The financial sector is one of the last remaining bargains in the current market that seems to make new highs on a pretty regular basis. There are plenty of choices within the sector, from the obvious "big banks" to small boutique savings and loan companies.
Some of the best long-term bargains can be found in the middle of the spectrum, with less drama and volatility than their bigger siblings and more ambitious growth than the little guys. One midsized bank that deserves extra consideration is M&T Bank (NYSE: MTB ) , a regional institution that has been ambitiously growing for years and doesn't seem to let anything get in the way of its long-term plans.
About M&T Bank
M&T is a fairly large regional bank operating mainly in the Mid-Atlantic region, with a large presence in New York, New Jersey, Maryland, and Pennsylvania. Once the acquisition of Hudson City Bancorp (NASDAQ: HCBK ) is finalized, the company will have 842 branches in total with almost $90 billion in total deposits.
The company has done an excellent job of growing through strategic acquisitions and has expanded consistently regardless of the economic climate. Some notable acquisitions of the past decade include 21 branches from Citigroup in 2006, Partners Trust Financial Group in 2007, Provident Bankshares in 2009, and Wilmington Trust in 2010.
As a result, M&T's income climbed steadily over that period, In fact, M&T's interest income rose every year over the past decade, including during the crisis years.
Even during the mortgage mess, M&T was profitable every single year; the worst year of the past decade (2009) still produced a profit of $2.89 per share. M&T was one of the only banks that didn't lower its dividend at all as a result of the crisis. How many other financial institutions can make these kinds of claims?
The Hudson City acquisition and why it's a smart move
As mentioned earlier, M&T agreed to acquire Hudson City Bancorp in an all-stock transaction through which Hudson City's stockholders will receive 0.08403 of an M&T share for each share they own.
There are distinct advantages to all-stock deals, especially when the market has been going up and up like it has been recently. Mainly, it provides the acquirer with some downside protection should the economy (or the company) perform badly.
For instance, at the current share price, the deal values Hudson City at roughly $5.3 billion. If financials get hammered and M&T drops by 20%, so does the effective price of the acquisition. This could, in theory, save the company billions in a bad market as opposed to a fixed-price acquisition. Of course, if the market skyrockets, the company will end up paying more.
Why M&T and not a big bank?
While the bigger banks are also potentially undervalued right now, there are several compelling reasons to stay away. One of the most compelling is the tremendous legal risk from the mortgage bubble that is still working its way through the system.
Some of the penalties can be stiff. Until recently, JPMorgan Chase was expecting a settlement of $3 billion to $5 billion for its alleged misbehavior during the precrisis years. Reports then indicated that an $11 billion figure was more likely, and the most recent news suggests the total to be closer to $13 billion.
Other big banks are in the same boat. Bank of America, for example, is on the hook for the bad behavior of the companies it acquired during the crisis.
There are certainly many smaller banks that got into serious trouble or failed altogether during the Great Recession. M&T Bank had a disproportionately low amount of toxic mortgage assets thanks to smart management and a fortunate geographic makeup. The states in which M&T has a large presence were some of the least affected by the decline in the real estate market.
As far as "smart management" goes, M&T Bank has always been regarded as one of the few remaining old-fashioned banks, sticking to the basics. Therefore, the company never got too involved in the business of exotic subprime mortgage lending. A glowing testimony to M&T's management is the fact that Warren Buffett puts his faith in the company, with Berkshire Hathaway holding about 5.4 million shares.
With very good management and an ambitious growth strategy that has proven successful so far, M&T is one of the best-run banking corporations in the U.S. and should reward its investors for decades to come.
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