Hudson City Meets Estimates

Hudson City Bancorp’s (HCBK - Analyst Report) third quarter 2009 operating earnings came in at 27 cents per share, a penny ahead of the Zacks Consensus Estimate's 26 cents per share. This was an increase over 25 cents last year. The company continued to experience strong lending revenue, even though provisions for losses increased and other credit quality metrics worsened.

Net income increased 10.8% to $135.1 million as compared to $121.9 million in the prior-year quarter. This increase occurred in the face of significantly higher deposit insurance fees, including an across-the-industry special assessment as well as a significantly higher provision for loan losses.

Net interest income increased 27.6% to $325.5 million as compared to $255.1 million last year. The increase was due to a steeper yield curve, which allowed reduction in deposit costs faster than the decrease in mortgage yields.

The provision for loan losses amounted to $40.0 million, compared to $5.0 million in the prior-year quarter. The increase in the provision for loan losses reflects the risks inherent in the company’s loan portfolio.

Non-performing loans amounted to $517.6 million or 1.66% of total loans as compared to $217.6 million or 0.74% of total loans at Dec. 31, 2008. Net charge-offs rose to $13.2 million from $1.4 million in the prior-year quarter. The increase in non-performing loans and net charge-offs reflects the current economic recession coupled with the continued deterioration of the housing market.

Total non-interest income was $2.5 million as compared to $2.2 million for the same quarter in 2008.

Total non-interest expense increased 27.3% to $62.9 million from $49.4 million in the third quarter of 2008. The increase is primarily due to increases of $10.0 million in federal deposit insurance expense, coupled with a hike in compensation and employee benefits expense as well as net occupancy expense.

As of Sept. 30, 2009, book value per share increased to $10.75 compared to $10.10 as of Dec 31, 2008. Tangible book value per share improved to $10.43 as of versus $9.77 as of Dec. 31, 2008.

Results were aided by an increase in net interest income, partially offset by an increase in its provisions for loan losses as more customers fell behind on repaying loans. Despite the stability in Hudson City’s earnings trend, we remain concerned about the relationship of provisions and non-performing assets, as well as the adverse trends with respect to the other credit quality metrics. Pending further positive developments, we maintain a Neutral recommendation on the shares.