Updated with comment from FIG Partners analyst Christopher Marinac. NEW YORK ( TheStreet) -- M&T Bank ( MTB) on Monday announced an agreement to acquire Hudson City Bancorp ( HCBK) 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." 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) 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."