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Hudson City Misses Estimates

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Hudson City Bancorp Inc. reported third quarter 2012 operating earnings of 12 cents per share, two cents below the Zacks Consensus Estimate.

Including $6.1 million of expenses associated with the prior disclosed merger with M&T Bank Corporation (MTB - Free Report) , Hudson City’s net income came in at $55.9 million or 11 cents per share for the quarter under review, down from earnings of $84.2 million or 17 cents per share reported in the year-ago period.

The lower-than-expected results at Hudson City were mainly due to a decrease in revenue as well as increase in expenses. Also, the continuation of the low interest rate environment impacted its net interest margin.

Total revenue in the reported quarter came in at $206.3 million, below the Zacks Consensus Estimate $221 million. Moreover, revenue fell 9.2% sequentially and 16.7% year over year.

Quarter in Detail

Hudson City’s net interest income decreased 16.9% year over year to $203.3 million. Net interest margin came in at 2.02% for the reported quarter, down from 2.12% in the prior quarter and slightly above 1.97% in the year-ago quarter.

The fall in net interest income was driven by the decrease in average balance of interest-earning assets as well as interest-bearing liabilities. Moreover, the low market interest rates continue to put pressure on net interest margin.

Hudson City’s non-interest income was $3.0 million in the reported quarter, down 2.5% year over year, reflecting a decrease in service charges and other income.

Moreover, total non-interest expense at Hudson City escalated 12.2% from the prior-year quarter to $93.9 million. The increase was primarily due to a rise in compensation and employee benefit costs and merger related expenses, partly mitigated by a decrease in Federal deposit insurance expense.

Credit Quality

Credit metrics were mixed in the quarter. Non-performing loans continued to increase and amounted to $1.14 billion as of September 30, 2012, increasing 4.8% sequentially and 20.1% year over year. The ratio of non-performing loans to total loans was 4.12% as of September 30, 2012, up from 3.88% in the prior quarter and 3.16% in the year-ago quarter. Results reflected a delay in the foreclosure process.

Nonperforming assets to total assets ratio was 2.84% in the reported quarter, up from 2.60% in the prior quarter and 1.95% in the comparable quarter last year.

However, the ratio of net charge-offs to average loans came in at 0.24% in the reported quarter, slightly below the 0.25% reported both in the prior quarter as well as the year-ago quarter.

Provision for loan losses amounted to $20 million in the reported quarter, down 20.0% both sequentially and year-over-year. The overall declining trend in net charge-offs and a reduction in the size of the loan portfolio 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 9.75% as of September 30, 2012 from 9.44% as of June 30, 2012. Equity to total assets was 11.25% compared with 10.70% as of June 30, 2012.

Dividend Update

Concurrent with the earnings release, Hudson City declared a quarterly cash dividend of 8 cents per share. The dividend is scheduled to be paid on November 30, 2012 to shareholders of record on November 9, 2012.

In Conclusion

In addition to the unfavorable interest rate environment, sluggish economic recovery and uncertainty surrounding the new and anticipated regulations are likely to serve as headwinds for Hudson City. However, during the third quarter, M&T agreed to takeover Hudson City in cash and stock deal. The deal is expected to close in the second quarter of 2013.

Notably, on the basis of the average closing price of M&T common stock on the New York Stock Exchange for the 10 trading days ending October 19, 2012, the implied value of the consideration was around $8.71 per share of the company's common stock to be received by the shareholders of the company in the merger.

However, the value that the shareholders will finally receive will depend on the average closing price of M&T common stock for the 10 trading days immediately prior to the completion of the merger.

Amidst a low interest rate environment and despite restructuring, Hudson City’s business model was encountering challenges in the path to growth. Though it announced initiatives to diversify earlier this year, 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’s full service commercial banking suite and help in expanding the premier community banking franchise in eastern U.S. and give M&T the fourth largest deposit share in New Jersey. Hence, the shareholders can benefit from this enhanced scale of business of the combined entity.

On the other hand, M&T Bank Corp.’s third quarter 2012 operating earnings of $2.24 per share were significantly above the Zacks Consensus Estimate of $1.84. In addition, it surpassed the prior-quarter earnings of $1.82 per share. The results were aided by bolstered net interest and non-interest income as well as lower operating expenses.

Within Hudson City’s peer group, last week People's United Financial Inc. (PBCT - Free Report) reported its third-quarter 2012 operating earnings per share of 19 cents, in line with the Zacks Consensus Estimate. Earnings compared unfavorably with 20 cents per share, reported in the prior quarter.

Higher non-interest expenses and elevated provision for loan losses were the dampeners for the quarter. However, higher revenue aided by improved non-interest income acted as a positive.

Hudson City currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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