Photo: Wikimedia Commons.

In August 2012, M&T Bank (NYSE:MTB) and Hudson City Bancorp (UNKNOWN:HCBK.DL) agreed to merge. At the time, the agreement seemed like a pretty typical M&A deal in the banking industry. However, it's now 2015 and regulators still haven't approved the merger.

At the core of the issue is that federal regulators are requiring M&T Bank to massively upgrade their regulatory compliance systems and processes before giving a decision on the deal. Based on statements made this month by high level M&T Bank executives, I think the Federal Reserve's decision could be just around the corner.

What we learned this month
We will focus on M&T Bank's perspective here, because I consider M&T Bank to be one of the best run banks in the United States. Hudson City, on the other hand, falls well short of that standard.

On the fourth-quarter earnings conference call this month, M&T CFO Rene Jones gave investors a treasure trove of information about the current state of the merger, the implications for M&T, and how M&T will respond if the deal is denied.

When M&T first agreed to the merger, the bank obviously had no clue that the deal would take this long to close. They also didn't anticipate the massive price tag related to updating their compliance systems to gain regulatory approval. As of year end 2013, CEO Robert Wilmers reported that the bank had invested over $60 million into the project, including hiring 285 additional employees. It's not inconceivable that the investment today could already top the $100 million mark! 

Even after all that extra spending, the consistently efficient bank is still committed to making the merger a reality. Jones told investors point blank:

Both parties remain committed to the merger and, as you know, agreed to extend the date after which either party may terminate their merger agreement to April 30, 2015.

Finally, the financial metrics we calculated at the time the transaction was announced remain intact. Of course, as you're aware, our projections are subject to a number of uncertainties, various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors which may differ materially from what actually unfolds in the future.

Put into plain English, the math still works from M&T's perspective. Management calculates that the investment in M&T's infrastructure will produce a justifiable return once the merger is complete.

But that's not to say the bank is resting its future in the hands of a regulator's judgement call on a single merger. The bank is ready for an approval, but also for a denial.

According to Jones, the bank's expenses related to the compliance improvement project were largely flat from the 2014 third quarter to fourth quarter, and management expects those expenses to decline substantially in 2015. The hard work and extra expenses, it seems, are largely in the rearview mirror. The bank can now enjoy the benefits of a robust, modernized risk infrastructure going forward regardless of whether the merger closes.

In that same regard, Jones' statement and responses in the Q&A focused intensely on the banks' operating leverage and efficiency going forward, now that the systems are in place. She went so far as to make these objectives quite distinct from the merger. She said, "I am not thinking about the deal when I am saying that", referring to the bank's efficiency and expense reduction goals for 2015.

M&T has done everything that's been asked. There's no reason for further delay
Thinking about Jones' statements on the conference call, you get the impression that M&T has reached its limit in terms of what else it's willing to do. It has modernized its compliance function. It's spent millions on consultants, new hires, technology solutions, and processes. It has done everything that its been asked to do.

The Federal Reserve Bank of New York building.

With the bank's attention now turning to increasing operating leverage by cutting expenses, that means there is little patience for further spending to appease regulators. The bank has, in essence, put the ball in the Fed's court.  At this point, the deal is what it is. There is no reason for further delay.

The bank appears ready to move forward if the deal gets done or not. Obviously, it hopes that regulators will approve the deal, but if not, it won't be the end of the world. That's true for long-term shareholders as well.

The truth is that M&T had no choice but to modernize its compliance function. Whether that upgrade happened three years ago, today, or three years in the future is irrelevant. It was going to have to happen eventually, and management recognized that fact.

From there, it's easy to see why the bank has so vigorously and willingly pursued the improvements. That huge investment isn't just about the Hudson City merger; it's about preparing the bank to do business in the post-financial-crisis, Dodd-Frank-defined world. With that work now all but complete, the bank can get back to doing what it's always done so well -- skillfully cutting expenses, managing a top-tier credit portfolio, and producing industry-beating returns.