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Hudson City Reports In Line

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Hudson City Bancorp Inc. reported first quarter 2012 net earning of 15 cents per share, in line with Zacks Consensus Estimate. The company had incurred a loss of $1.13 per share as a result of restructuring its balance sheet. On an operating basis, the company had earned 19 cents per share in the prior-year quarter.

Hudson City’s results reflect the impact of the debt pay off as well as the benefit from the balance sheet restructuring efforts. However, with the continuation of the low interest environment, the company anticipates continuing margin compression in 2012.

Total revenue in the reported quarter came in at $236.9 million, up 12.9% sequentially but down 34.5% year over year. The revenue figure was slightly above the Zacks Consensus Estimate of $234 million.

Quarter in Detail

Hudson City’s net interest income decreased 8.7% year over year to $234.1 million. Net interest margin moved up to 2.15% for the reported quarter from 1.73% in the prior quarter and 1.72% in the year-ago quarter.

The increase in margin reflects the impact of debt extinguishment in the prior quarter as well as balance sheet restructuring in the year-ago quarter. However, the overall decline in interest-earning assets and interest-bearing liabilities pushed down the net interest income figure in the reported quarter despite an uptick in the net interest margin.

Hudson City’s non-interest income was $2.8 million in the reported quarter, drastically down from $105.2 million in the year-ago quarter. Notably, the prior-year figure included $102.5 million of net gains on sale of securities. However, there were no securities sales in the reported quarter. The company used the gains from securities sale to pay off borrowings in the restructuring transaction.

Total non-interest expense at Hudson City declined to $91.6 million from $1.24 billion in the year-ago quarter. The year-ago results included the loss on the extinguishment of debt-related to the Restructuring Transaction. However, the company experienced an increase in compensation and employee benefit costs as well as in Federal deposit insurance expense.

Credit Quality

Credit metrics were mixed in the quarter. Provision for loan losses totaled $25 million, flat sequentially and down from $40 million in the prior-year quarter. The year-over-year fall was mainly due to the stabilization in early-stage delinquencies, decline in net charge-offs and a reduction in the size of the loan portfolio.

The ratio of non-performing loans to total loans was 3.71% as of March 31, 2012 compared with 3.48% as of December 31, 2011. Allowance for loan losses as a percent of total loans and as a percent of non-performing loans were 0.98% and 26.37%, respectively as of March 31, 2012, compared with 0.93% and 26.77%, respectively as of December 31, 2011. The ratio of net charge-offs to average loans decreased to 0.25% from 0.27% in the prior quarter and 0.28% in the year-ago quarter.

Capital Ratios

Hudson City’s capital ratios remained strong during the quarter. Tier 1 leverage capital ratio increased to 9.17% as of March 31, 2012 from 8.83% as of December 31, 2011. Equity to total assets was 10.46% compared with 10.05% as of December 31, 2011.

Dividend Update

Concurrent with the earnings release, Hudson City declared a quarterly dividend of 8 cents per share. The dividend is payable on May 25, 2012 to shareholders of record on May 10, 2012.

Our Take

Hudson City’s strong business model, solid capital position and conservative underwriting will boost its financial position. The debt pay-off is also a strategic fit for the company.

Yet an unfavorable interest rate environment, sluggish economic recovery and uncertainty surrounding the new and anticipated regulations are the primary headwinds.

Within Hudson City’s peer group, People's United Financial Inc. (PBCT - Free Report) reported its first-quarter 2012 operating earnings per share of 18 cents, missing the Zacks Consensus Estimate by a penny. However, earnings compared favorably with 17 cents per share reported in the prior quarter.

Lower revenue due to reduced net interest income and non-interest income were the negatives for the quarter. However, lower non-interest expenses, reflecting better expense management and improved credit quality, were the upsides in the quarter.

HudsonCitycurrently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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