M&T Bank (MTB) will walk away with a much lighter haul than planned when and if it completes its long-awaited purchase of Hudson City Bancorp (HCBK).
Since Hudson City in Paramus, N.J., agreed to be sold in August 2012, it has steadily shrunk. Its deposits, loans and assets have fallen each quarter compared with the last.
Hudson City could contract even more. The deadline to complete its sale to M&T has been delayed twice because of regulatory issues and now sits at Dec. 31 which would be 28 months after the announcement.
It's a cautionary tale about the risks in bank M&A, especially for sellers, when everything doesn't go according to plan, but it's also one with a twist as some experts believe the shrinkage will spare M&T some cost-cutting work later.
Regardless, some Hudson City employees and clients aren't waiting around, turning to rival banks for stability, says Matthew Schultheis, an analyst at Boenning & Scattergood. "When you start losing customer-facing employees branch staff and loan originators customers don't like that," he says.
Total assets have dropped 9% at Hudson City since the third quarter of 2012, to $38.2 billion. Loans are down 14%, to $23.8 billion, and deposits have declined by 12%, to $21.1 billion. Its securities portfolio has dropped 32%, to $8.5 billion.
Officials at M&T, based in Buffalo, N.Y., and Hudson City declined to make executives available to comment.
Yet Hudson City's slimmer frame should serve as a positive for M&T since it is going to cut costs at Hudson City anyway, says Chris Spahr, an analyst at CLSA.
"M&T had already said they were going to reduce [Hudson City's] back office," Spahr says. "They are going to get $200 million of savings by rejiggering the deposit side as well as the asset side."
When M&T unveiled the deal, management said it would liquidate Hudson City's low-yield investment portfolio to repay about $13 billion of the seller's high-cost borrowings.
Regulators have held up the deal until M&T fixes shortcomings in its anti-money-laundering and other compliance programs. M&T's executives and numerous analysts have said they expect the acquisition to close, despite the delays. M&T is spending hundreds of millions of dollars to upgrade compliance technology, to secure regulators' blessing for the deal.
"There are a lot of good reasons why, even in the face of challenges and disappointments, we have decided to stick with" the Hudson City acquisition, Robert Wilmers, M&T's chairman and chief executive, said at the company's annual meeting on April 15.
Hudson City's pre-closing shrinkage was expected, Spahr says, adding that M&T was able to land the deal at a good price because the thrift had problems. M&T agreed to pay 80% of Hudson City's tangible book value at the time the deal was announced.
"M&T is buying them at a discount for a reason," Spahr says, adding that Hudson City is rate-sensitive because of a reliance on single-family residential lending.
Hudson City's profit fell 11% in the first quarter compared with a year earlier, to $42.5 million, as net interest income compressed because of low interest rates.
Hudson City's work force has decreased by nearly 5% since August 2012, to 1,535 employees at March 31. The company is believed to be using incentives to keep employee flight in check, such as offering workers rewards for staying on board through a certain date. That's often the best way to retain highly valued employees, Schultheis says.
"You've got to give them a reason to stay," Schultheis says. "If people know they're going to be severed, you have to make the severance attractive enough for them to stick around through the transition."
M&T has tried to free Hudson City up to make more loans. The banks amended their merger agreement in December to let Hudson City introduce new products as they await regulatory approval. M&T also agreed to let Hudson City focus on secondary mortgages and expand in commercial real estate lending.
Still, Hudson City has probably been an awkward place to work for some time and will remain so until the deal closes, and there is little management can do about the work environment, Schultheis says. "I don't want to say you put [the bank] on auto-pilot, because you can't," he says.
"You don't totally check out, but anything that's really strategic in focus is gone," Schultheis adds. "Hudson City is no longer the company that M&T [agreed to buy], but it's the company that M&T is going to buy."