Cautious spending, lending help Hudson City set records

Oct 22, 2009 (The Record - McClatchy-Tribune Information Services via COMTEX) -- HCBK | Quote | Chart | News | PowerRating -- Ronald Hermance, chief executive officer of Paramus-based Hudson City Bancorp Inc., has been in the business media spotlight, held up as a role model for safe, sound and profitable bank management. Hudson City was Forbes magazine's "Best Managed Bank" last year, and the year before, and Hermance is a frequent guest on financial television channels such as CNBC.

The attention and accolades are primarily for remaining profitable in hard times and for doing what many lenders failed to do in recent years -- verify borrowers' credit worthiness and require that borrowers have equity in the home of at least 20 percent of its appraised value.

But there is another reason for the bank's against-the-grain profitability that gets less attention: low overhead.

The company said Wednesday that in the third quarter it spent a little less than 20 cents on non-interest operating costs such as payroll, real estate, and utilities for each dollar of revenue generated from loans, investments and fees. The average overhead cost per dollar of revenue for all banks and thrifts for the first half of this year was 62.4 cents, according to the Federal Deposit Insurance Corp.

Hudson City "has benefited from higher spreads, a low efficiency ratio, and tight underwriting standards, which have contained credit costs," Richard D. Weiss, an analyst at Janney Montgomery Scott, wrote Wednesday in research note to investors.

Hermance says the bank saves on labor by employing only seven people per branch on average, which is less than most banks, and it has about $170 million in deposits per branch, more than twice the New Jersey average of about $67 million per branch for banks and thrifts. Efficiency in deposit- gathering is particularly important because deposits generally are a bank's cheapest source of funding for income-generating loans.

Also, the savings bank's deposit accounts are primarily in the form of certificates of deposit that require little servicing, unlike the multitude of small checking accounts held by most commercial banks.

The company relies heavily on brokers rather than its own staff for mortgage loan sales.

"The fact that we operate so efficiently, and that our credit costs are so low, that is the formula for us," Hermance said. "The benefit accrues to the customer and the shareholder, big time," he said.

A conservative lending -- and spending -- approach has helped Hudson City set earnings records each year since the company went partially public in 1999, even while rivals stumbled in 2008 and 2009 under the weight of bad loans and investments.

The company's shares rose 6.3 percent in 2008 as the Standard & Poor's 500 Index fell 38 percent. This year the stock is down about 18 percent.

"It's a lack of liquidity on the part of investors," Hermance said, explaining the slumping stock price. "What do you sell first? The stuff you have a profit in."

Weiss maintained his "neutral" rating on the stock, calling it "reasonably valued."

Hudson City -- which became fully shareholder-owned in a $3.9 billion second offering in 2005 -- said Wednesday it had record net income for the third quarter of $135.1 million, an increase of nearly 11 percent from the same period a year earlier. Per share earnings of 27 cents a share beat Wall Street's expectation by a cent.

The company, which has 131 branches in New Jersey, New York and Connecticut, employed 1,483 as of Sept. 30, up from 1,406 a year earlier.

To be sure, the bank's credit costs have risen along with unemployment. Non-performing assets increased 20 percent in the past three months and the bank set aside $40 million in the third quarter to cover possible future home loan losses, up from $5 million in the third quarter of 2008.

But credit quality "should not be a material issue relative to capital or franchise value," Weiss wrote, adding that "higher loan loss provisions and net loan charge-offs are likely for 2010."

Weiss held his 2009 earnings per share estimate at $1.08, and despite higher expected charge-offs he raised his 2010 earnings estimate to $1.20 per share from $1.15 because of higher net interest margin expectations.

E-mail: newman@northjersey.com

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