Hudson City Bancorp (HCBK) has historically held on to the mortgage loans it originates, but it will soon start selling some of those loans on the secondary market in an effort to boost its profits.
The Paramus, N.J., company will also start making commercial real estate loans within its branch footprint, a move it hopes will balance its risk profile, generate more deposits and deepen relationships with customers.
The $44 billion-asset Hudson City unveiled the new initiatives in its earnings announcement Wednesday.
Denis J. Salamone, Hudson City's acting chief executive, said that persistently low interest rates, combined with Fannie Mae and Freddie Mac's active role in the mortgage market, have made it difficult for the company to stick with its business model of making and holding residential loans. Hudson City's earnings fell 25% in the second quarter from the same period last year, to $76 million, as the company scaled back its loan production due to its "low appetite" for taking on more long-term, fixed-rate loans.
"We're in an unprecedented situation," Salamone said, referring to historically low interest rates and their impact on loan yields. "Ninety-six percent of our assets are in residential mortgages and it's time to diversify the balance sheet."
In an interview, Salamone added that the Hudson City would also consider acquisitions if they could further change its asset mix.
"All options are on the table," he said.
To date, Hudson City has largely dealt with the threat to its traditional business model by shrinking its balance sheet and cutting expenses. The company has shed more than one-quarter of its assets over the last three years by reducing both its loan originations and investments in mortgage-backed securities. It also substantially restructured its balance sheet by selling off billions of dollars in wholesale borrowings that had been the primary funding vehicle for its 30-year mortgages.
Other regional banks, including BB&T (BBT) of Winston-Salem, N.C., and M&T Bank (MTB), have recently made the decision to sell rather than retain fixed-rate mortgages because of their low yields, but Hudson City's move is more noteworthy because of its history as a portfolio lender.
Salamone said that selling residential loans rather than keeping them on the books will allow Hudson City to offer rates that are typically lower than what it can offer and, in turn, capture more customers.
Regarding its expansion in commercial real estate, Hudson City initially plans to participate in syndicated CRE and multi-family mortgages until it has the capacity to originate loans itself. Such loans are attractive to Hudson City because they are typically shorter-term than most residential mortgages and can generate more business deposits.
Salamone acknowledged that "it will take a while" to get the business up and running, but said he is confident that Hudson City can succeed by hiring experience lenders who have deep ties to the New York metropolitan market.
He also pointed out that foreign banks are increasingly scaling back their CRE lending as they deal with problems in their home countries, creating further opportunities for a newcomer like Hudson City.
In a research note Wednesday, Sandler O'Neill & Partners said the new strategies "make sense," given the interest-rate climate. It raised Hudson City's earnings-per-share estimate for this year by four cents, to 56 cents, though it retained its hold rating on the stock.
Still, analysts Mark Fitzgibbon and Matthew Forgotson said in their note that Hudson City's moves might disappoint investors who had been hoping the company might sell itself.
"We expect this to put some temporary pressure on the stock price as investors digest this information," they wrote.
Hudson City's shares were trading at $5.75 midday Wednesday, up a penny from Tuesday's closing price.
Also on Wednesday Hudson City announced that its long-time chairman and chief executive, Ronald Hermance, would be returning to his duties Aug. 1. Hermance has been out on medical leave since February.