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[Beginning of
Cramer's
verbatim
comments for
this segment...]
Jim:
You know that I
think the banks are
a great place to
be... especially
when I called the
housing bottom.
Remember, that
doesn't mean that
they're going to
shoot up... I think
that there's
stability with house
price depreciation
ending around the
country... Yes,
things have simply
stopped
deteriorating as
quickly as they
were.
Bankers are in a
position to going
back to doing what
they do best...
turning on the
lights every day and
making money off the
net interest
margin... NIM...
total financial
jibberish meaning
the difference
between the rate
they pay you for
your deposits...
which is like
nothing... and the
higher rate that you
borrow from.
I think
Bank of America (BAC*),
down 50% year over
year, is a steal.
That's why I've been
buying that for
my charitable trust...
But suppose you
aren't quite as
bullish as I am...
about a turn in the
economy or the
banks... but you
want bank
exposure?... What if
you want to play
this banking
resurgence with
something you can
bank on?... In other
words, you don't
have to roll the
dice...
How would you like a
bank that's been
able to buy back
stock, while nearly
all of its
competitors are
flooding the country
with stock
(offerings)... You
see how much stock
Citigroup had to
issue? Yeah, that's
right... almost
everybody had to
sell stock, but not
this one...
Uh, this bank really
does exist... one
that bought back
stock, and it's
called
Hudson City Bancorp (HCBK)...
based in the
Northeast, run by
the terrific Ron
Hermance, the winner
of our first-ever
George Bailey award
for banking, of
which there will
probably be no other
banks that could win
that... because,
well, his bank is
just like the Bailey
Building and Loan
from "It's A
Wonderful Life." The
other guys...
they're almost out
of business, when
compared to this
one.
This one's got great
faithful depositors
and from what I can
tell, it has always
made sound loans...
never lending to
people who can't
pay, or
over-extending
itself with bizarre,
exotic mortgages...
the kind that
brought so many
other banks down. Of
course, the usual
suspects are going
to make it... 19
banks passed the
stress test...
whatever... but they
all... Well, let's
put it this way...
almost every bank in
this country needed
help to survive.
As of its most
recent quarter,
Hudson City's
deposits increased
by $2 billion...
It's net interest
margin was good and
expanding. It raised
its dividend so
that, at the current
price, it yields a
Marathon Man-like
4.6%. Most of your
banks slashed their
dividends, right?
This one raised it.
On just about every
metric, this is a
pristine bank. Net
charge off, the
total loan ratio is
just 0.06, compared
to an average of
1.66 for its
competitors,
indicating that it
has an absolute
miniscule proportion
of bad loans.
Its tangible common
equity ratio...
that's the most
conservative and
Draconian way of
measuring a bank's
ability to take
losses... is 8.7%
versus 6.3% for its
peers.
Capital up... buying
back 3.8 million
shares in an average
price of $10.85...
more than $2 below
its current price...
so it has gotten a
good deal too,
although the rest of
the banking industry
has been issuing
stock like mad, in
order to raise
capital. Hudson City
was always
responsible. It
didn't need to raise
capital. It didn't
need no stinkin'
TARP either...
A bank like this,
you figure that
Hudson City must be
trading at a huge
premium, right?
Wrong. It trades at
just 1.3x book
value. Historically,
it's traded at 2.5x
book. Now, remember
the way book value
works at a safe
bank... it's cash.
It's just cash. You
get all the branches
for free, plus the
cash...
And if this stock
traded at its
historical ratio,
it's be at $25, not
$13. Don't take it
from me though...
Let's hear it from
the non-fictional
George Bailey of our
generation, the CEO
of Hudson City
Bancorp, Ron
Hermance...
[Start of
interview... ]
Jim:
Mr. Hermance,
welcome back to Mad
Money
Ron:
Jim, thanks for
having me.
Jim:
Oh, it's a
pleasure... it is a
pleasure. It is an
amazing time, and I
know the other banks
are struggling and
they're going to
make it, but many,
many needed help
from the government.
Why is it that
Hudson City did not
need to take part?
Ron:
Well Jim, we're
well capitalized, as
you mentioned in
your intro. You
know, I guess I'd
liken it... we're in
baseball season.
It's like a singles
hitter... We hit an
awful lot of
singles, and we're
pretty happy. And
someone said to us
not too long ago...
they said, you know,
I was at a
conference in
Atlanta, and they
said, in good times
you make a lot of
money. In bad times,
you make more money.
So it's a very solid
foundation. And
really what we do is
we key on two
things... One is
asset quality...
and, as you
mentioned, our asset
quality is
pristine...
Secondarily, our
operating overhead
is very low, and
that's measured as
an efficiency ratio,
and it basically
means, how many
cents does it take
you in overhead to
create a dollar in
revenue? Well, as
you mentioned, we're
the 24th largest
bank in the country.
In the top 50, it
takes 58 basis
points, or 58%...
It's 19 for us. We
can make a lot of
money like that.
Jim:
Okay, well then
I have a way that I
think you may be
making more money...
Your net interest
rate margin
question... You've
got $13.7 billion in
CDs maturing in the
next 12 months, I
believe...
Ron:
Right.
Jim:
That's a scaled
report, but that's
close... Those were
all paying at a 3.1%
rate. And $8.2
billion in a Q2
average, at 3.3%. I
have to believe,
given what I look at
for CD rates, which
are around 2-2.25%,
that you may have a
gigantic improvement
coming ahead in net
interest margin. How
are my calculations?
Ron:
Your
calculations are
right on the
money... you don't
miss by much. No,
exactly... You know,
part of it Jim, is
managing your
liability book. I
mentioned earlier
that asset quality
is one of the prime
movers in our
organization. But if
you don't manage
your liability
costs, they're going
to eat you up. So
literally, we've had
an 85-90% retention
ratio in our
certificates of
deposits (CDs) and,
believe me, people
want to get paid
nowadays. So you
mentioned the $2
billion gain in the
first quarter and
we're on target to
do a very similar
amount this
quarter... and at
much lower rates.
Jim:
Now I think one
of the things I had
been historically
anti-buyback... but
there are certain
situations where
buybacks make sense,
and I'm going to
need you to walk
through with our
viewers why, when
you buy back stock
below the cost of
book, that's
actually a
positive...
Ron:
Yep, it's
accretive.
Jim:
Alright,
explain that.
Ron:
And, in the
first quarter, we
were being punished
much like the rest
of the industry, as
you mentioned, even
though we had a
record quarter,
Jim... and upped the
dividend. So it
became important, at
least to our
shareholders, that
we get in and
support that, by
buying below book.
So, as a result, we
bought stock... and
I saw you had the
average...
Jim:
Your basically
buying cash, for
under cash, right?
Ron:
Absolutely.
Absolutely...
Jim:
You're buying
$12 of cash for $10
bucks?...
Ron:
Exactly.
Jim:
... which is
only with savings
and loans people...
Only does that
happen in savings
and loans... because
it doesn't work
typically otherwise.
Ron:
And we own over
250 million shares,
at an average price
of $7.75. Now that's
not gone forever.
That's a war
chest...
Jim:
Right...
Ron:
... for when
times are good
again. But look how
accretive that is to
the book value.
Jim:
Okay, now... so
I go around and I
ask people how come
the stock isn't
higher. I get
this... This is not
my view, but I have
to give you
everything... "The
stock is the lower
level of loan loss
reserves" is what's
bothering people...
There was a thought
that you were being
unrealistic, even
though... and this
is a quote... "that
he's been talking
until he's blue in
the face about
better origination
practices and lower
loan losses are
certainly going to
do things well."
People feel like
your reserves should
be increased. Does
that make any sense
at all?
Ron:
Well, let me
describe why you put
reserves away in the
first place... At
the annual meeting,
I picked on a
commercial bank that
does nothing but
credit cards... and,
if those go 90 days
delinquent, you're
unsecured, and
you've got to write
them off today. If
there's another bank
in the country that
does an awful lot of
second mortgages,
well, you might wait
a second, when they
go 90 days, and get
an appraisal. But,
if you've got a
first mortgage on
this... and here's
the key component...
at the end of the
first quarter, the
average
loan-to-value of our
mortgage portfolio,
at the time of
origination, was 62%
loan-to-value...
Jim:
So, in that
sense.. and you
know, you never want
to bet against
anybody... but the
people who borrow
from you, it would
be better if you
took delivery of
their homes that
they missed...
Ron:
That's it...
that's it. But, you
know, a lot of the
foreclosures that
are taking place in
America today, where
a lot are
non-accruals, are
the reason when
somebody does a book
about this
someday... and it
might be you, for
all we know... is
they're going to say
it's America's
appetite for
additional debt...
not first mortgage,
but how much debt
was behind it? We
have four
foreclosures going
right now in New
Jersey...
Jim:
Four
thousand?...
Ron:
Four. All four
have six-figure
second mortgages
behind us from name
banks. Now, if they
don't protect, that
just gives us
greater equity.
Jim:
Right. You get
it, you get it. Well
you know, Ron, every
time you come on, I
learn something. I
think our viewers
learn something.
They learn what a
good banker looks
like. Ron Hermance,
chairman president
and CEO at
Hudson City Bancorp (HCBK).
It is always a
pleasure to have you
on the show. Keep
doing that great job
that you're doing.
Ron:
Thank you.
[verbatim recap]
[end of segment]
Read Jim's next Segment
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