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Hudson City Bancorp Inc. (HCBK - Analyst Report) reported its first-quarter 2013 operating earnings of 10 cents per share, a penny below the Zacks Consensus Estimate. Moreover, this compares unfavorably with the year-ago earnings of 15 cents per share.

The lower-than-expected results at Hudson City mainly came on the back of a fall in revenue due to declining net interest and non-interest income. However, lower expenses and a strong capital position were the tailwinds for the quarter. Lower provision for loan losses also came as a positive.

Hudson City’s net income for the quarter came in at 47.9 million, compared with $73.0 million in the prior-year quarter.

Quarter in Detail

Hudson City’s total revenue was $179.9 million, down 24.1% from the year-ago quarter. Further, revenues were lower than the Zacks Consensus Estimate of $192.0 million.

Hudson City’s net interest income decreased 24.2% year over year to $177.4 million. The decrease in net interest income reflects the decline in the average balance of interest-earning assets and interest-bearing liabilities and the continued low interest-rate environment. Net interest margin came in at 1.78%, down from 2.15% in the year-ago quarter.

Hudson City’s non-interest income came in at $2.5 million, down 10.7% year over year, reflecting a decrease in service charges and other income.

Moreover, total non-interest expense at Hudson City waned 11.3% from the prior-year quarter to $81.3 million. The decline was primarily driven by lower compensation and employee benefit costs, partially mitigated by an increase in other expenses.

However, the efficiency ratio increased to 45.12% from 38.66% in the year-ago quarter. The increase in efficiency ratio indicates a decline in profitability.

Credit Quality

Credit metrics displayed mixed results in the quarter. Non-performing loans reached $1.14 billion as of Mar 31, 2013, down 1.7% sequentially but up 27.3% year over year. The ratio of non-performing loans to total loans was 4.35% as of Mar 31, 2013, up from 4.29% in the prior quarter and 3.71% in the year-ago quarter.

The ratio of nonperforming assets to total assets stood at 2.98% in the reported quarter, in line with the prior quarter and up from 2.49% in the comparable quarter last year.

However, the ratio of net charge-offs to average loans came in at 0.32%, above 0.21% reported in the prior quarter and 0.25% reported in the year-ago quarter.

Provision for loan losses amounted to $20 million, down 20.0% both sequentially and on a year-over-year basis. The year-over-year decrease in provision for loan losses was primarily due to the stabilization of home prices, a smaller size of the loan portfolio and a decline in the amount of total delinquent loans.

Capital Ratios

Hudson City’s capital ratios remained strong during the quarter. The bank’s Tier 1 leverage capital ratio advanced to 10.20% as of Mar 31, 2013 from 9.17% as of Mar 31, 2012. Equity to total assets was 11.69% compared with 10.46% as of Mar 31, 2012.

Dividend Update

Concurrent with the earnings release, Hudson City declared a quarterly cash dividend of 4 cents per share. The dividend will be paid on May 30 to shareholders of record on May 14.

Our Viewpoint

An unfavorable interest-rate environment, sluggish economic recovery and 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 a cash-and-stock deal. The deal is expected to close upon the receipt of all essential regulatory and shareholder approvals and satisfaction of all other conditions.

Amid a low interest-rate environment and despite restructuring, Hudson City’s business model was encountering challenges in its growth trajectory. Although it announced some initiatives to diversify in 2012, it did not have adequate flexibility with respect to its 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 expand 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 the enhanced scale of business of the combined entity.

Hudson City currently carries a Zacks Rank #3 (Hold). Other stocks in the same sector that are performing well and worth considering include American National Bankshares Inc. (AMNB - Snapshot Report) and Crescent Financial Bancshares, Inc. . Both these stocks carry a Zacks Rank #1 (Strong Buy).
 

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