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Hudson City Bancorp


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


with a first-quarter efficiency ratio of 25.03% followed by

New York Community Bancorp


with a first-quarter efficiency ratio of 36.62%, according to

SNL Financial


Hudson City Bancorp had total assets of $60.9 billion as of June 30. Nonperforming loans were still increasing, although at their slowest pace since the third quarter of 2008. Nonperforming assets, including problem loans and repossessed real estate, totaled $811.8 million or 1.33% of total assets, compared to 1.25% in March and 0.77% in June 2009.

The second-quarter provision for loan losses was $50 million, the same level as the first quarter and an increase from $32.5 million during the second quarter of 2009. The company continued to build its loan loss reserves, since net charge-offs (loan losses less recoveries) totaled just $22.8 million during the second quarter.

Hudson City's conservative approach on reserve provisioning is reflected in its low ratio of net charge-offs to average loans, which was an annualized 0.29% for the second quarter, and the ratio of reserves to total loans, which was 0.60%. The company explained its approach on provisioning as "consideration of the continuing weak economic conditions."

In his comments about the financial reform legislation, Hermance pointed out that Hudson City wouldn't be affected by changes in regulatory capital requirements since the company is already strongly capitalized and "all of our capital is common capital." This means the company won't be affected by the coming exclusion of some trust-preferred equity from regulatory capital.

Hermance also said the company wouldn't be affected by restrictions on proprietary trading, or requirements to retain some credit risk on loan securitization because Hudson City doesn't "sell loans to the secondary market or securitize loans."

The company's shares are not highly valued by the market, trading for roughly 10.7 times the consensus earnings estimate of $1.15 for 2010, 10 times the 2011 earnings estimate and 9.3 times the 2011 estimate, according to



With a 15 cent quarterly payout, the shares yield 4.88%, and the dividend is comfortably supported by earnings, as Hudson City's ratio of dividends paid-out to net income for the second quarter was 52%.

Hardesty Capital's Schluederberg also told


that the company is "just a steal," and with signs of continued economic improvement during the second half, the shares could rise to $17 or $18 in the first quarter of 2011 when the market's "comfort level comes back." He also said that with excess capital, the company might consider expanding its geographic base with an acquisition.

Finally, when asked if Hudson City's management might consider selling the company, Schluederberg said "It's out there, with a $26 buyout potential."


Written by Philip van Doorn in Jupiter, Fla.

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 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.