M&T Bank, Hudson City Savings Bank and JPMorgan Chase Bank

Dow Jones reports that Hudson City Bancorp (HCBK) Inc. agreed to be acquired by M&T Bank Corp. (MTB) for about $3.7 billion.  This gives the Buffalo, N.Y.-based MTB "a franchise stretching from Connecticut to Virginia."  What this deal gives MTB is one of the most pristine looking retail banking franchises in the East and all this care of the Office of the Comptroller of the Currency.  That’s right, the invisible hand is at work once again in the world of bank M&A.  But why?  

Back in March of 2011 you may recall that HCBK announced a restructuring that included the early and forced paydown of $12 billion in structured notes.  This event was orchestrated by the OCC and forced HCBK to reduce assets by more than 15%.  The bank took a substantial loss that drove HCBK, a perennial above peer performer, into the red with efficiency ratios in triple digits.  As one industry veteran notes, the implication of the tough OCC action is that the apparently pristine balance sheet may indeed look too good to be true. 

Of note, JPMorgan (JPM) acted as advisor to HCBK in the balance sheet restructuring. At the same time that OCC examiners were forcing HCBK to unwind its “unsafe and unsound” interest rate arbitrage position, the same regulator was ignoring more egregious behavior at JPM in the Office of the Chief Investment Officer. We still don’t really know what happened at JPM or when, but we do know that the people at the OCC felt sufficiently offended by the state of things at HCBK to orchestrate a sale.

The rating for HCBK from Institutional Risk Analytics dropped from “A+” in Q4 2010 to “F” in Q1 2011 because of the large losses flowing through the bank’s P&L from the unwind of the bank’s internal hedge fund.  The bank’s IRA rating would remain at “F” through all of 2011, but as of Q1 2012 HCBK was once again rated “A+” with operating stress levels below industry averages and a 39% efficiency ratio. 

Today the thrift subsidiary of HCBK is easily one of the best performing depositories in the US – at least if you believe the disclosure from the nation’s largest thrift.   MTB was also rated “A+” by IRA as of the end of Q1 2012 with a public data CAMELS of 1.5 as of that date.

The HCBK loan portfolio remained very quiet during 2011, with an IRA Bank Stress Index score of 0.5 for loan defaults compared to the industry average of 3.5 (1995=1).  In fact, the public data CAMELS score for HCBK just barely broke 2 during all of 2011 despite the large amounts of cash and non-cash charges flowing through the bank’s income statement. Yet given the geographic distribution of the HCBK credit exposures, is that ultra low default rate on the bank’s retained portfolio a red flag?   

Company line: HCBK was a good bank that got the wrong bureaucrats at the OCC pissed off and paid the price.  Meanwhile JPM CEO Jaime Dimon was literally betting the house with non-interest bearing, 100% FDIC insured institutional deposits covered under the TAG program.  There could be no more graphic example of the arbitrary and capricious nature of federal regulation, large banks vs small, than the examples of HCBK and JPM.

Now HCBK seems like a very good deal for MTB, yes?  MTB buys control over $41 billion in nominal assets and $4.2 billion in TCE for $3.7 billion.  Let’s use the cool bank merger module inside The IRA Bank Monitor, which merges the call reports of up to five depositories.  The link below will download an xml file with the CALL/TFR schedules for the two lead banks merged:


HCBK’s bank unit combined with the lead of the MTB group results in a depository with $121 billion in total assets and almost $14 billion in tangible common equity at the bank level.  If HCBK’s credit book is all that the public data suggests, then MTB is walking away with one of the lowest loss rate portfolios in the Northeast US and at a discount to book.  But is that 33bp charge off rate, more than half a standard deviation below peer, too good to be true?  

A cynic would say that the solid book equity at HCBK is a fiction and that the high-end, single and multifamily portfolio at HCBK is not a pristine as some may believe.  Does HCBK really have a better slice of Northern New Jersey than other lenders?  If not, then the book-multiple paid by MTB for HCBK may be near the top of the valuation range and not the bargain some may suppose. Indeed, after an adjustment for “doubtful” assets, will there be any book equity?  Only future BTB earnings releases will tell.

But never forget that HCBK got bought because the folks who populated the OCC two years ago decided to make an example of this small northeastern community bank.  If Jamie Dimon and JPM were subjected to the same level of scrutiny and regulatory intervention which ultimately led to the sale of HCBK, then the largest bank in the US would be for sale in large chunks. 

If the OCC treated JPM like it dealt with HCBK, Jamie Dimon would be out of a job and JPM would be auctioning off half a trillion in “noncore” assets to its competitors.  Instead, HCBK gets slammed into MTB to keep a lid on a perhaps festering situation and the boys at JPM are almost back to business as usual.  Just another day in paradise, eh home?