Hudson City Bancorp, Inc. (HCBK) reported the third consecutive quarter of positive earnings surprise with the second-quarter earnings of 8 cents per share outpacing the Zacks Consensus Estimate by a penny. However, this compared unfavorably with the prior-year quarter figure of 10 cents.
Results were primarily supported by increased non-interest income, lower expenses and no provision for loan losses. 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 $39.2 million, down 19.5% from the prior-year quarter.
Quarter in Detail
The company reported total revenue (net of interest expense) of $138.9 million in the quarter, surpassing the Zacks Consensus Estimate of $134.0 million. However, the reported figure was down 18.0% year over year.
Hudson City’s net interest income decreased 26.4% year over year to $117.7 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 1.29%, down from 1.64% in the year-ago quarter.
Non-interest income came in at $21.2 million, including a $19.5 million gain on the sale of mortgage-backed securities. Non-interest income in the prior-year quarter stood at $9.6 million which included a $7.2 million gain on the sale of securities.
Total non-interest expense waned 4.6% from the prior-year quarter to $73.1 million. The decline was primarily due to lower federal deposit insurance expense, partially offset by a rise in other non-interest expense.
The efficiency ratio increased to 52.65% in the quarter from 45.22% in the year-ago quarter. An increase in the efficiency ratio indicates decline in profitability.
As of Jun, 30, 2014, net loans stood at $23.00 billion compared with $23.94 billion as of Dec 31, 2014. Total deposits were $21.51 billion against $21.47 billion as of Dec 31, 2014.
Credit Quality
Credit metrics continued to improve with allowance for loan losses declining 14.2% year over year to $255.0 million. Nonperforming loans stood at $1.01 billion as of Jun 30, 2014, down 9.3% year over year.
Further, the reported quarter witnessed no provision for loan losses similar to the prior quarter, but compared with provision of $12.5 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 an improving housing market.
Nonperforming assets decreased 7.5% year over year to $1.01 billion. Further, net charge-offs stood at $10.7 million, down 34.2% year over year.
Capital Ratios
Hudson City’s capital ratios remained strong during the quarter. As of Jun 30, 2014 the bank’s Tier 1 leverage capital ratio advanced to 11.26% from 10.41% as Jun 30, 2013. Equity to total assets was 12.77%, up from 11.74% as Jun 30, 2013. Total risk-based capital ratio of the bank was 26.91%, up from 23.78% in the year-ago quarter.
Our Viewpoint
Hudson City’s results reflect a decent performance. Though the company has been struggling with its net interest income due to a low interest rate environment, we remain optimistic 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 recent launch of commercial real estate lending and secondary mortgage market operations should favorably support its results in the upcoming quarters to a great extent.
However, mounting levels of repayments 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 surrounding 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
Washington Federal Inc. (WAFD) came out with yet another impressive quarter with its fiscal third-quarter 2014 earnings (ended Jun 30) of 37 cents per share beating the Zacks Consensus Estimate by a penny. This marked the company’s tenth consecutive quarter of earnings beat. It also compared favorably with the prior-year quarter figure of 36 cents.
People's United Financial Inc.’s (PBCT) second-quarter 2014 operating earnings per share of 20 cents came in line with the Zacks Consensus Estimate as well as the prior-year quarter earnings.
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