NEW YORK (

TheStreet

) -- After two major balance sheet restructurings,

Hudson City Bancorp

(HCBK)

still needs to change its business model, possibly restructure again and more than one analyst thinks the company should consider selling.

Sterne Agee analyst Matthew Kelley on Friday projected that in a takeout scenario, the troubled Hudson City Bancorp would have a "terminal value" of $8.25 a share, which would be a 31% premium over Thursday's closing price of $6.27.

Hudson City's net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- has been under pressure for several years, in the prolonged low-rate environment, because of the Paramus, N.J. lender's focus on residential mortgage lending.

Following a first-quarter 2012 balance sheet restructuring that was forced by regulators and included the prepayment of $12.5 billion in higher-cost borrowings charges of $649.3 million, the company prepaid another $4.3 billion in borrowings during the fourth quarter, resulting in $440.7 million in charges.

During the first quarter, Hudson City earned $73 million, or 15 cents a share, and the net interest margin improved to 2.15% from 1.73% the previous quarter, and 1.72% a year earlier. For the entire U.S. banking industry, the first-quarter net interest margin was 3.52% during the first quarter, narrowing from 3.57% in the fourth quarter, and 3.66% in the first quarter of 2011, according to the Federal Deposit Insurance Corp.

Kelly said that "earnings power at HCBK will continue to suffer in a sustained low interest rate environment, in our view," and that the company was "expected to announce changes to its business plan (add mortgage banking)," and that a third restructuring of borrowings was "not out of the question."

The analyst said that mortgage loan prepayments were continuing to pressure Hudson City's margins, and that because

Fannie Mae

(FNMA)

and

Freddie Mac

(FMCC)

have raised their dollar limits on the "conforming" mortgage loans that they will buy, "the pool of jumbo mortgages which has wider spreads (without government guarantees)," and has been a traditional focus for the company, "is smaller."

Going forward, options for Hudson City "include a push into a less capital-intensive mortgage banking," focusing on quickly selling newly originated conforming mortgages to generate gains-on-sale," according to Kelley, who added that the company "may also be considering a move into non-residential lending (multi-family and commercial real estate)," with which Sterne Agee "would be more concerned," because of "the lack of infrastructure, history and expertise in these areas."

Regarding the possibility of a sale, Kelley said he would be "surprised to see the company sell over the near term," because of "the company's large size,

a current regulatory order and plans to announce new revenue/asset classes," but added that he saw "upside in a potential sale," for an acquirer "that could take the substantial liability marks. "

Back in January, Guggenheim Securities analyst David Darst suggested that New York Community Bancorp could be a potential bidder for Hudson City Bancorp, as the combined companies "would create an attractive NY, NJ, and CT franchise with 345 branches in the Tri-State market," and that New York Community "could pay $8 to $8.50 per share," representing about 1.3 times tangible book value "in an all-stock transaction," with "NYB realizing greater than 20% EPS accretion."

Interested in more on Hudson City Bancorp? See TheStreet Ratings' report card for this stock.

--

Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here:

Philip van Doorn

.

To follow the writer on Twitter, go to

http://twitter.com/PhilipvanDoorn

.

To submit a news tip, send an email to:

tips@thestreet.com

.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.