Paramus, N.J. (
Hudson City Bancorp
may not be in the same league as banking titans like
in terms of scale, but don't discount the $59 billion-asset company just because it's smaller in size.
Unlike other financial firms that limped through the financial crisis, if they survived at all, this thrift got it right. At the helm is Chairman and CEO Ron Hermance, who has been praised because Hudson City is the largest bank that did not take taxpayer money through the Troubled Asset Relief Program. A big reason for the bank's resilience is Hermance's focus on keeping the thrift as a banker's bank. Hudson City's business plan is simple -- it takes in deposits and makes loans to affluent customers. It does this while being arguably the most efficient bank in the industry.
Hermance says he was never interested in expanding into riskier businesses or loan products like many troubled banks did, partially because he didn't understand them. That cost him in return on assets, particularly in the housing heyday, but in hindsight it was probably one of the smartest moves he could have made. In an interview with
, the 62-year-old also says that, after being in the business for more than 30 years, he's seen enough credit cycles to smell a new one coming.
"I've been around long enough to know what credit cycles look like. The further you get away from a bad one, the closer you are to the next one. More esoteric products come up. We all know that whenever there is a high yield over the norm, there is a higher degree of potential for it to go wrong," Hermance says.
"I stuck closer to everything we knew how to do," he adds. "I mean staying in your core competency is not a hard thing nowadays for somebody to understand after we've had these problems. But when you're in an environment where everything goes, people look at you and say what are you sticking to that for? It's just something we felt very strongly about."
Hermance and his bank are touted frequently on
and have often been mentioned by both buy- and sell-side analysts as a safe bet since the company and its stock have held up so well, even through the financial crisis. Of note is that Hudson City has been able to post earnings growth every year since it went public in 1999. The stock is down roughly 15% this year, but on the whole it has held up better than other bank stocks throughout the financial crisis.
Hermance "understands the business," says Bob Ramsey, vice president of equity research at FBR Capital Markets. "He understands keeping it simple. He has always done a good job of keeping the company
in what they know. He is a good manager."
With 131 branches located in New York and New Jersey, mostly in wealthy areas that have for the most part held up throughout the housing downturn, Hudson City has placed a premium on providing jumbo loans to high-net-worth consumers with significant available equity. Hermance says the average down payment on a mortgage the bank underwrites is 39%.
Focused execution and conservative risk management are strong points for Hermance and his team. The bank does not do any commercial loans, or credit card or auto loans. Because Hudson City is able to contain its expenses, it attracts customers by offering lower interest rates on its mortgages and higher rates on its deposits such as certificates of deposit. The company also offers an attractive dividend yield, something rare in the bank sector these days.
Hudson City's efficiency ratio, which is a measure of how well the company is using its expenses to produce revenue, was 19.2% at Sept. 30. Many larger banks are less efficient, with ratios above 50%.
"The model is really very simple, but it's very resilient. It operates in all kinds of economies as long as you can keep your operating overhead low," Hermance says. "I've got a tremendous cost advantage. There is no lending authority in the branches. We offer
a fairly limited menu of deposit products and will refer mortgages into our department for underwriting.
"My average branch is $175 million," Hermance says, referring to deposits. "We just celebrated this year our Clifton branch went over a half a billion in deposits. That's the size of many banks."
The company has benefited from the surge in refinancings this year. Roughly 70% of the mortgages Hudson City approved in 2009 were refinancings, Hermance notes.
"I like these mortgages because
of the candidate. He's somebody who's got a higher rate elsewhere, is used to paying and performing at that rate, wants a lower rate, no new money, just wants a lower rate and doesn't mind subjecting himself to a full underwriting process all over again, which includes a new appraisal," he says. "So I like these loans even better than the ones I put on last year because these are people that are used to paying."
Still the company has also rejected its highest amount of loans ever this year, primarily because of lower appraisals -- not credit.
"They've been able to grow their earnings consistently through this whole cycle," FBR's Ramsey says. "They've been able to do that really because they were able to take very little credit risk in their lending."
Hudson City also has significant resources after a nearly $4 billion capital raise it did in 2005. Hermance spearheaded the firm's transition from mutual holding company into public company, beginning with an initial partial offering of stock in 1999. In 2005, the bank sold the rest of its stock -- 53% -- in a so-called second-step offering, where it raised $3.9 billion. Hudson City has been using the money to make loans and to grow organically.
As of Sept. 30. Hudson City's tangible common equity was 8.7%, but Hudson City's risk-based capital, was above 21.27% of assets.
"This is the old-fashioned way of doing things but it's making money," Hermance says. "In 2008, we were double-digit return on equity at a time when no one was returning anything on equity. In arguably the worst year in banking, 2008, our profits were up 60% and
we raised our dividends each quarter. Our theory all along has been nobody makes money unless everybody makes money."
Of course, Hudson City is not totally exempt from the credit crisis. Nonperforming assets have risen as a result of the down economy, and Hudson City will likely have to continue adding to its reserves against loans, some analysts say. But relatively speaking, the increase is minimal compared to other banks.
"The opportunity is there presumably to return to 20% pace of growth once we get through this with a little more loan demand and little less competition from the government," Ramsey says.
Hudson City stands to pick up more market share when the government extracts itself from the mortgage market. Many large banks are not making residential single family loans if they can't sell them to
, whereas Hudson City keeps many loans on their balance sheet, analysts say.
"If rates turn around and go up or if the federal government walks away from buying any GSE paper after the first quarter, my sense is the liquidity will dry up and mortgage rates may widen," which means fewer banks will want to make loans, Hermance says. "My duration extends on my existing portfolio, fewer people pay
their loans off
by refinancing with other lenders, so the loan generation I am doing now will result in better growth."
The company is not typically very acquisitive -- it's done just one bank acquisition since 2005 -- but in this environment it's hard not to at least look, Hermance says.
"We've looked at everything now that the FDIC
Federal Deposit Insurance Corp. is involved. Nothing has been really geographically great. I'd love to gain more deposits. I'd love to gain more market share. That's probably the favored type of acquisition right now," he says.
Hudson City, besides JPMorgan Chase, is one of the few financial firms owned by Hardesty Capital Management.
"They just never got into trouble," says Scott Schluederberg, a portfolio manager at Hardesty. "Their stock made money in 2008 when no one else did and they grew their dividend every quarter. So that attracted us. Hudson City should be a mid-20 stock. We're going to be in there to see that happen."
For all the praise, Hermance is not interested in taking a job at a large competitor where there's been large management shakeup from the crisis.
"I'm pretty happy where I am. This is a model that I understand. I'm pretty identifiable here," he says.
--Written by Laurie Kulikowski in New York.