Hudson City Bancorp – Yielding Total Return for Options Writers
HCBK:NDQ - Oct. 13, 2009 Close: $13.17
Dividend = $0.15 quarterly = 4.55% current yield
Hudson City Bancorp, Inc. offers offering traditional deposit products, residential real estate mortgage loans and consumer loans. In addition, the Company purchases mortgages and mortgage-backed securities and other securities issued by United States government-sponsored enterprises. Its revenues are derived principally from interest on its mortgage loans and mortgage-backed securities, and interest and dividends on its investment securities. They have about 131 branches in NY, NJ, and CT. HCBK converted from a chartered mutual savings bank into its current form in two stages. The first came in 1999 and the final step took place on June 7, 2005.
In direct contrast to almost all other banks Hudson City posted record earnings in 2008 and is on track for another all-time high in EPS for 2009. In fact, 2009 will likely be the ninth consecutive year of improved earnings and increased dividends. This is quite a feat in light of the past few years housing market.
As of year-end 2008 about 99% of HCBK’s loans were first mortgages and just 1% were consumer and other loans. They managed to sidestep the worst of the carnage through the use of old time banking standards. Forbes magazine called them “The Best Managed Bank in America” in both 2007 and 2008.
Here are their impressive (split adj.) per share numbers as reported by Value Line:
| Year | Mort. Loans | EPS | Div. | B/V | Avg. P/E | Avg. Yield |
| 2001 | 17.19 | 0.21 | 0.07 | 2.02 | 16.6x | 2.1% |
| 2002 | 21.19 | 0.31 | 0.11 | 2.14 | 17.4x | 2.0% |
| 2003 | 23.28 | 0.35 | 0.16 | 2.18 | 24.1x | 1.9% |
| 2004 | 27.96 | 0.40 | 0.22 | 2.35 | 28.1x | 1.9% |
| 2005 | 32.99 | 0.48 | 0.27 | 8.83 | 23.8x | 2.4% |
| 2006 | 46.60 | 0.53 | 0.30 | 8.84 | 24.9x | 2.3% |
| 2007 | 65.11 | 0.58 | 0.33 | 8.89 | 23.9x | 2.4% |
| 2008 | 74.49 | 0.90 | 0.45 | 9.43 | 19.1x | 2.6% |
First half 2009 earnings per share were $0.52 versus $0.40 and Zacks now sees 2009 – 2010 EPS at $1.05 and $1.15 respectively. That puts HCBK’s multiple at< 12.6x this year’s and under 11.5x next year’s estimates. Compare those P/Es with all the historical valuations in the chart above. HCBK shares are near the cheapest they’ve ever been.
Dividends were initiated in 2000 and have been raised in each year since. The current yield of 4.55% is better than the interest rates on bank CDs, treasury notes and virtually everything else without high risk. It’s also the best yield in HCBK’s history as seen from the chart above.
Value Line notes Hudson City’s financial strength as B+ and gives them 90th percentile rankings in both ‘stock price stability’ and ‘earnings predictability’ (with 100th being best). HCBK shares have outperformed 80% of the 1700 stocks in Value Line’s research universe on a long-term basis. Morningstar sees ‘fair value’ for Hudson City as $15/share.
A rebound to just fourteen time 2010 estimates of $1.15 would see HCBK back above $16 /share within about 15 – 18 months. Add in the generous dividend yield and this looks like an attractive total return stock.
Is a $16 target price reasonable? Sure. HCBK shares touched highs of $16.10, $25.00 and $15.90 in calendar 2007-2008 and 2009 YTD. With earnings and dividends now better than ever before, there is no reason these shares shouldn’t attain at least their old highs.
Here’s a way to play with even less risk…
| Cash Outlay | Cash Inflow | |
| Buy 1000 HCBK @ $13.17 share | $13,170 | |
| Sell 10 Jan. 2011 $15 calls @ $0.95/sh. | $950 | |
| Sell 10 Jan. 2011 $15 puts @ $3.50 | $3,500 | |
| Net Cash Out-of-Pocket | $8,720 |
If Hudson City rises to at least $15 (+ 13.9%) by Jan. 21, 2011:
· The $15 calls will be exercised.
· You will sell your shares for $15,000.
· The $15 puts will expire worthless.
· You will likely have received at least $750 in dividends.
· You will have no further option obligations.
· You will end up with no shares and $15,750 in cash.
That 14% (or better) rise in the share price would have generated a $7,030 net profit on an original cash outlay of $8,720 = 80.6% total return over the 15-month holding period.
What’s the downside?
If Hudson City shares finish below $15 on Jan. 21, 2011:
· The $15 calls will expire worthless.
· The $15 puts will be exercised.
· You will be forced to buy another 1000 HCBK shares.
· You will need to lay out an additional $15,000 in cash.
· You will likely have received at least $750 in dividends.
· You will have no further option obligations.
· You will end up with 2000 shares and $750 in cash.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $13.17 purchase price less the
$0.95 /share call premium = $12.22 /share.
On the ‘put’ shares it’s the $15 strike price less the $3.50 /share
put premium = $11.50 /share.
Your overall break-even would be $11.86 /share (ignoring dividends)
or $11.49 /share (including yield).
HCBK could fall by as much as $1.68 /share (-12.7%) without causing
a loss on this trade.
Summary:
Hudson City Bancorp appears to be a well run, conservatively managed community bank with a historically low P/E and a very attractive dividend. Their shares appear poised to rebound to $16 or better by early 2011.
Using the buy/write strategy above any move above $15 by early 2011 will likely translate into 80% total returns over the 15 months until expiration.
You have a built-in margin of safety of almost 13% even if things don’t go as expected.
Disclosure: Author is long HCBK shares and short HCBK options.
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
The tendency towards conservative management of Hudson City can be seen in some of the old-fashioned banking metrics, which for many other banks are barely even mentioned these days (click chart to enlarge). Net interest income increased 28% to $326 million in the quarter, and deposits grew at 6.6% in the quarter. Like Cramer, we are surprised by the market’s lack of interest in a regional bank with so much going for it. In recent months, investors have been extremely eager to snatch up stock in government mandated capital raises, but when it comes to a bank that is slowly and steadily gaining market share and has very few problems, it has declined year to date. HCBK has fallen more than 17% year to date, while the financial sector as measured by the iShares IYF is up 16.5%.
In contrast to many of our ratings on financial shares at current levels, Ockham is maintaining our Greatly Undervalued rating on Hudson City. The quality management of this company and their ability to stay the course through the credit crisis will eventually be rewarded by the market. We believe the solid fundamentals of the stock would make this a $20 stock or more. There is significantly less risk in this bank than probably any other major bank, and their CEO believes that the conventional wisdom regarding New York City is probably too bearish. With a multiple below 13x and a dividend yield around 4.5%, we firmly believe this investment will start to attract some attention as quality becomes more of a premium.
A Bank Stock that Stayed Out of Harm’s Way
By TERESA RIVAS - Barrons Online
Hudson City Bancorp, one of the recession’s best performing banks, should continue to best rivals in the hyper-competitive New York area.
IN NEW YORK, the city that never sleeps, Hudson City Bancorp (ticker: HCBK) is one of the few financial institutions that wasn’t asleep at the wheel in the last year.
The nation’s largest thrift has stayed true to its roots, making conservative mortgage loans in New York City and the surrounding suburbs, even as its rivals were engaged in some risky lending during the last real-estate boom.
Hudson City’s strategy paid off, leaving it cash-rich and able to take market share from competitors in a difficult banking environment.
At a Glance:
Hudson City Bancorp (HCBK)
Stock Price: $13.30
52-Wk High: $18.93
52-Wk Low: $7.46
Market Cap: $6.5 billion
Est. FY 2009 EPS: $1.08
2009 P/E: 12.7 times
Est. Long-Term EPS Growth: 16.4%
Est. (’10/’09 EPS Growth: 10.2%
Revenue (trailing 12 months): $1.1 billion
Dividend Yield: 4.5%
CEO: Ronald Hermance
Headquarters: Paramus, NJ
* Based on analyst estimates looking ahead three to five years.
Sources: Morningstar, Barron’s, Yahoo Finance, Thomson Reuters. “It’s one of the best run banks in the country, and you can see that in their performance metrics, even in the worst of times” says Sandler O’Neill analyst Mark Fitzgibbon. “They’re still [turning out] returns on average equity in excess of 10%, and their 19% efficiency ratio is the lowest in the industry.”
Still, while Hudson City didn’t suffer from the steep losses of its peers in the depths of the recession, its shares haven’t been bid up in the latest rally: The stock actually fell 1% in the last three months while the market saw double-digit gains.
Trading at just 11 times 2010 earnings, Hudson City is scraping the bottom of its five-year range. The stock is also paying a hefty 4.5% dividend yield, supported by more than $600 million in cash.
“We continue to view Hudson City as a solid bank with good capital ratios and a balance sheet that enables it to capitalize on a favorable net-interest-margin environment,” says Ragen Steinke, portfolio manager of the WHG SMidCap Fund.
When Hudson City reported better-than-expected earnings last week, profit rose 11%, as net-interest margin widened and deposits grew. The company has continued to make loans to high-quality residential borrowers with at least 20% down.
Although nonperforming assets did rise during the quarter, it was from a very low point. Growing to 90 basis points of total assets, Hudson City’s levels are still well below peers.
“It’s not a real risk to the story,” says FBR Capital Markets analyst Bob Ramsey, who notes the bank’s tangible common equity-to-assets ratio of 8.7% gives them plenty of capital for growth, helped by their strong credit quality. “The proof is in the pudding,” Ramsey says of their continued earnings power.
“You could call it a one-trick pony, as it’s basically a one-product institution on the lending side, but they stick to what they are extremely good at,” says Fitzgibbon.
This mentality helped the company avoid all the toxic-financial products that eventually saddled competitors’ balance sheets.
“This is a really terrific management team,” says Janney Montgomery Scott analyst Richard Weiss. “They knew when to hang up the phone when other banks bought these products that they really didn’t understand.”
Bill Bartmann, publisher of the weekly financial newsletter, The Bartmann Report, applauds Hudson City for avoiding “the ’siren song’ of quick and easy money and stayed true to their business plan.”
Still, though the bank still originates the majority of its loans, about 30% are purchased from other institutions, and some investors may fear the company doesn’t have as tight of control over these products.
However, Ronald Hermance, the chairman and chief executive of Hudson City, assures Barrons.com that these loans do not dilute Hudson City’s quality portfolio.
“We write specifications that are more restrictive than we would take directly: they have to be jumbo, owner-occupied loans with a 25% down payment in the Northeast,” he says. “These are prime loans.”
And though the bank has maintained its integrity during the downturn, it shouldn’t be left behind the pack in the recovery. Making loans and offering attractive rates to depositors (financed by its enviable capital) have allowed Hudson City to gain market share from weaker rivals.
Hermance says he has “no fear” that the company will be able to maintain this lead, because Hudson City’s cost efficiency and lean infrastructure is not something competitors can emulate overnight.
Of course with over 70% of their loans in the New York metro area, any steep deterioration in home prices in the region would adversely affect the company, as would sharply rising short-interest rates. Nor is $30 billion in debt a number to gloss over.
However, the government has indicated that keeping interest rates low is a priority in the near future, and Hudson City’s core base doesn’t seem in danger of a large housing drop off. Likewise, Hudson City has not been in trouble with its creditors and did not take funds from the Troubled Asset Relief Fund, and has a strong-capital position.
Therefore investors should consider moving into Hudson City.
Hudson City Bancorp 4th-quarter net + 9.9%
(HCBK 13.80, +0.06, +0.44%) the Paramus, N.J., holding company for Hudson City Savings Bank, reported fourth-quarter net income rose 9.9%. Earnings reached $136.6 million, or 28 cents a share, from $124.3 million, or 25 cents, in the year-earlier period. Shares outstanding fell 0.7% to 492.2 million. The net interest margin — the difference between what a bank takes in on loans and pays out on deposits –widened in the quarter to 2.3% from 2.02% a year earlier
ZACKS Analyst Blog
Hudson City Bancorp (HCBK - Analyst Report) announced yesterday its intention to change its regulator to the Office of the Comptroller of the Currency (OCC). Currently the bank is under the regulation of the Office of Thrift Supervision (OTS). The bank is planning to file an application with the OCC to change its organization from a savings bank to a nationalized bank.
The OCC regulates and supervises more than 1,500 national banks and 50 federal branches of foreign banks in the U.S., accounting for nearly two-thirds of the total assets of all U.S. commercial banks.
The motives behind such reorganization are ensuring safety and soundness of Hudson City Bank, continue with solid performance and growth in the banking industry and maintaining customers’ trust and confidence. The move by Hudson City comes as a “preemptive” action as reform proposals from the U.S. Treasury and Congress have offered to merge the OTS with the OCC.
Though the bank is planning to change its regulator, its business model will remain intact. The bank will continue to focus on attracting deposits and originating and purchasing first mortgage loans on residential properties.
Hudson City wants to stand on equal footing with its peers, most of which are regulated with the OCC. OTS supervises only a handful of thrifts, Hudson City being the biggest among them.
Hudson City has been able to maintain solid earnings and active capital management. For full year 2009, the bank posted a 19% year-over-year increase in earnings to $1.07 per share. Hudson City Bank remains well capitalized with tier-1 leverage ratio of 7.59% and a total risk-based capital ratio of 21.02%, compared to 7.09% and 23.25%, respectively, a year earlier. The strength of the bank is due to its focus on traditional banking.
UPDATE 1-Hudson City profit rises 11.5 percent
Wed Jul 21, 2010 8:18am EDT
* Q2 EPS 29 cents vs. 26 cents a year ago
* Slower growth in nonperforming loans
NEW YORK July 21 (Reuters) - Hudson City Bancorp Inc (HCBK.O) said second-quarter profit rose 11.5 percent as it saw a slowdown in growth of its nonperforming loans.
Hudson City, the largest U.S. thrift, said on Wednesday that net income rose to $142.6 million, or 29 cents per share, from $127.9 million, or 26 cents per share, a year earlier.
Analysts on average had expected a profit of 28 cents per share, according to Thomson Reuters I/B/E/S.
The Paramus, New Jersey-based parent of Hudson City Savings Bank said it was seeing signs that the real estate markets are stabilizing