July 28, 2008 - Hudson City Bancorp. (HCBK-NASDAQ) operates as the bank holding company for Hudson City Savings Bank that provides a range of retail banking services in the states of New Jersey, New York, and Connecticut. It offers various deposit accounts, including passbook and statement savings accounts, interest-bearing transaction accounts, checking accounts, money market accounts, and time deposits, as well as IRA accounts and qualified retirement plans.

The banks loan portfolio primarily comprises one-to four-family residential first mortgage loans; multi-family and commercial mortgage loans; construction loans; and consumer loans, such as fixed-rate second mortgage loans and home equity credit line loans, as well as collateralized passbook loans, overdraft protection loans, automobile loans, unsecured personal loans, and secured and unsecured commercial lines of credit.

As of December 31, 2007, it operated through 91 branches located in 16 counties throughout the State of New Jersey; 9 branch offices in Westchester County, 7 branch offices in Suffolk County, 1 branch office in Putnam and Rockland Counties, and 4 branch offices in Richmond County located in New York; and 6 branch offices in Fairfield County, Connecticut. The company was founded in 1868 and is based in Paramus, New Jersey.

Here's a stat: the company went public in 2000 (coverting from a mutual savings bank) and every year has increased earnings, starting with 16 cents a share. Last year, it tallied 58 cents. This year analysts look for 90 cents a share, then $1.16 next year. For the last 4 quarters, each one has been a record breaker. Earnings have averaged an annual gain of 14.4% over the last 5 years. Analysts project 14.4% over the next 5 years. Analysts predict growth of 8% a year, on average, for the industry.

HCBK sticks to its knitting, not making too many differnt kinds of investments. Its bread and butter is single family home mortgages. With the yield curve positively sloped (short term rates are lower than long term rates), the bank should see continued positive earnings growth. If and when the Fed raises interest rates, that may negatively affect results, but if the whole curve shifts upward in parallel, the spreads would remain the same. The bank would still show good earnings.

By focusing on one product, the bank attains better efficiencies than most lenders. While several competitors are out of the market, due to some messes past loan decisions have left in their portfolios, HCBK is seeing a tidal wave of applications. In the first quarter, total assets (loans are assets to banks) rose by 5%, a very healthy increase. Analysts think the growth will continue and predict a 20% growth in assets for the year.

More loans require more deposits. Because HCBK runs so efficiently, it can offer very competitive deposit rates. Deposit growth in the first quarter was 6%. To help gather even more, the bank is opening 8 new branches in 2008, about a 7% increase in total branches. On average, HCBK's branches hold twice as many deposits as the average FDIC-insured institution. Another way the bank is preserving capital for growth: a cutback in the bank's stock repurchase program.

Of course, when an institution makes loans, some of them will be a problem. Up until this year, prolem assets haven't been a problem. In 2007, they were .2% of assets. This year, analysts think they'll go to .4%, still well below the average bank. Next year, analysts think the number will stay at .4% Still, the loan loss provision jumped to $2.5 million in the most recent quarter, well ahead of the $300,000 in 2007. If this trend continues, don't expect the stock to go any higher.

Other numbers: Book Value is $9.08. Price to Book is 1.88. Profit margin is 45.7%. Return on Assets is .74. Return on Equity is 6.6%. There's an annual 48 cent dividend for a yield of 2.2%. That takes 56% of earnings to pay. Market Cap is $8.9 billion with 519 million shares outstanding.

HCBK is one of those banks that gets more efficient as it grows, sticking basically with one product. It's making loans while its competitors are pulling back. If it stays with strict, conservative guidelines, earnings will continue to improve. But if the Fed raises rates or too many loans go into default, it can't avoid the inevitable. Higher rates may hurt earnings, but those loan losses definitely will.

- Company Web site: www.hcbk.com

- Ted Allrich