Hudson City Bancorp Inc. (HCBK) reported second-quarter 2013 operating earnings of 10 cents per share, in line with the Zacks Consensus Estimate. However, this compares unfavorably with the prior-year quarter figure of 15 cents.
Quarterly results at Hudson City mainly came on the back of increased non-interest income and lower provision for loan-losses. Further, decreased expenses and a strong capital position were the tailwinds for the quarter. However, a decline in revenues due to lower net interest income was a negative.
Hudson City’s net income for the quarter came in at 48.7 million, compared with $72.3 million in the prior-year quarter.
Quarter in Detail
Hudson City’s total revenue was $169.4 million, down 25% from the year-ago quarter. Further, revenues were lower than the Zacks Consensus Estimate of $174.0 million.
Hudson City’s net interest income decreased 29% year over year to $159.9 million. The fall was due to overall decline in the average balance of interest-earning assets and interest-bearing liabilities and the persistent low interest rate environment. Net interest margin came in at 1.64%, down from 2.12% in the year-ago quarter.
Hudson City’s non-interest income came in at $9.6 million, up substantially year over year. Included in non-interest income for the second quarter of 2013 was a $7.2 million gain on the sale of corporate bonds. There were no securities sales for the quarter ended Jun 30, 2012.
Moreover, total non-interest expense at Hudson City waned 8% from the prior-year quarter to $76.6 million. The decline was primarily due to decreases in federal deposit insurance expense and other non-interest expense, partially offset by a rise in compensation and benefits.
The efficiency ratio increased to 45.22% from 36.79% in the year-ago quarter. An increase in the efficiency ratio indicates decline in profitability.
Credit metrics displayed mixed results in the quarter. Nonperforming loans reached $1.11 billion as of Jun 30, 2013, down 3% sequentially and 4% year over year. The ratio of nonperforming loans to total loans was 4.42% as of Jun 30, 2013, up from 4.35% in the prior quarter and 3.88% in the year-ago quarter.
The ratio of nonperforming assets to total assets was 2.96%, down from 2.98% in the prior quarter but up from 2.60% in the comparable quarter last year.
However, the ratio of net charge-offs to average loans came in at 0.26%, down from 0.32% in the prior quarter but up from 0.25% in the year-ago quarter.
Provision for loan losses amounted to $12.5 million, down 38% sequentially and 75% on a year-over-year basis. The year-over-year decrease in provision for loan losses was primarily due to the stabilization of home prices, a decrease in the size of the loan portfolio and a decrease in the amount of total delinquent loans.
Hudson City’s capital ratios remained strong during the quarter. The bank’s Tier 1 leverage capital ratio advanced to 10.41% as of Jun 30, 2013 from 9.44% as of Jun 30, 2012. Equity to total assets was 11.74%, compared with 10.70% as of Jun 30, 2012.
Along with the earnings release, Hudson City declared a quarterly cash dividend of 4 cents per share. The dividend will be paid on Aug 30 to shareholders of record on Aug 12.
An unfavorable interest-rate environment, sluggish economic recovery and uncertainty surrounding the new and anticipated regulations are likely to be headwinds for Hudson City. However, in Aug 2012, M&T Bank Corporation (MTB) agreed to take over Hudson City in a cash-and-stock deal. The deal is expected to close upon the receipt of all essential regulatory and shareholder approvals and the fulfillment of other conditions.
Despite the restructuring in Hudson City’s business model, amid a low interest-rate environment, the company’s growth was facing challenges. Although it announced some initiatives to diversify in 2012, it did not have adequate flexibility with respect to its balance sheet. Hence, the above-mentioned deal was a strategic fit for Hudson City.
The deal would combine Hudson City’s retail network with M&T Bank’s full service commercial banking suite and helped expand the premier community banking franchise in eastern U.S. Hence, shareholders can benefit from the enhanced scale of business of the combined entity. However in Apr 2013, the Federal Reserve detected several loopholes in M&T Bank's efforts to fight money laundering and put a hold on the acquisition. Nevertheless, in Jun 2013, the bank successfully reached an agreement with the Fed to improve compliance with respect to risky activities. Hence, the merger has managed to overcome all regulation hurdles and is expected to be completed in the near term.
Hudson City currently carries a Zacks Rank #3 (Hold). Some other well-placed stocks in this sector that are worth considering include Banner Corporation (BANR) and Washington Federal Inc. (WAFD). Both these stocks carry a Zacks Rank #1 (Strong Buy).
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