HCBK (MM)

Hudson City Bancorp Inc. (HCBK) reported a fourth quarter 2011 net loss of 73 cents per share, reflecting the impact of the debt extinguishments that resulted in an after-tax charge of $416.8 million. The company had earned 25 cents per share in the year-ago period. The Zacks Consensus Estimate was a loss of 74 cents per share.

HudsonCity’s operating earnings came in at 12 cents per share in the reported quarter compared with 25 cents in the year-ago quarter. The decrease reflects increased liquidity levels which were held in overnight funds with an average yield of 0.28% until they were used to extinguish borrowings with an average cost of 4.21% in December 2011.

Total revenue in the reported quarter came in at $209.9 million, down 15.3% sequentially and 33.3% year over year, reflecting a decline in both net interest and non-interest revenue. The revenue figure also missed the Zacks Consensus Estimate of $232 million.

Quarter in Detail

Hudson City’s net interest income decreased 17.8% year over year to $207.0million. Net interest margin remained flat year over year at 1.73% but decreased 24 basis points sequentially. The sequential decrease reflected the elevated liquidity levels provided by the calls of investment securities and repayments of mortgage-related assets.  

Hudson City’s non-interest income was $2.9 million in the reported quarter, significantly down from $62.9 million in the year-ago quarter. The company reported net gains on securities transactions of $60.2 million that resulted from the sale of $2.02 billion of mortgage-backed securities available-for-sale in the prior year period. However, there were no security sales in the reported quarter.

Total non-interest at Hudson City expense increased to $820.1 million from $69.6million in the year-ago quarter. This increase was driven by a $728.5 million loss on the extinguishment of debt completed in December 2011. In addition, the company experienced an increase in Federal deposit insurance assessments and other non-interest expense, which was partially offset by a decrease in compensation and employee benefits. Efficiency ratio increased to 41.79% in the reported quarter from 22.10% in the year-ago quarter.  

Credit Quality

The provision for loan losses at Hudson City remained unchanged sequentially and decreased 44% year-over-year from $45 million to $25 million. The year-over-year decrease was attributable to the stability in growth rate of non-performing loans and charge-offs as well as a reduction in the loan portfolio size.

However, the ratio of non-performing loans to total loans was 3.48% as of December 31, 2011, up 32 bps from the prior quarter. Allowance for loan losses to total loans increased 4 bps sequentially to 0.93%. The ratio of net charge-offs to average loans slightly increased to 0.27% from 0.25% in the prior quarter.

Capital Ratios

Hudson City’s capital ratios remained strong during the quarter. Tier 1 leverage capital ratio increased to 8.83% as of December 31, 2011 from 8.77% as of September 30, 2011. Equity to total assets was 10.05% compared with 9.79% as of September 30, 2011.

Dividend Update

Concurrent with the earnings release, Hudson City declared a quarterly dividend of 8 cents per share. The dividend is payable on February 28, 2012 to shareholders of record on February 10, 2012.

Our Take

Hudson City’s strong business model, solid capital position and conservative underwriting will boost its financial position. The debt pay-off is also a strategic fit for the company.

Yet an unfavorable interest rate environment, sluggish economic recovery and uncertainty surrounding the new and anticipated regulations are the primary headwinds.

Within Hudson City’s peer group, People's United Financial Inc.’s (PBCT) reported its fourth-quarter 2011 earnings last week. People’s United’s fourth-quarter 2011 operating earnings per share of 17 cents missed the Zacks Consensus Estimate by 2 cents.

Quarterly results at People’s United were impacted by a lower top line coupled with a downtrend in credit quality due to economic weakness. However, lower non-interest expenses reflected better expense management.

Hudson City currently retains its Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

 
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