Big Stock Upside for Hudson City Deal: Analyst

NEW YORK (TheStreet) -- After two major balance sheet restructurings, Hudson City Bancorp (HCBK) still needs to change its business model, possibly restructure again and more than one analyst thinks the company should consider selling.

Sterne Agee analyst Matthew Kelley on Friday projected that in a takeout scenario, the troubled Hudson City Bancorp would have a "terminal value" of $8.25 a share, which would be a 31% premium over Thursday's closing price of $6.27.

Hudson City's net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- has been under pressure for several years, in the prolonged low-rate environment, because of the Paramus, N.J. lender's focus on residential mortgage lending.

Following a first-quarter 2012 balance sheet restructuring that was forced by regulators and included the prepayment of $12.5 billion in higher-cost borrowings charges of $649.3 million, the company prepaid another $4.3 billion in borrowings during the fourth quarter, resulting in $440.7 million in charges.

During the first quarter, Hudson City earned $73 million, or 15 cents a share, and the net interest margin improved to 2.15% from 1.73% the previous quarter, and 1.72% a year earlier. For the entire U.S. banking industry, the first-quarter net interest margin was 3.52% during the first quarter, narrowing from 3.57% in the fourth quarter, and 3.66% in the first quarter of 2011, according to the Federal Deposit Insurance Corp.

Kelly said that "earnings power at HCBK will continue to suffer in a sustained low interest rate environment, in our view," and that the company was "expected to announce changes to its business plan (add mortgage banking)," and that a third restructuring of borrowings was "not out of the question."