Thursday, July 3, 2008

This Operation Is No CountryWide

I recently saw Ronald Hermance, CEO of New Jersey based Hudson City Savings Bank being interviewed on CNBC. He was on the show as the rare exception in the otherwise dismal banking sector. He described his $44bb institution as a simple and careful lender that continues to generate record profits. He said they concentrate on mortgage loans and individually underwrite every loan based by the traditional measures of collateral and income. Every loan, he went on, even those they eventually sell are underwritten as if they would be retained forever.

Being something of a skeptic, I wondered if there might be more to the story. So I pulled their financial data and guess what? The only “more” to the story is that they seem to be even more plain vanilla then what was described. Their earning assets are split about 60-40 between mortgage loans and mortgage backed securities. But, all of their mortgage securities contain only loans carrying government agency guarantees. And, while many regional banks have been ‘juicing’ their earnings with construction loan portfolios totaling 200 to 300% of capital, Hudson has a whooping construction portfolio equal to 1% of capital. No typo there…it is 1%. Home equity loans are almost as inconsequential.

So how are they doing? Very well, thank you! Their stock, while off from recent highs, is still double the level from 5 years ago. It sells at 1.8 times book value compared to most banks that now trade at a discount to book value. I can’t help myself from making a comparison to Bank of America which now sells at a 10 year low. In fact, you have to go back to the old NationsBank to get a higher price. Its price is .7 times its book value. Another comparison – Bank of America is 40 times larger than Hudson but has a market capitalization only 10 times larger. Hummm… think Hermance would have acquired CountryWide?