The “Best-Managed Bank in America”

The largest savings and loan in the United States said second-quarter earnings were up 16% from last year. Net income rose to $127.9 million, or 26 cents a share, compared with $110.7 million, or 22 cents a share, last year. The results were a penny better than analysts had forecast. Overall loans increased by $1.28 billion.

Hudson City Bancorp’s (Nasdaq: HCBK) shares have performed exceptionally well since the beginning of the credit crisis. HCBK is up 15% since June 2007, while the Keefe Bruyette & Woods Mortgage Finance Index has fallen almost 82%. HCBK trades at 13.3 times earnings, a little less than its average, but the key there is “earnings.” Many publicly traded banks don’t have any.

Hudson City has been able to withstand the worst of the financial crisis by lending conservatively. It has stayed out of the subprime mortgage market, doesn’t make auto or credit card loans, and has not taken any TARP money.

The bank’s main business is writing “jumbo” mortgages for well-to-do clientele in the wealthy suburbs of New York, New Jersey and Connecticut. These loans require a minimum 20% down payment. Hudson City does not write adjustable-rate mortgage loans.

The bank also invests in mortgage-backed securities backed by the U.S. government. It holds $25 billion worth of these securities.

Hudson City originated $1.7 billion in loans and purchased $1.2 billion of first mortgage loans for the second quarter. A “first mortgage” loan has priority over other liens on a property in the event of a default.

Out of the bank’s $30.7 billion loan portfolio, 96% are secured by first liens. This is what makes Hudson City different. About 55% of Bank of America’s and about 40% of Wells Fargo’s mortgages are first liens. By maintaining a first-lien position on most of its loans, Hudson City is shouldering less risk.

In fact, it doesn’t look like Hudson takes any risk, judging by the number of loans that go bad. Nonperforming loans, or loans that haven’t had payments for 90 days, increased to 1.4%. The industry average for S&Ls is 4.0%. That means 98.6% of Hudson City’s loans are still performing — a remarkable number in these conditions.

The company charged off $9.6 million in loans for the quarter. First-quarter charge-offs for 2009 were $4.7 million. So, compared with a $30.7 billion loan portfolio, charge-offs from the first half of the year only amount to a fraction of a percent. That was head and shoulders above S&Ls overall charge-off rate of 1.5% and 1.9% for all banks.

Hudson City has been able to make good loans and collect on them while its peers are struggling. It should continue to thrive despite industry-wide concerns about an increase in loan losses.

The company was named the Best-Managed Bank in America by Forbes in 2007 and 2008 and it’s not hard to see why. As long as the bank continues to do what it does best, HCBK shares should continue to build upon their gains with improving conditions.