually don’t win because we don’t like to overpay because that would be dilutive for our shareholders.”

M&T counts Warren Buffett’s Berkshire Hathaway Inc. (BRK/B) as one of its largest shareholders. The firm held about 5.4 million shares as of June 30, or a 4.3 percent stake in the company, according to data compiled by Bloomberg.

Brian Klock, an analyst at KBW Inc., said investors may be hesitant to buy M&T shares.

“Eight of the 11 large regional banks are trading at tangible book or lower,” Klock said in an interview. “It’s hard to pay two times for M&T.” He rates the lender market perform.

M&T completed its purchase of Wilmington Trust Corp. last year, acquiring the Delaware bank founded by the du Pont family for about $406 million in stock. Wilmington Trust had put itself up for sale amid losses fueled by soured commercial real estate loans and investments in pools of trust-preferred securities.

Delaware Growth

The deal built M&T’s market share in Delaware and expanded wealth management and corporate services to boost fee income. It also valued Wilmington Trust about 46 percent less than its closing price at the time of the announcement in November 2010.

M&T bought Provident Bankshares Corp. in 2009, a $269.3 million stock deal that added deposits in the U.S. mid-Atlantic region. The transaction added 143 branches, $4.6 billion in deposits and $4.3 billion in loans.

M&T is an “umbrella of safety and soundness and prudency that helps when you get into some of these banks that have challenges,” said Marty Mosby, a Memphis, Tennessee-based analyst at Guggenheim Securities LLC, who rates the shares neutral.

Banco Santander, Spain’s biggest bank, was said to be in talks in 2010 to combine M&T with its U.S. banking unit, people with knowledge of the matter said at the time. Talks broke down over a disagreement about who would control the business, one of the people said.

Investor’s Mentality

Wilmers, who has run M&T since 1983, has about 3.9 million shares, making him the seventh-largest shareholder, according to data compiled by Bloomberg. His investor’s mentality led to deals that benefit shareholders, Cassidy said.

“This is a company that makes very good acquisitions, implements them very well, and executes on a plain-vanilla, basic-banking strategy that assumes everybody’s products are the same,” he said.

Wilmers is “setting the tone,” Guggenheim’s Mosby said. “He’s still actively involved and has a very experienced management team that in our mind focuses on the things that can continue to build shareholder value.”

With the Hudson City acquisition, M&T will have total assets of $109 billion, a boost from $80.8 billion at the end of the second quarter. Deposits would jump to $87 billion.

New York

M&T is acquiring branches in New Jersey, Connecticut and the Long Island region of New York, areas where the firm didn’t previously have a significant presence.

Hudson City’s bullish options trading jumped to the highest level since March 2011 on Aug. 3 as more than 14,000 calls to buy the stock changed hands as part of a dividend strategy. That’s 13.7 times the four-week average and compares with 4 puts to sell, the data show.

An investor also bought 2,900 Oct. $6 calls on Aug. 10 for about 75 cents a contract, according to Trade Alert, a New York- based provider of options-market data. The price of that option doubled to $1.50 yesterday, data compiled by Bloomberg show.

“I do not believe there is anything unusual about the ex- dividend flow on Aug. 3, but we did see an outsized spike in call volume on Aug. 10,” Trade Alert’s Henry Schwartz wrote in an e-mail. “The position is up about $142,000, a 100 percent return. We don’t see that very often.”

Hiring Plan

Hudson City was developing a plan to hire 230 people over the next few years “and do the kind of things that M&T was doing” when they were sought out by the larger lender, CEO Ron Hermance, 65, said on a conference call yesterday. “It wasn’t a competitive process.”

Hermance returned to Hudson City Aug. 1 after taking medical leave in February to receive a bone-marrow transplant. M&T’s discussions with Hudson City have been going on for about the last four months, Wilmers said in the interview.

Hudson City was the largest U.S. bank to forgo a government bailout. The lender took an after-tax charge of $440.7 million last year from the early repayment of $4.3 billion of so-called structured putable borrowings. The company said it was under pressure from regulators to reduce risk.

Denis Salamone, Hudson City’s acting chairman and CEO, said earlier this year that it had become difficult for the bank to profitably expand its residential-lending portfolio amid record- low interest rates and the participation of government-sponsored enterprises in the market. As a result, it began evaluating a “variety of strategies” to adapt, he said.

“The strong banks are clearly taking advantage of buying the weaker banks at distressed prices to the benefit of their shareholders, as evidenced by this deal,” Cassidy said.

To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net.

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Rick Green at rgreen18@bloomberg.net

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