Hudson City Bancorp: Bum or Bum Rap?

| About: Hudson City (HCBK)

Since we have written extensively on Hudson City Bancorp (NASDAQ:HCBK) in the past, we have received several requests for an update given yesterday's circumstances. An article in yesterday's Wall Street Journal by Corrie Driebush of Dow Jones newswires titled, Hudson City Expects to Receive Regulatory Enforcement Action, stimulated a sharp selloff in the company's share price. Although we believe it is premature to draw firm conclusions until the Office of Thrift Supervision's (OTS) actual memorandum is available to analyze, we feel that it is our responsibility to at least provide some initial color.

The article we authored on January 29, 2011 was titled: Hudson City Bancorp: Short-term Risk, Long-term Opportunity? This article could be summarized by saying that we believe that Hudson City Bancorp (HCBK) is a very prudently managed thrift that faces short-term headwinds, but is well-positioned for the long-term future. Our definition of long-term implies at least a business cycle which we consider to be a minimum of 3 to 5 years in duration. Knowing what we know today, we continue to take that stance on this high-quality thrift.

In response to a private message request from a reader, I provided the following answer which included a brief excerpt from the Wall Street Journal article cited above:

I am reviewing the info now, but have no conclusions as of yet. However, I remain confident in this institution. I find it ironic that the one thrift that behaved responsibly is now being punished by overzealous regulators. The following is from today's WSJ and provides a few positives. Frankly, I still see a long term opportunity here. The short term risk is more related to price volatility rather than business viability. I continue to believe that they are prudently managed.

I then included the following excerpt from the Wall Street Journal article cited above:

Janney Capital Markets said instead of restructuring its borrowings, the bank may consider de-levering its balance sheet by making more use of gains on securities, which Hudson City has done in recent quarters. Although these securities gains reduce assets and earnings, they also enhance capital ratios.

The research firm said while it has long-regarded interest rate exposure as Hudson City's chief risk, that risk is tempered by high asset quality, a strong efficiency ratio and ample capital. Janney maintained its neutral rating on the bank.

Hudson City said in the filing that regulatory response to the financial crisis has resulted in significantly greater regulatory supervision of financial institutions. The bank has added staff to keep up with operational and regulatory requirements and plans to continue to invest in technology and staffing. "

-By Corrie Driebusch, Dow Jones Newswires; 212-416-2143;”

Summary and Conclusions

The bottom line is that we do not believe that Hudson City Bancorp is in any danger of going out of business. The company is well capitalized and we believe capable of effectively navigating through these troubled waters. There certainly could be some short-term pain involved, to include a temporary interruption in their growth and earnings. However, we would add that Hudson City Bancorp had already made the decision to hunker down until the financial storm subsides and lending opportunities improve.

Furthermore, although we believe their decision to withdraw their application to become a National Bank was an appropriate one, and is also indicative of their readiness to adapt and change in this rapidly changing regulatory environment. We are hopeful that Hudson City Bancorp continues on the path of restructuring their borrowings, as discussed in the Wall Street Journal article excerpt above. We consider this a good strategy and certainly more favorable than cutting their dividend.

However, as previously stated, it is premature to offer a conclusive opinion until more information becomes available. On the other hand, we feel that today's stock price represents an incredible long-term opportunity, especially if the thrift is capable of maintaining their dividend. If we are correct and Hudson City Bancorp navigates their way through these short-term issues, then today's price selloff will represent an incredible long-term opportunity. But until we know more, the stock is only for the most venturesome and perhaps patient investors.

Disclosure: I am long HCBK.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.