Hudson City Stands Out Among Regionals

NEW YORK (TheStreet) -- The smaller regional banks will be among the financial sectors to get a competitive boost if reform legislation puts new clamps on the big banks.

With that thesis in mind, TheStreet.com Ratings did an analysis (see table above) to find regional bank and thrift holding companies with low stock valuations for investors looking to get some exposure to the group to consider. The exercise found Hudson City Bancorp (HCBK) to be a standout with Astoria Financial (AF) and People's United Financial (PBCT) not too far behind. Honorable mentions went to BancorpSouth Inc. (BXS), and Bok Financial Corp. (BOKF).

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First a word on the methodology. After beginning with a list of all publicly-traded U.S. bank and thrift holding companies with between $10 billion and $100 billion in total assets, the group was narrowed down to these five actively-traded names, with price-to-tangible-book ratios below two.

Companies with nonperforming assets -- including nonaccrual loans and repossessed real estate -- plus performing loans past due 90 days or more comprising 5% or more of total assets, were excluded.

We chose to narrow down the list using price-to-tangible-book ratios, since earnings haven't yet "normalized" for many of the regional banks making large provisions for loan loss reserves over the past year.

Hail! Hail! Hudson City

As of Wednesday, Hudson City Bancorp of Paramus, N.J. had the lowest closing price relative to tangible book value among the five companies, and its shares were also trading for the lowest multiple to consensus earnings estimates among analysts polled by Thomson Reuters, for 2010, 2011 and 2012.

Shares are also supported by a 15 cent quarterly dividend, for a yield of 4.14%.

This week Hudson City reported first-quarter earnings of $148.9 million, or 30 cents a share, up from $136.6 million, or 28 cents a share, in the fourth quarter and $127.7 million, or 26 cents a share, in the first quarter of 2009. The company's annualized return on assets was 0.98% and its return on equity was 10.96%, which was very good for a thrift in the current environment.

While Hudson City hasn't suffered from debilitating loan losses during the credit crisis, one concern for the company is that the thrift holding company's net interest margin -- the difference between the average yield on loans and investments and its average cost of funds -- bucked the industry trend and declined to 2.20% during the first quarter.

The margin doesn't compare favorable to most other regional holding companies, but Hudson City has a long-term track record for remarkable efficiency. The company's efficiency ratio - essentially its noninterest operating expenses divided by operating income - was 19.33% during 2009, by far the lowest for any of the 48 regional companies we analyzed. Hudson City's efficiency ratio has consistently lead large banks and has been improving for years.

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