Hudson City Savings Bank is a New Jersey-based mortgage machine, steadily rolling into wealthy regions and chewing up the market. Despite only nine Connecticut locations, it’s the state’s top-ranked jumbo loan lender in terms of both loan volume and dollar volume – by a wide margin. It ranks highly for non jumbo mortgages. The bank also holds an impeccable reputation among investors – or rather, it did, until last month.
In its annual report, the $60.6 billion Hudson City announced that its regulator, the Office of Thrift Supervision (OTS), would soon issue a warning that the bank was overextended on its interest rate risks, and would need to take corrective action. The news sent the bank’s shares skidding and caught analysts off guard.
But although the ripple effects are still unclear, one analyst said it’s unlikely Connecticut’s local banks will be able to turn Hudson’s hiccup to their advantage.
‘One-Trick Pony’
Hudson City, which crept into Connecticut in a “discreet, quiet, almost stealthy manner,” according to Hartford-based bank analyst John Carusone, has single-mindedly pursued mortgages and made many jumbo loans, which are generally classified as those above $750,000. That strategy has historically been a great strength, but it also turns out to have been a weakness of late.
“They’re kind of a one-trick pony,” said James Sinegal, associate director of equity research for Morningstar. The bank takes in deposits and uses them to fund mortgages with very high down payments and low loan-to-value ratios. It generally works well, and the narrow focus keeps the bank efficient and holds down operating expenses, he said.
Hudson City declined to comment for this article. But CEO Ronald Hermance has stated in previous media reports that the bank has purposefully stuck to conservative mortgages, and has expanded in wealthy areas, including its Paramus, N.J., base, Fairfield County and Westchester County, N.Y.
It’s a strategy that has certainly led to market share growth in Connecticut. The 131-branch bank has fewer than 10 Connecticut locations, but dominates the jumbo loan market. According to data from The Warren Group, publisher of The Commercial Record, Hudson City wrote 230 Connecticut jumbo mortgages in 2010, easily besting the 91 jumbo loans originated by No. 2 on the list, New Haven-based NewAlliance Bank. It’s also no slouch on other mortgage`s, with 271 non-jumbo purchase loans originated last year. That puts it No. 7 among banks in that category.
But those are fixed-rate, long-term assets made during a period of low interest rates, Sinegal said. That low-rate income extends far into the future, but in the meantime, the bank will have to continue to pay out interest on deposits – and interest rates paid on deposits are far more volatile. When rates rise on deposits, the bank may be squeezed between paying out more on deposits than it’s taking in on mortgages.
A bank with a more diversified business would likely be less vulnerable to such shifts, Sinegal said – the downside of Hudson’s well-oiled mortgage machine.
The size of the problem is unclear, he added, saying it depended on how much interest rates rise, and how soon.
“It’s not like it’s a pressing issue … they need to reduce the risk,” Sinegal said. “How much they need to reduce it is hard to say at this point.”
Chink In The Armor
Hudson’s entry into Connecticut is fairly recent, said Carusone, president of the Hartford-based Bank Analysis Center. The bank set up shop here with the 2006 purchase of Sound Financial Bancorp, which had locations in New York and Fairfield County. Since then, it has proven itself very “nimble and adroit” at expanding its branch network.
“[Hudson] entered the market on the financial equivalent of cat feet, and has enjoyed very considerable success,” he said.
Its current interest-rate risk predicament means it will have to reorient its balance sheet and strategy. That stumble might create an opening for local competitors to take more of the mortgage market, Carusone said, but only to a small degree, as many Fairfield County banks aren’t in a good position to leap at the chance.
Stamford-based Patriot National Bank, for example, just re-organized under new leadership, Carusone said. Wilton Bank is laboring under a slew of nonperforming loans. First County Bank, also based in Stamford, is working to improve its low earnings. These types of trouble are leaving Hudson’s neighbors largely distracted.
Dan Berta, COO of Ridgefield-based Fairfield County Bank, acknowledged that his bank competed with Hudson for mortgages, but that it also sold many of its mortgages to the larger thrift. Both are working in a niche market, and both have benefited recently as competitors pulled back after the financial turmoil of the past few years took its toll. The remaining lenders in the field have all managed to grow as a result, Berta said.
He emphasized that while Hudson was laser-focused on mortgages, his own institution had a much broader business model that included business loans and investment advising. According to data from The Warren Group, Fairfield County Bank made 23 jumbo loans in 2010, putting it at No. 7 among banks in that category.
Much is still unknown about how Hudson City will deal with its regulatory setback, Sinegal said. But if the interest rate issue turns out to be a large problem, it leaves the bank with a number of unappetizing possibilities.
It could execute a potentially extensive balance sheet restructuring, and possibly reduce its growth. Hudson City’s income, and perhaps its 15-cent quarterly dividend, could take a hit. At worst, the bank would have to raise capital and dilute shareholder value, Sinegal said. Although things are murky at the moment, the next few quarters’ filings should further illuminate the situation.
The bank is facing challenges, but likely isn’t in serious trouble, Carusone said.
“Until recently, they’ve often been mentioned as one of the best-managed institutions in the country,” he added. “They’ve enjoyed a lot of success in a very focused niche.”
