Hudson City Bancorp’s (HCBK) second-quarter operating earnings came in at 29 cents per share, just a penny ahead of the Zacks Consensus Estimate of 28 cents. Earnings also compared favorably with 26 cents in the prior-year quarter. The results were primarily helped by lower interest expense, partially offset by an increase in provision for loan losses.
Hudson City reported an 11.5% year-over-year increase in net income to $142.6 million. Net interest income increased 5.0% year over year to $317.5 million. Net interest margin declined 5 basis points year over year to 2.13% from 2.18% in the comparable period last year.
Total non-interest income was up 25% year over year to $33.2 million. Total interest and dividend income decreased 1.4% to $717.6 million from $727.8 million in the prior-year quarter. The decline was due to lower yield on interest earning assets.
Total interest expense decreased 6.0% to $400.1 million as compared with $425.4 million in the prior-year quarter. The decline was brought about mainly by a decline in cost of total interest bearing liabilities.
Total non-interest expense decreased 23.9% year over year to $64.6 million. This was primarily due to no federal deposit assessment expense, coupled with a decline in compensation and employee benefits expense, partially offset by an increase of $13.5 million in federal deposit insurance expense.
The efficiency ratio improved to 18.42% during the quarter from 25.83% in the prior year quarter.
The provision for loan losses at Hudson City increased 54% year over year to $50.0 million, reflecting the risks inherent in the company’s loan portfolio.
Hudson City witnessed a slowdown in growth in non-performing assets Non-performing loans, defined as non-accruing loans and accruing loans delinquent 90 days or more, amounted to $790.1 million as of June 30, 2010 compared with $744.9 million as of March 31, 2010 and $627.7 million as of December 31, 2009. The ratio of non-performing loans to total loans was 2.46% as of June 30, 2010 compared with 2.32% as of March 31, 2010 and 1.98% as of December 31, 2009. The trend signifies the slowly stabilizing real estate markets.
However, the current high unemployment and sluggish economic recovery have forced the customers to default on their loans, as witnessed by an increase in net charge-offs, which rose to $22.8 million from $9.6 million in the prior-year quarter.
Hudson City's return on average assets for the quarter was 0.93% and its return on average equity was 10.42%, increasing from 0.91% and 9.98%, respectively, in the prior year quarter.
Hudson City also declared a quarterly dividend of 15 cents per share, payable to shareholders on August 27, 2010.
Unlike most of the banks and financial institutions that were ravaged by the financial crisis caused by mortgage market crash, Hudson City remained safe due to its strict underwriting standards. It refrained from becoming heavily involved in investing in exotic securities such as trust-preferreds or collateralized debt obligations. Its focus on its core business of multifamily lending in the New York metropolitan area and single-family mortgage lending has kept it steady. Solid capital management and growth in loans, assets and deposits in the recent quarters also bode well for the company. Thus we maintain our Neutral recommendation.