Hudson City Bancorp said Wednesday that its record deposit growth will offset a rise in bad loans, ensuring that it will remain profitable.
This quarter the Paramus, N.J., company expects to earn 25 cents a share, even though its level of nonperforming loans through February has soared 33%, to $288.6 million. The earnings forecast is in line with analyst estimates.
Despite Hudson City's profitability, Ronald Hermance, the company's chairman, president and chief executive, said it remains unclear what chargeoffs will be this quarter, though he expects them to exceed the $1.8 million charged off in the fourth quarter.
"We still don't know," he said. "Our earnings are also going to be higher, and as a result we think we have the capacity in the earnings to provide for more loan losses."
Though its bad loans are mounting, Hudson City's deposits are soaring as people increase their savings in response to the ongoing economic recession, Hermance said.
The company collected more deposits in January and February — $1.26 billion — than in any other two-month period in its history, he said. Its deposit total grew 6.8% in the two months, to $19.72 billion.
Hudson City also has lowered its interest rates on certificates of deposit, with one-year CDs carrying a rate of 2.9% or lower as of Feb. 28. It retired $4.33 billion of CDs in the first two months of the year at a yield of 3.87%
The rate drop and deposit growth should boost the company's net interest margins, helping offset loan losses, analysts said.
"That's good for them," said Jason O'Donnell, a senior research analyst with Boenning & Scattergood Inc. "It increases their net interest margin when they pay less in the form of deposits."
Collyn Bement Gilbert, an analyst, with Stifel, Nicolaus & Co., said Hudson City's swelling deposits will help the company build its reserves, cushioning its bottom line. "They should still be able to extract earnings growth."
Hermance said the deposit growth means it can rely less on borrowed funds from sources such as the Federal Home Loan Bank of New York. O'Donnell said Hudson City's current CD rate is more favorable than financing from the Home Loan bank. For instance, according to its latest annual report, Hudson City ended last year with $15.13 billion of borrowings at an average rate of 3.97% from the Home Loan bank.
Also buoying Hudson City is its growth in the home loan market.Mortgage production is up 66% in the first two months of the year, to $646.9 million. Hudson City's retail originations have an average loan-to-value ratio of 56%.
The parent of Hudson City Savings Bank has traditionally provided large loans to homeowners in affluent markets of New Jersey, New York and Connecticut. Analysts say the $54.1 billion-asset company, which has more than 125 branches, has been more insulated than others from the credit crisis, because it has largely stuck to traditional lending standards and steered clear of risky subprime and adjustable-rate mortgages.
Matthew Kelley, an analyst with Sterne, Agee & Leach Inc., said Hudson City's earnings update indicates that it is continuing to navigate the credit crisis better than most of its competitors.
"They are experiencing credit pains like everybody else," Kelley said. "Unlike others, I don't think those credit costs are going to completely overwhelm earnings power."