Hudson City Pulls Back After Earnings Beat

PARAMUS, N.J. (TheStreet) -- Hudson City Bancorp (HCBK) edged Wall Street's profit expectations for the second quarter early Friday but the market yawned and sent the stock lower in midday trades.

At least one money manager sees the decline in the shares as a buying opportunity.

"We're believers in the stock," said Scott Schluederberg, a portfolio manager with Hardesty Capital Management in Baltimore, Md., who also said Hudson City "should trade at more like 1.5 times book, but all the thrifts are down quite a bit given the economic uncertainty."

Earlier in the session, the shares scraped a low of $12.08, a level that's roughly 1.1 times tangible book value. Year-to-date, Hudson City is down nearly 8%. In recent trading, the stock was off 3.9% to $12.21. Volume of 5.2 million was creeping up on the issue's trailing three-month daily average of 7.6 million.

Before Wednesday's opening bell, the bank reported second-quarter net income of $142.6 million or 29 cents a share, a penny ahead of the average estimate of analysts polled by Thomson Reuters.

That performance was down from earnings of $148.9 million, or 30 cents a share, in the first quarter, but up 11% from a profit of $127.9 million or 26 cents a share, in the same period a year earlier.

The biggest factor in the sequential earnings decline was pressure on Hudson City's net interest margin, which is essentially a bank's average yield on loans and investments, less its average cost of funds. The net interest margin was 2.13% for the second quarter, declining from 2.20% in the first quarter and 2.18% a year earlier.

CEO Ronald Hermance said that mortgage loan rates had reached "historical lows" during the second quarter, and "the yields available on securities issued by U.S. government-sponsored enterprises, the only securities we purchase, also fell."

Hudson City's return on average assets (ROA) for the second quarter was 0.93% and the company's return on average equity (ROE) was 10.42%, which is a respectable earnings performance in the current industry environment. While Hudson City's net interest margin is quite narrow when compared to the first-quarter national aggregate margin of 3.83% reported by the Federal Deposit Insurance Corp., the company's high efficiency drives earnings.

The efficiency ratio -- noninterest expense divided by the sum of net interest income and noninterest income -- was 18.42%. While second-quarter numbers weren't yet available for many of the largest banks, Hudson City's first-quarter efficiency ratio of 18.27% was by far the lowest among the largest 50 U.S. bank and thrift holding companies.

The next-best was Washington Federal (WFSL) with a first-quarter efficiency ratio of 25.03% followed by New York Community Bancorp (NYB) with a first-quarter efficiency ratio of 36.62%, according to SNL Financial.

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