Hudson City Bancorp Inc. said Friday that it has paid down $4.3 billion of high-cost debt in a move the company says will wipe out fourth-quarter profits but boost its net interest margin going forward.
The Paramus, N.J., company extinguished the structured putable borrowings, which carried an average interest rate of 4.21%, with cash it had on hand that in a more normal climate it might have used to make loans or invest in securities. In a news release, Chairman and Chief Executive Ronald E. Hermance said that after reviewing all of its available options, the company decided that paying down debt was the best use of the cash.
Hudson City's shares were up sharply on the news. In heavy trading, Friday the stock was up roughly 6% midday Friday, to $6.13.
"We're doing just what our customers are doing: paying down expensive debt in this prolonged period of depressed market interest rates," Hermance said. "Calls of securities in our investment portfolio and mortgage pre-payments due to low interest rates have provided us with excess liquidity. The interest rate environment and regulatory climate have limited the options for redeploying this excess liquidity."
Hudson City said that the action will result in a one-time charge to earnings of $440.7 million, or 89 cents per share, which it expects to take in the fourth quarter. In the third quarter, the company earned $84.2 million, or 17 cents per share.
But after repaying the debt, the company expects that its net interest margin will improve by 20 basis points next quarter when compared to the quarter, when its margin was 1.97%. Hermance added that the repayment would have no significant impact in Hudson City's capital ratios because the company has reduced the size of its balance sheet in proportion to the size of its fourth-quarter charge to earnings.