Hudson City Bancorp, Inc. (HCBK) reported yet another impressive quarter as it came out with first-quarter 2014 earnings of 9 cents per share, beating the Zacks Consensus Estimate by a penny. However, this compares unfavorably with the prior-year quarter figure of 10 cents.
Shares of Hudson City increased marginally in the morning trade, indicating that investors have started considering the results with optimism. However, the price reaction during the full trading session will give a fair idea whether Hudson City has been able to meet market expectations.
Results were primarily supported by increased non-interest income, lower expenses and no provision for loan losses. A strong capital position and credit quality were also the tailwinds for the quarter. However, a decline in the top line due to lower net interest income was on the flipside.
Hudson City’s net income for the quarter came in at $42.5 million, compared with $47.9 million in the prior-year quarter.
Quarter in Detail
The company reported total revenue (net of interest expense) of $150.1 million in the quarter, surpassing the Zacks Consensus Estimate of $137.0 million. However, the reported figure was down 16.6% from the year-ago quarter.
Hudson City’s net interest income decreased 25.4% year over year to $132.3 million in the quarter. The fall was mainly due to the overall decline in the average balance of interest-earning assets and interest-bearing liabilities and the persistent low interest rate environment. Net interest margin came in at 1.41%, down from 1.80% in the year-ago quarter.
Non-interest income came in at $17.8 million, including $15.9 million gain on the sale of mortgage-backed securities. Non-interest income in the prior-year quarter stood at $2.5 million and there were no other gain to support.
Total non-interest expense waned 1.9% from the prior-year quarter to $79.7 million. The decline was primarily due to lower federal deposit insurance expense, partially offset by a rise in other non-interest expense and compensation costs.
The efficiency ratio increased to 55.11% from 45.12% in the year-ago quarter. An increase in the efficiency ratio indicates decline in profitability.
Credit Quality
Credit metrics continued to improve as reflected in the reported quarter with allowance for loan losses declining 11.7% year over year to $265.7 million. Nonperforming loans declined to $1.02 billion as of Mar 31, 2014, down 9.7% year over year.
Further, the reported quarter witnessed no provision for loan losses similar to the prior quarter, but compared with $20.0 million in the year-ago quarter. The year-over-year change was primarily due to a fall in total delinquent loans and total loans and improving housing market.
Nonperforming assets decreased 7.9% year over year to $1.11 billion. Further, net charge-offs stood at $10.4 million, significantly down 51.2% year over year.
Capital Ratios
Hudson City’s capital ratios remained strong during the quarter. The bank’s Tier 1 leverage capital ratio advanced to 11.03% as of Mar 31, 2014 from 10.20% as Mar 31, 2013. Equity to total assets was 12.51%, up from 11.69% as of Mar 31, 2013. Total risk-based capital ratio of the bank was 26.10%, up from 22.77% in the year-ago quarter.
Our Viewpoint
Hudson City started 2014 on a positive note, reflecting its efforts towards achieving growth and profitability. Though the company has been struggling with its net interest income due to a low interest rate environment, we remain encouraged owing to its scope to capitalize on non-interest revenue sources.
Further, we expect continuation of balance sheet restructuring and the gradual implementation of some initiatives of its Strategic Plan (announced in 2012), particularly the ongoing launch of commercial real estate lending and secondary mortgage market operations, would favorably support its results in the upcoming quarters to a great extent.
However, owing to an unfavorable interest-rate environment, mounting levels of prepayments on mortgage assets, sluggish economic recovery and uncertainty surrounding the new and anticipated regulations are likely to be headwinds for Hudson City. Also, we remain cautious over ambiguity regarding the materialization of the proposed merger with M&T Bank Corp. (MTB).
Hudson City currently carries a Zacks Rank #3 (Hold).
Performance of Other Savings & Loan Institutions
First Niagara Financial Group Inc. (FNFG) reported first-quarter 2014 operating earnings of 17 cents per share, in line with the Zacks Consensus Estimate as well as the year-ago figure.
Washington Federal Inc.’s (WAFD) fiscal second-quarter 2014 earnings of 38 cents per share came in line with the Zacks Consensus Estimate.
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