Hudson City: A Penny Ahead

Zacks

Hudson City Bancorp Inc. (HCBK) reported second quarter 2012 earnings of 15 cents per share, a penny ahead of the Zacks Consensus Estimate. However, the results compared unfavorably with prior-year quarter’s earnings of 19 cents per share.

Hudson City’s results were aided by a decrease in expense as well as an expansion in fee income. Yet, net interest income moved down and the continuation of the low interest rate environment impacted its net interest margin.

Total revenue in the reported quarter came in at $227.2 million, almost in line with the Zacks Consensus Estimate $228 million. However, the revenue fell 4.1% sequentially and 17.6% year over year.

Notably, Hudson City also announced that Ronald Hermance will return to his position of Chairman and Chief Executive Officer effective August 1, 2012, after being on a medical leave since February.

Quarter in Detail

Hudson City’s net interest income decreased 17.8% year over year to $224.3 million. Net interest margin came in at 2.12% for the reported quarter, down from 2.15% in the prior quarter and 2.14% in the year-ago quarter. Besides the decrease in net interest margin, the fall in net interest income also reflects the overall drop in interest-earning assets as well as interest-bearing liabilities.

Hudson City’s non-interest income was $2.9 million in the reported quarter, up 7.0% year over year, reflecting an increase in service fees and charges on deposit and loan accounts.

Total non-interest expense at Hudson City declined 2.6% from the prior-year quarter to $83.6 million. The decline was primarily due to a reduction in Federal deposit insurance expense, partially offset by increases in compensation and employee benefit costs, occupancy expense and other expenditures.

Notably, the reduction in the size of Hudson City’s balance sheet as a result of balance sheet restructuring moves and debt extinguishment led to a fall in Federal deposit insurance expense in the reported quarter.

Credit Quality

Credit metrics were mixed in the quarter. The ratio of non-performing loans to total loans was 3.88% as of June 30, 2012, up from 3.71% in the prior quarter and 3.01% in the year-ago quarter. Nonperforming assets to total assets ratio was 2.60% in the reported quarter, up from 2.49% in the prior quarter and 1.84% in the comparable quarter last year. Results reflected a delay in the foreclosure process.

However, the ratio of net charge-offs to average loans came in at 0.25% in the reported quarter, flat sequentially and down from 0.30% in the year-ago quarter.

Provision for loan losses amounted to $25 million in the reported quarter, unchanged sequentially and down 16.7% from $30 million reported in the prior-year quarter. The overall declining trend in net charge-offs and a reduction in the size of the loan portfolio primarily contributed to the drop in loan loss provisions.

Capital Ratios

Hudson City’s capital ratios remained strong during the quarter. The bank’s Tier 1 leverage capital ratio advanced to 9.44% as of June 30, 2012 from 9.17% as of March 31, 2012. Equity to total assets was 10.70% compared with 10.46% as of March 31, 2012.

Dividend Update

Concurrent with the earnings release, Hudson City declared a quarterly dividend of 8 cents per share. The dividend is scheduled to be paid on August 29, 2012 to shareholders of record on August 8.

Our Take

Hudson City’s strong business model, solid capital position and conservative underwriting will boost its financial position. The debt pay-off and balance sheet restructuring are also strategic fits for the company.

The company is also making efforts to diversify its revenue base. It plans to offer eligible residential mortgage loans for sale in the secondary market. Moreover, it also intends to foray into the commercial real estate market. Such measures are likely to be implemented next year.

However, with the continuation of the low interest environment, the company is expected to face continued margin pressure. We believe, in addition to the unfavorable interest rate environment, sluggish economic recovery and uncertainty surrounding the new and anticipated regulations would continue to pose as headwinds, going forward. 

Within Hudson City’s peer group, People's United Financial Inc. (PBCT) reported second-quarter 2012 operating earnings per share of 20 cents, beating the Zacks Consensus Estimate by a penny. Moreover, earnings compared favorably with 18 cents per share reported in the prior quarter.

Higher revenue aided by improved net interest income and non-interest income were the positives for the quarter. Moreover, lower non-interest expenses reflected better expense management by the company. However, elevated net loan charge-offs and reduced net interest margin were the dampeners.

Hudson City currently retains the Zacks #3 Rank, which translates into a short-term Hold rating.

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