Running Out of Options
In 2012, Hudson City Bancorp decided to throw in the towel, selling to M&T Bank Corp. The acquisition was significant — Paramus, New Jersey-based Hudson City added around $35 billion in assets to M&T’s balance sheet when the deal finally closed in 2015, after M&T resolved deficiencies in its Bank Secrecy Act/anti-money laundering compliance program. Hudson City CEO Ron Hermance Jr. passed away during the three-plus years it took to bring the deal to fruition.
The M&T/Hudson City announcement came as the industry anticipated a change in the M&A environment. Some even believed that an M&A wave could be on its way, driven by expected low growth. In a January 2013 Bank Director magazine cover story, industry prognosticators believed the number of banks could decline by half by 2018, from 7,200 banks to 3,600.
Deal activity and pricing did, in fact, pick up over those five years. But it wasn’t until January 2021 that the number of Federal Deposit Insurance Corp.-insured banks dropped below 5,000. There were 4,746 as of September 2022.
Now, the M&A market has slowed down again. Today, it seems, it’s tough to find willing targets. In Bank Director’s 2023 Bank M&A Survey, less than half of bank executives and board members say they’d be willing to sell for the right price.
And buyers and sellers typically aren’t on the same page: 43% of prospective acquirers would pay 1.5 times tangible book value for a target meeting their acquisition strategy; 36% wouldn’t even pay that high a price. On the flip side, 70% of prospective sellers want more than these buyers would be willing to pay.
Hermance admitted to Bank Director in 2013 that he wasn’t happy with the 81% price to book value his bank garnered. But 10 years ago, Hudson City didn’t have a lot of options. The low-rate environment resulted in a wave of prepayments at the mortgage-heavy thrift, leaving low-rate loans and high-cost funding on its balance sheet — an asset-liability mismatch that could be coming back to haunt some institutions today as the Federal Reserve continues to raise rates.
“It wasn’t the problem that killed us,” Hermance said then, referencing the Fed’s response to the financial crisis that included keeping the federal funds rate near 0% for seven years. “It was the solution.”
• Emily McCormick, vice president of editorial & research