HCBK (MM)

Hudson City Bancorp Inc.’s (HCBK) second-quarter 2011 operating earnings came in at 19 cents per share, outpacing the Zacks Consensus Estimate by a penny. However, this compares unfavorably with the earnings of 29 cents in the prior-year quarter.

HudsonCity reported an operating income of $96.0 million compared with $142.6 million in the prior-year quarter. Operating earnings were primarily affected by lower interest and dividend income, substantial decrease in non-interest income and increased non-interest expense. However, lower interest expense and reduced provision for loan losses were among the positives.

Quarter in Detail

Revenue for the reported quarter came in at $275.6 million, plummeting 21.4% year over year driven by a decline in non-interest revenue.

Net interest income decreased 14% year over year to $272.9 million. However, net interest margin inched up 1 basis point (bp) year over year to 2.14%. Total non-interest income was $2.7 million compared with $33.2 million in the year-ago quarter. 

Total non-interest expense increased to $85.8 million from $64.6 million in the year-ago quarter. The increase in non-interest expense was primarily due to higher federal deposit insurance assessment expense. Operating efficiency ratio increased to 31.14% from 18.42% in the prior-year quarter.

Credit Quality

Hudson City witnessed a mixed credit quality during the reported quarter. The provision for loan losses at Hudson City decreased 25% sequentially and 40% year over year to $30.0 million. The year-over-year decrease resulted from stability in growth rate of non-performing loans and charge-offs to a certain extent.

However, the ratio of non-performing loans to total loans was 3.01% as of June 30, 2011, up 9 bps from 2.92% as of March 31, 2011. Allowance for loan losses to total loans increased 2 bps sequentially to 0.86%. Moreover, the ratio of net charge-offs to average loans increased to 0.30% from 0.28% in the prior quarter.

Profitability Ratios

Hudson City's return on average assets for the quarter was 0.74% and its return on average equity was 8.00%, as against 0.93% and 10.42%, 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 8.44% as of June 30, 2011 from 8.12% as of March 31, 2011. Equity to total assets was 9.44% compared with 9.02% as of March 31, 2011.

Dividend Update

Concurrent with the earnings release, Hudson City declared a quarterly dividend of 8 cents per share. The dividend will be paid on August 30 to shareholders of record as of August 5.

Going forward, the low interest rate environment would likely result in a compression of the net interest margin from its new higher level driven by the restructuring transaction. This coupled with the reduction in the size of its balance sheet from the restructuring transaction, would lead to a reduction of net interest income. With the sluggish economy recovery, balance sheet and earnings growth would continue to face hurdles in the upcoming quarters. While its strong business model and solid capital position would aid results, increase in FDIC insurance costs remains an overhang.

HudsonCity’s close competitor First Financial Holdings Inc. (FFCH) is scheduled to release its fiscal third-quarter 2011 earnings on July 29.

Hudson City currently retains a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating. Moreover, considering the fundamentals, we are maintaining a long-term “Underperform” recommendation on the stock.

 
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