Hudson City Bancorp Inc.'s (HCBK) second-quarter earnings rose 16% on deposit growth and increased revenue as the New Jersey regional bank beat analysts' expectations, although it failed to alleviate concerns about loss severities.

The company has stuck to its core business of writing conservative loans to borrowers mostly in the New York metropolitan area and, as a result, largely avoided the sky-high rates of default that have plagued its competitors.

But analysts said Tuesday the bank's growth in loans was slow and warned loan-loss provisions will likely continue to grow, and investors seized on the fears, particularly as the bank itself warned again of rising charge-offs.

Standard & Poor's equity analyst Kevin Cole cut his investment rating on Hudson City, saying that while the second-quarter profit topped his expectations, there will be moderation in higher mortgage rates which will hamper margins the rest of the year. "Despite relatively strong credit quality, we see increasing loss severities forcing (Hudson City) to raise its reserves to 30% of nonperformers (currently 20%) by year-end," Cole said in a note to clients.

Shares recently fell 74 cents, or 5.1%, to $13.86 after rising in premarket trading after the release of the earnings report.

Hudson City posted income of $127.9 million, or 26 cents a share, up from $110.7 million, or 22 cents a share, a year earlier. The latest results included $21.1 million for a Federal Deposit Insurance Corp. special assessment and was slightly better than the 25-cent profit analysts polled by Thomson Reuters had been expecting.

Revenue increased 40% to $329 million, handily topping the $293 million Wall Street was looking for.

Net interest income rose 30%. Deposits rose 17% in the first half of the year, while total assets climbed 6% during that same time to $57.41 billion.

Loan-loss provisions soared to $32.5 million in the latest quarter from $20 million in the first quarter and $3 million a year earlier amid an increase in nonperforming loans as economic conditions, especially unemployment levels, continue to deteriorate. Net charge-offs rose to $9.6 million in the quarter from $4.7 million in the previous quarter and $694,000 last year. Nonperforming assets rose to 0.77% from 0.59% and 0.25% in the respective periods.

The company's Tier 1 capital leverage ratio, a key measure of financial strength, fell to 7.7% from 8.4% a year earlier and 7.8% in the prior quarter.

FBR Capital analysts said in a note that the credit trends were "basically in line" with expectations but warned that "balance sheet growth was light." Fox-Pitt analysts said the loan growth was below their expectations.

Chairman and Chief Executive Ronald Hernance, Jr. reiterated an earlier warning that charge-offs are increasing. He has cited defaults from rising unemployment coupled with expected further declines in home values, which are expected to plague the New York region, as reasons for the increase.

Hudson City, which didn't participate in the federal government's Troubled Asset Relief Program, was the best-performing bank in the Standard & Poor's 500 index last year, rising 7.7% as most other banks' shares were plummeting.

-By Kerry Grace Benn and David Benoit, Dow Jones Newswires; 212-416-2353; david.benoit@dowjones.com