HCBK (MM)

Hudson City Bancorp’s (HCBK) first-quarter 2011 operating earnings came in at 19 cents per share, substantially better than the Zacks Consensus Estimate of a massive loss. However, this compares unfavorably with the earnings of 30 cents in the prior-year quarter.

The company completed the restructuring of its balance sheet during the quarter. This move has reduced after-tax earnings by $649.3 million. Considering all the non-recurring items, HudsonCity reported a GAAP net loss of $555.7 million or $1.13 per share.

Operating earnings were primarily affected by lower interest and dividend income, and increased non-interest expense. However, lower interest expense, reduced provision for loan losses and a substantial increase in non-interest incomewere among the positives.

Quarter in Detail

Revenue for the reported quarter came in at $361.6 million, almost flat year over year. However, this compares favorably with the Zacks Consensus Estimate of $253.0 million.

Net interest income decreased 23% year over year to $256.4 million. Net interest margin declined 48 basis points (bps) year over year to 1.72%.

Total non-interest income was $105.2 million compared with $33.0 million in the year-ago quarter. Non-interest income for the reported quarter included net gains of $102.5 million on securities transactions, compared with $30.8 million in the year-ago quarter.  

Total non-interest expense increased to $1.24 billion from $66.5 million in the year-ago quarter. The number included a $1.17 billion loss on extinguishment of debt. Excluding this loss, the increase in non-interest income was primarily due to higher federal deposit insurance assessment expense. Operating efficiency ratio increased to 26.00% from 18.27% in the prior-year quarter.

The provision for loan losses at Hudson City decreased 11% sequentially and 20% year over year to $40.0 million.  The year-over-year decrease resulted from a lower growth rate of non-performing loans, improvement in the unemployment rate and a drop in charge-offs.

CreditQuality

Hudson Citywitnessed a mixed credit quality during the reported quarter. The ratio of non-performing loans to total loans was 2.92% at March 31, 2011, up 10 bps from 2.82% at December 31, 2010. Allowance for loan losses to total loans increased 7 bps sequentially to 0.84%. However, the ratio of net charge-offs to average loans decreased to 0.28% from 0.32% in the prior quarter.

Profitability Ratios

Hudson City's return on average assets for the quarter was negative 3.73% and its return on average equity was negative 41.49%, as against 0.98% and 10.96%, respectively, in the prior-year quarter.

Capital Ratios

The company’s capital ratios remained strong during the quarter. Tier 1 leverage capital ratio increased to 8.12% at March 31, 2011 from 7.95% at December 31, 2010. Equity to total assets was 9.02%, compared with 9.01% at December 31, 2010.

Dividend Update

Concurrent with the earnings release, Hudson City declared a quarterly dividend of 8 cents per share. This represents a 47% decrease from the prior quarter’s dividend of 15 cents. The dividend will be paid on May 27 to shareholders of record on May 5.

The recent completion of balance sheet restructuring, aimed at improving interest income and margin, is encouraging. Yet, the upfront costs for it cannot be avoided. Besides, the elevated levels of credit costs remain a concern for the company. Regulatory issues also remain a headwind. However, its strong business model, solid capital position, and conservative underwriting remain impressive.

HudsonCity’s close competitor First Financial Holdings Inc. (FFCH) is scheduled to release its fiscal second quarter 2011 earnings on April 28.

HudsonCitycurrently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.

 
FIRST FINL HLDG (FFCH): Free Stock Analysis Report
 
HUDSON CITY BCP (HCBK): Free Stock Analysis Report
 
Zacks Investment Research