Tickers in this Article: HCBK, CFR, BXS, PRSP
Hudson City Bancorp (Nasdaq:HCBK) is trading down around its lowest levels in several years, as the market registers its concerns about the bank's funding issues and loan environment. Could this be an opportunity for investors with a long-term horizon to take a position in this lender?

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Background
Hudson City Bancorp specializes in one to four family mortgage lending and made its way through the financial crisis relatively unscathed, unlike many of its peers in the banking industry. The bank was one of the few that felt strong enough to refuse the capital offered by the U.S. government through the Troubled Asset Relief Program (TARP). Other banks that declined TARP that was offered in 2008 and 2009 were BancorpSouth, Inc. (NYSE:BXS), Cullen Frost (NYSE:CFR) and Prosperity Bancshares, Inc. (Nasdaq:PRSP). The banks cited adequate capitalization as the main reason for this action.

Hudson City Bancorp has seen relatively low levels of nonperforming assets, although this metric has been rising of late. The bank reported total nonperforming assets of $917 million at the end of 2010. This represented 1.5% of total assets, up from 1.07% at the end of 2009.

Conservative Underwriting
Although the concentration of Hudson City Bancorp's loan portfolio in residential mortgages might concern some investors, the bank has traditionally followed a conservative underwriting policy on loans. This historical practice will help the bank get through the short term issues impacting the company. On loans up to $1 million, the bank uses a maximum loan to value (LTV) ratio of 80% at the time of origination. On loan amounts of $3 million, which is the maximum that the bank originates, the LTV is capped at 60%.

Hudson City Bancorp estimates that its loan portfolio had a weighted average LTV ratio of 61% at the end of 2010. The bank also said that its nonperforming loan portfolio had a weighted average LTV ratio of 61%, giving the bank room when trying to recover on these assets.

Securities Portfolio
Hudson City Bancorp's security portfolio is mostly adjustable rate, and will benefit as interest rates increase. The bank reported that 80% of its securities portfolio is composed of adjustable rate securities as of June 30, 2010, and these instruments will earn more for the bank if rates rise as many expect.

Putable Borrowings
Hudson City Bancorp has taken much criticism for the level of structured putable borrowings on its balance sheet. These liabilities are structured to allow the issuer to put the borrowings back to the bank and demand repayment once an initial time period is up. Hudson City Bancorp has recognized this issue, albeit at the urging of its regulator, and has begun the process of restructuring its funding source to one more stable. The bank paid off $12.5 billion of these putable borrowings during the first quarter of 2011, and has about $16.6 billion remaining.

Although this is a large amount, Hudson City Bancorp stated in its regulatory filings that a 200 basis point increase in rates would be needed to trigger a substantial amount of these borrowings being put back to the bank.

Valuation
Hudson City Bancorp reported tangible book value of $10.85 per share at the end of 2010, and will most likely see a decline in tangible book value when it reports earnings for the first quarter of 2011.

If we assume a reduction of $1-1.50 per share in tangible book value, and the current stock price of $9.72 per share, Hudson City Bancorp is trading at or slightly under its tangible book value. While this level of valuation would not put the stock into the deep value category, it is trading at a discount relative to its historical range.

The Bottom Line
Hudson City Bancorp is facing some short-term issues that have caused many to abandon the stock. Investors that have the luxury of a longer investment horizon might find some value here. (A case study in how poor planning toppled a subprime mortgage giant. See The Rise And Demise Of New Century Financial.)

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