New Jersey-based Hudson City Bancorp, which has nine branches in Connecticut, said regulators may force it to raise capital, reduce its interest-rate risk and find more sources of funding because the bank has too much exposure to shifting interest rates, Reuters reports.
The bank’s shares fell by more than 9 percent after it said its main regulator, the U.S. Office of Thrift Supervision, is expected to issue an memorandum of understanding requiring changes to its business.
The announcement was a surprise for many investors in Hudson City, which during the financial crisis was praised for its conservative lending practices.
Hudson City Bancorp, is parent company to Hudson City Savings Bank, which has nine branches in Connecticut with $1.1 billion in deposits, giving it about 1.2 percent of the state’s market share.
The enforcement action shows that even banks that have successfully managed credit risk in the mortgage market can get socked by shifting interest rates, which can squeeze profit margins on loans by decreasing the returns a bank receives on new loans relative to funding costs.
Hudson City required borrowers to make down payments of at least 20 percent on home loans, and shied away from subprime mortgages. It did not apply for bailout money under the U.S. Troubled Asset Relief Program.
The bank, based in Paramus, New Jersey, has $61 billion in total assets and is one of the largest U.S. thrifts to survive the 2008 financial crisis.
But in its annual report filed with the Securities and Exchange Commission, Hudson City disclosed it is not complying with the limits for interest rate risk established by the bank’s board and OTS guidelines.
The bank’s earnings have suffered from low U.S. interest rates and borrowers refinancing their mortgages, Hudson City said in its annual report.
As a result of these issues, the OTS may require higher capital or place restrictions on dividend payments, stock buybacks or adding debt.
Hudson City said the regulatory action would be spurred by the bank’s interest rate risk, a reliance on structured borrowings for funding, the overall growth of the lender since 2005 and compliance-related matters.
After the annual report filing, Evercore Partners downgraded Hudson City’s stock from equal weight to under weight, and lowered its price target for the company’s shares to $10 from $12.
