HCBK (MM)

Hudson City Bancorp Inc.’s (HCBK) third quarter 2011 operating earnings came in at 17 cents per share, missing the Zacks Consensus Estimate of 18 cents as well as the year-ago quarter earnings of 25 cents per share.

Hudson City reported operating income of $84.2 million compared with $124.6 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, partly offset by lower interest expense and reduced provision for loan losses.

Quarter in Detail

Total revenue in the reported quarter came in at $247.7 million, down 30.9% year over year due to lower non-interest revenue.

Net interest income decreased 15.7% year over year to $244.6 million. Net interest margin remained flat year over year at 1.97%. Total non-interest income was $3.1 million compared with $33.9 million in the year-ago quarter.

Total non-interest expense increased to $83.7 million from $65.7 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 33.77% from 20.27% in the prior-year quarter.

Credit Quality

The provision for loan losses at Hudson City decreased 16.0% sequentially and 50% year over year to $25.0 million. The year-over-year decrease was attributable to stability in growth rate of non-performing loans and charge-offs.

However, the ratio of non-performing loans to total loans was 3.16% as of June 30, 2011, up 15 bps from 3.01% as of June 30, 2011. Allowance for loan losses to total loans increased 3 bps sequentially to 0.89%. However, the ratio of net charge-offs to average loans decreased to 0.25% from 0.30% in the prior quarter.

Profitability Ratios

Hudson City's return on average assets during the quarter was 0.65% and its return on average equity was 6.80%, as against 0.82% and 8.86%, 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 8.77% as of June 30, 2011 from 8.44% as of June 30, 2011. Equity to total assets was 9.79% compared with 9.44% as of June 30, 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 November 30, 2011 to shareholders of record as of November 4, 2011.

Recommendation

We maintain our Neutral rating over the long term due to lower interest expense and reduced provision for loan losses in the third quarter.

However, unfavorable interest rate environment, sluggish economic recovery and uncertainty surrounding the new and anticipated regulations (particularly the BASEL III capital and liquidity requirements) are the primary headwinds. While its strong business model and solid capital position should aid results, increase in FDIC insurance costs remains an overhang going forward.

Hudson City's close competitor First Financial Holdings Inc. (FFCH) is scheduled to release its fourth-quarter 2011 earnings on October 27, 2011.

Hudson City currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.

 
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