Many banking companies have been eager to unload their debt in recent quarters, but Hudson City Bancorp Inc. is borrowing more.
"We haven't restructured" the balance sheet, "ever," Ronald E. Hermance Jr., the Paramus, N.J., company's president and chief executive, said in an interview last week.
In the third quarter Hudson's borrowings rose 7.5% from the second quarter and 60.5% from a year earlier, to $15.6 billion. As of Sept. 30 the company had $8.5 billion of mortgage-backed securities on its books, along with $5.6 billion of other securities, making up 42% of the assets.
Mr. Hermance said that Hudson has never needed to restructure its balance sheet, which currently includes $33.6 billion of assets, because of its reluctance to use securities funded by short-term debt to play the yield curve.
"There is no carry trade here," he said.
A number of banking companies, both large and small, that had sought to play the yield curve by holding securities on their balance sheets have restructured in recent quarters, selling or reinvesting securities and paying down debt.
Provident Bankshares Corp. in Baltimore, BB&T Corp. in Winston-Salem, N.C., and KeyCorp in Cleveland are the latest institutions to shed securities. All three announced balance-sheet restructurings Dec. 1. And more companies are likely to follow suit, Gary Townsend, an analyst for Friedman, Billings, Ramsey & Co. Inc., wrote in a research report published Monday.
"Companies with large and/or low-yielding securities portfolios would be most likely to restructure," he wrote.
At first glance, Hudson City could fit that profile. However, Mr. Hermance said that his company buys none of its securities with borrowed funds, and that they are used specifically to hedge the company's mortgage portfolio. "We put these assets on as an asset-liability tool."
The duration of the company's loan portfolio, about 5.5 years, requires some short-term assets as balance, he said; the securities portfolio has a duration of 1.5 years.
Hudson City follows a similar rationale on the liability side of the balance sheet. Many customers take advantage of the high yields on short-term certificates of deposit, while the low interest on mortgages makes fixed-rate mortgages attractive, Mr. Hermance said. "It's hard to make a 15- or 30-year loan with a four-month deposit."
Analysts generally approve of Hudson City's strategy.
Mr. Hermance "has done an exceptional job" in, among other things, "managing the balance sheet," Laurie Hunsicker, a Friedman, Billings, Ramsey analyst, said in an interview Monday.
However, some analysts say they are worried that Hudson City is taking on too much debt.
Richard D. Weiss of Janney Montgomery Scott LLC, wrote in a note published last month that even though he likes Mr. Hermance's overall strategy, the increasing debt was an "unwelcome development."
However, in an interview Tuesday, a day after meeting with Hudson City's management, he qualified his comments in the note. "Unwelcome might be a bit harsh," considering that borrowings are currently cheaper than CDs. Still, "when the yield curve comes back to normal, it has to stop," he said.
Addressing his critics, Mr. Hermance defended the balance sheet and his borrowing. "If I couldn't grow, then I would be worried about it," he said.
Hudson City, which converted from a mutual thrift company to a stock company in two steps, in 1999 and in 2005, focuses on generating deposits, mostly interest-bearing ones, and on making mortgages, mostly jumbo ones. There are no commercial loans and very few consumer loans other than mortgages on the books.
Because of this, the company remains a classic thrift, with little fee income, according to Mr. Hermance - "We are terrible at that and always will be." In the third quarter its average loan portfolio grew 33.3% from a year earlier, to $17.7 billion, and mortgages, which make up 97% of the loan book, grew 32.6%.
Net interest income grew 0.6%, to $153.1 million, though the net interest margin contracted 44 basis points, to 1.93%. Hudson City's third-quarter profits fell 5.4%, to $71 million, because of the inverted yield curve and rising costs related to the company's branch-building efforts.
"Many people pooh-pooh the thrift model," Mr. Hermance said. "But here is the thing: I don't think that customer has gone away" - the customer who shops for the highest rate on deposits and the lowest mortgage rate. "Many of the large banks … we could coexist with, maybe even share the same parking lot, because we are not going to get the same customer."
Ms. Hunsicker said Hudson City could do with some more low-cost deposits, but Mr. Hermance said he sees no reason to change course. Hudson City has opened nine branches this year, and in July it bought Sound Federal Bancorp Inc. of White Plains, N.Y., for $265 million in cash.
Next year Hudson City plans to open another nine branches, targeting very specific markets around New York that should offer plenty of opportunity to make jumbo loans, he said.
The company's shares have risen nearly 17% for the year. On Wednesday they rose 0.8%.
