Banking's longest-running M&A drama appears to be approaching its finale.

Three years after M&T Bank agreed to buy Hudson City Bancorp, the Federal Reserve is expected to decide within the next two weeks whether the deal may go through.

Perhaps the bigger mystery surrounding the transaction is whether it is still worth it.

If the Fed gives its OK, M&T would pay a far higher price for a far less profitable company than when it first agreed to acquire Hudson City, but the deal could still be a strategic winner for the Buffalo, N.Y.-based M&T.

Hudson City is a smaller and in some ways less attractive version of the company M&T agreed to buy back in 2012, before a regulatory order that M&T fix its anti-money-laundering program set off numerous closing delays.

But M&T has thrived in the meantime, and its rising stock price has increased the estimated cost of the deal from $3.7 billion when it was signed to $5.5 billion as of the company's latest regulatory filings.

It is a hefty price to pay for bank whose asset size and loan margin are rapidly shrinking, and whose bread-and-butter loan product — the jumbo mortgage — has become less viable with interest rates as low as they have been.

But analysts say that Hudson City is worth far more as part of M&T than it is by itself, and the strategic fit just as good as when the ink on the deal was still wet. The Federal Reserve has said it would decide on whether the companies may merge by Sept.30, and the banks set an Oct. 31 deadline to close the deal.

"The initial things M&T wanted to get out of this deal are still there, even though a lot has happened in the last three years," said Brian Klock, a Keefe, Bruyette & Woods analyst.

Representatives of the two banks declined to discuss the pending merger. M&T has done all it can and is waiting for the Fed to rule, Chief Financial Officer Rene Jones said in July.

"At this point in time, there is not much more that we can really say or do," he said on M&T's second-quarter conference call. "We have to allow our regulators the time to work through their process and to work through the application."

Hudson City's 135 branches would make M&T one of the largest banks in New Jersey and would give better access to both the New York and Philadelphia metro areas. It would also give M&T the chance to cross-sell and expand relationships with Hudson City's comparatively wealthy base of customers.

M&T has already added about 100 commercial lenders in New Jersey, who are likely waiting impatiently for the chance to access Hudson City's customers, Klock said.

"The biggest frustration from M&T's side is that there's so much value they haven't been able to capitalize on for three years," he said. "A Hudson City customer who's a business owner and has a jumbo mortgage, that could be an M&T commercial customer."

Hudson City's bankers, too, are likely looking forward to getting back to work. The bank has spent the last three years in a holding pattern, letting its loans run off and building up nearly $6.6 billion in cash, according to Federal Deposit Insurance Corp data.

Its performance, unsurprisingly, has cratered as it has stopped making loans. Its total assets have shrunk to $35 billion as of June 30 from $43 billion three years earlier, and loans have declined by 29%, to $20 billion, according to FDIC data. Through the first six months of the year, it earned $38 million, compared with $142 million in the same period three years ago, and its return on equity has fallen to 1.73% from 6.69%.

Hudson City's problems run deeper than the merger-related halt to lending. Even three years ago, analysts said the sale to M&T showed that Hudson City's thrift model had run its course.

The Paramus, N.J., bank suffered an abrupt turn of fortune after the financial crisis. It had borrowed billions shortly before the crisis, and as a single-product lender, it was sheltered from most of the contagion from Lehman Brothers' collapse. It never took federal assistance, and its stock hit its all-time peak in September 2008, while the rest of the financial sector was crumbling.

But the government's response to the crisis — particularly the central bank's low-interest-rate policy — along with some ill-timed borrowing spelled trouble for Hudson City's business model. The billions it had borrowed before the crisis carried average interest rates above 4%, while yields on the bank's new loans kept falling. Meanwhile, Fannie and Freddie began buying jumbo mortgages in order to stimulate the housing market, which brought much more competition to Hudson City's niche and further squeezed its returns.

There are still good reasons to think that it will be financially healthier as part of M&T than as a stand-alone institution.

Hudson City has traditionally had a relatively weak deposit franchise and a high loan-to-deposit ratio, which has forced it to rely on high-cost outside funding. This expensive funding, combined with low rates, have compressed its net interest margin from 2.13% three years ago to 0.72% as of June 30, according to the FDIC.

Hudson City still has more than $12 billion in debt at an average interest rate of 4.59%, Sandler O'Neill analysts wrote in a note published Tuesday. If the deal goes through, however, some of Hudson City's more expensive borrowed funds would likely be repaid using its ample cash hoard.

And the former Hudson City could use M&T's stronger deposit franchise to fund loans, and that lower cost of funds should drastically improve Hudson City's loan yield. If you strip out its high-cost funding, Hudson City's net interest margin is actually higher than M&T's, Klock said.

Then there is the price of the deal, which, though higher than it would have been three years ago, is still reasonable, analysts say. The stock portion of the transaction was set at a fixed exchange rate between M&T's shares and Hudson City's, and over the last three years as M&T's stock has appreciated by about 30%, the cost of the acquisition rose.

Still, the deal would be accretive to M&T, even if not as much as it would have been three years ago, said Sandler O'Neill analyst Frank Schiraldi. It should add to M&T's tangible book value as well as earnings per share, he said.

"I think the deal still makes sense both financially and strategically," Schiraldi said. "It is still attractive financially — it's just not as accretive as it once was."

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