The bank operates in New Jersey, and after its merger with Sound Federal last year, it acquired 14 branches scattered throughout Westchester, Putnam, and Rockland counties in New York and in Fairfield County, Conn. These are some of the wealthiest and most densely populated counties in the country.
Here's a wonderfully old-fashioned, simple, profitable concept that's virtually lost in today's market: Hudson City simply collects deposits and makes loans, and it then keeps the difference as a profit. Its business is in offering traditional deposit accounts and residential real estate mortgage and consumer loans. But unlike many of its peers, it does not sell its loans. Instead, it views those loans as one of its most valuable assets. That makes sense when you consider the excellent job the company does in examining credit and keeping quality very high. Over the past 10 years, the company has had to charge off an amazingly low $557,000. That's not a typo. It also purchases mortgage loans, which allow it to diversify geographically.
In short, you don't need to be a genius to understand this business. Countrywide Financial
Speaking of investors, those who hold a stake in Hudson City are likely to be pleased with their company's decision to repurchase shares -- up to 51.4 million of them, or about 10% of the outstanding amount -- and to raise its dividend to $0.085 per quarter.
For the first half of the year, Hudson generated more than $149 million in cash flow from operations. It's no wonder the company can afford to keep raising its dividend and purchasing shares.
Earnings increased $0.01, to $0.14 a share. The increase in per-share earnings is the result of a lower share count, since net income actually fell 3%, to $143.9 million. But even though the yield curve became more favorable, competitive pressures pushed down on deposit rates. Given the current environment, fixed mortgage rates have actually risen while the 10-year rate has fallen. Last week's decision by the Federal Reserve to cut the discount rate by 50 basis points could be a harbinger of things to come, but at least that move can only help Hudson, since it would be able to cut the rate paid on deposits.
I should also point out that management set aside $500,000 this quarter as a provision for loan losses -- sort of a rainy-day fund, in light of the current tumultuous environment and dropping home values. It's really nothing to worry about, though. Just keep in mind that the bank has only had to charge off a measly $557,000 over the past 10 years. More than anything, the rainy-day fund is a mark of conservative management -- a refreshing change in this industry.
Along those same lines, it's worth noting that the company won't have a problem with subprime loans, since it doesn't offer them in the first place. It also doesn't make loans with a high loan-to-value ratio or negative amortization. It doesn't even purchase subprime, unrated, or private-label loans, since they don't meet its underwriting criteria. Hudson purchases only mortgage backed securities from a government agency or a government-sponsored enterprise such as the Federal National Mortgage Association -- a.k.a. Fannie Mae
By comparing similar companies, we can get a good understanding of where Hudson's valuation fits in. So let's take a closer look at some of its competitors.
Hudson City's stock may not be exceptionally cheap, but sometimes quality will cost you. Its P/E is 26, but you're getting a steady company with sound fundamentals. There's also that nice 2.5% dividend yield. It's a Wonderful Life may be just a movie, but like the Jimmy Stewart character, you may find that what you were looking for was here all along -- at least in the investing sense.
Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at firstname.lastname@example.org. He doesn't have any positions in the companies mentioned. Fannie Mae is an Inside Value recommendation. The Fool has a disclosure policy.
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