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Updated with comment from FIG Partners analyst Christopher Marinac.



) --

M&T Bank

(MTB) - Get M&T Bank Corporation Report

on Monday announced an agreement to acquire

Hudson City Bancorp


of Paramus, N.J., for roughly $3.7 billion.

Hudson City's shareholders "will receive consideration valued at 0.08403 of an M&T share in the form of either M&T stock or cash, based upon the election of each Hudson City shareholder," subject to the terms of the merger agreement, "which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash."

The deal values Hudson City at $7.22 a share, representing a 12% premium over Friday's closing price of $6.44. The purchase prices values Hudson City at 80% of its reported June 30 tangible book value of $9.08.

Hudson City has been facing heavy pressure on its net interest margin in the prolonged low-rate environment, and has undergone two major balance sheet restructurings. Following a first-quarter 2011 restructuring that was forced by regulators and included the prepayment of $12.5 billion in higher-cost borrowings charges of $649.3 million, the company prepaid another $4.3 billion in borrowings during the fourth quarter of last year, resulting in $440.7 million in charges.

Despite the painful transition, Hudson City's second-quarter net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- was a stubbornly low 2.12%, declining from 2.15% in the first quarter, and 2.14% in the second quarter of 2011. With long-term rates continuing to see downward pressure, especially for Hudson City's bread-and-butter mortgage lending business, the margin pressure was bound to continue.

M&T Bank of Buffalo, N.Y., has $80.8 billion in total assets, and Hudson City has $43.6 billion in assets, with 135 branches, with 97 branches in New Jersey, 29 in New York, and nine in Fairfield County, Conn.

M&T will pick up $25 billion in deposits and $28 billion in loans, through the Hudson City deal. Following the merger, M&T plans to "repay approximately $13 billion of Hudson City's long-term borrowings by liquidating its comparably sized investment portfolio."

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M&T also said that the merger with Hudson City will be "accretive to the combined company's capital ratios, capital generation and tangible book value per share, as well as its GAAP and operating earnings per share."

M&T Bank CEO Robert Wilmers said "as a thrift, Hudson City focused primarily on deposits and mortgages. M&T will build on Hudson City's loyal customer base to create a comprehensive community banking franchise that provides a full range of checking and savings accounts, debit and credit cards, home equity loans and other lending options, plus small business and commercial banking services and our premier wealth management and corporate trust solutions through Wilmington Trust," which M&T acquired in May 2011.

Hudson City CEO Ronald Hermance said that "Hudson City recently embarked on a diversification of our product lines and our balance sheet," and that "as we combine Hudson City's attractive retail network with M&T's full service commercial banking suite, our stakeholders will participate in the growth of one of the nation's strongest and most successful banking franchises." After the merger is completed, Hermance will remain as a board member for the combined holding company and its main banking subsidiary.

The merger is subject to regulatory approval and votes by both companies' shareholders.

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report

acted as Hudson City's financial advisor in negotiating the deal.

FIG Partners analyst Christopher Marinac calls the Hudson City acquisition "a wonderful deal for M&T." Discussing the below-book-value takeout, Marinac says "in the late 90s you had a lot of very expensive deals," at high premiums to book value. "Today the pricing and mechanics of the deals are significaantly different," because of mark-to-market accounting.

"You have to mark the assets and liabilities to fair value, which limits what the buyer will pay," the analyst says.

With such a large acquisition not requiring an offering of common shares, while also increasing the combined company's capital ratios, Marinac says "It is definitely a stroke of discipline for M&T."

A novel approach to TARP

M&T of Buffalo, N.Y., owes $230 million in bailout money provided through the Troubled Assets Relief Program, or TARP, in December 2008, in addition to $151.5 million for TARP assistance provided to Provident Bancshares before that company was acquired by M&T in May 2009.

The U.S. Treasury on Aug. 17 completed a public offering of the $381.5 million in M&T TARP preferred shares held by the government. The preferred shares have a 5.00% coupon, which is scheduled to rise to 9.00% in February 2014 for the remaining $230 of the bank's original TARP bailout, with the coupon on the $151.5 million in assistance originally provided to Provident Bancshares rising to 9.00% in November 2013.

M&T on Aug. 20 made proposed an innovative amendment under which the dividend rate on all of the former TARP preferred shares will rise to 6.375% on November 15, 2013. The amendment needs to be approved by common shareholders, who will be sure to do so, since it will reduce the possibility of a dilutive common equity raise. The amendment also needs to be approved by the new preferred shareholders, who are likely to give the plan the nod, because 6.375% is a decent rate in the current environment, especially when the issuer is a strong, consistent earner like M&T.

If M&T's preferred shareholders approve the lower rate increase, M&T won't redeem the preferred share until November 15, 2008. Otherwise, the company will probably redeem the shares in 2013, leaving the investors to pursue dividend income elsewhere. The big icing on the cake for M&T is that the former TARP preferred shares qualify as regulatory Tier 1 capital.

Interested in more on M&T Bank? See TheStreet Ratings' report card for this stock.


Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.