M&T Bank Corp. and Hudson City Bancorp announced their engagement two years ago today, but they are still waiting for federal regulators to let them walk down the aisle.
No one could have imagined then M&T’s $3.7 billion acquisition of New Jersey-based Hudson City would take so long to win approval. But both banks have said they remain committed to the deal.
For Buffalo-based M&T, there are good reasons to stick with it: M&T would add 135 branches in New Jersey, downstate New York and Connecticut, and move ever closer to the top 10 of U.S. banks. Robert G. Wilmers, M&T’s chairman and chief executive officer, has predicted Hudson City will become M&T’s “next shining success story.”
But first, M&T must satisfy the regulators, which has proved time-consuming and expensive. The Federal Reserve Bank of New York found “deficiencies” in M&T’s anti-money laundering and Bank Secrecy Act program, putting the deal on ice and prompting M&T to staff up and pour tens of millions of dollars into bolstering its system.
“They’re spending so much money to take this from being an inadequate functioning system to a top-of-the-line best system that’s going to be the best system out there,” said Brian Klock, an analyst with Keefe, Bruyette & Woods.
Rich Gold, M&T executive vice president for mortgage and business banking, said the bank is steadily working on meeting regulators’ requirements.
“We think that the merger makes good sense for both companies, but we recognize and respect our obligations as an operator of a large financial institution,” Gold said. “There is work that we have had to do to satisfy those obligations, and we remain committed and are busy doing that work, and we hope everything works out in the end.”
No one can say for certain when or if regulators might give the M&T and Hudson City deal the green light. The Federal Reserve Board’s policy is not to comment on the process until the board has an approval to announce. Despite the remarkably long delay, the two banks have been busy the past couple of years:
• M&T expects to spend $150 million this year to bolster its anti-money laundering/Bank Secrecy Act program, on top of the $60 million the bank spent through the end of 2013. M&T said that during the second quarter it had 571 employees devoting most of their time to compliance work, not counting part-time workers and contractors.
• M&T and Hudson City, led by CEO and Chairman Ronald E. Hermance Jr., have twice extended a deadline after which either party could terminate the deal without a financial penalty. The deadline is Dec. 31.
• Even without acquiring Hudson City’s branch network – the majority of which is in New Jersey – M&T has increased its presence in the Garden State. M&T opened its first commercial banking office in New Jersey in 2007; this summer, M&T opened its fifth such office in the state, and the bank has announced plans for a sixth office. The offices’ scope has grown beyond commercial loan production to include small business lending, mortgage lending and wealth management.
“We’ve built a really nice business in New Jersey that sort of replicates a lot of the community bank approach that we use in all of our markets,” Gold said. The bank has about $1 billion in outstanding loans and $750 million in deposits raised in New Jersey.
John Wilcox, professor in economics and finance at SUNY Buffalo State, said adding branches in New Jersey, Connecticut and just outside New York City helps M&T bolster its presence in New York City: “You want a branch close to your home, and you want a branch close to your work.”
But first, the regulators must sign off on the deal.
Wilcox said the acquisition is “somewhat being held hostage” until M&T demonstrates the capabilities the regulators are looking for. That has meant a lot of additional hiring by M&T.
“M&T has historically run a pretty lean house,” he said. “It’s one of the ways that they have been financially successful over the past 30, 40 years, certainly since Bob Wilmers got there.”
Gold said fulfilling the requirements of M&T’s written agreement with federal regulators is an ongoing process that touches a variety of elements of the bank’s business.
All of those elements must eventually come together to form a reliable system that regulators approve of, Gold said.
“It’s not an easy road because you don’t get a lot of feedback along the way, and that’s part and parcel to the way it works,” he said. “We sort of know what we have to do and are putting an extraordinary amount of effort around shoring things up that need to be shored up.”
Klock said he believes the deal could close in the fourth quarter or in early 2015. Based on comments he heard from M&T in the bank’s conference call with analysts this summer, he thinks M&T has made headway in hitting milestones and preparing its improved anti-money laundering system for review and testing.
Banking industry observers say the delay seems to have had a “chilling effect” on other big bank mergers happening in the past couple of years. Banks want to ensure their own systems are adequate before opening themselves up to scrutiny from regulators, especially with greater attention since the 2008 financial crisis.
“There was a message to all the big banks that you need to focus on this or else we’re not going to let you do other things,” Klock said.
Even so, Klock said he sees the pieces of the M&T and Hudson City deal coming together.
“Just from the process of what’s been done, the amount of work and effort, the expense that’s been put into this, I think we’re getting closer to the ninth inning here,” he said.