Magazine article American Banker

Hudson City Deleveraging May Mean Dividend Cut

Magazine article American Banker

Hudson City Deleveraging May Mean Dividend Cut

Article excerpt

Byline: Matthew Monks

Two big questions face Hudson City Bancorp as it copes with a surprising wrist-slap from regulators: How much will it cost the well-regarded thrift to appease its overseers, and is the Paramus, N.J., lender's unusually rich dividend threatened?

The short answer to both, according to market watchers: Complying with the pending enforcement action from the Office of Thrift Supervision will be expensive. And the future looks grim for that 15-cent-a-quarter dividend, a payout that until now had confirmed everything that Hudson City had done before the crisis - sticking to safe bets on giant New York-area home mortgages while other big banks chased subprime borrowers.

What galls some investors and analysts since the probable enforcement action came to light Wednesday is that Hudson City still has not really done anything different. Its bread-and-butter banking model is essentially the same as it was before and after the collapse, they say. What's changed is that the drawn-out economic recovery and tighter scrutiny of big banks is exposing a weakness in its approach - a leveraged balance sheet. In other words, a lot of securities investments and borrowed funds, items that can create a lot of interest rate risk.

Right now Hudson City's risk level - because of the size and unusual structure of its balance sheet - is making increasingly aggressive regulators nervous. A memorandum of understanding that Hudson City said it expects to receive from the OTS means it will most likely have to spend plenty of money to rein in that risk by shrinking its $60 billion-asset balance sheet. Just how, and by how much, isn't known yet.

"They're a victim of circumstances," said Charles C. Carnevale, co-founder and chief investment officer of EDMP Inc. in Lutz, Fla. "They're kind of caught up in the wave of regulation, if you will."

In the past, regulators have been comfortable with the way Hudson City has managed its interest rate risk because it tends to makeloans that don't lose money. But that doesn't exempt it from the stark new realities facing all banks: People aren't borrowing, which squeezes profits, and regulators are implementing tougher compliance standards for banks like Hudson City deemed a potential threat to the economy under the Dodd-Frank Act.

Hudson City isn't really a threat to the economy, according to David W. Darst, an analyst with Guggenheim Securities LLC. He said the economy - and government - are the threat to Hudson City. It has had to compete harder on new loans since the government-sponsored enterprises increased the limits on the size of mortgages they will purchase, he said. It has also had to compete with the agencies to purchase jumbo mortgages made by others, a market that Hudson City has used to grow assets.

"It's very hard for them to originate and put assets on the books today," Darst said.

But what is more certain is that the company will have to restructure its funding base because other circumstances have complicated its interest rate exposure. Hudson City has managed that exposure by using deposits to fund securities investments and borrowed funds to fund loans, he said. …

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