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Hudson City Bancorp Inc. (HCBK - Analyst Report) reported its fourth quarter 2012 operating earnings of 10 cents per share, a penny below the Zacks Consensus Estimate. However, earnings compared favorably with net loss per share of 73 cents in the year-ago quarter.

The lower-than-expected results at Hudson City mainly came on the back of a fall in both net interest and non-interest income. However, substantially lower expenses and a strong capital position were the positives for the quarter.

Hudson City’s net income for the quarter reached $47.9 million, compared with a net loss of $360.5 million for the prior-year quarter. The net loss in the fourth quarter of 2011 was due to the extinguishment of $4.3 billion of borrowings which resulted in an after-tax charge of $416.8 million.

For full year 2012, the company reported net income of $249.1 million or 50 cents per share compared with net loss of $736.0 million or $1.49 per share in 2011.  However, net income was lower than the Zacks Consensus Estimate of 53 cents.

Quarter in Detail

Hudson City’s total revenue was $195.0 million, down 7.1% from the year ago quarter. Further revenues were also lower than the Zacks Consensus Estimate of $202.0 million.

For the full year 2012, total revenue was $865.4 million, down 21.0% from 2011. This was also lower than the Zacks Consensus Estimate of $884.0 million.

Hudson City’s net interest income decreased 7.1% year over year to $192.3 million. The decrease reflected the overall decline in the average balance of interest-earning assets and interest-bearing liabilities. Net interest margin came in at 1.97%, up from 1.73% in the year-ago quarter.

Hudson City’s non-interest income was $3.0 million in the reported quarter, down 5.2% year over year, reflecting a decrease in service charges and other income.

Moreover, total non-interest expense at Hudson City substantially declined from the prior-year quarter to $87.6 million. Total non-interest expense for prior-year quarter included a $1.90 billion loss on the extinguishment of debt.

Credit Quality

Credit metrics displayed mixed results in the quarter. Non-performing loans continued to increase and reached $1.16 billion as of Dec 31, 2012, rising 1.7% sequentially and 13.7% year over year. The ratio of non-performing loans to total loans was 4.29% as of Dec 31, 2012, up from 4.12% in the prior quarter and 3.48% in the year-ago quarter.

The ratio of nonperforming assets to total assets stood at 2.98% in the reported quarter, up from 2.84% in the prior quarter and 2.34% in the comparable quarter last year.

However, the ratio of net charge-offs to average loans came in at 0.21%, slightly below 0.24% reported in the prior quarter and 0.27% reported in the year-ago quarter.

Provision for loan losses amounted to $25 million, up 25.0% sequentially but remained unchanged on a year-over-year basis. The overall declining trend in net charge-offs primarily contributed to the drop in loan loss provisions.

Capital Ratios

Hudson City’s capital ratios remained strong during the quarter. The bank’s Tier 1 leverage capital ratio advanced to 10.09% as of Dec 31, 2012 from 8.83% as of Dec 31, 2011. Equity to total assets was 11.58% compared with 10.05% as of Dec 31, 2011.

Dividend Update

Concurrent with the earnings release, Hudson City declared a quarterly cash dividend of 8 cents per share. The dividend will be paid on Feb 28, 2013 to shareholders of record on Feb 11, 2013.

In Conclusion

An unfavorable interest rate environment, sluggish economic recovery as well as uncertainty surrounding the new and anticipated regulations are likely to be the headwinds for Hudson City. However, in Aug 2012, M&T Bank Corporation (MTB - Analyst Report) agreed to takeover Hudson City in cash-and-stock deal. The deal is expected to close in the second quarter of this year.

Amid a low interest rate environment and despite restructuring, Hudson City’s business model was encountering challenges in the path to growth. Although it announced some initiatives to diversify earlier this year, it did not have adequate flexibility with respect to balance sheet. Hence, this deal is a strategic fit for Hudson City.

The deal would combine Hudson City’s retail network with M&T Bank’s full service commercial banking suite and help in expanding the premier community banking franchise in eastern U.S. This will also provide M&T bank the fourth-largest deposit share in N.J. Hence, the shareholders can benefit from this enhanced scale of business of the combined entity.

Hudson City currently retains a Zacks Rank #4 (Sell). Other stocks in the same sector that are performing well and worth considering include First Financial Holdings Inc. and Home Federal Bancorp Inc. (HOME - Snapshot Report). Both these stocks carry a Zacks Rank #1 (Strong Buy).

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