Fed Stall on Deal Spurs Hudson to Revive Go-It-Alone Plan

Hudson City Bancorp Inc. (HCBK) Chief Executive Officer Ronald Hermance said he’ll expand his company independently, even as he remains committed to completing the firm’s long-stalled sale to M&T Bank Corp. (MTB)

The lenders disclosed yesterday that their deal announced in August 2012 -- the biggest pending U.S. bank merger -- may be delayed 11 more months after the Federal Reserve pushed M&T to bolster money-laundering controls. Regulators haven’t given any assurance they’ll approve, so Hudson City is proceeding with its own plan to build its business, Hermance said.

“We’ve given M&T a chance to accomplish the goals that the Fed set out for them, and during that time we don’t want to sit still,” he said yesterday in a telephone interview. “This was the other plan, our Plan B, that we were going to take. Now we are activating Plan A and Plan B.”

Both companies’ stocks have lagged behind broader indexes in 2013, and bankers are saying the regulatory delays have discouraged other deals. Faced with the possibility of another year on its own, Hudson City will hire more people and expand secondary mortgage-market operations and commercial real estate lending, Hermance said.

“It’s regrettable that we didn’t know what the bar was when we started this process,” said Hermance, 66. “Maybe we all have to orient our thinking moving forward.”

Deadline Extended

The takeover of Paramus, New Jersey-based Hudson City, originally valued at $3.7 billion, was stalled in April after the Fed questioned internal procedures at M&T. Buffalo, New York-based M&T agreed to improve compliance with the Bank Secrecy Act and anti-money-laundering programs.

The two firms first extended the deadline to complete the deal to Jan. 31. Yesterday, that was pushed back to Dec. 31, 2014. The Fed isn’t expected to act before the second half of next year, M&T and Hudson City said yesterday in the statement.

“We say it could be another year, but it’s up to M&T to satisfy the regulators,” Hermance said. “We don’t know when that will happen.”

Either firm can terminate the deal if it’s not done by the end of the next year and Hudson City may exit at any time if the bank “reasonably determines that M&T will not be able to complete the actions necessary to obtain regulatory approval,” according to a regulatory filing yesterday.

Breakup Fee

Hudson City would have to pay M&T a termination fee of $125 million under certain conditions if the New Jersey bank backs out of the deal, according to previous company filings. Both companies affirmed their commitment to the deal yesterday, and analysts at firms including Sandler O’Neill & Partners LP predicted it will get done.

The merger will “probably go down in history as one of the longest deals from start to finish,” said Bob Ramsey, an analyst at FBR Capital Markets Corp. Acquisitions of its size typically are completed in less than a year, he said.

M&T has $84.4 billion in total assets and $66.6 billion in deposits, according to third-quarter company filings. Hudson City has $39.2 billion in total assets and $22.1 billion in deposits, the firm reported.

Both banks were left behind by this year’s 33 percent rally in the KBW Bank Index. M&T rose 0.4 percent to close at $114.14 in New York, the worst performer today on the 24-company index. The shares have climbed 16 percent in 2013. Hudson City gained 0.5 percent to $9.21, pushing its advance to 13 percent this year.

‘Further Chill’

Hudson City’s pursuit of a plan to expand independently and Hermance’s comments were partly responsible for the two banks’ underperformance today, said FBR Capital’s Ramsey. Investors have “some lingering concern that the deal is not going to happen,” he said.

M&T, led by CEO Robert Wilmers, 79, counts Warren Buffett’s Berkshire Hathaway Inc. among its largest shareholders. It agreed to buy Hudson City to expand in New Jersey.

“We continue to believe strongly that a merger with Hudson City is beneficial to both institutions, their shareholders and the communities we serve,” M&T Chief Financial Officer Rene F. Jones said in the statement. Chet Bridger, a spokesman for M&T, declined to elaborate beyond yesterday’s statement.

The second extension is “likely to cast a further chill over the M&A landscape for large banks,” analysts at Sandler O’Neill led by Joseph Fenech said yesterday in a research note.

The first postponement was “widely cited as a reason for the lack of large bank M&A activity over the rest of this year, given many banks’ reluctance to ‘test the waters,’” said Fenech, who reduced his full-year 2014 earnings estimate for M&T because of the delay. “The hope was that the process would ease somewhat in 2014, but that now appears unlikely.”

Bankers Balk

The Fed’s stance has made bankers balk at bidding on other lenders, especially at firms with assets of more than $50 billion, according Brian Klock, an analyst at Keefe, Bruyette & Woods Inc.

“The fact that this has been held up until next year -- that does make you think twice about taking on the deal risk,” Klock said.

Executives at large banks who have expressed concern about the M&T deal include John Kanas, the CEO of BankUnited Inc. whose career was built in part through takeovers.

The Fed “poured cold water on that, put it off for God knows how long,” Kanas told analysts in April. “You should be aware that regulators are very much involved in the process of consolidation in this industry, and in some cases are using that to further tighten the regulatory grip.”

Deal Dangers

Executives at some of the biggest regional banks have also raised concern about the regulatory burdens associated with deals. Richard Davis, CEO of U.S. Bancorp, the nation’s largest regional bank, said last month that it’s “dangerous” to consider large acquisitions “until the dust settles” from deals done during the financial crisis.

The six biggest U.S. banks have been pummeled with claims and costs of more than $100 billion since the credit crisis. Much of the sum was tied to misdeeds of distressed firms that were bought five years ago or more, and it included fines and penalties from regulators.

“The due diligence and what you have to really go through to get an acquisition approved is much more arduous than what it’s ever been,” Daryl Bible, BB&T Corp. (BBT)’s finance chief, said at an investor conference last month. Rather than buy an entire bank, BB&T said today it’s paying Citigroup Inc. (C) $36 million to acquire 21 Texas branches.

Even with M&T and Hudson City committed, “there’s no certainty that this deal closes,” said Peter Winter, a BMO Capital Markets Corp. analyst who’s still counting on the merger’s completion. “We are really in uncharted waters.”

To contact the reporter on this story: Elizabeth Dexheimer in New York at edexheimer@bloomberg.net

To contact the editor responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net

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