Bank of Montreal rides to regional banks’ rescue by Colin Barr @FortuneMagazine December 17, 2010, 1:11 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Maybe the regional banks aren’t doomed to takeunders after all. The shares of some big U.S. regional banks rallied Friday after Bank of Montreal BMO agreed to buy Marshall & Ilsley mi , a Milwaukee-based lender that has lost money eight quarters in a row, for $4 billion in stock. Riding the M&I roller coaster Bank of Montreal will issue about $7.75 a share worth of its own stock in exchange for each share of Marshall & Ilsley, which represents a 34% premium to the U.S. bank’s closing price Thursday. Bank of Montreal said the deal will expand its presence in the United States, where it already operates Harris Bank, the No. 3 lender in Chicago. The bank will raise 800 million Canadian dollars in new capital to do the deal, under which it will repay M&I’s borrowings under the Troubled Asset Relief Program. The deal “transforms BMO’s competitive position in the U.S. Midwest by bringing together highly complementary businesses that align well with BMO’s retail, commercial, and asset/wealth management businesses in the U.S.,” CEO Bill Downe said. “It also increases scale and provides strong entry into other attractive markets, including Minnesota, Missouri, and Kansas, and expansion in Indiana and Wisconsin.” The price of the deal spells some relief for investors in the hard-hit U.S. regional banks, many of which have been losing money by the bucketful after they got overextended on commercial property loans during the credit bubble. The banks have spent the last few years taking their lumps and rebuilding capital, but the prospect of a renewed downturn in the housing market has spelled trouble for those plans. One such overstretched lender, Wilmington Trust WL of Delaware, ran up the white flag this fall after a long attempt at rehabilitation. That deal alarmed investors because Wilmington, facing deepening losses, sold out at a 40% discount, which some took as a sign of things to come for other troubled midsize banks. But on Friday, some of the regional banks took part in an early rally on hopes that other deep-pocketed buyers – including some of BMO’s expansion-minded peers in Canada – will see fit to pay premiums to the banks’ depressed stock prices. BMO fell 3% in early action, while M&I rose 24%, jumping $1.41 to $7.20. Regions rf rose 6% and Huntington Bancshares hban , an Ohio-based lender that just set plans to repay its own TARP loans, added 2%.