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Hudson City Restructures, Plans 4Q Charge (Update 1)

Stocks in this article: HCBK FNMA FMCC

Updated with comments from Guggenheim Securities analyst David Darst.

PARAMUS, N.J. ( TheStreet) -- Hudson City Bancorp (HCBK) has taken another major step to restructure its balance sheet and boost its net interest margin.

The company announced on Friday that it had "extinguished $4.3 billion of structured putable borrowings that had a weighted-average cost of 4.21%," using cash on hand to repay the borrowings. Hudson City CEO Ronald Hermance said that the company was "doing just what our customers are doing: paying down expensive debt in this prolonged period of depressed market interest rates."

Investors were obviously pleased at the prepayments of such high-cost borrowings, as the shares rose 7% in morning trading, to $6.17.

Hudson City Bancorp CEO Ronald Hermance

Hudson City said that it would take a $440.7 million fourth-quarter charge on the debt repayments and would report a net loss for the quarter. The company said that for main subsidiary Hudson City Savings Bank, the "Tier I leverage capital ratio was substantially unaffected by the extinguishments," and that the bank would "continue to have a significant cushion above the regulatory requirements to be considered well capitalized."

The debt repayment followed a major restructuring of Hudson City Bancorp's balance sheet that was forced by the Office of Thrift Supervision during the first quarter, when the company prepaid $12.5 billion in structured borrowings, resulting in a $649.3 million charge and a $555.7 million net loss. The company later reduced its quarterly dividend payout to 8 cents a share, from 15 cents.

Hudson City said that it did "not expect the loss for the fourth quarter to affect its dividend strategy in light of the improved earnings position."

Hudson City's long-term problem has been a leverage strategy of using borrowings from the Federal Home Loan Bank to buy investment securities -- mainly mortgage-backed securities issued by Fannie Mae (FNMA) and Freddie Mac (FMCC) -- which backfired in the prolonged low-rate environment, while mortgage loan demand was also soft. The company's net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings -- dipped as low as 1.70% during the fourth quarter of 2010, according to SNL Financial, while the U.S. banking industry's net interest margin was 3.71%, according to the Federal Deposit Insurance Corp.

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