M&T Bank Corp. of Buffalo is on the cusp of becoming one of Maryland's top retail banks.
With its deal for the $6.4 billion-asset Provident Bankshares Corp. in Baltimore, Maryland's largest commercial bank, M&T Bank would have the biggest retail branch network in the Baltimore-Washington region and the second-largest deposit share in Maryland.
It would be M&T Bank's first acquisition in Maryland since it entered the state by purchasing the $15 billion-asset Allfirst Financial in 2003.
Rene F. Jones, M&T's chief financial officer, said in a conference call with analysts Friday that his company, which has assets of $65.3 billion, has been eager to beef up in the Baltimore-Washington region because there are few opportunities for growth in and around Buffalo.
"Not only is it larger than our legacy market, it also has a higher median income level than the national average, and higher job and economic growth due to a disproportionately higher level of federal spending," Mr. Jones said.
M&T Bank's $401 million deal for Provident is the second large one involving a Middle Atlantic banking company announced this month. On Dec. 4 the $15.5 billion-asset thrift company Chevy Chase Bank of McLean, Va., announced it was selling itself to Capital One Financial Corp. of McLean.
Thomas Alonso, an analyst at Fox-Pitt Kelton Cochran Coronia Waller, said buying Provident would increase M&T's visibility in the region and put it a strong position to capture any deposits that might be in play. He expects runoff could occur not only from Chevy Chase, but from Wachovia Corp. of Charlotte, which is about to be sold to Wells Fargo & Co.
M&T Bank, which is No. 5 in deposit share in Maryland, at 7.7%, said that after buying Provident it would have 11.6% of the state's deposits. Bank of America Corp. is No. 1 in Maryland, with a 19.2% deposit share. Other banking companies with sizable share in those markets include PNC Financial Services Group Inc. and SunTrust Banks Inc.
M&T Bank said it would pay $10.50 per share Provident. Collyn Bement Gilbert, an analyst at Stifel, Nicolaus & Co. Inc., said she found the price "perplexing" considering that the Baltimore company has been struggling with higher losses on residential construction loans and markdowns on trust-preferred securities. Provident's shares closed $5.80 on Thursday but soared 60.9%, to $9.33 Friday.
"But M&T must have a more big-picture view, in terms of Provident's overall value and revenue potential," Ms. Gilbert said.
The deal is valued at 1.4 times Provident's tangible book value, which M&T Bank said is well the below the average of 2.7 times tangible book for Middle Atlantic banks sold in the last five years.
"We think the value of Provident's cash flows are tremendous," Mr. Jones said. "Their core value has been overshadowed by those issues of higher credit and securities losses."
M&T Bank's shares closed at $55.96 Friday, down 6.3%.
Todd Hagerman, a Credit Suisse analyst, said M&T Bank has a history of fixing struggling companies, including Allfirst. "That said, turning around Provident is going to take some work," he said.
Mr. Jones said that when the deal closes next year, M&T Bank plans to write down $383 million in Provident's loans and $240 million of its securities. M&T expects the acquisition to be accretive in 2010 and estimates its internal rate of return will exceed 16%.
Mr. Hagerman said M&T Bank should raise additional common equity, because buying Provident would lower its tangible common equity ratio, now 4.9%, to 4.4%. The company said in the call that it was open to doing that.
M&T Bank received $600 million from the Treasury Department's Capital Purchase Program, or 1% of its risk-weighted assets. M&T Bank said it would not use any of that capital for the deal. Provident is the first bank to agree to sell itself after receiving Tarp funding. It received $151 million, or 3% of risk-weighted assets, from the Treasury on Nov. 17.
Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said the Tarp capital "made Provident more attractive" to M&T Bank. "M&T has to take marks against their loan portfolio and securities, which goes right against equity. So the Tarp money helps stabilize the capital base."
