NEW YORK ( TheStreet) -- M&T Bank ( MTB) of Buffalo, N.Y., was the loser among major banking names on Friday, with shares sliding 4.5% to close at $100.24. M&T in August agreed to acquire Hudson City Bancorp ( HCBK) of Paramus, N.J., in a deal originally valued at roughly $3.7 billion in cash and stock. The merger was expected to be completed in the second quarter of 2013. The two banks together announced early on Friday that the time needed to gain regulatory approval of the deal would be "extended substantially," because "M&T has learned that the Federal Reserve has identified certain regulatory concerns with M&T's procedures, systems and processes relating to M&T's Bank Secrecy Act and anti-money-laundering compliance program." M&T said it had "already commenced a major initiative, including the hiring of an outside consulting firm, intended to fully address the Federal Reserve's concerns." Hudson City's shares declined 5.5% to close at $8.29. Heading into the August deal, Hudson City was under pressure because its long-term leverage strategy of increasing wholesale borrowings and investing in mortgage-backed securities had backfired in the prolonged low-rate environment. The company was forced by regulators to undergo two major balance sheet restructurings during 2011. Hudson City's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- was 1.97% in the fourth quarter, narrowing from 2.02% in the third quarter, but improving from 1.73% a year earlier. The Federal Deposit Insurance Corp. reported in its Quarterly Banking Profile that the aggregate fourth-quarter net interest margin for all U.S. banks was 3.32%. The merger deal values each share of Hudson City at 0.084 of an M&T share, or $8.42 a share, which is just above where Hudson City's stock closed on Friday. The companies together said they would extend the date after which either company could walk away from the deal until January 31, 2014, but also said "there can be no assurances that the merger will be completed by that date." M&T will announce its first-quarter results on Monday, with analysts polled by Thomson Reuters expecting the bank to report a profit of $1.96 a share, declining from $2.16 in the fourth quarter, but increasing from $1.50 in the first quarter of 2012. The company on Tuesday will proceed with its special meeting, including a shareholder vote, on the Hudson City deal.
The consensus among analysts is for Hudson City to report first-quarter EPS of 12 cents a share, increasing from 10 cents in the fourth quarter, but declining from 15 cents in the first quarter of 2012. Hudson City on April 18 will hold its special meeting and shareholder vote on the M&T acquisition. Jefferies analyst Ken Usdin in a note to clients on Friday said that the announcement implied M&T would be handed down a "formal/informal decree" over its Bank Secrecy Act compliance deficiencies, and that the merger delay was "clearly a negative for both MTB shares and the merger
arbitrage spread on both the delay of EPS accretion and greater uncertainty on closing." "The trouble with regulatory decrees is that the timeframe for their eventual removal is difficult to handicap," Usdin wrote. According to Usdin, "the worst-case scenario of one of the parties walking away is tough to assign a probability to, but it would seem that both parties would desire the deal to still close (MTB for earnings help and credibility, HCBK for fundamental business model reasons)."
Atlantic Equities analyst Richard Staite rates JPMorgan "overweight," with a price target of $54, and said in a report on Friday that excluding the 18-cent after-tax benefit from the reserve release and another two-cent benefit from debit valuation adjustments (DVA), "we calculate adjusted EPS of $1.38 vs our adjusted EPS estimate of $1.33." JPMorgan Chase's shares declined 1% to close at $49.01.
Pressure on net interest margins are an obvious concern for most banks, as the Federal Reserve has kept the short-term federal funds rate in a range of zero to 0.25% since late 2008, and has recently been making monthly purchases of $85 billion in long-term securities, in an effort to hold long-term rates down. This means that most banks have already realized the bulk of the benefit on the cost side, while their assets continue to reprice. One of the major reasons for the decline in Wells Fargo's net interest margin is the company's success in growing deposits. Wells Fargo CFO Tim Sloan said during the company's earnings conference call that "last year we were able to grow our net interest income by over $0.5 billion; and our expectation is that we should be able to grow it this year." He added that on a quarterly basis, "net interest income has more or less bottomed at about $10.6 billion." When discussing Wells Fargo's first-quarter mortgage results, KBW analyst Frederick Cannon said in a note to clients that the lender's gain-on-sale margin was down only moderately, but "we view this as a lagging indicator since the company does not recognize revenues at the time of the rate lock, as most originators do." Wells Fargo's shares were down 1% to close at $37.21. -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn