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Tickers in this Article: HCBK, FCTY, BXS, HBHC
Hudson City Bancorp (Nasdaq:HCBK) has prospered during the financial crisis and solidified its reputation as one of the few banks to have avoided the bad loans and toxic investments that have crippled the banking industry. This is even more surprising when you consider that almost its entire loan portfolio is in residential real estate mortgages. At the end of the 2008's third quarter, the bank had $28.5 billion in outstanding loans, 98.3% of which were residential mortgages.

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Simple Business Model
The bank's business model is deceptively simple. It makes primarily 1-4 family jumbo first mortgage loans in its footprint in the Northeast.

The bank has never underwritten subprime loans, negative amortization, or Option ARM loans. When making these loans, the bank exercised what many in the industry seemed to have forgotten - common sense. Its underwriting guidelines are very strict with a maximum loan-to-value (LTV) of 90% on smaller loans, and then decreasing to a 60% LTV on loans of $3 million. For example a loan of 600,000 could only be taken out on a house worth $666,666 (LTV of 90%) and the higher the loan, the lower the LTV - thus reducing the risk to the bank. (Take a look at the factors that caused this market to flare up and burn out, see The Fuel That Fed The Subprime Meltdown.)

Hudson City Maximum Loan to Value

Max Loan Amounts
Up to $600,000
$ 600,100-$1,000,000
Source: Hudson City, as of September 30, 2008
High Asset Quality
This conservative lending philosophy is reflected in the bank's asset quality. Its non-performing assets as a percent of total assets were an astoundingly low 0.29% at the end of the third quarter. At the end of 2008, it moved slightly higher to 0.43%. The fourth quarter was so good for the company that it even raised its dividend. There a few other banks whose asset qualities are as good as Hudson's. Hancock Holding Company (Nasdaq:HBHC), a bank headquartered in Mississippi, reported that non-performing assets as a percent of total loans was only 0.83% at December 31, 2008.

Hudson City felt strong enough to turn down the Capital Purchase Program of the Troubled Asset Relief Program (TARP) that was created by the Bush administration in 2008. The bank cited its soundness and desire to remain unfettered by government restrictions on pay and dividends. More than 60 banks have declined TARP funds from the government including BancorpSouth (NYSE:BXS), which cited a high risk-based capital ratio, and higher asset quality than most of its peers.

Capital Ratio
Hudson City reported a total risk based capital ratio of 21.8% at the end of 2008. Another bank with a high total risk based capital ratio is 1st Century Bancshares, Inc. (Nasdaq:FCTY), which had a 22.61% ratio at the end of 2008.

Bottom Line
Hudson City Bancorp is a conservative well run institution that will emerge on the other side of the financial crisis intact, rewarding investors who have a long-term time horizon. The bank reported a tangible book value of $9.80 per share at the end of 2008. It closed February 4, 2009 at $12.12 giving is a price to tangible book value of 1.23. While this is above the average price to tangible book for banks, it is far below Hudson's historical valuation. (This calculation will serve up your portion of the shareholder pie, read more in Digging Into Book Value.)

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