Hudson City Bancorp (NYSE:HCBK), fully recognized as the poster child for “safe” prime-only mortgage lending and whose CEO’s frequent media appearances (particularly on Jim Cramer’s “Mad Money”) usually come with heaping portions of high praise and accolades, appears now to be fully experiencing portfolio stress driven by the vicious combination of rising unemployment and falling home values.

Though CEO Ronald Hermance appears to have succeeded in his goal of increasing basic confidence in his bank, its non-performing loan ratio, which has exploded dramatically jumping from .5% in Q3 2008 to 1.66% in Q3 2009, tells a different story.

On Wednesday’s Mad Money, Jim Cramer invited the CEO of Hudson City Bancorp (HCBK) Ron Hermance to discuss the company’s third quarter results. The results were an example of the consistency as the regional bank reported EPS of $.27, which was one cent better than expectations and two cents better than last year’s results. Hudson City Bancorp is regarded as one of the most conservatively managed banks in the market, a trait which seems to have been counted against them in the rally of the last 7-plus months.

“I look at Hudson City, HCBK, for you home gamers. Here is one of the, if not the most responsible lender in the business, hardly any bad loans. They actually made you money in 2008. This year, it’s left in the dust. It’s down 24% in the last twelve months. What’s wrong with the picture? It beat the earnings estimates by a penny…On the call, he talked about how Hudson City increased loan originations by $1.7 billion. Non-performing loans were 1.4% of total loans; half the rate of its peers. No exposure to commercial real no sub-prime loans. No option arms. $30 billion of good old fashioned mortgages…” — CNBC’s Mad Money 10/21/2009

You've Come a Long Way, Sallie: Sallie Mae (SLM)

Hudson City Bancorp’s (HCBK) third quarter 2009 operating earnings came in at 27 cents per share, a penny ahead of the Zacks Consensus Estimate's 26 cents per share. This was an increase over 25 cents last year. The company continued to experience strong lending revenue, even though provisions for losses increased and other credit quality metrics worsened.

Net income increased 10.8% to $135.1 million as compared to $121.9 million in the prior-year quarter. This increase occurred in the face of significantly higher deposit insurance fees, including an across-the-industry special assessment as well as a significantly higher provision for loan losses.

Sentiment

Stocks are broadly higher on hopes the earnings reporting season will deliver good news for investors in the days and weeks ahead. Caterpillar (CAT), which releases results Tuesday morning, is up 5.3 percent and leading the Dow Jones Industrial Average to a triple digit gain. Texas Instruments (TXN) is holding modest gains and Apple Computer (AAPL) is flat ahead of reports due out after the closing bell. The tech-heavy NASDAQ is up 20.

The economic calendar remains light. A report from the National Association of Homebuilders [NAHB] released Monday afternoon showed homebuilder sentiment [HMI] slipped to 18 in October, down from 19 the month before and its fist decline since June, when the gauge of industry confidence slipped to 15.

One of Superman’s greatest powers is his x-ray vision. Independent banking analyst Chris Whalen has similar skills when it comes to seeing through banks’ vaults and financial books.

You can hardly find anyone as well respected on Wall Street as Chris Whalen — and Chris has earned that reputation. In addition to his accurate and incredibly thorough analysis, Whalen follows Groucho Marx’s valuable advice, “Before I speak, I have something important to say.”

HCBK:NDQ - Oct. 13, 2009 Close: $13.17

Caller: Question for you, I know in the past you’ve liked Hudson City Bancorp. Do you still?

Cramer: Yes, I do. Very conservative bank. People don’t want conservatism they want explosive earnings. They’re not going to get it from Ron Hermance. The yield is good, stock is good, I want to be in it. — CNBC’s Mad Money 10/6/2009

Bullish Calls:

Terra Nitrogen (TNH): "I can't count on these companies other than Terra Nitrogen."

By Hao Jin

One of the most popular ways for investors to select stocks is to focus on companies with long track records of increasing dividends. On Feb 27, 2009, General Electric (GE), once the most prominent dividend aristocrat, cut its dividend 68%, the first time since 1938.

One of the most popular ways for investors to select stocks is to focus on companies with long track records of increasing dividends. On Feb 27, 2009, General Electric (GE), once the most prominent dividend aristocrat, cut its dividend 68%, the first time since 1938. Who might be next?

I examined four types of high dividend stocks. Please note all these companies have great balance sheets, greater than 3.5% yield, low P/Es, and low short ratios.

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

It's been a week or two since we last checked in on 13F filings and our apologies for those of you anxiously awaiting the next installment. Unfortunately, there has been such a slew of 13D and 13G filings from various funds we track that we have been swamped. However, we are here again to cover a few more funds via 13F to give you an entire portfolio snapshot of their long U.S. equity positions. The last manager we covered in our 13F analysis was Bret Barakett and Tremblant Capital Group. This time around, we'll kick it back off with Chris Shumway's hedge fund, Shumway Capital Partners.

Napoleon Hill in his classic book Think & Grow Rich said: “In every adversity lies the seed of a greater or equivalent benefit.” The recession and the accompanying bear market devastated portfolio values.

Although we are currently in the midst of a powerful recovery, inexplicably, blue chips with dividends remain historically undervalued. It’s as though quality dividend payers are getting no respect.

Sentiment

Morning trading was sluggish Monday, but the major averages battled back from modest early losses and are trading a bit higher late in the day. With no economic data to guide morning trading, some of the focus was on overseas markets.

Benchmarks were broadly lower across the Asia/Pacific on concerns about an escalating trade war between the US and China. The US imposed tariffs on Chinese made tires. China is opening an anti-dumping investigation related to auto and poultry products. Hong Kong's Hang Seng lost 1 percent and Japan's Nikkei sank 2.2 percent. Major averages were broadly lower across Europe as well.

Bullish Calls

Banco Santander (STD), Banco Bilbao (BBV): "Banco Santander is good… but I like Banco Bilbao Argentaria even better. Santander is good; they have a great position in America, but they are just not as great a lender as BBV. Let’s buy BBV. They are the ones that have got a guaranteed bank, and I think that they are best in show."

From the late November lows of last year we have been quietly buying, led by our increasingly bullish view on the equity markets. Late February we found ourselves fully invested.

From mid-March we have been on a ride along bull market street. This is a rally of broad participation including corporate-bonds, emerging market bonds,commodities and high yield currencies.

Hudson City Bancorp (HCBK) reported 2Q09 operating earnings of $0.24 per share, one penny above our expectation and two pennies below consensus. HCBK continued to experience strong lending revenue, even though provisions for losses increased and other credit quality metrics worsened.

Despite the stability in the EPS trends, we remain concerned about the relationship of provisions and non-performing assets, as well as the adverse trends with respect to credit quality metrics and regulatory capital ratios. Prior to the conference call, we are adjusting our FY09E EPS and FY10E EPS to $1.04 per share and $1.20 per share, respectively. We continue to view the shares of HCBK as a Hold, though our concerns remain for the industry and this company over the near term.

• CIT confirms rescue details. CIT Group (CIT) confirmed its $3B rescue by bondholders, of which $2B is available immediately and the rest is expected to be available within ten days. The loan has a 2.5-year maturity. CIT also announced a tender for debt due August 17 where it would pay creditors $0.825 on the dollar as part of a "comprehensive restructuring of its liabilities," and canceled its Thursday earnings release. The real question now is whether the loan is anything more than a stop-gap measure and if CIT can survive without a complete overhaul.
• California closes budget gap. California lawmakers reached an agreement over how to close a $26B budget deficit, pulling the state back from the brink of bankruptcy. The deal, which needs to be approved by the state's full Senate and Assembly, will cut spending for schools, public works, welfare programs and municipalities, will force companies and individuals to pay income taxes sooner and will make it more difficult to receive state aid. In the time it took lawmakers to close the budget gap, California issued 153,711 IOUs worth $682M.
• TARP update. A leaked report from TARP Special Inspector General Neil Barofsky shows the country's bailouts and backstop plans total $23.7T. Of the $700B slated for TARP, $441B has been distributed. Barofsky will present a quarterly report on TARP to a congressional panel at 10:00 ET, and will criticize the Treasury for not being transparent enough about how it's spending taxpayer money. (Read Barofsky's report (.doc))
• Deutsche's spying probe. Insiders say Deutsche Bank (DB) has fired two top executives following an internal investigation into whether the company spied on a board member and others. Meanwhile, German prosecutors have opened a preliminary probe into whether Deutsche Bank and its senior officials broke civil and criminal laws protecting individual privacy.
• Yahoo's new homepage. Yahoo is launching a new homepage months earlier than planned, rolling out a test version in some markets today. The first homepage re-design since 2006, Yahoo is hoping to attract more users and advertisers by making its site the "center of their lives online," and will make it easier for users to access content from across the web, including from social networking sites.
• Ameritrade reaches ARS settlement. TD Ameritrade (AMTD) reached a settlement with New York Attorney General Andrew Cuomo and will buy back $456M of auction-rate securities from around 4,000 clients. Clients with accounts under $250,000 should get their money back within 75 days, while the company aims to return the rest of the funds by March 2010.
• Swiss banks retreat from U.S. clients. As the Justice Department's case against UBS (UBS) drags on, Swiss banks are reevaluating their U.S. business connections. Some Swiss banks are cutting off business with American clients for fear of U.S. authorities, while others are no longer accepting deposits from U.S.-based customers or allowing them to open accounts.
• Final Opel bids. General Motors confirmed it received three binding takeover offers for its Opel unit and will consider the deals in conjunction with the European countries that will be affected. The consortium of Magna International (MGA) and Russia's Sberbank made an unexpected last-minute change to their bid to appease critics, agreeing to evenly split a 55% majority stake in Opel instead of giving 80% of the stake to Sberbank. The other two bidders are RHJ International and Beijing Automotive.
• Wyeth okays Pfizer deal. As expected, Wyeth (WYE) shareholders approved a takeover by Pfizer (PFE), with 98% of votes cast in favor of the deal. The transaction still needs to be cleared by U.S. antitrust regulators.
• Barnes & Noble's e-book strategy. Barnes & Noble (BKS) announced plans to launch an electronic bookstore and will debut a physical e-book reader early next year, a direct attack on Amazon (AMZN) and its Kindle. Titles bought through the eBookstore can also be read over devices like the iPhone (AAPL) and BlackBerry (RIMM) and on computers.
• Leading indicators improve. Conference Board's Leading Indicators index rose +0.7% in June, vs. +0.5% consensus, the third increase in as many months with most components contributing positively. The index is up 2% in H1 2009 vs. -3.1% in H2 2008.

Earnings: Tuesday Before Open

• Ameritrade (AMTD): FQ3 EPS of $0.33 beats by $0.04. Revenue of $614M (-1.6%) vs. $580.5M. (PR)
• Autoliv (ALV): Q2 EPS of -$0.24 beats by $0.18. Revenue of $1.19B (-37%) vs. $1.15B. (PR)
• BJ Services (BJS): FQ3 EPS of -$0.11 misses by $0.11. Revenue of $787M (-40.8%) vs. $868M. (PR)
• BlackRock (BLK): Q2 EPS of $1.75 beats by $0.17. Revenue of $1.03B in-line. Assets under management $1.373T. Shares +1.6% premarket (8:20 ET). (PR)
• Caterpillar (CAT): Q2 EPS of $0.72 beats by $0.50. Revenue of $8.0B (-41.5%) vs. $8.9B. Shares +9.3% premarket (7:50 ET). (PR)
• Coca-Cola (KO): Q2 EPS of $0.92 beats by $0.03. Revenue of $8.3B (-8.6%) vs. $8.7B. Shares -1% premarket (7:50 ET). (PR)
• Comerica (CMA): Q2 EPS of -$0.10 beats by $0.35. Tier 1 capital ratio of 11.57%. Net credit-related charge-offs of $248M, or 2.08% of average total loans. (PR)
• Continental Airlines (CAL): Q2 EPS of -$1.36 misses by $0.01. Revenue of $3.1B (-22.7%) in-line. (PR)
• EI DuPont de Nemours (DD): Q2 EPS of $0.61 beats by $0.08. Revenue of $6.9B (-22.4%) vs. $7.15B. Shares +1% premarket (6:40 ET). (PR)
• Elan (ELN): Q2 EPS of -$0.14 beats by $0.01. Revenue of $281M (+14.4%) vs. $262M. (PR)
• Forest Laboratories (FRX): FQ1 EPS of $0.87 beats by $0.05. Revenue of $1B (+4.3%) in-line. (PR)
• Freeport-McMoRan Copper & Gold (FCX): Q2 EPS of $1.38 beats by $0.69. Revenue of $3.7B (-32.3%) vs. $3.4B. Shares +3.1% premarket (8:10 ET). (PR)
• Hudson City Bancorp (HCBK): Q2 EPS of $0.26 beats by $0.01. Loan loss provisions of $32.5M in Q2 vs. $3M in Q2 2008. Net charge-offs of $9.6M. (PR)
• Jefferies Group (JEF): Q2 EPS of $0.30 beats by $0.04. Revenue of $590M (+50.5%) vs. $510M. Shares +5.1% premarket. (PR)
• Lexmark International (LXK): Q2 EPS of $0.55 misses by $0.05. Revenue of $905M (-20.6%) vs. $916M. (PR)
• Lockheed Martin (LMT): Q2 EPS of $1.88 beats by $0.07. Revenue of $11.24B (+1.8%) in-line. Reaffirms full-year guidance. Shares -0.4% premarket. (PR)
• Merck & (MRK): Q2 EPS of $0.83 beats by $0.06. Revenue of $5.9B (-2.5%) vs. $5.8B. (PR)
• Peabody Energy (BTU): Q2 EPS of $0.49 in-line. Revenue of $1.3B (-12.2%) vs. $1.4B. Shares -2.4% premarket (8:10 ET). (PR)
• Precision Castparts (PCP): FQ1 EPS of $1.70 misses by $0.05. Revenue of $1.4B (-23.8%) vs. $1.6B. (PR)
• Quest Diagnostics (DGX): Q2 EPS of $1.00 beats by $0.05. Revenue of $1.9B (+3.5%) in-line. (PR)
• Regions Financial (RF): Q2 EPS of -$0.28 misses by $0.06. Loan origination volume of $3.1B vs. $2.8B in Q1. Net loan charge-offs increased to $491M, or an annualized 2.06% of average loans. (PR)
• Schering-Plough (SGP): Q2 EPS of $0.46 beats by $0.01. Revenue of $4.6B (-5.6%) in-line. (PR)
• Southwest Airlines (LUV): Q2 EPS of $0.08 beats by $0.01. Revenue of $2.6B (-8.8%) in-line. Shares +0.7% premarket (7:50 ET). (PR)
• State Street (STT): Q2 EPS of $1.04 beats by $0.07. Revenue of $2.15B (-20.3%) vs. $2.16B. Shares -1.6% premarket (8:00 ET). (PR)
• United Technologies (UTX): Q2 EPS of $1.21 beats by $0.17. Revenue of $13.2B (-17.2%) vs. $13.9B. (PR)
• Unitedhealth Group (UNH): Q2 EPS of $0.73 beats by $0.03. Revenue of $22B (+6.8%) in-line. (PR)
• Western Union (WU): Q2 EPS of $0.32 beats by $0.02. Revenue of $1.25B (-6.9%) in-line. (PR)

Earnings: Monday After Close

• Allscripts-Misys Healthcare Solutions (MDRX): Q4 EPS of $0.16 beats by $0.01. Revenue of $166M (+71%) vs. $160M. (PR)

Have all banks run amok? Not quite. I’ve gone out on a limb lately and recommended a couple of banks in the advisory I edit, Cabot Benjamin Graham Value Letter.

Hudson City Bancorp (HCBK) owns and operates 127 savings bank branches in northern New Jersey and New York City. The bank specializes in writing jumbo mortgages in the more affluent counties of New York and New Jersey. High loan standards and the avoidance of the sub-prime market have led to Hudson City’s strong balance sheet and low mortgage defaults.