In late April, Hudson City Bancorp (Nasdaq: HCBK) posted a first-quarter profit of $73.0 million, overturning the $555.7 million loss it had reported the previous year. The big improvement came from higher credit quality. Earnings per share came in at $0.15, which matched the figure analysts had expected.

Lower credit losses means profits
A trimmed balance sheet led to net interest income declining by 8.7% to $234.1 million. However, the banks' net interest rate spread rose to 1.95% from 1.50% a year ago, while its net interest margin rose to 2.15% from 1.72% last year. In the first quarter of 2011, Hudson overhauled its balance sheet, which led to the bank reporting a hefty loss.

Since there weren't any security sales in the first quarter, Hudson's noninterest income declined to $2.8 million from $105.2 million a year ago. However, as fear of defaults declined, the bank set aside less to cover for delinquencies, which helped it record profits. Hudson's loan-loss provisions declined by a noticeable 34% to $236.9 million.

A trend to be noted
As economic conditions have improved in the U.S., banks are starting to expect fewer defaults. So these banks, whether regional or the biggies, have been setting aside less money to cover for loan losses. For instance, despite Citigroup's (NYSE: C) profits falling by 2%, the banking giant's allowance for loan losses fell to $29.0 billion from $36.6 billion in the previous year. Similarly, regional lender Regions Financial (NYSE: RF), which posted a net income of $199 million this quarter, was helped by a whopping 76% fall in loan-loss provisions to $117 million from the year-ago period.

The balancing act
A look at Hudson's balance sheet reveals that net charge-offs declined to $18.1 million from $21.3 million last year. The percentage of net charge-offs to average loans also declined to 0.25% from 0.28% a year ago. On the other hand, the ratio of nonperforming loans to total loans went up to 3.71% from 2.92% a year ago, while the ratio of nonperforming assets to total assets also rose to 2.49% from 1.77% a year ago.

The bank's Tier 1 leverage capital ratio increased to 9.17% from 8.83% in the previous quarter, indicating a strong capital position.

Hudson is on its path to recovery largely because of an improving economy and last year's balance sheet overhaul that involved writing off of $4.3 billion of debt in the fourth quarter. I think the bank had a reasonably good start to 2012 and should be able to build on it for the rest of the year. However, Hudson will have to overcome the challenges of low interest rates as well as a sluggish economy. You can keep track of Hudson's operations in 2012 with the help of the Fool's free My Watchlist service.

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