Few banking companies have the kind of war chest Hudson City Bancorp of Paramus, N.J., does.
Flush with $3.8 billion raised June 7 in the seventh-largest stock offering in U.S. history, Hudson City has more than enough capital to move in any direction. And with the housing market cooling, analysts say it is time for the $26.6 billion-asset thrift company to move beyond just making mortgages - or to consider buying another banking company, as many thrifts have done with public-offering proceeds.
But chairman and chief executive Ronald E. Hermance Jr. said that for now it will stick to its game plan and use the new capital to book jumbo single-family loans, open branches, buy back its stock - which he says is undervalued - and pay generous dividends.
"I don't think you'll see us vary our pattern," he said in an interview last month. He did not rule out acquisitions but said that no deals "are planned at this time - and they really aren't a primary driver" of strategy.
Mr. Hermance, who joined Hudson City in 2002, insists that though demand for home loans is slowing, talk of a widespread housing decline is overblown. Even if the market does contract some, he said, Hudson City could leverage its position as a large-scale, low-cost producer to increase its market share.
The best way to do that, he said, is to stick with lending in its home territory, northern New Jersey and the New York metropolitan area, where the housing market shows few signs of weakening, and to broaden its portfolio geographically by buying loans on the secondary market.
That is the course it set after its initial public offering, in July 1999, when it converted from a depositor-owned mutual savings bank to a mutual holding company and raised $541 million. Since then its assets have grown at a compound annual rate of 18%, and Mr. Hermance said its more-than-ample capital - shareholder equity equals 20% of assets - should allow that trend to continue for years.
"Mortgage lending is the basis of this company, along with credit quality and efficiency," Mr. Hermance said.
"Everyone is talking about the demise of the real estate industry, but I don't see it," he said. "It did slump in the early 1990s, but we were dealing with job losses too.
"I still see this economy growing. You've got companies out there creating jobs and spending money. I don't see where real estate is going to be a drag on the economy."
Hudson City raised more than seven times as much in June, with the second-step conversion to a fully stock-traded company, than it had six years earlier. Analyst Kevin T. Timmons said it would be hard pressed to use all the new proceeds originating and buying home loans.
"Especially in the environment we have today, doing a deal eventually is the only way Hudson City will be able to deploy its capital effectively," said Mr. Timmons, of C.L. King & Associates in Albany, N.Y.
Founded in 1868, Hudson City has remained essentially a plain-vanilla thrift. Hudson City Savings Bank is its only subsidiary, and home mortgages and mortgage-backed securities are more than three fourths of its assets.
Mr. Hermance said the strategy is narrow but deep. A long-time focus on jumbo mortgages - those bigger than Fannie Mae or Freddie Mac will buy - has made Hudson City an expert in the field. Only 0.06% of its assets were nonperforming on Sept. 30, and its 23% efficiency ratio was the best among the nation's 50 largest banking companies.
The average loan it made last year was for $410,000. In its home markets it acts as a direct lender. To add geographic diversity, in 1999 it began buying loans as far west as the Mississippi River and southward into the Carolinas.
At the end of the third quarter, 53% of the loans in its portfolio had been made on New Jersey properties.
Mr. Hermance said the company originates and buys only prime loans. "We've had brokers tell us that if we start taking … [subprime loans] or take loans from California, they could give us much more product," he said. "We'll live with less."
The ability to control costs while avoiding asset-quality issues has had a predictably positive effect on Hudson City's bottom line. Net income has risen steadily for years, to a record $239.3 million in 2004 and $201.2 million in the first three quarters of 2005, including $75 million in the third quarter.
Many converted thrifts - including First Niagara Financial Group of Lockport, N.Y.; Provident Financial Services Inc. of Jersey City; and NewAlliance Bancshares Inc. of New Haven - have used their new capital for significant acquisitions within months of going public. Most such deals have increased profits, but they can also dilute the buyer's tangible book value - the real cash value of their shares.
That is something Mr. Hermance is loath to do, said James M. Ackor, who covers Hudson City for Royal Bank of Canada's RBC Capital Markets. "Shaving 20% to 25% off your tangible book has not served investors well, historically," Mr. Ackor said.
Hudson City's shares, which went for $10 each at the time of the second-step conversion, have risen steadily since then. They were trading at $12.42 at midday Thursday.
But that is little more than 1.3 times their book value - below the industry average. The shortfall reflects the enormous amount of capital the company must put to work, analysts say.
Though Mr. Hermance has shown little interest in deals, his company is hardly standing pat. It opened its first branch outside northern New Jersey, on Long Island, east of New York City, in October 2004 and since then has added three there and two in the city's Borough of Staten Island. Mr. Hermance said it is also considering branching into contiguous markets in Pennsylvania and Connecticut.
Theodore P. Kovaleff of Sky Capital LLC said that Hudson City's branching has been successful, and that branching into new markets might open the door to the additional mortgage lending Mr. Hermance is counting on.
Mr. Kovaleff said that though he was not about to criticize a company for "carefully husbanding" its capital, he is surprised that Hudson City has not done a deal.
"I thought they would have done something," he said.
