M&T's Regulatory Snag Could Test Shareholder Patience

Regulators have gotten increasingly tough on compliance. For M&T Bank's (MTB) sake, the company had better hope that shareholders at Hudson City Bancorp (HCBK) will be more understanding.

The companies have pushed back the deadline for completing their merger by five months, to Jan. 31, so M&T can address Bank Secrecy Act and anti-money-laundering concerns raised by the Federal Reserve Board.

M&T has not identified specific issues raised by the Fed, but observers say the Buffalo, N.Y., company's deal has hit an intersection of regulatory scrutiny. Regulators are paying more attention than ever to deals, especially those between larger banks. M&T has $81 billion in assets; Hudson City, in Paramus, N.J., has $44 billion.

"This very much reflects the level of detail and scrutiny that is going into merger applications these days," says Ralph "Chip" MacDonald, a partner at Jones Day. "It is becoming a much more professional, much more analytical process, and it is much more demanding. [Regulators] are asking more questions and they are asking better questions."

As banks move past credit issues, regulators have sharpened their focus on compliance.

"BSA/AML is always percolating at various levels of heat, but my sense is that it is heating up as the economic meltdown winds down," says Ross Delston, a Washington lawyer and anti-money-laundering expert. The Office of the Comptroller of the Currency "is filling 15 AML-specific positions at the moment. That should tell you something."

A merger application is the perfect opportunity for regulators to compel a bank to make changes, adds Delston, a former assistant general counsel of assisted acquisitions at the Federal Deposit Insurance Corp.

"Regulators have the authority over life and death of the transaction," Delston says. "That gives them greater leverage than an enforcement action."

Hudson City did not return calls for comment; M&T did not make an executive available.

Though he made no mention of BSA issues, M&T Chairman and CEO Robert Wilmers wrote in his annual letter to investors that regulation was getting tougher. "The most effective regulation must be based on clarity and simplicity," he wrote.

"When the rules are easy to understand and follow, there's a greater likelihood they'll be followed," he added. "We are, unfortunately, seeing the emergence of unprecedented — and unhelpful — regulatory complexity."

M&T is set to report first-quarter results and host a conference call Monday, but analysts believe management will provide very few new details. Executives should still expect questions, observers say.

"I don't believe we are going to find out exactly what happened," says Anthony Polini, an analyst at Raymond James. "I think they are hardly going to say anything."

M&T has one of the industry's best reputations, so the news was a bit of a shock to those to follow the company.

"I don't believe this is a breakdown of their policies and procedures," Polini says. "It was probably something specific that was discovered and likely emanated from a past acquisition."

M&T has completed six acquisitions of open banks along the East Coast since 2000, including Wilmington Trust in 2011 and Provident Bankshares in 2009.

Despite the regulatory snag, M&T's shareholders will vote on the $3.7 billion deal on Tuesday. Hudson City's shareholders will meet two days later.

The delay is unlikely to sink the deal, says Polini. Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners, agrees.

"I think at the end of the day, they want to do this merger and it is a good partnership between the two of them," Fitzgibbon says. "It is unlikely that [shareholders] will vote against it."

M&T's stock fell 4.6% on Friday, with shares ended the day $100.08. Though the deal has a stock component, analysts say shares would have to fall dramatically to cause the parties to renegotiate the deal's terms.

"I think there is a 95% chance that this deal closes by the end of the year without any changes," Polini adds. "M&T experiences some embarrassment and a few million [dollars] in expense and they move on."

Though analysts believe the acquisition will remain on course, MacDonald says the extra time can sometimes be detrimental to a deal's overall success.

"The risk increases the longer the deal goes," MacDonald says. "Stock prices change, markets change, potential white knights might try to steal it."