NEW YORK (TheStreet) -- M&T Bank (MTB) - Get Report is working through a regulatory mess as part of its efforts to complete its acquisition of Hudson City Bancorp (HCBK) , but the deal just keeps getting sweeter for M&T, according to Citigroup analyst Keith Horowitz.

M&T of Buffalo, N.Y. on Aug. 27, 2012 announced an agreement to acquire Hudson City Bancorp of Paramus, N.J. in a deal that was valued at roughly $3.7 billion in stock and cash when it was announced. M&T agreed to pay the equivalent of 0.08403 per M&T share for each share of Hudson City, with the mix of stock and cash set at 60% to 40%. M&T's stock closed at $85.87 on Aug. 12, 2012, while Hudson City's stock closed at $6.44 that day. M&T's offer when it was announced was worth $7.22 per Hudson City share, for a premium of 12%.

The merger was originally expected to be completed during the second quarter of 2013, but the two companies last April announced that the time needed to gain regulatory approval of the deal would be "extended substantially," because M&T had "learned that the Federal Reserve [had] identified certain regulatory concerns" with M&T's compliance programs. The companies now expect the merger to be completed by the end of 2014.

M&T's shares closed at $111.51 Friday, while Hudson City's shares closed at $9.04. So the deal is now worth $9.37 per Hudson City share, for premium of 4%, showing that Hudson City's shares haven't quite adjusted up to the deal value.

There's still some doubt in the market that the deal will be completed, however, the companies have agreed twice to extend the walk-away date, and M&T has been making heavy investments in systems and processes to improve its Bank Secrecy Act and anti-money laundering compliance.

M&T on Jan. 17 reported fourth-quarter earnings of $227.4 million, or $1.74 a share, declining from $275.4 million, or $2.11 a share, during the third quarter, and $276.6 million, or $2.16 a share, during the fourth quarter of 2012. Earnings available to common shareholders for all of 2013 totaled $1.087 billion, or $8.38 a share, increasing from $953.4 million in 2012.

The bank's noninterest expenses rose 7% sequentially and 12% year-over-year to $703.7 million in the fourth quarter. Excluding non-operating expenses, M&T said its noninterest expense totaled "$693 million in the recent quarter, up from $612 million and $648 million in the fourth quarter of 2012 and the third quarter of 2013, respectively," in its earnings release.

"The higher noninterest operating expenses in the recent quarter reflect increased costs for professional services largely associated with investments in M&T's infrastructure related to BSA/AML compliance, capital planning and stress testing, risk management, and operational and technology initiatives. Those increases amounted to approximately $40 million when compared to the immediately preceding quarter and $50 million in comparison to the fourth quarter of 2012."

Even with the massive increase in spending, M&T's 2013 return on assets was 1.39% and its return on average common equity was 11.18%, both respectable numbers.

Looking further into the two companies' numbers, Horowitz in a note to clients on Feb. 3 wrote, "After updating our model, we see an [internal rate of return] IRR of ~20% as the higher deal price due to the 30% increase in MTB stock since deal announcement has been offset by HCBK's improved position today." M&T's original IRR expectation for the Hudson City acquisition was 18%.

"Since 2Q12, HCBK's quarterly expense run rate is 13% lower (~$10 mil) and an 11% reduction in the size of the balance sheet has improved HCBK's capital position, offsetting some of the higher deal cost," Horowitz added. He expects the deal to add 3% to M&T's earnings-per-share during 2013, with the benefit growing to 7% in 2016.

Horowitz has a "neutral" rating on M&T, with a $122 price target. "While we have a longer-term positive bias on the stock and believe it should trade in a 'normal' environment at 2.5x tangible book, we believe there are near-term risks due to the uncertain economic outlook and with the stock trading at a premium valuation vs peers combined with its below-average capital position," the analyst wrote.

M&T's shares trade for 4.1 times their reported Dec. 31 tangible book value of $52.64, and for 12.6 times the consensus 2015 earnings estimate of $8.82 a share, among analysts polled by Thomson Reuters. The company's estimated Dec. 31 Tier 1 common equity ratio was 9.25%, rising from 7.57% a year earlier.

Horowitz also likes the "strategic rationale" of the M&T/Hudson City combination, because "HCBK's NJ footprint fills a hole in M&T's northeast through mid-Atlantic footprint - despite little actual direct overlap," and because Hudson City will provide M&T with "a proven mortgage production engine to support earnings near-term.

M&T's shares were down 1.2% to $110.10 in afternoon trading during a session that saw sharp market declines on numbers showing slowing manufacturing growth in the United States and slowing purchasing growth in China.  Hudson City's shares were down 1.1% to $8.94.

This chart shows the performance of M&T Bank and Hudson City Bancorp against the KBW Bank Index (I:BKX) and S&P 500I:GSPC since their merger agreement was announced:

data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.