The attempts at closing the long awaited merger deal between M&T Bank Corporation MTB and Hudson City Bancorp, Inc. HCBK bore fruit on Wednesday. After facing several delays, finally, the banks received the Federal Reserve’s approval to complete about $5.4 billion stock-cash deal announced in April 2012.

However, the deal awaits the New York State Department of Financial Services’ approval and is yet to meet certain customary closing conditions. After formalities, the deal is expected to be completed on or around Nov 1, 2015.

"At M&T, we are deeply committed to the success of the customers and communities we serve, and we look forward to the opportunity to bring that strong commitment to Hudson City's markets," said Robert G. Wilmers, M&T Chairman and CEO.

Terms of the Deal

Per the terms of the transaction, Hudson City shareholders have the option of either receiving shares at an exchange ratio of 0.08403 shares of M&T Bank common stock for each Hudson City share or equivalent cash. Notably, cash or stock option is subject to the overall value of the deal, which is 60% in stock and 40% in cash.

Hudson City works with 135 branches, which are anticipated to convert into M&T Bank’s name in the first quarter of 2016. Till then, the branch locations will operate under the Hudson City name. As of Jun 30, 2015, Hudson City had about $18 billion in deposits and $20 billion in loans.

The Story Behind

In August 2012, M&T Bank agreed to take over Hudson City in a cash and stock deal worth $3.7 billion. The deal was projected to fetch M&T Bank around $25 billion in deposits and $28 billion in loans, subject to acquisition accounting adjustments.

However, in April 2013, the Federal Reserve detected loopholes in M&T Bank's efforts to fight money laundering and put the acquisition on hold. The U.S. regulatory body had pointed out several discrepancies in M&T Bank’s risk-management agenda that violated federal anti-money-laundering regulations. The Fed also raised questions about M&T Bank's procedures, systems and processes relating to M&T's Bank Secrecy Act and anti-money-laundering compliance program.

The bank was successful in reaching an agreement with the Fed to improve compliance with relation to risky activities. However, in December 2013, M&T Bank and Hudson City planned to extend the deal’s closure date from Jan 31, 2014 to Dec 31, 2014.

The closing date of the proposed merger was further extended last December. The dead line was set at Apr 30, 2015, which was further extended to Oct 31, 2015 as the Federal Reserve informed M&T Bank that it will be able to complete its review on the merger application by Sep 30 and hence the merger deal would not be closed by May 1 as previously planned.

Last week, Hudson City agreed to settle the lawsuit under which the bank was sued for encouraging discriminatory mortgage lending practices. The settlement agreement was penned with the U.S. Department of Justice ("DOJ") and the Consumer Financial Protection Bureau ("CFPB"). On the U.S. District Court’s approval in New Jersey, the bank will be paying around $33 million, including about $27 million as loan subsidy with a penalty amount of $5.5 million.

Hudson City neither accepted nor denied the wrongdoings and said it “disagrees with the statistical analysis of loans relied upon by the DOJ and CFPB as the principal basis for claims as well as the agencies’ conclusions from their investigations.” It added that it settled the matter “to avoid litigation with these agencies so that it can focus on continuing to provide fair credit services to its customers and working to complete its pending merger.”

Bottom-Line

We believe that M&T Bank’s efforts in gradually addressing the issues raised by the Federal Reserve helped it win the Fed’s approval on the merger. The completion of the Hudson City deal is expected to open up significant opportunities for M&T Bank to augment its top line by leveraging on Hudson City’s retail network as well as product and balance sheet diversification and expanding its franchise in eastern U.S. However, recent litigation issues and low interest environment remain headwinds.

Currently, M&T Bank carries a Zacks Rank #4 (Sell), while Hudson City has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the finance space include SunTrust Banks, Inc. STI and Wells Fargo & Company WFC. Both the stocks sport a Zacks Rank #2 (Buy).

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