Eight months after opening its first out-of-state branch, Hudson City Bancorp of Jersey City is set to start adding more at a furious pace.
Flush with nearly $4 billion from a record-shattering stock sale this month, the $21.1 billion-asset company is thinking about entering or expanding in a long list of markets in Connecticut, New York, and Pennsylvania. It has also earmarked a number of New Jersey markets for growth.
It expects to open 10 to 15 branches a year for the "foreseeable future," said Ronald E. Hermance Jr., its chairman, president, and chief executive officer. "We're in the sweet spot," he said. The money from the conversion "just fuels our strategy."
Hudson City, founded as a mutual thrift in 1868, converted to a mutual holding company in July 1999, selling a 47% ownership stake to the public for $528 million.
It completed its public offering 10 days ago. In a second-step conversion, it sold the 53% ownership stake it had held as a mutual holding company, netting a whopping $3.93 billion.
That was the seventh-largest public offering in history, and the largest ever by a banking company, according to Ben A. Plotkin, the chairman and CEO of Ryan Beck & Co., which managed the sale.
In October the 147-year-old Hudson City Savings, its only bank, opened its first out-of-state branch, in Southold, N.Y., on New York's Long Island. When that branch proved successful, the company followed with plans for two more, in the New York City borough of Staten Island.
The Northeast corridor, in which Hudson City plans to expand, is one of the most competitive banking markets in the country. It has already seen significant branching by a number of companies, including Bank of America Corp. of Charlotte; Commerce Bancorp Inc. of Cherry Hill, N.J.; Webster Financial Corp. of Waterbury, Conn.; and North Fork Bancorp of Melville, N.Y.
James M. Ackor, who covers Hudson City for Royal Bank of Canada's RBC Capital Markets, said the fact that Hudson City's branch expansion follows so many others is worrying.
"I'm not 100% comfortable," he said. "The de novo activity we've seen the past five years makes your head spin. You've got branching strategies across the country that are getting bigger by the quarter."
When New Haven Savings Bank converted to public ownership last year, it changed its name to NewAlliance Bancshares Inc. and used the $1 billion it raised to simultaneously buy two banks.
When Hudson City announced in December that it planned to conduct a second-step conversion, there was some speculation among analysts and investors that it might do some deals as a way to put some of its excess capital to work quickly. Mr. Hermance, however, has made it clear that the company has nothing dramatic on its agenda.
"We're going to continue to focus on our game plan," he said. "We asked for this money to continue doing the things and producing the results the market has become accustomed to over the past six years."
What that means is that Hudson City is going to stay true to its historical roots, maintaining and even intensifying its emphasis on originating and purchasing home loans - even as the mortgage market continues its gradual slowdown.
Mr. Hermance said he worried a little whether a plain-vanilla thrift model would excite investors, so he was more than a little pleased with the result.
"It was extremely gratifying," he said. "When you have as simple a strategy as ours, you wonder what investors will do."
Mr. Ackor and other analysts said the massive capital hoard the market handed Hudson City gives it a formidable competitive advantage as it seeks to build its retail banking business. Simply put, it can outprice its competitors, paying more on deposits and offering lower rates on loans.
"To me, the key here is to increase franchise value by growing core deposits," said Richard D. Weiss of Janney Montgomery Scott LLC in Philadelphia. "They can bring new customers in by offering higher rates, then they've got to make sure those accounts stay with them. That's going to be the trick."
To date, Hudson City has had no problem doing that. Since 1999 it has recorded a compound annual growth rate of 11% in deposits, which totaled $11.7 billion on March 31, and 21.5% in mortgages.
Mr. Hermance said the Southold branch attracted $38 million of deposits in its first nine months.
"We know how to grow organically," he said.
Given the company's track record since its conversion to a mutual holding company in 1999, analysts and investors were more than willing to give it the benefit of the doubt.
"The thing you have to use as a final litmus test is their share price," said Theodore P. Kovaleff, who covers Hudson City for Sky Capital LLC in New York. "They went from about $5 to $32 in a five-year period, and not only that, they did it while they were constantly raising their dividend. That's a damn good record."
Mr. Plotkin said investors were impressed by Hudson City's results over the past five years, but he added that the success of the conversion is also a vote of confidence in its plan going forward.
"Past performance is certainly helpful, but frankly, when you're selling two-thirds of the company to new investors, you need to talk about the future as well," he said. "They did a good job of selling their story."
