Hudson City (HCBK): 'Best in breed' bank

"Hudson City Bancorp (NASDAQ: HCBK) is a fortress of safety with plenty of upside potential," says value investor Nathan Slaughter.

In his Half-Priced Stocks, he explains, "The 140-year old bank is a classic example of the tortoise and hare fable. Its slower, measured approach has paid off handsomely and keptit at arms length from the problems plaguing other banks."

"Hudson City manages a network of 130 bank branches spread throughout affluent regions of New Jersey, New York and Connecticut. At last count, the firm had over $20 billion in deposits and approximately $56 billion in total assets.

"According to an independent study, this tight-knit institution has been rated one of the nation's three strictest mortgage underwriters. So when most other banks relaxed their standards in recent years to attract riskier clientele, Hudson City stuck to its conservative roots and refused to budge.

"You won't find any ticking time bombs here -- there isn't even any auto, credit card or commercial real estate loans lurking on the balance sheet. The firm has never originated a single subprime mortgage and steers clear of exotic option adjustable-rate products.

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"Instead, the company deals primarily with wealthy customers sporting top FICO scores who can make hefty down-payments and easily afford their monthly notes.

"Its branches are concentrated within 10 of the nation's top-50 counties in terms of median household income. And its conservative loan-to-value ratio of 60% is much lower than that of its peers.

"All companies talk about being lean and cutting costs, but Hudson City walks the walk. In fact, the company maintains an industry-leading efficiency ratio (operating expenses/revenues) below 20%.

"Hudson City hasn't just survived this historic downturn -- it has thrived. Remarkably, the company didn't need a penny of government TARP money. The company is well on its way to delivering its 11th straight year of record earnings in 2009. 

"Since Hudson City first hit the market 10 years ago, the firm has generated cumulative profits of $2.3 billion -- and every penny of that has been returned to shareholders through dividends and share repurchases.

"In fact, investors have been treated to six dividend hikes in the past six quarters. Beginning with a payment of $0.09 per share in early 2008, subsequent distributions ratcheted to $0.11, and then to $0.12, $0.13, and $0.14 -- and the next payout will be $0.15 per share.

"Most banks have been forced to slash their dividends or eliminate them entirely. Only a select few have had strong enough balance sheets to raise payments. So it speaks volumes that Hudson City has lifted distributions not once, not twice -- but six times since this mess started.

"Of course, this is par for the course for a well-managed company whose dividends have risen to the tune of +57% annually since the firm's IPO in 1999. Meanwhile, over the same time frame, the shares have vaulted +935%, versus a -20% decline in the Dow.

"Looking ahead, I think shareholders will see double-digit total returns this year. In addition to the momentum discussed above, a steeper yield curve should translate into fatter profits -- and Hudson City's net interest margins have already widened considerably.

"Despite posting record profits of $127 million (up +44%) in the first quarter, HSBK shares have still wilted to around $12 -- down from a peak above $20. I think this unwarranted pullback presents an attractive opportunity.

"With a fair value of $24, HCBK is a true 'half-priced stock.' With all this in mind, I see this best-in-breed bank as a sound idea for income investors."