For most of the year, M&T Bank (NYSE:MTB) has found itself the subject of unwelcomed speculation that the bank was an acquisition target of Banco Santander (NYSE:STD). With Allied Irish Banks' (NYSE:AIB) decision to publicly distribute its stake in MTB to shareholders, that speculation has largely died away, and in an interesting twist, M&T has become an opportunistic buyer of another bank.

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The Deal
M&T announced that it had reached an agreement to acquire Delaware-based Wilmington Trust (NYSE:WL) in an all-stock deal. In offering about 0.05 shares for each WL share, MTB management was valuing Wilmington at $3.84 a share on the basis of Friday's close. The fact that Wilmington reported earnings Monday morning and stated that tangible book value had fallen to $3.84 seems like a little more than just coincidence.

What MTB Is Buying
M&T is buying a bank that is in serious trouble. Although Wilmington has some attractive fee-based businesses (that are not subject to the new banking rules), the loan book is a horror show. Wilmington reported that non-performing assets had increased 77% on a sequential basis and had risen to a ratio of 12.1%. Worse still, over one-quarter of the bank's loans were in trouble and the company had a Texas Ratio of 114% - anything over 75% is worrisome and a number above 100% is all but a death-knell.

M&T will have to mark those loans on Wilmington's books and the end result of that process could mean that M & T has to raise capital. By the same token, M&T is a very careful operator and it would be surprising if management did not already have a very good idea of how that was going to shake out.

On a more positive note, M&T is getting a bank with over $8 billion in deposits and loans (before mark-downs) and 48 branches in Delaware that do not overlap with the current business. PNC (NYSE:PNC) and Wells Fargo (NYSE:WFC) are also active in Delaware, but pursue somewhat different business models.

Even more important is WL's lucrative trust, administration and wealth advisory businesses. Given how many corporations are headquartered in Delaware, it is a great place for a bank to pick up some of that highly-profitable ancillary business. Moreover, there is no reason to think that M&T cannot learn from Wilmington and use this acquisition to further their own company-wide fee-based businesses. (For more, see Banking On Merger Mania.)

The Bottom Line
Unlike a fair number of bank deals that have happened in the past two years, this deal was not facilitated by the government and there is no sweetheart deal that will cover any losses M&T incurs from Wilmington's book. Still, M&T is a conservative operator and it is unlikely that management would have signed a deal if they were not comfortable with the risks and the probability of recognizing a strong return over time (in fact, the company is projecting better than a 20% internal return).

This deal does not vault M&T into being a great buy today. It is an exceptionally well-run bank, and the valuation is not unreasonable (particularly in the wake of the post-Santander sell-off), but it is not a striking bargain. There is no reason for investors to sell these shares today, but prospective new buyers probably need to see a lower price to justify the risk. (For more, see Banking: Introduction.)

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