EX-13.1 5 y87928exv13w1.htm EX-13.1 exv13w1
Exhibit 13.1
Dear Fellow Shareholders:
The past year will be remembered as one marked by unprecedented change and uncertainty for our economy, political landscape, regulatory environment, and banking industry. While institutions and consumers continued to rebuild their balance sheets, our country experienced a stubborn unemployment rate and a weak economic recovery.
Despite these challenges, we are very proud to report that Hudson City’s net income totaled $537.2 million or $1.09 per diluted share.
In retrospect, 2010’s results were more difficult to achieve than during any time in the last twelve years due to a prolonged period of low market interest rates resulting in heightened mortgage refinancing and prepayment activity. The result was a 21 basis point decrease in our net interest margin to 2.01% for the year.
These extremely low interest rates are largely the result of monetary actions taken by the Federal Reserve Board and the United States government-sponsored enterprises (the “GSEs”) commonly known as Fannie Mae and Freddie Mac. In the fall of 2008, the U.S. government became the conservator of both Fannie Mae and Freddie Mac. Since that time, the GSEs have been offering extremely low mortgage rates in an attempt to support the housing market. In 2010, the GSEs accounted for more than 90% of mortgage production in the U.S. In our primary market area (the New York metropolitan area), the GSEs are subsidizing loans up to $729,750 and are a significant competitor for our traditional prime mortgage product.
In July 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”). The enactment of the Reform Act will impose significant new regulatory burdens on the industry. The regulatory response to the recent financial crisis, the legislative directives to the banking regulators, and the related public reaction has resulted in significantly greater regulatory supervision of financial institutions, particularly larger institutions such as Hudson City. To put this burden in perspective, in 2010 our fees and tax expense to federal and state governments was $411.2 million, while our remaining overhead, including compensation, was $210.4 million. In other words, our ratio of government fees and taxes to overhead was 2 to 1.
As we look ahead to 2011, the combination of significant GSE participation in the marketplace, low market interest rates, and a more stringent regulatory environment is expected to produce substantial headwinds for Hudson City, resulting in reduced earnings and significant pressure on our net interest margin.
Our growth since our initial public offering in 1999, particularly since our second-step conversion in 2005, resulted in Hudson City becoming one of the 40 largest domestic insured depository institutions by asset size. Although our regulatory capital ratios are in excess of the applicable requirements to be considered “well capitalized” for bank regulatory purposes, we believe the current regulatory environment will require Hudson City to maintain a cushion above these requirements. Furthermore, in light of the current economic environment, where interest rate levels are artificially low and GSEs are actively purchasing loans, there is very little opportunity for residential mortgage portfolio lenders, like Hudson City, to profitably add to our loan portfolio and to continue our recent growth strategy. As a result, we slowed our growth rate considerably in 2010. Hudson City grew its assets by 1.5% to $61.17 billion at December 31, 2010. This is in stark contrast to an annualized growth rate of 21% from our public offering in 2005 though December 31, 2009.
During 2010, our management team began exploring ways to position our balance sheet for the future as market conditions change and allow for more profitable growth. We want to ensure that we are well positioned to capture an additional share of the mortgage market as conditions permit. While it is difficult to predict when conditions will improve, we believe now is the right time to prepare for the “new normal.” Our primary focus is on the types of funding we use for mortgage loan production.

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We currently have structured borrowings on our balance sheet which are fixed-rate, longer-term debt that the lender has the option to recall or “put” back to us after initial fixed periods. These borrowings were used to fund the longer duration mortgage assets on our balance sheet. Since market interest rates have remained very low for an extended period of time, we have not had any lenders put borrowings back to us. As a result, we currently have $19.0 billion of borrowings that may be put back to us quarterly. In addition, the actions of the GSEs and the Federal Reserve Board have resulted in a prolonged period of low interest rates and high prepayments on our mortgage assets. The reinvestment of these prepayments has been in lower-yielding assets resulting in a lower net interest margin. Consequently, we are studying the feasibility of a partial restructuring of our borrowings to strengthen our balance sheet and improve net interest margin going forward.
The restructuring may include the modification of putable borrowings to extend or eliminate the put dates, the extinguishment of certain borrowings, the refinancing of certain borrowings or a combination of these actions. Any restructuring could result in a decrease in the size of our balance sheet and a material charge to earnings.
During the past year, the regulatory environment has become much more stringent in almost every area of our business. In fact, our industry is facing over 240 new regulations to be promulgated in 2011 as a result of the Reform Act. Hudson City is adapting to this new regulatory environment. We expect to enhance our operational and compliance functions in a number of areas in order to meet these additional regulations.
Throughout the recent economic recession, our asset quality fared much better than that of our peers. However, we were not immune to the economic woes faced by our customers as unemployment rates remained high. Non-performing loans totaled $871.3 million at December 31, 2010, as compared to $627.7 million at December 31, 2009. It is important to note that the growth rate in non-performing loans slowed during 2010 and our net charge-offs have stabilized. While non-performing loans increased, the type of lending we engage in and our conservative underwriting standards moderated these losses. The ratio of net charge-offs to average loans was 0.31% for 2010. This compares to an average of over 2.0% for domestic banks with assets greater than $50.0 billion as of December 31, 2010, based on data obtained from SNL Financial.
At Hudson City, we remain focused on shareholder value. That is why the decision to restructure our funding sources is being carefully considered in order to prepare our balance sheet for future growth opportunities as capital and liquidity become an even greater regulatory focus in 2011.
We are beginning to see some signs of recovery in the housing markets and the overall economy. We are also starting to see some bi-partisan movement in Washington to resolve the fate of the GSEs and direct a larger portion of home mortgage lending back to the private sector. Both would be positive changes for Hudson City that would enable us to capture a larger share of the mortgage market.
It is with these views that we look forward to 2011 and beyond. Changing times require bold leadership. We believe, after a period of adjustment to the “new normal”, that Hudson City will be well-positioned to capitalize on improving market conditions and enhance shareholder value. On behalf of the board of directors and all of our employees, we thank you for your confidence and pledge to continue to earn your trust. We will continue to lead the Bank in a way that makes you proud — with quality, passion, and integrity.
         
/s/ Ronald E. Hermance, Jr.
      /s/ Denis J. Salamone
 
       
Chairman & Chief Executive Officer
      President & Chief Operating Officer

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Selected Consolidated Financial Information
The summary information presented below under “Selected Financial Condition Data,” “Selected Operating Data” and “Selected Financial Ratios and Other Data” at or for each of the years presented is derived in part from the audited consolidated financial statements of Hudson City Bancorp, Inc.
                                         
    At December 31,
    2010   2009   2008   2007   2006
    (In thousands)
Selected Financial Condition Data:
                                       
Total assets
  $ 61,166,033     $ 60,267,760     $ 54,145,328     $ 44,423,971     $ 35,506,581  
Total loans
    30,923,897       31,779,921       29,418,888       24,192,281       19,083,617  
Federal Home Loan Bank of New York stock
    871,940       874,768       865,570       695,351       445,006  
Investment securities held to maturity
    3,939,006       4,187,704       50,086       1,408,501       1,533,969  
Investment securities available for sale
    89,795       1,095,240       3,413,633       2,765,491       4,379,615  
Mortgage-backed securities held to maturity
    5,914,372       9,963,554       9,572,257       9,565,526       6,925,210  
Mortgage-backed securities available for sale
    18,120,537       11,116,531       9,915,554       5,005,409       2,404,421  
Total cash and cash equivalents
    669,397       561,201       261,811       217,544       182,246  
Foreclosed real estate, net
    45,693       16,736       15,532       4,055       3,161  
Total deposits
    25,173,126       24,578,048       18,464,042       15,153,382       13,415,587  
Total borrowed funds
    29,675,000       29,975,000       30,225,000       24,141,000       16,973,000  
Total stockholders’ equity
    5,510,238       5,339,152       4,938,796       4,611,307       4,930,256  
                                         
    For the Year Ended December 31,  
    2010     2009     2008     2007     2006  
    (In thousands)  
Selected Operating Data:
                                       
Total interest and dividend income
  $ 2,784,496     $ 2,941,786     $ 2,653,225     $ 2,127,505     $ 1,614,843  
Total interest expense
    1,593,669       1,698,308       1,711,248       1,480,322       1,001,610  
 
Net interest income
    1,190,827       1,243,478       941,977       647,183       613,233  
Provision for loan losses
    195,000       137,500       19,500       4,800        
 
Net interest income after provision for loan losses
    995,827       1,105,978       922,477       642,383       613,233  
 
Non-interest income:
                                       
Service charges and other income
    10,369       9,399       8,485       7,267       6,287  
Gains on securities transactions, net
    152,625       24,185             6       4  
 
Total non-interest income
    162,994       33,584       8,485       7,273       6,291  
 
Total non-interest expense
    266,388       265,596       198,076       167,913       158,955  
 
Income before income tax expense
    892,433       873,966       732,886       481,743       460,569  
Income tax expense
    355,227       346,722       287,328       185,885       171,990  
 
Net income
  $ 537,206     $ 527,244     $ 445,558     $ 295,858     $ 288,579  
 
                             

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Selected Consolidated Financial Information (continued)
(Dollars in thousands, except per share data)
                                         
    At or for the Year Ended December 31,
    2010   2009   2008   2007   2006
 
Selected Financial Ratios and Other Data:
                                       
Performance Ratios:
                                       
Return on average assets
    0.88 %     0.92 %     0.91 %     0.74 %     0.91 %
Return on average stockholders’ equity
    9.66       10.18       9.36       6.23       5.70  
Net interest rate spread (1)
    1.77       1.93       1.58       1.11       1.31  
Net interest margin (2)
    2.01       2.22       1.96       1.65       1.96  
Non-interest expense to average assets
    0.44       0.46       0.41       0.42       0.50  
Efficiency ratio (3)
    19.68       20.80       20.84       25.66       25.66  
Average interest-earning assets to average interest-bearing liabilities
    1.09     1.09     1.11     1.14     1.20
Share and Per Share Data:
                                       
Basic earnings per share
  $ 1.09     $ 1.08     $ 0.92     $ 0.59     $ 0.54  
Diluted earnings per share
    1.09       1.07       0.90       0.58       0.53  
Cash dividends paid per common share
    0.60       0.59       0.45       0.33       0.30  
Dividend pay-out ratio
    55.05 %     54.63 %     48.91 %     55.93 %     55.56 %
Book value per share (4)
  $ 11.16     $ 10.85     $ 10.10     $ 9.55     $ 9.47  
Tangible book value per share (4)
    10.85       10.53       9.77       9.22       9.15  
Weighted average number of common shares outstanding:
                                       
Basic
    493,032,873       488,908,260       484,907,441       499,607,828       536,214,778  
Diluted
    494,314,390       491,295,511       495,856,156       509,927,433       546,790,604  
 
                                       
Capital Ratios:
                                       
Average stockholders’ equity to average assets
    9.14 %     9.03 %     9.74 %     11.93 %     16.00 %
Stockholders’ equity to assets
    9.01       8.86       9.12       10.38       13.89  
 
                                       
Regulatory Capital Ratios of Bank:
                                       
Leverage capital
    7.95 %     7.59 %     7.99 %     9.16 %     11.30 %
Total risk-based capital
    22.74       21.02       21.52       24.83       30.99  
Asset Quality Ratios:
                                       
Non-performing loans to total loans
    2.82 %     1.98 %     0.74 %     0.33 %     0.16 %
Non-performing assets to total assets
    1.50       1.07       0.43       0.19       0.09  
Allowance for loan losses to non-performing loans
    27.15       22.32       22.89       43.75       102.09  
Allowance for loan losses to total loans
    0.77       0.44       0.17       0.14       0.16  
Net charge-offs to average total loans
    0.31     0.15     0.02            
 
                                       
Branch and Deposit Data:
                                       
Number of deposit accounts
    720,456       725,979       638,951       605,018       580,987  
Branches
    135       131       127       119       111  
Average deposits per branch (thousands)
  $ 186,468     $ 187,619     $ 145,386     $ 127,339     $ 120,861  
 
(1)   Determined by subtracting the weighted average cost of average total interest-bearing liabilities from the weighted average yield on average total interest-earning assets.
 
(2)   Determined by dividing net interest income by average total interest-earning assets.
 
(3)   Determined by dividing total non-interest expense by the sum of net interest income and total non-interest income. For 2009, the efficiency ratio includes the FDIC special assessment of $21.1 million and net securities gains of $24.2 million.
 
(4)   Computed based on total common shares issued, less treasury shares, unallocated ESOP shares and unvested stock award shares. Tangible book value excludes goodwill and other intangible assets.

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Performance Graph
Pursuant to the regulations of the Securities and Exchange Commission, the graph below compares the performance of Hudson City Bancorp, Inc. with that of the Standard and Poor’s 500 Stock Index, and for all thrift stocks as reported by SNL Securities L.C. from December 31, 2005 through December 31, 2010. The graph assumes the reinvestment of dividends in all additional shares of the same class of equity securities as those listed below. The index level for all series was set to 100.00 on December 31, 2005.
Hudson City Bancorp, Inc. Total Return Performance
(PERFORMANCE GRAPH)
                                                 
    12/31/05   12/31/06   12/31/07   12/31/08   12/31/09   12/31/10
Hudson City Bancorp, Inc.
    100       117       130       142       127       124  
SNL Thrift Index
    100       117       70       45       42       43  
S&P 500 Index
    100       116       122       77       97       112  
 
*   Source: SNL Financial LC and Bloomberg Financial Database
There can be no assurance that stock performance will continue in the future with the same or similar trends as those depicted in the graph above.

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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report to Shareholders contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which may be identified by the use of such words as “may,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “predict,” “continue,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Hudson City Bancorp, Inc. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond our control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These factors include, but are not limited to:
  the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control;
  there may be increases in competitive pressure among financial institutions or from non-financial institutions;
  changes in the interest rate environment may reduce interest margins or affect the value of our investments;
  changes in deposit flows, loan demand or real estate values may adversely affect our business;
  changes in accounting principles, policies or guidelines may cause our financial condition to be perceived differently;
  general economic conditions, including unemployment rates, either nationally or locally in some or all of the areas in which we do business, or conditions in the securities markets or the banking industry may be less favorable than we currently anticipate;
  legislative or regulatory changes including, without limitation, the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, may adversely affect our business;
  enhanced regulatory scrutiny may adversely affect our business and increase our cost of operation;
  applicable technological changes may be more difficult or expensive than we anticipate;
  success or consummation of new business initiatives may be more difficult or expensive than we anticipate;
  litigation or matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than we anticipate;
  the risks associated with adverse changes to credit quality, including changes in the level of loan delinquencies and non-performing assets and charge-offs, the length of time our non-performing assets remain in our portfolio and changes in estimates of the adequacy of the allowance for loan losses (the “ALL”);
  difficulties associated with achieving or predicting expected future financial results;
  our ability to restructure our balance sheet, diversify our funding sources and to continue to access the wholesale borrowing market and the capital markets; and
  the risk of a continued economic slowdown that would adversely affect credit quality and loan originations.
Our ability to predict results or the actual effects of our plans or strategies is inherently uncertain. As such, forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report to Shareholders. We do not intend to update any of the forward-looking statements after the date of this Annual Report to Shareholders or to conform these statements to actual events.
As used in this Annual Report to Shareholders, unless we specify otherwise, “Hudson City Bancorp,” “Company,” “we,” “us,” and “our” refer to Hudson City Bancorp, Inc., a Delaware corporation. “Hudson City Savings” and “Bank” refer to Hudson City Savings Bank, a federal stock savings bank and the wholly-owned subsidiary of Hudson City Bancorp.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
We continue to focus on our traditional consumer-oriented business model through the origination and purchase of one- to four-family mortgage loans. We have funded this loan production with customer deposits and borrowings. During 2010 we funded substantially all of our asset growth with deposit growth.
Our results of operations depend primarily on net interest income, which, in part, is a direct result of the market interest rate environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily mortgage loans, mortgage-backed securities and investment securities, and the interest we pay on our interest-bearing liabilities, primarily time deposits, interest-bearing transaction accounts and borrowed funds. Net interest income is affected by the shape of the market yield curve, the timing of the placement and repricing of interest-earning assets and interest-bearing liabilities on our balance sheet, the prepayment rate on our mortgage-related assets and the puts of our borrowings. Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, credit quality, government policies and actions of regulatory authorities. Our results are also affected by the market price of our stock, as the expense of our employee stock ownership plan is related to the current price of our common stock.
The Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the “FOMC”) noted that the economic recovery is continuing, though at a rate that has been insufficient to reduce the unemployment rate. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. The national unemployment rate was 9.4% in December 2010 as compared to 9.6% in September 2010 and 9.9% in December 2009. The FOMC decided to maintain the overnight lending rate at zero to 0.25% during 2010. As a result, short-term market interest rates remained at low levels during 2010. The yields on mortgage-related assets also remained at low levels. Our net interest rate spread decreased to 1.77% for 2010 as compared to 1.93% for 2009. Our net interest margin decreased to 2.01% for 2010 as compared to 2.22% for 2009. While our deposits continued to reprice to lower rates during 2010, the cost of our borrowings increased slightly due to the modification of certain borrowings and the lack of borrowings repricing during the year. In addition, the low market interest rates, coupled with the GSEs efforts to keep mortgage rates low to support the housing markets, have resulted in lower yields on our mortgage-related interest-earning assets as customers refinanced to lower mortgage rates and our new loan production and asset purchases were at the current low market interest rates. Mortgage-related assets represented 87.7% of our average interest-earning assets during 2010.
On July 21, 2010, President Obama signed the Reform Act. The Reform Act, among other things, effectively merges the Office of Thrift Supervision (the “OTS”) into the Office of the Comptroller of the Currency (the “OCC”), with the OCC assuming all functions and authority from the OTS relating to federally chartered savings banks, and the Federal Reserve Board (the “FRB”) assuming all functions and authority from the OTS relating to savings and loan holding companies. Certain aspects of the Reform Act will have an impact on us including the combination of our primary regulator, the OTS, with the OCC, the imposition of consolidated holding company capital requirements, changes to deposit insurance assessments and the rollback of federal preemption applicable to certain aspects of our operations. Pursuant to the Reform Act, the OTS will be merged into the OCC as early as July 2011 at which time Hudson City Savings Bank (“Hudson City Savings” or the “Bank”) will be regulated by the OCC and Hudson City Bancorp, Inc. (“Hudson City Bancorp” or the “Company”) will be regulated by the FRB.
Net income amounted to $537.2 million for 2010, as compared to $527.2 million for 2009. For the year ended December 31, 2010, our return on average assets and average shareholders’ equity were 0.88% and 9.66%, respectively, as compared to 0.92% and 10.18% for 2009. The decrease in our return on average equity and

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average assets is due primarily to the increase in the average balance of shareholders’ equity and total assets for 2010 as compared to 2009.
Net interest income decreased $52.7 million, or 4.3%, to $1.19 billion for the 2010 as compared to $1.24 billion for 2009. During 2010, our net interest rate spread decreased 16 basis points to 1.77% and our net interest margin decreased 21 basis points to 2.01% as compared to 2009. The decrease in our net interest margin and net interest rate spread was primarily due to the decrease in the weighted-average yield of our interest-earning assets during 2010.
Market interest rates on mortgage-related assets remained at near-historic lows due to a number of factors, including the overall impact of the low rates established by the FOMC, the FRB’s program to purchase mortgage-backed securities to keep mortgage rates low and provide stimulus to the housing markets and increased competition for mortgage loans due to the unprecedented involvement of the GSEs in the mortgage market as a result of the economic crisis. The GSEs involvement is also an attempt to provide stimulus to the housing markets and has caused the interest rates for thirty year fixed rate mortgage loans that conform to the GSEs’ guidelines for purchase to remain exceptionally low. We originate such conforming loans and retain them in our portfolio. The United States Congress recently extended to September 2011 the time period within which the GSEs may purchase loans under an expanded limit on principal balances that qualify as conforming loans. Further, we have no indication that the FOMC is likely to increase rates in the near future. As a result, we expect this adverse environment for portfolio lending to continue, with the likely result that we will continue to experience compression of our net interest margin, and, in combination with a potential reduction in the size of the balance sheet, a reduction of net interest income.
Due to the combination of downward pressure on yields for mortgage-related assets as a result of the involvement of the GSEs in the mortgage market and our significant portfolio of structured borrowings, we find ourselves faced with significant risk to our future earnings potential, particularly in a rising interest rate environment. However, the opportunity for loan portfolio growth should improve as the economy improves and should the GSEs reduce their involvement in the mortgage market.
We are examining various strategies to position our balance sheet for the future as market conditions change and allow for more profitable growth. As a result, we expect to further restructure a portion of our funding mix. The potential restructuring may include the continued modification of putable borrowings to extend or eliminate the put dates, the extinguishment of certain borrowings, the refinancing of certain borrowings or a combination of these actions. The fair value of our borrowings, which is generally the value at which borrowings are extinguished, was approximately 111% of carrying value at December 31, 2010. Any restructuring could result in a decrease in the size of the balance sheet and a material charge to earnings.
The provision for loan losses amounted to $195.0 million for 2010 as compared to $137.5 million for 2009. The increase in the provision for loan losses for the year ended December 31, 2010 and the resulting increase in the allowance for loan losses (“ALL”) is due primarily to an increase in net charge-offs, the increase in non-performing loans during 2010 and continuing elevated levels of unemployment. In addition, although home prices appear to have started to stabilize in our primary market area, conditions in the housing markets in many of our lending markets remain weak. Non-performing loans amounted to $871.3 million or 2.82% of total loans at December 31, 2010 as compared to $627.7 million or 1.98% of total loans at December 31, 2009. While national economic activity appears to be showing signs of improvement, the continued high level of unemployment has negatively impacted the financial condition of residential borrowers and their ability to remain current on their mortgage loans. As a result, we experienced increases in loan delinquencies and loan loss experience, which resulted in increased levels of charge-offs. These factors contributed to an increase in our provision for loan losses for 2010 and resulted in an increase in our ALL. During the second half of 2010, we experienced a slower growth rate in non-performing loans and a stable level of net charge-offs.
Total non-interest income was $163.0 million for 2010 as compared to $33.6 million for 2009. Included in non-interest income for the year ended December 31, 2010 were net gains on securities transactions of $152.6

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million which resulted from the sale of $3.92 billion of mortgage-backed securities available-for-sale. Included in non-interest income for the year ended December 31, 2009 were net gains on securities transactions of $24.2 million substantially all of which resulted from the sale of $761.6 million of mortgage-backed securities available-for-sale.
Total non-interest expense increased $791,000 to $266.4 million for 2010 from $265.6 million for 2009. The increase is primarily due an increase of $3.9 million in other expense. The increase in other expense is due to a $2.9 million increase in professional services. This increase was partially offset by a $3.3 million decrease in compensation and employee benefits expense primarily due to a decrease in stock benefit plan expense.
Our assets grew by 1.5% to $61.17 billion at December 31, 2010 from $60.27 billion at December 31, 2009. We grew our assets by 11.3% during 2009. Our growth rate slowed during 2010 as mortgage refinancing activity caused loan repayments and prepayments on mortgage-backed securities to remain at elevated levels during 2010. During this same time period, available reinvestment yields on the types of assets in which we invest also decreased. We lowered our deposit rates beginning in the first quarter of 2010 to slow our deposit growth from 2009 levels since the low yields that are available to us for mortgage loans and investment securities have made a growth strategy less prudent until market conditions improve.
Loans decreased $947.2 million to $30.77 billion at December 31, 2010 from $31.72 billion at December 31, 2009. Our loan production was $6.59 billion for 2010 offset by $7.26 billion in principal repayments. Loan originations continued to be strong as a result of elevated levels of mortgage refinancing activity caused by low market interest rates. The refinancing activity has also caused increased levels of repayments to continue in 2010 as some of our customers refinanced with other banks.
Total securities increased $1.70 billion to $28.06 billion at December 31, 2010 from $26.36 billion at December 31, 2009. The increase in securities was primarily due to purchases of mortgage-backed and investment securities of $15.49 billion and $5.80 billion, respectively, partially offset by principal collections on mortgage-backed securities of $8.37 billion and sales of mortgage-backed securities with an amortized cost of $3.92 billion and calls of investment securities of $7.07 billion. The securities purchased were all issued by GSEs.
The increase in our total assets during 2010 was funded primarily by growth in customer deposits. Deposits increased $595.1 million to $25.17 billion at December 31, 2010 from $24.58 billion at December 31, 2009. The increase in deposits was primarily attributable to growth in our money market accounts. Borrowed funds decreased $300.0 million to $29.68 billion at December 31, 2010.
Comparison of Financial Condition at December 31, 2010 and December 31, 2009
During 2010, our total assets increased $898.3 million, or 1.5%, to $61.17 billion at December 31, 2010 from $60.27 billion at December 31, 2009. The increase in total assets reflected a $2.95 billion increase in total mortgage-backed securities partially offset by a $1.25 billion decrease in investment securities and a $947.2 million decrease in net loans. Total assets decreased $65.6 million from March 31, 2010 as mortgage refinancing activity caused loan repayments and prepayments on mortgage-backed securities to remain at elevated levels. During this same time period, available reinvestment yields on these types of assets also decreased. We lowered our deposit rates beginning in the first quarter of 2010 to slow our deposit growth from the 2009 levels since the low yields that are available to us for mortgage loans and investment securities have made a growth strategy less prudent until market conditions improve. This resulted in a decrease in deposits from the first quarter of 2010.
In addition, the current economic environment, where interest rate levels are very low and GSEs are actively purchasing loans in an effort to keep mortgage rates down to support the housing market, has provided very little opportunity for one- to four- family lenders, like us, to profitably add mortgage loan products to our

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portfolio and to continue our recent growth strategy. Accordingly, we are likely to experience some balance sheet shrinkage while current economic and regulatory conditions prevail.
Our net loans decreased $947.2 million during the year ended December 31, 2010 to $30.77 billion. The decrease in loans primarily reflects the elevated levels of loan repayments during 2010 as a result of continued low market interest rates and the significant reduction in total loans purchased during 2010. Historically our focus has been on loan portfolio growth through the origination of one- to four-family first mortgage loans in New Jersey, New York, Pennsylvania and Connecticut and, to a lesser extent, the purchase of mortgage loans. During 2010, we originated $5.83 billion and purchased $764.3 million of loans, compared to originations of $6.06 billion and purchases of $3.16 billion for 2009. The origination and purchases of loans were offset by principal repayments of $7.26 billion in 2010 as compared to $6.77 billion for 2009. Loan originations continue to be strong as a result of elevated levels of mortgage refinancing activity caused by low market interest rates. The refinancing activity caused increased levels of repayments in 2010 as some of our customers refinanced with other banks. Our loan purchase activity has significantly declined as the GSEs have been actively purchasing loans as part of their efforts to keep mortgage rates low to support the housing market during the recent economic recession. As a result, the sellers from whom we have historically purchased loans are originating loans at lower rates than we would accept are selling many of their loans to the GSEs or keeping them in their portfolio. We expect that the amount of loan purchases will continue to be at reduced levels for the near-term.
Our first mortgage loan originations and purchases during 2010 were substantially all in one- to four-family mortgage loans. Approximately 53.0% of mortgage loan originations for 2010 were variable-rate loans as compared to approximately 47.0% for 2009. Approximately 76.9% of mortgage loans purchased for the year ended December 31, 2010 were fixed-rate mortgage loans. Fixed-rate mortgage loans accounted for 66.8% of our first mortgage loan portfolio at December 31, 2010 and 69.1% at December 31, 2009.
Non-performing loans amounted to $871.3 million or 2.82% of total loans at December 31, 2010 as compared to $627.7 million or 1.98% of total loans at December 31, 2009.
Total mortgage-backed securities increased $2.95 billion to $24.03 billion at December 31, 2010 from $21.08 billion at December 31, 2009. This increase in total mortgage-backed securities resulted from the purchases of $15.32 billion of mortgage-backed securities available-for-sale and $172.4 million of mortgage-backed securities held-to-maturity. All of these securities were issued by GSEs. Our purchases of mortgage-backed securities available-for-sale provides us with greater flexibility than held-to-maturity securities since proceeds from the sale of these securities may be used to fund operating liquidity needs. Substantially all of these purchases were hybrid adjustable-rate securities which typically have a fixed interest rate for three, five or ten years. After this initial fixed-rate term, the interest rates adjust annually. The increase was partially offset by repayments received of $8.37 billion and sales of $3.92 billion. At December 31, 2010, variable-rate mortgage-backed securities accounted for 85.9% of our portfolio compared with 70.7% at December 31, 2009. The purchase of variable-rate mortgage-backed securities is a component of our interest rate risk management strategy. Since our loan portfolio includes a concentration of fixed-rate mortgage loans, the purchase of variable-rate mortgage-backed securities provides us with an asset that reduces our exposure to interest rate fluctuations.
Total investment securities decreased $1.25 billion to $4.03 billion at December 31, 2010 as compared to $5.28 billion at December 31, 2009. The decrease in investment securities is primarily due to calls of investment securities of $7.07 billion, partially offset by purchases of $5.80 billion.
Since we invest primarily in securities issued by GSEs, there were no debt securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the security.

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Total cash and cash equivalents increased $108.2 million to $669.4 million at December 31, 2010 as compared to $561.2 million at December 31, 2009. This increase is primarily due to liquidity provided by increased repayments on mortgage-related assets. Other assets increased $69.6 million to $274.2 million at December 31, 2010 as compared to $204.6 million at December 31, 2009. The increase in other assets is primarily due to a $123.4 million increase in deferred tax assets partially offset by a $49.4 million decrease in prepaid assets.
Total liabilities increased $727.2 million, or 1.3% to $55.66 billion at December 31, 2010 from $54.93 billion at December 31, 2009. The increase in total liabilities primarily reflected a $595.1 million increase in deposits and a $438.2 million increase in amounts due to brokers, partially offset by a $300.0 million decrease in borrowed funds.
Total deposits increased $595.1 million, or 2.4%, to $25.17 billion at December 31, 2010 as compared to $24.58 billion at December 31, 2009. The increase in total deposits reflected a $1.25 billion increase in our money market accounts and a $151.5 million increase in our interest-bearing transaction accounts and savings accounts. These increases were partially offset by a decrease of $788.9 million in our time deposits as customers shifted deposits to our money market savings account. Deposit flows are typically affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets, and other factors. During 2009, we grew our deposits by $6.12 billion or 33.2%. We lowered our deposit rates in 2010 to slow our deposit growth from the 2009 levels since the low yields that are available to us for mortgage-related assets and investment securities have made a growth strategy less prudent until market conditions improve. We had 135 branches at December 31, 2010 as compared to 131 branches at December 31, 2009.
Borrowings amounted to $29.68 billion at December 31, 2010 as compared to $29.98 billion at December 31, 2009. Borrowed funds at December 31, 2010 were comprised of $14.88 billion of Federal Home Loan Bank (the “FHLB”) advances and $14.80 billion of securities sold under agreements to repurchase.
Substantially all of our borrowings are putable quarterly at the discretion of the lender after an initial no-put period of one to five years with a final maturity of ten years. We have, in the past, used borrowings to fund a substantial portion of the growth in interest-earning assets. At December 31, 2010, we had $22.83 billion of borrowed funds with put dates within one year. If interest rates were to decrease, or remain consistent with current rates, we believe these borrowings would probably not be put back and our average cost of existing borrowings would not decrease even as market interest rates decrease. Conversely, if interest rates increase above the market interest rate for similar borrowings, we believe these borrowings would likely be put back at their next put date and our cost to replace these borrowings would increase. However, we believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be put back will not increase substantially unless interest rates were to increase by at least 200 basis points.
Since market interest rates have remained very low for an extended period of time, we have not had any lenders put borrowings back to us. As a result, many of our borrowings have become putable quarterly. To better manage our liquidity and reduce the level of interest rate risk posed by this type of borrowing, we began to modify these borrowings in 2009 to extend or eliminate the put dates. During 2010, we modified $4.03 billion of borrowings to extend the put dates of the borrowings by between three and five years.
The Company has two collateralized borrowings in the form of repurchase agreements totaling $100.0 million with Lehman Brothers, Inc. Lehman Brothers, Inc. is currently in liquidation under the Securities Industry Protection Act. Mortgage-backed securities with an amortized cost of approximately $114.5 million are pledged as collateral for these borrowings and we have demanded the return of this collateral. We believe that we have the legal right to setoff our obligation to repay the borrowings against our right to the return of the mortgage-backed securities pledged as collateral. As a result, we believe that our potential economic loss from Lehman Brother’s failure to return the collateral is limited to the excess market value of the collateral over the $100 million repurchase price. We intend to pursue full recovery of the pledged collateral in accordance with the contractual terms of the repurchase agreements. There can be no assurances that the final settlement of this

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transaction will result in the full recovery of the collateral or the full amount of the claim. We have not recognized a loss in our financial statements related to these repurchase agreements as we have concluded that a loss is neither probable nor estimable at December 31, 2010.
Due to brokers amounted to $538.2 million at December 31, 2010 as compared to $100.0 million at December 31, 2009. Due to brokers at December 31, 2010 represents securities purchased in the fourth quarter of 2010 with settlement dates in the first quarter of 2011. Other liabilities decreased to $269.5 million at December 31, 2010 as compared to $275.6 million at December 31, 2009. The decrease is primarily the result of a decrease in accrued taxes of $33.0 million, partially offset by an increase in accrued expenses of $16.9 million and in accrued interest payable on borrowings of $9.4 million.
Total shareholders’ equity increased $171.1 million to $5.51 billion at December 31, 2010 from $5.34 billion at December 31, 2009. The increase was primarily due to net income of $537.2 million for the year ended December 31, 2010. These increases to shareholders’ equity were partially offset by cash dividends paid to common shareholders of $295.8 million and a $99.1 million decrease in accumulated other comprehensive income. The accumulated other comprehensive income of $85.4 million at December 31, 2010 includes a $117.3 million after-tax net unrealized gain on securities available for sale partially offset by a $31.9 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans. At December 31, 2009, accumulated other comprehensive income amounted to $184.5 million and included a $205.8 million after-tax net unrealized gain on securities available for sale partially offset by a $21.3 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans. The decrease in the net unrealized gain on securities available for sale was primarily due to the sale of $3.92 billion of mortgage-backed securities available for sale which resulted in a pre-tax realized gain of $152.6 million.
As of December 31, 2010, there remained 50,123,550 shares that may be purchased under our existing stock repurchase programs. We did not repurchase any shares of our common stock during 2010 pursuant to our repurchase programs. We did purchase 34,923 shares that were surrendered by employees for withholding taxes related to vesting stock awards. At December 31, 2010, our capital ratios were in excess of the applicable regulatory requirements to be considered well-capitalized. See “Liquidity and Capital Resources.”
At December 31, 2010, our shareholders’ equity to asset ratio was 9.01% compared with 8.86% at December 31, 2009. For 2010, the ratio of average shareholders’ equity to average assets was 9.14% compared with 9.03% for 2009. Our book value per share, using the period-end number of outstanding shares, less purchased but unallocated employee stock ownership plan shares and less purchased but unvested recognition and retention plan shares, was $11.16 at December 31, 2010 and $10.85 at December 31, 2009. Our tangible book value per share, calculated by deducting goodwill and the core deposit intangible from shareholders’ equity, was $10.85 as of December 31, 2010 and $10.53 at December 31, 2009.
Analysis of Net Interest Income
Net interest income represents the difference between the interest income we earn on our interest-earning assets, such as mortgage loans, mortgage-backed securities and investment securities, and the expense we pay on interest-bearing liabilities, such as time deposits and borrowed funds. Net interest income depends on our volume of interest-earning assets and interest-bearing liabilities and the interest rates we earned or paid on them.

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Average Balance Sheet. The following table presents certain information regarding our financial condition and net interest income for 2010, 2009, and 2008. The table presents the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. We derived the yields and costs by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we considered adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Non-accrual loans were included in the computation of average balances and therefore have a zero yield. The yields set forth below include the effect of deferred loan origination fees and costs, and purchase premiums and discounts that are amortized or accreted to interest income.
                                                                         
  For the Year Ended December 31,
    2010     2009     2008  
                    Average                     Average                     Average
    Average             Yield/     Average             Yield/     Average             Yield/  
    Balance     Interest     Cost     Balance     Interest     Cost     Balance     Interest     Cost  
    (Dollars in thousands)  
Assets:
                                                                       
Interest-earning assets:
  $ 31,395,378     $ 1,667,027       5.31 %   $ 30,126,469     $ 1,678,789       5.57 %   $ 26,379,724     $ 1,523,521       5.78 %
First mortgage loans, net (1)
                                                                       
Consumer and other loans
    346,166       18,409       5.32       381,029       21,676       5.69       422,097       26,184       6.20  
Federal funds sold
    1,102,575       2,614       0.24       566,079       1,186       0.21       209,607       4,295       2.05  
Mortgage-backed securities,
                                                                       
at amortized cost
    20,557,582       851,595       4.14       19,604,600       983,658       5.02       16,595,143       875,008       5.27  
Federal Home Loan Bank stock
    878,672       46,107       5.25       876,736       43,103       4.92       790,305       48,009       6.07  
Investment securities, at amortized cost
    4,992,249       198,744       3.98       4,577,148       213,374       4.66       3,602,206       176,208       4.89  
 
                                                           
Total interest-earning assets
    59,272,622       2,784,496       4.70       56,132,061       2,941,786       5.24       47,999,082       2,653,225       5.53  
Noninterest-earning assets (4)
    1,560,439                       1,209,257                       887,168                  
 
                                                                 
Total assets
  $ 60,833,061                     $ 57,341,318                     $ 48,886,250                  
 
                                                                 
Liabilities and stockholders’ equity:
                                                                       
Interest-bearing liabilities:
                                                                       
Savings accounts
  $ 839,029       5,952       0.71 %   $ 749,439       5,640       0.75 %   $ 724,943       5,485       0.76 %
Interest-bearing transaction accounts
    2,323,618       23,996       1.03       1,789,361       31,903       1.78       1,578,419       48,444       3.07  
Money market accounts
    5,217,815       54,949       1.05       3,823,116       69,008       1.81       2,227,261       73,180       3.29  
Time deposits
    16,111,567       291,450       1.81       14,771,051       376,917       2.55       11,546,958       454,248       3.93  
 
                                                           
Total interest-bearing deposits
    24,492,029       376,347       1.54       21,132,967       483,468       2.29       16,077,581       581,357       3.62  
Repurchase agreements
    15,034,110       616,488       4.10       15,100,221       611,776       4.05       13,465,540       561,301       4.17  
FHLB advances
    14,875,000       600,834       4.04       15,035,798       603,064       4.01       13,737,057       568,590       4.14  
 
                                                           
Total borrowed funds
    29,909,110       1,217,322       4.07       30,136,019       1,214,840       4.03       27,202,597       1,129,891       4.15  
 
                                                           
Total interest-bearing liabilities
    54,401,139       1,593,669       2.93       51,268,986       1,698,308       3.31       43,280,178       1,711,248       3.95  
 
                                                           
Noninterest-bearing liabilities:
    588,150                       576,575                       554,584                  
Noninterest-bearing deposits
                                                                       
Other noninterest-bearing liabilities
    284,335                       317,972                       289,930                  
 
                                                                 
Total noninterest-bearing liabilities
    872,485                       894,547                       844,514                  
 
                                                                 
Total liabilities
    55,273,624                       52,163,533                       44,124,692                  
Stockholders’ equity
    5,559,437                       5,177,785                       4,761,558                  
 
                                                                 
Total liabilities and stockholders’ equity
  $ 60,833,061                     $ 57,341,318                     $ 48,886,250                  
 
                                                                 
Net interest income
          $ 1,190,827                     $ 1,243,478                     $ 941,977          
 
                                                                 
Net interest rate spread (2)
                    1.77                       1.93                       1.58  
Net interest-earning assets
  $ 4,871,483                     $ 4,863,075                     $ 4,718,904                  
 
                                                                 
Net interest margin (3)
                    2.01 %                     2.22 %                     1.96 %
Ratio of interest-earning assets to interest-bearing liabilities
                    1.09                     1.09                     1.11
 
(1)   Amount is net of deferred loan costs and allowance for loan losses and includes non-performing loans.
 
(2)   Determined by subtracting the weighted average cost of average total interest-bearing liabilities from the weighted average yield on average total interest-earning assets.
 
(3)   Determined by dividing net interest income by average total interest-earning assets.
 
(4)   Includes the average balance of principal receivable related to FHLMC mortgage-backed securities of $297.1 million, $164.3 million and $99.1 million for the years ended December 31, 2010, 2009 and 2008, respectively.

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Rate/Volume Analysis. The following table presents the extent to which the changes in interest rates and the changes in volume of our interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to:
  changes attributable to changes in volume (changes in volume multiplied by prior rate);
 
  changes attributable to changes in rate (changes in rate multiplied by prior volume); and
 
  the net change.
The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
                                                 
    2010 Compared to 2009     2009 Compared to 2008  
    Increase (Decrease) Due To     Increase (Decrease) Due To  
    Volume     Rate     Net     Volume     Rate     Net  
    (In thousands)  
 
                                               
Interest-earning assets:
                                               
First mortgage loans, net
  $ 68,728     $ (80,490 )   $ (11,762 )   $ 211,866     $ (56,598 )   $ 155,268  
Consumer and other loans
    (1,910 )     (1,357 )     (3,267 )     (2,443 )     (2,065 )     (4,508 )
Federal funds sold
    1,241       187       1,428       3,014       (6,123 )     (3,109 )
Mortgage-backed securities
    46,237       (178,300 )     (132,063 )     151,892       (43,242 )     108,650  
Federal Home Loan Bank stock
    96       2,908       3,004       4,857       (9,763 )     (4,906 )
Investment securities
    18,252       (32,882 )     (14,630 )     45,780       (8,614 )     37,166  
 
Total
    132,644       (289,934 )     (157,290 )     414,966       (126,405 )     288,561  
 
 
                                               
Interest-bearing liabilities:
    631       (319 )     312       215       (60 )     155  
Savings accounts
                                               
Interest-bearing transaction accounts
    7,852       (15,759 )     (7,907 )     5,835       (22,376 )     (16,541 )
Money market accounts
    20,480       (34,539 )     (14,059 )     37,937       (42,109 )     (4,172 )
Time deposits
    31,719       (117,186 )     (85,467 )     106,911       (184,242 )     (77,331 )
Repurchase agreements
    (2,719 )     7,431       4,712       66,928       (16,453 )     50,475  
FHLB advances
    (6,620 )     4,390       (2,230 )     52,690       (18,216 )     34,474  
 
Total
    51,343       (155,982 )     (104,639 )     270,516       (283,456 )     (12,940 )
 
Net change in net interest income
  $ 81,301     $ (133,952 )   $ (52,651 )   $ 144,450     $ 157,051     $ 301,501  
 
                                   
Comparison of Operating Results for the Years Ended December 31, 2010 and 2009
General. Net income was $537.2 million for 2010, an increase of $10.0 million, or 1.9%, compared with net income of $527.2 million for 2009. Basic and diluted earnings per common share were both $1.09 for 2010 as compared to basic and diluted earnings per share of $1.08 and $1.07, respectively for 2009. For 2010, our return on average shareholders’ equity was 9.66%, compared with 10.18% for 2009. Our return on average assets for 2010 was 0.88% as compared to 0.92% for 2009. The decrease in our return on average equity and assets is primarily due to the increase in average equity and assets during 2010.
Interest and Dividend Income. Total interest and dividend income for 2010 decreased $157.3 million, or 5.4%, to $2.78 billion as compared to $2.94 billion for 2009. The decrease in total interest and dividend income was primarily due to a decrease of 54 basis points in the weighted-average yield on total interest-earning assets to 4.70% for 2010 from 5.24% for 2009. The decrease in the weighted-average yield was partially offset by an

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increase in the average balance of total interest-earning assets of $3.14 billion, or 5.6%, to $59.27 billion for 2010 as compared to $56.13 billion for 2009.
Interest on first mortgage loans decreased slightly to $1.67 billion for 2010 as compared to $1.68 billion for 2009. This was primarily due to a 26 basis point decrease in the weighted-average yield to 5.31% for the year ended December 31, 2010 as compared to 5.57% for 2009. The effect of the decrease in the weighted-average yield was partially offset by a $1.27 billion increase in the average balance of first mortgage loans to $31.40 billion, which reflected our historical emphasis on the growth of our mortgage loan portfolio. The decrease in the average yield earned was due to lower market interest rates on mortgage products and also due to the continued mortgage refinancing activity. During 2010, existing mortgage customers refinanced or modified approximately $3.47 billion in mortgage loans with a weighted average rate of 5.77% to a new weighted average rate of 4.84%.
Interest on consumer and other loans decreased $3.3 million to $18.4 million for 2010 from $21.7 million for 2009. The average balance of consumer and other loans decreased $34.8 million to $346.2 million for 2010 as compared to $381.0 million for 2009 and the average yield earned decreased 37 basis points to 5.32% as compared to 5.69% for the same respective periods.
Interest on mortgage-backed securities decreased $132.1 million to $851.6 million for 2010 as compared to $983.7 million for 2009. This decrease was due primarily to an 88 basis point decrease in the weighted-average yield to 4.14% for 2010 from 5.02% for 2009. The effect of the decrease in the weighted-average yield was partially offset by a $953.0 million increase in the average balance of mortgage-backed securities to $20.56 billion during 2010 as compared to $19.60 billion for 2009.
The increases in the average balances of mortgage-backed securities were due to purchases of primarily variable-rate hybrid securities. We purchased these securities to reinvest cash flows resulting from prepayments on our mortgage loans and the calls of investment securities. The elevated levels of prepayments, weak home purchase activity and the GSEs involvement in the mortgage market have made it difficult for us to reinvest cash flows into the mortgage portfolio. The decrease in the weighted average yield on mortgage-backed securities is a result of lower yields on securities that have been purchased since the second half of 2009 when market interest rates were lower than the yield earned on the existing portfolio.
Interest on investment securities decreased $14.7 million to $198.7 million during 2010 as compared to $213.4 million for 2009. This decrease was due primarily to a decrease in the average yield of investment securities of 68 basis points to 3.98% for 2010 as compared to 4.66% for 2009. This decrease in the average yield earned reflects current market interest rates. The effect of the decrease in the weighted-average yield on investment securities was partially offset by a $415.1 million increase in the average balance of investment securities to $4.99 billion during 2010 from $4.58 billion for 2009. The increase in the average balance was due primarily to the reinvestment of proceeds from the continued elevated levels of repayments of mortgage-related assets.
Dividends on FHLB stock increased $3.0 million, or 7.0%, to $46.1 million for 2010 as compared to $43.1 million for 2009. This increase was due primarily to a 33 basis point increase in the average dividend yield earned to 5.25% for 2010 as compared to 4.92% for 2009. The increase in dividend income was also due to a $2.0 million increase in the average balance to $878.7 million for 2010 as compared to $876.7 million for 2009. The increase in the average balance was due to purchases of FHLB stock to meet membership requirements.
Interest on Federal funds sold amounted to $2.6 million for 2010 as compared to $1.2 million for 2009. The average balance of Federal funds sold amounted to $1.10 billion for 2010 as compared to $566.1 million for 2009. The yield earned on Federal funds sold was 0.24% for the year ended December 31, 2010 and 0.21% for the year ended December 31, 2009. The increase in the average balance of Federal funds sold is a result of liquidity provided by increased levels of repayments on mortgage-related assets and calls of investment securities.

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Interest Expense. Total interest expense for the year ended December 31, 2010 decreased $104.6 million, or 6.2%, to $1.59 billion from $1.70 billion for the year ended December 31, 2009. This decrease was primarily due to a 38 basis point decrease in the weighted-average cost of total interest-bearing liabilities to 2.93% for the year ended December 31, 2010 compared with 3.31% for the year ended December 31, 2009. The effect of the decrease in the weighted-average cost was partially offset by a $3.13 billion, or 6.1%, increase in the average balance of total interest-bearing liabilities to $54.40 billion for the year ended December 31, 2010 compared with $51.27 billion for 2009.
Interest expense on our time deposit accounts decreased $85.4 million to $291.5 million for 2010 from $376.9 million for 2009. This decrease was due to a decrease in the weighted-average cost of 74 basis points to 1.81% for 2010 from 2.55% for 2009 as maturing time deposits were renewed or replaced by new time deposits at lower rates. This effect of the decrease in the weighted average cost was partially offset by a $1.34 billion increase in the average balance of time deposit accounts to $16.11 billion for 2010 from $14.77 billion for 2009. Interest expense on money market accounts decreased $14.1 million to $54.9 million for 2010 from $69.0 million for 2009. This decrease was due to a decrease in the weighted-average cost of 76 basis points to 1.05% for 2010 from 1.81% for 2009. This decrease was partially offset by an increase in the average balance of money market accounts of $1.40 billion to $5.22 billion 2010 as compared to $3.82 billion for 2009. Interest expense on our interest-bearing transaction accounts decreased $7.9 million to $24.0 million for 2010 compared with $31.9 million for 2009. This decrease is due to a 75 basis point decrease in the weighted-average cost to 1.03%, partially offset by a $534.3 million increase in the average balance to $2.32 billion for 2010 as compared to $1.79 billion for 2009.
The increases in the average balances of interest-bearing deposits reflect our efforts to grow deposits in 2009. Also, in response to the economic conditions in 2009, we believe that households increased their personal savings and customers sought insured bank deposit products as an alternative to investments such as equity securities and bonds. We believe these factors contributed to our deposit growth in 2009. We lowered our deposit rates during 2010 to slow our deposit growth from 2009 levels since the low yields that are available to us for mortgage loans and investment securities have made a growth strategy less prudent until market conditions improve.
The decrease in the average cost of deposits for 2010 reflected lower market interest rates and our decision to lower deposit rates to slow deposit growth. At December 31, 2010, time deposits scheduled to mature within one year totaled $10.60 billion with an average cost of 1.32%. These time deposits are scheduled to mature as follows: $4.58 billion with an average cost of 1.18% in the first quarter of 2011, $2.96 billion with an average cost of 1.19% in the second quarter of 2011, $1.40 billion with an average cost of 1.44% in the third quarter of 2011 and $1.66 billion with an average cost of 1.82% in the fourth quarter of 2011. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain with us as renewed time deposits or as transfers to other deposit products at the prevailing rate.
Interest expense on borrowed funds increased $2.5 million to $1.22 billion for the year ended December 31, 2010 as compared to $1.21 billion for the year ended December 31, 2009. This increase was primarily due to a 4 basis point increase in the weighted-average cost of borrowed funds to 4.07% for 2010 as compared to 4.03% for 2009. The slight increase reflects the cost of modifying a portion of our borrowings as well as the low percentage of borrowings that matured in 2010 and that no borrowings were put back to us during the year. During 2010, we modified $4.03 billion of borrowings to extend the put dates of the borrowings by between three and five years. During 2009, we modified approximately $1.73 billion of borrowings. The increase in the weighted-average cost was partially offset by a $226.9 million decrease in the average balance of borrowed funds to $29.91 billion for 2010 as compared to $30.14 billion for 2009.
We have, in the past, used borrowings to fund a substantial portion of the growth in interest-earning assets. However, we were able to fund substantially all of our growth in 2009 and 2010 with deposits. Substantially all of our borrowings are putable quarterly at the discretion of the lender after an initial non-put period of one to

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five years with a final maturity of ten years. We believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be put back will not increase substantially unless interest rates were to increase by at least 200 basis points. See “Liquidity and Capital Resources.”
Net Interest Income. Net interest income decreased $52.7 million, or 4.3%, to $1.19 billion for 2010 compared to $1.24 billion for 2009. Our net interest rate spread decreased 16 basis points to 1.77% for 2010 from 1.93% for 2009. Our net interest margin decreased 21 basis points to 2.01% for 2010 from 2.22% for 2009.
The decrease in our net interest margin and net interest rate spread was primarily due to the decrease in the weighted-average yield of our interest-earning assets. The yields on mortgage-related assets, which account for 87.7% of the average balance of interest-earning assets for the year ended December 31, 2010, remained at near-historic lows. The low market interest rates resulted in increased refinancing activity which caused a decrease in the yield we earned on mortgage-related assets. We were able to reduce our funding costs but to a lesser extent than the decrease in mortgage yields, due in part to the longer duration of our borrowings which caused our liabilities to reprice less quickly than our assets. These factors resulted in a decrease in our net interest rate spread and net interest margin for the year ended December 31, 2010.
Provision for Loan Losses. The provision for loan losses amounted to $195.0 million for 2010 as compared to $137.5 million for 2009. The ALL amounted to $236.6 million and $140.1 million at December 31, 2010 and 2009, respectively. The increase in the provision for loan losses for the year ended December 31, 2010 and the resulting increase in the ALL is due primarily to the increase in non-performing loans during 2010, continuing elevated levels of unemployment and an increase in charge-offs. In addition, although home prices appear to have started to stabilize, conditions in the housing markets in many of our lending markets remain weak. We recorded our provision for loan losses during 2010 based on our ALL methodology that considers a number of quantitative and qualitative factors, including the amount of non-performing loans, the loss experience of our non-performing loans, conditions in the real estate and housing markets, current economic conditions, particularly increasing levels of unemployment, and growth in the loan portfolio. See “Critical Accounting Policies — ALL.”
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties. Our loan growth is primarily concentrated in one- to four-family mortgage loans with original loan-to-value (“LTV”) ratios of less than 80%. The average LTV ratio of our 2010 first mortgage loan originations and our total first mortgage loan portfolio were 61.4% and 60.7%, respectively using the appraised value at the time of origination. The value of the property used as collateral for our loans is dependent upon local market conditions. As part of our estimation of the ALL, we monitor changes in the values of homes in each market using indices published by various organizations. Based on our analysis of the data for 2010, we concluded that, while at a slower rate, home prices in our primary lending area continued to decline from 2009 levels, as evidenced by reduced levels of sales, increasing inventories of houses on the market and an increase in the length of time houses remain on the market.
The national economy was in a recessionary cycle for approximately 2 years with the housing and real estate markets suffering significant losses in value. The faltering economy was marked by contractions in the availability of business and consumer credit, falling home prices, increasing home foreclosures and rising levels of unemployment. Economic conditions have improved but at a relatively slow pace. Despite recent signs of improvement in national unemployment rates, the rates remain very high as economic growth has not been strong enough to result in any significant improvement in the labor markets. We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. We determined the provision for loan losses for 2010 based on our evaluation of the foregoing factors, the growth of the loan portfolio, the recent increases in delinquent loans, non-performing loans and net loan charge-offs, and trends in the unemployment rate.

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Non-performing loans amounted to $871.3 million at December 31, 2010 as compared to $627.7 million at December 31, 2009. Non-performing loans at December 31, 2010 included $858.3 million of one- to four-family first mortgage loans as compared to $613.6 million at December 31, 2009. The ratio of non-performing loans to total loans was 2.82% at December 31, 2010 compared to 1.98% at December 31, 2009. Loans delinquent 30 to 59 days amounted to $418.9 million at December 31, 2010 as compared to $430.9 million at December 31, 2009. Loans delinquent 60 to 89 days amounted to $193.2 million at December 31, 2010 as compared to $182.5 million at December 31, 2009. Foreclosed real estate amounted to $45.7 million at December 31, 2010 as compared to $16.7 million at December 31, 2009. As a result of our underwriting policies, our borrowers typically have a significant amount of equity, at the time of origination, in the underlying real estate that we use as collateral for our loans. Due to the steady deterioration of real estate values in recent years, the LTV ratios based on appraisals obtained at time of origination do not necessarily indicate the extent to which we may incur a loss on any given loan that may go into foreclosure. However, our lower average LTV ratios at origination have helped to moderate our charge-offs.
At December 31, 2010, the ratio of the ALL to non-performing loans was 27.15% as compared to 22.32% at December 31, 2009. The ratio of the ALL to total loans was 0.77% at December 31, 2010 as compared to 0.44% at December 31, 2009. Changes in the ratio of the ALL to non-performing loans is not, absent other factors, an indication of the adequacy of the ALL since there is not necessarily a direct relationship between changes in various asset quality ratios and changes in the ALL, non-performing loans and losses we may incur on our loan portfolio. In the current economic environment, a loan generally becomes non-performing when the borrower experiences financial difficulty. In many cases, the borrower also has a second mortgage or home equity loan on the property. In substantially all of these cases, we do not hold the second mortgage or home equity loan as this is not a business we have actively pursued.
Charge-offs on our non-performing loans increased in 2010. We generally obtain new collateral values by the time a loan becomes 180 days past due. If the estimated fair value of the collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs. As a result, certain losses inherent in our non-performing loans are being recognized as charge-offs which may result in a lower ratio of the ALL to non-performing loans. Charge-offs amounted to $98.5 million for 2010 as compared to $47.2 million in 2009. These charge-offs were primarily due to the results of our reappraisal process for our non-performing residential first mortgage loans. During 2010, we disposed of 71 loans through the foreclosure process with a final aggregate realized gain on sale (after previous charge-offs and write-downs of $8.9 million) of approximately $508,000. Write-downs on foreclosed real estate amounted to $3.2 million for 2010. The results of our reappraisal process and our recent charge-off history are also considered in the determination of the ALL.
As part of our estimation of the ALL, we monitor changes in the values of homes in each market using indices published by various organizations including the Federal Housing Finance Agency (“FHFA”). Our Asset Quality Committee (“AQC”) uses these indices and a stratification of our loan portfolio by state as part of its quarterly determination of the ALL. We generally obtain updated collateral values by the time a loan becomes 180 days past due which we believe identifies potential charge-offs more accurately than a house price index that is based on a wide geographic area and includes many different types of houses. However, we use the house price indices to identify geographic areas experiencing weaknesses in housing markets to determine if an overall adjustment to the ALL is required based on loans we have in those geographic areas and to determine if changes in the loss factors used in the ALL quantitative analysis are necessary. Our quantitative analysis of the ALL accounts for increases in non-performing loans by applying progressively higher risk factors to loans as they become more delinquent.
Due to the nature of our loan portfolio, our evaluation of the adequacy of our ALL is performed primarily on a “pooled” basis. Each month we prepare an analysis which categorizes the entire loan portfolio by certain risk

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\

characteristics such as loan type (one- to four-family, multi-family, commercial, construction, etc.), loan source (originated or purchased) and payment status (i.e., current or number of days delinquent). Loans with known potential losses are categorized separately. We assign estimated loss factors to the payment status categories on the basis of our assessment of the potential risk inherent in each loan type. These factors are periodically reviewed for appropriateness giving consideration to charge-off history, delinquency trends, portfolio growth and the status of the regional economy and housing market, in order to ascertain that the loss factors cover probable and estimable losses inherent in the portfolio. Based on our recent loss experience on non-performing loans, we increased certain loss factors used in our quantitative analysis of the ALL for one- to four-family first mortgage loans during 2010. We define our loss experience on non-performing loans as the ratio of the excess of the loan balance (including selling costs) over the updated collateral value to the principal balance of loans for which we have updated valuations. We generally obtain updated collateral values by the time a loan becomes 180 days past due. Based on our analysis, our loss experience on our non-performing one- to four-family first mortgage loans was approximately 13.3% during 2010 and was approximately 11.0% in 2009. Our one- to four- family mortgage loans represent 98.8% of our total loans. The recent adjustment in our loss factors did not have a material effect on the ultimate level of our ALL or on our provision for loan losses. If our future loss experience requires additional increases in our loss factors, this may result in increased levels of loan loss provisions.
In addition to our quantitative systematic methodology, we also use qualitative analyses to determine the adequacy of our ALL. Our qualitative analyses include further evaluation of economic factors, such as trends in the unemployment rate, as well as a ratio analysis to evaluate the overall measurement of the ALL. This analysis includes a review of delinquency ratios, net charge-off ratios and the ratio of the ALL to both non-performing loans and total loans. This qualitative review is used to reassess the overall determination of the ALL and to ensure that directional changes in the ALL and the provision for loan losses are supported by relevant internal and external data.
We consider the average LTV of our non-performing loans and our total portfolio in relation to the overall changes in house prices in our lending markets when determining the ALL. This provides us with a “macro” indication of the severity of potential losses that might be expected. Since substantially all of our portfolio consists of first mortgage loans on residential properties, the LTV is particularly important to us when a loan becomes non-performing. The weighted average LTV in our one- to four-family mortgage loan portfolio at December 31, 2010 was 60.7%, using appraised values at the time of origination. The average LTV ratio of our non-performing loans, using appraised values at the time of origination, was 74.8% at December 31, 2010. Based on the valuation indices, house prices have declined in the New York metropolitan area, where 70.9% of our non-performing loans were located at December 31, 2010, by approximately 22% from the peak of the market in 2006 through November 2010 and by 31% nationwide during that period. During the first eleven months of 2010, the house price indices decreased by 1.5% in the New York metropolitan area and 2.1% nationwide. Changes in house values may affect our loss experience which may require that we change the loss factors used in our quantitative analysis of the ALL. There can be no assurance whether significant further declines in house values may occur and result in a higher loss experience and increased levels of charge-offs and loan loss provisions. Further, no assurance can be given in any particular case that our LTV ratios will provide full protection in the event of borrower default.
Net charge-offs amounted to $98.5 million for 2010 as compared to net charge-offs of $47.2 million for 2009. Our charge-offs on non-performing loans have historically been low due to the amount of underlying equity in the properties collateralizing our first mortgage loans. Until the recent recessionary cycle, it was our experience that as a non-performing loan approached foreclosure, the borrower sold the underlying property or, if there was a second mortgage or other subordinated lien, the subordinated lien holder would purchase the property to protect their interest thereby resulting in the full payment of principal and interest to Hudson City Savings. This process normally took approximately 12 months. However, due to the unprecedented level of foreclosures and the desire by most states to slow the foreclosure process, we are now experiencing a time frame to repayment or foreclosure ranging from 30 to 36 months from the initial non-performing period. In addition, in light of the highly publicized foreclosure issues that have recently affected the nation’s largest mortgage loan servicers

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which has resulted in greater bank regulatory, court and state attorney general scrutiny, our foreclosure process and timing to completion of foreclosures may be further delayed. If real estate prices do not improve or continue to decline, this extended time may result in further charge-offs. In addition, current conditions in the housing market have made it more difficult for borrowers to sell homes to satisfy the mortgage and second lien holders are less likely to repay our loan if the value of the property is not enough to satisfy their loan. We continue to closely monitor the property values underlying our non-performing loans during this timeframe and take appropriate charge-offs when the loan balances exceed the underlying property values.
At December 31, 2010 and December 31, 2009, commercial and construction loans evaluated for impairment in accordance with Financial Accounting Standards Board (“FASB”) guidance amounted to $16.7 million and $11.2 million, respectively. Based on this evaluation, we established an ALL of $5.1 million for loans classified as impaired at December 31, 2010 compared to $2.1 million at December 31, 2009.
Although we believe that we have established and maintained the ALL at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Increases in our loss experience on non-performing loans, the loss factors used in our quantitative analysis of the ALL and continued increases in overall loan delinquencies can have a significant impact on our need for increased levels of loan loss provisions in the future. Although we use the best information available, the level of the ALL remains an estimate that is subject to significant judgment and short-term change. See “Critical Accounting Policies.”
Non-Interest Income. Total non-interest income for the year ended December 31, 2010 was $163.0 million compared with $33.6 million for 2009. Included in non-interest income for the year ended December 31, 2010 were net gains on securities transactions of $152.6 million which resulted from the sale of $3.92 billion of mortgage-backed securities available-for-sale. Included in non-interest income for the year ended December 31, 2009 were net gains on securities transactions of $24.2 million substantially all of which resulted from the sale of $761.6 million of mortgage-backed securities available-for-sale. We believe that the continued elevated levels of prepayments and the eventual increase in interest rates will reduce the amount of unrealized gains in the available-for-sale portfolio. Accordingly, we sold these securities to take advantage of the favorable pricing that currently exists in the market.
Non-Interest Expense. Total non-interest expense increased $791,000 to $266.4 million for the year ended December 31, 2010 from $265.6 million for the year ended December 31, 2009. The increase is primarily due to a $20.9 million increase in federal deposit insurance expense and a $3.9 million increase in other expense partially offset by the absence of the FDIC special assessment of $21.1 million and a decrease of $3.3 million in compensation and employee benefits expense. The decrease in compensation and employee benefits expense included a $6.0 million decrease in expense related to our stock benefit plans and a $3.6 million decrease in pension expense. These decreases were partially offset by a $5.8 million increase in compensation costs due primarily to normal increases in salary as well as additional full time employees. The decrease in stock benefit plans expense was due primarily to decreases in the market price of our common stock. The decrease in pension expense is due to improved returns on plan assets as well as investment returns on the 2009 contribution to the pension plan which amounted to $35.0 million. The increase in Federal deposit insurance expense is due primarily to an increase in total deposits and the increases in our deposit insurance assessment rate as a result of a restoration plan implemented by the FDIC to recapitalize the Deposit Insurance Fund. The increase in other expense is due primarily to a $2.9 million increase in regulatory fees and professional services. Included in other non-interest expense for the year ended December 31, 2010 were write-downs on foreclosed real estate and net losses on the sale of foreclosed real estate, of $2.7 million as compared to $2.4 million for 2009.
Our efficiency ratio was 19.68% for 2010 as compared to 20.80% for 2009. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income. Our ratio of non-interest expense to average total assets for 2010 was 0.44% as compared to 0.46% for 2009.

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Income Taxes. Income tax expense amounted to $355.2 million for 2010 compared with $346.7 million for 2009. Our effective tax rate for 2010 was 39.80% compared with 39.67% for 2009.
Comparison of Operating Results for the Years Ended December 31, 2009 and 2008
General. Net income was $527.2 million for 2009, an increase of $81.6 million, or 18.3%, compared with net income of $445.6 million for 2008. Basic and diluted earnings per common share were $1.08 and $1.07, respectively for 2009 as compared to basic and diluted earnings per share of $0.92 and $0.90, respectively for 2008. For 2009, our return on average shareholders’ equity was 10.18%, compared with 9.36% for 2008. Our return on average assets for 2009 was 0.92% as compared to 0.91% for 2008. The increase in the return on average equity and assets is primarily due to the increase in net income during 2009.
Interest and Dividend Income. Total interest and dividend income for 2009 increased $288.6 million, or 10.9%, to $2.94 billion as compared to $2.65 billion for 2008. The increase in total interest and dividend income was primarily due to an $8.20 billion, or 17.0%, increase in the average balance of total interest-earning assets to $56.30 billion for 2009 as compared to $48.10 billion for 2008. The increase in the average balance of total interest-earning assets was partially offset by a decrease of 29 basis points in the weighted-average yield on total interest-earning assets to 5.23% for 2009 from 5.52% for 2008.
Interest on first mortgage loans increased $155.3 million, or 10.2%, to $1.68 billion for 2009 as compared to $1.52 billion for 2008. This was primarily due to a $3.75 billion increase in the average balance of first mortgage loans to $30.13 billion during 2009 as compared to $26.38 billion for 2008, which reflected our continued emphasis on the growth of our mortgage loan portfolio and an increase in mortgage originations due to the refinancing activity caused by market interest rates that are at near-historic lows. The positive impact on first mortgage loan interest income from the increase in the average balance was partially offset by a 21 basis point decrease in the weighted-average yield to 5.57% for 2009 as compared to 5.78% for 2008. The decrease in the average yield earned was due to lower market interest rates on mortgage products and also due to the continued mortgage refinancing activity. During 2009, existing mortgage customers refinanced or modified approximately $2.80 billion in mortgage loans with a weighted average rate of 5.78% to a new rate of 5.03%. We allow existing customers to modify their mortgage loans, for a fee, with the intent of maintaining our customer relationship in periods of extensive refinancing due to a low interest rate environment. The modification changes the existing interest rate to the market rate for a product currently offered by us with a similar or reduced term. We generally do not extend the maturity date of the loan. To qualify for a modification, the loan should be current and our review of past payment performance should indicate that no payments were past due in any of the 12 preceding months. In general, all other terms and conditions of the existing mortgage remain the same.
Interest on consumer and other loans decreased $4.5 million to $21.7 million for 2009 from $26.2 million for 2008. The average balance of consumer and other loans decreased $41.1 million to $381.0 million for 2009 as compared to $422.1 million for 2008 and the average yield earned decreased 51 basis points to 5.69% as compared to 6.20% for 2008.
Interest on mortgage-backed securities increased $108.7 million, or 12.4%, to $983.7 million for 2009 as compared to $875.0 million for 2008. This increase was due primarily to a $3.08 billion increase in the average balance of mortgage-backed securities to $19.77 billion during 2009 as compared to $16.69 billion for 2008, partially offset by a 26 basis point decrease in the weighted-average yield to 4.98% as compared to 5.24% for the same respective periods.
The increase in the average balance of mortgage-backed securities is due to purchases of these securities during 2009 which provide us with a source of cash flow from monthly principal and interest payments. The decrease in the weighted average yield on mortgage-backed securities is a result of lower yields on securities purchased

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during the second half of 2008 and for 2009 compared to the yields on the $4.73 billion of mortgage-backed securities that matured during the year.
Interest on investment securities increased $37.2 million to $213.4 million for 2009 as compared to $176.2 million for 2008. This increase was due primarily to a $974.9 million increase in the average balance of investment securities to $4.58 billion for 2009 from $3.60 billion for 2008. The impact on interest income from the increase in the average balance of investment securities was partially offset by a decrease in the average yield of investment securities of 23 basis points to 4.66% in 2009 as compared to 4.89% in 2008.
Dividends on FHLB stock decreased $4.9 million, or 10.2%, to $43.1 million for 2009 as compared to $48.0 million for 2008. The decrease was due primarily to a 115 basis point decrease in the average yield to 4.92% as compared to 6.07% for 2008. The decrease in the average yield earned was partially offset by an $86.4 million increase in the average balance to $876.7 million for 2009 as compared to $790.3 million for 2008.
Interest Expense. Total interest expense for 2009 decreased $12.9 million to $1.70 billion as compared to $1.71 billion for 2008. This decrease was primarily due to a 64 basis point decrease in the weighted-average cost of total interest-bearing liabilities to 3.31% for 2009 compared with 3.95% for 2008. The decrease was partially offset by a $7.99 billion, or 18.5%, increase in the average balance of total interest-bearing liabilities to $51.27 billion for the year ended December 31, 2009 as compared to $43.28 billion for 2008.
Interest expense on our time deposit accounts decreased $77.3 million to $376.9 million for 2009 as compared to $454.2 million for 2008. This decrease was due to a decrease in the weighted-average cost of 138 basis points to 2.55% for 2009 from 3.93% for 2008. This decrease was partially offset by a $3.22 billion increase in the average balance of time deposit accounts to $14.77 billion for 2009 from $11.55 billion for 2008. Interest expense on money market accounts decreased $4.2 million to $69.0 million for 2009 as compared to $73.2 million for the same period in 2008. This decrease was due to a 148 basis point decrease in the weighted-average cost to 1.81%, partially offset by a $1.59 billion increase in the average balance to $3.82 billion as compared to $2.23 billion for 2008. Interest expense on our interest-bearing transaction accounts decreased $16.5 million to $31.9 million for 2009 as compared to $48.4 million for 2008. The decrease is due to a 129 basis point decrease in the weighted-average cost to 1.78%, partially offset by a $210.9 million increase in the average balance to $1.79 billion.
The increases in the average balances of interest-bearing deposits reflect our plan to expand our branch network and to grow deposits in our existing branches by offering competitive rates. Also, in response to the economic recession, we believe that households have increased their personal savings and customers have sought insured bank deposit products as an alternative to investments such as equity securities and bonds. We believe these factors contributed to our deposit growth. The decrease in the average cost of deposits for 2009 reflected lower market interest rates.
Interest expense on borrowed funds increased $84.9 million to $1.21 billion for 2009 as compared to $1.13 billion for 2008. This was primarily due to a $2.94 billion increase in the average balance of borrowed funds to $30.14 billion, partially offset by a 12 basis point decrease in the weighted-average cost of borrowed funds to 4.03%.
The decrease in the average cost of borrowings for 2009 reflected new borrowings in 2009 and 2008, when market interest rates were lower than existing borrowings and borrowings that matured. Substantially all of our borrowings are putable quarterly at the discretion of the lender after an initial no-put period of one to five years with a final maturity of ten years. At December 31, 2009, we had $22.25 billion of borrowed funds with a weighted-average rate of 4.14% and with put dates within one year. We believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be put back will not increase substantially unless interest rates were to increase by at least 300 basis points. During 2009, we modified $1.73

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billion of borrowings to extend the put dates of the borrowings by between three and four years while keeping the interest rates consistent. See “Liquidity and Capital Resources.”
Net Interest Income. Net interest income increased $301.5 million, or 32.0%, to $1.24 billion for 2009 compared to $942.0 million for 2008. Our net interest rate spread increased 35 basis points to 1.92% for 2009 from 1.57% for 2008. Our net interest margin increased 25 basis points to 2.21% for 2009 from 1.96% for 2008.
The increase in our net interest margin and net interest rate spread was primarily due to the decrease in the weighted-average cost of interest-bearing liabilities. The yield curve steepened during 2009, with short-term rates decreasing slightly while longer-term rates increased. Notwithstanding the increase in long-term rates, market rates on mortgage loans remain at near-historic lows, resulting in increased refinancing activity which resulted in a decrease in the yield we earned on mortgage-related assets. However, we were able to reduce deposit costs to a greater extent than the decrease in mortgage yields thereby increasing our net interest rate spread and net interest margin.
Provision for Loan Losses. The provision for loan losses amounted to $137.5 million for 2009 as compared to $19.5 million for 2008. The ALL amounted to $140.1 million and $49.8 million at December 31, 2009 and 2008, respectively. We recorded our provision for loan losses during 2009 based on our ALL methodology that considers a number of quantitative and qualitative factors, including the amount of non-performing loans, the loss experience of our non-performing loans, conditions in the real estate and housing markets, current economic conditions, particularly increasing levels of unemployment, and growth in the loan portfolio. See “Critical Accounting Policies — Allowance for Loan Losses.”
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties. Our loan growth is primarily concentrated in one- to four-family mortgage loans with original LTV ratios of less than 80%. The average LTV ratio of our 2009 one- to four-family first mortgage loan originations and our total one- to four-family first mortgage loan portfolio were 60.5% and 60.8%, respectively using the appraised value at the time of origination. The value of the property used as collateral for our loans is dependent upon local market conditions. As part of our estimation of the ALL, we monitor changes in the values of homes in each market using indices published by various organizations. Based on our analysis of the data for the fourth quarter of 2009, we concluded that home values in our lending areas, have continued to decline from 2008 levels, as evidenced by reduced levels of sales, increasing inventories of houses on the market, declining house prices and an increase in the length of time houses remain on the market. However, the rate of decline in home values decreased during the second half of 2009.

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The following table presents the geographic distribution of our loan portfolio as a percentage of total loans and of our non-performing loans as a percentage of total non-performing loans. The LTV ratio is for non-performing first mortgage loans and is based on appraised value at the time of origination.
                         
    At December 31, 2009
                    Average LTV ratio
                    of Non-performing
    Total loans   Non-performing loans   first mortgage loans
New Jersey
    43.0 %     41.6 %     69 %
New York
    18.2       18.0       70  
Connecticut
    12.6       4.2       72  
 
                       
Total New York metropolitan area
    73.8       63.8       69  
 
                       
Virginia
    4.6       6.2       78  
Illinois
    3.9       5.6       78  
Maryland
    3.5       5.1       76  
Massachusetts
    2.7       2.3       75  
Pennsylvania
    2.0       1.9       75  
Minnesota
    1.4       1.8       82  
Michigan
    1.3       4.2       75  
All others
    6.8       9.1       71  
 
                       
Total Outside New York metropolitan area
    26.2       36.2       75  
 
                       
 
    100.0 %     100.0 %     72 %
 
                       
The national economy has been in a recessionary cycle for approximately two years with the housing and real estate markets suffering significant losses in value. The faltering economy has been marked by contractions in the availability of business and consumer credit, increases in corporate borrowing rates, falling home prices, increasing home foreclosures and rising levels of unemployment. Economic conditions have improved slightly during the second half of 2009 although unemployment rates continued to increase. We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. We determined the provision for loan losses for 2009 based on our evaluation of the foregoing factors, the growth of the loan portfolio, the recent increases in delinquent loans, non-performing loans and net loan charge-offs, and the increasing trend in the unemployment rate.
At December 31, 2009, first mortgage loans secured by one-to four-family properties accounted for 98.7% of total loans. Fixed-rate mortgage loans represent 69.1% of our first mortgage loans. Compared to adjustable-rate loans, fixed-rate loans possess less inherent credit risk since loan payments do not change in response to changes in interest rates. In addition, we do not originate or purchase loans with payment options, negative amortization loans or sub-prime loans.
Included in our loan portfolio at December 31, 2009 and December 31, 2008 are interest-only loans of approximately $4.59 billion and $3.47 billion, respectively. These loans are originated as adjustable rate mortgage loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan term, or offered on a 30-year fixed-rate loan, with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will adjust to include both principal and interest and will amortize over the remaining term so the loan will be repaid at the end of its original life. These loans are underwritten using the fully-amortizing payment amount. We had

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$82.2 million and $16.6 million of non-performing interest-only loans at December 31, 2009 and December 31, 2008, respectively.
Non-performing loans amounted to $627.7 million at December 31, 2009 as compared to $217.6 million at December 31, 2008. Non-performing loans at December 31, 2009 included $613.6 million of one- to four-family first mortgage loans as compared to $207.0 million at December 31, 2008. The ratio of non-performing loans to total loans was 1.98% at December 31, 2009 compared with 0.74% at December 31, 2008. Loans delinquent 60 to 89 days amounted to $182.5 million at December 31, 2009 as compared to $104.7 million at December 31, 2008. Foreclosed real estate amounted to $16.7 million at December 31, 2009 as compared to $15.5 million at December 31, 2008. As a result of our conservative underwriting policies, our borrowers typically have a significant amount of equity, at the time of origination, in the underlying real estate that we use as collateral for our loans. Due to the steady deterioration of real estate values over the last three years, the LTV ratios based on appraisals obtained at time of origination do not necessarily indicate the extent to which we may incur a loss on any given loan that may go into foreclosure. However, our lower average LTV ratios have helped to moderate our charge-offs as there has generally been adequate equity behind our first lien as of the foreclosure date to satisfy our loan.
As a result of the increase in non-performing loans, the ratio of the ALL to non-performing loans decreased from 102.09% at December 31, 2006 to 22.32% at December 31, 2009. During this same period, the ratio of the ALL to total loans increased from 0.17% to 0.44%. Historically, our non-performing loans have been a negligible percentage of our total loan portfolio and, as a result, our ratio of the ALL to non-performing loans was high and did not serve as a reasonable measure of the adequacy of our ALL. The decline in the ratio of the ALL to non-performing loans is not, absent other factors, an indication of the adequacy of the ALL since there is not necessarily a direct relationship between changes in various asset quality ratios and changes in the ALL and non-performing loans. In the current economic environment, a loan generally becomes non-performing when the borrower experiences financial difficulty. In many cases, the borrower also has a second mortgage or home equity loan on the property. In substantially all of these cases, we do not hold the second mortgage or home equity loan as this is not a business we have actively pursued.
The Company’s losses on non-performing loans increased in 2009 but, overall, have been modest due to our first lien position and relatively low average LTV ratios. We generally obtain new collateral values for loans after 180 days of delinquency. If the estimated fair value of the collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs. As a result, certain losses inherent in our non-performing loans are being recognized as charge-offs which may result in a lower ratio of the ALL to non-performing loans when accompanied by a concurrent increase in total non-performing loans (i.e. due to the addition of new non-performing loans). Charge-offs amounted to $47.2 million, consisting of 517 loans, for 2009 and $4.4 million, consisting of 47 loans, in 2008. These charge-offs were primarily due to the results of our reappraisal process for our non-performing residential first mortgage loans with only 55 loans disposed of through the foreclosure process during 2009 with a final loss on sale (after previous charge-offs) of $2.4 million. The results of our reappraisal process and our recent charge-off history are also considered in the determination of the ALL. At December 31, 2009 the average LTV ratio (using appraised values at the time of origination) of our non-performing loans was 72.4% and was 60.8% for our total mortgage loan portfolio. Thus, the ratio of the ALL to non-performing loans needs to be viewed in the context of the underlying LTVs of the non-performing loans and the relative decline in home values. Based on our loss experience on non-performing loans, we increased the loss factors used in our quantitative analysis of the ALL for our one- to four-family first mortgage loans during 2009.
Net charge-offs amounted to $47.2 million for 2009 as compared to net charge-offs of $4.4 million for 2008. Our charge-offs on non-performing loans have historically been low relative to the size of our portfolio due to the amount of underlying equity in the properties collateralizing our first mortgage loans. Until this current recessionary cycle, it was our experience that as a non-performing loan approached foreclosure, the borrower

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sold the underlying property or, if there was a second mortgage or other subordinated lien, the subordinated lien holder would purchase the property to protect their interest thereby resulting in the full payment of principal and interest to Hudson City Savings Bank (“Hudson City Savings”). This process normally took approximately 12 months. However, due to the unprecedented level of foreclosures and the desire by most states to slow the foreclosure process, we are now experiencing a time frame to repayment or foreclosure ranging from 24 to 30 months from the initial non-performing period. If real estate prices decline further, this extended time may result in further charge-offs. In addition, current conditions in the housing market have made it more difficult for borrowers to sell homes to satisfy the mortgage and second lien holders are less likely to purchase the property and repay our loan if the value of the property is not enough to satisfy their loan. We continue to monitor closely the property values underlying our non-performing loans during this timeframe and take appropriate charge-offs when the loan balances exceed the underlying property values.
At December 31, 2009 and December 31, 2008, commercial and construction loans evaluated for impairment in accordance with FASB guidance amounted to $11.2 million and $9.5 million, respectively. Based on this evaluation, we established an ALL of $2.1 million for loans classified as impaired at December 31, 2009 compared to $818,000 at December 31, 2008.
Non-Interest Income. Total non-interest income was $33.6 million for 2009 as compared to $8.5 million for 2008. Non-interest income primarily consists of service charges on loans and deposits. Included in non-interest income of 2009 were net gains on securities transactions of $24.2 million which resulted primarily from the sale of $761.6 million of mortgage-backed securities available-for-sale. Proceeds from the securities sale were primarily used to fund the purchase of first mortgage loans during the second quarter of 2009.
Non-Interest Expense. Total non-interest expense for the year ended December 31, 2009 was $265.6 million as compared to $198.1 million during 2008. The increase is primarily due to the FDIC special assessment of $21.1 million, a $30.8 million increase in Federal deposit insurance expense, a $9.9 million increase in compensation and employee benefits expense, and a $4.0 million increase in other non-interest expense. The special assessment and the increase in Federal deposit insurance expense were the result of the restoration plan implemented by the FDIC to recapitalize the Deposit Insurance Fund. The increase in compensation and employee benefits expense included a $6.0 million increase in compensation costs, due primarily to normal increases in salary as well as additional full time employees, a $3.3 million increase in pension costs and a $3.4 million increase in costs related to our health plan. These increases were partially offset by a $2.8 million decrease in expense related to our stock benefit plans. This decrease was due primarily to a decrease in employee stock ownership plan (“ESOP”) expense as a result of changes in the price of our common stock during 2009. Included in other non-interest expense for the year ended December 31, 2009 were write-downs on foreclosed real estate and net losses on the sale of foreclosed real estate, of $2.4 million as compared to $1.3 million for 2008.
Our efficiency ratio was 20.80% for 2009 as compared to 20.84% for 2008. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income. Our ratio of non-interest expense to average total assets for 2009 was 0.46% as compared to 0.41% for 2008.
Income Taxes. Income tax expense amounted to $346.7 million for 2009 compared with $287.3 million for 2008. Our effective tax rate for 2009 was 39.67% compared with 39.21% for 2008.

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A

Asset Quality
Credit Quality
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties. Our lending market areas generally consists of those states that are east of the Mississippi River and as far south as South Carolina.
The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at December 31:
                                 
    2010     2009  
            Percent             Percent  
    Amount     of Total     Amount     of Total  
            (Dollars in thousands)          
 
First mortgage loans:
                               
One- to four-family:
                               
Amortizing
  $ 24,912,935       80.56 %   $ 26,490,454       83.36 %
Interest-only
    5,136,463       16.61       4,586,375       14.43  
FHA/VA
    499,724       1.62       285,003       0.90  
Multi-family and commercial
    48,067       0.16       54,694       0.17  
Construction
    9,081       0.03       13,030       0.04  
 
                       
Total first mortgage loans
    30,606,270       98.98       31,429,556       98.90  
 
                       
 
                               
Consumer and other loans
                               
Fixed-rate second mortgages
    160,896       0.52       201,375       0.63  
Home equity credit lines
    137,467       0.44       127,987       0.40  
Other
    19,264       0.06       21,003       0.07  
 
                       
Total consumer and other loans
    317,627       1.02 %     350,365       1.10 %
 
                       
Total loans
    30,923,897       100.00       31,779,921       100.00  
 
                           
Deferred loan costs
    86,633               81,307          
Allowance for loan losses
    (236,574 )             (140,074 )        
 
                           
Net loans
  $ 30,773,956             $ 31,721,154          
 
                           
At December 31, 2010, first mortgage loans secured by one-to four-family properties accounted for 98.8% of total loans. Fixed-rate mortgage loans represent 66.8% of our first mortgage loans. Compared to adjustable-rate loans, fixed-rate loans possess less inherent credit risk since loan payments do not change in response to changes in interest rates. In addition, we do not originate or purchase loans with payment options, negative amortization loans or sub-prime loans. The market does not apply a uniform definition of what constitutes “sub-prime” lending. Our reference to sub-prime lending relies upon the “Statement on Subprime Mortgage Lending” issued by the OTS and the other federal bank regulatory agencies (the “Agencies”), on September 29, 2007, which further references the “Expanded Guidance for Subprime Lending Programs” (the “Expanded Guidance”), issued by the Agencies by press release dated January 31, 2001. In the Expanded Guidance, the Agencies indicated that sub-prime lending does not refer to individual sub-prime loans originated and managed, in the ordinary course of business, as exceptions to prime risk selection standards. The Agencies recognize that many prime loan portfolios will contain such loans. The Agencies also excluded prime loans that develop credit problems after acquisition and community development loans from the sub-prime arena. According to the Expanded Guidance, sub-prime loans are other loans to borrowers which display one or more characteristics of reduced payment capacity. Five specific criteria, which are not intended to be exhaustive and are not meant to define specific parameters for all sub-prime borrowers and may not match all markets or

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institutions’ specific sub-prime definitions, are set forth, including having a Fair Isaac Corporation (“FICO”) score of 660 or below. Based upon the definition and exclusions described above, we are a prime lender. However, as we are a portfolio lender, we review all data contained in borrower credit reports and do not base our underwriting decisions solely on FICO scores and do not record FICO scores on our mortgage loan system. We believe our loans, when made, were amply collateralized and otherwise conformed to our prime lending standards.
Included in our loan portfolio at December 31, 2010 are interest-only loans of approximately $5.14 billion, or 16.6%, of total loans as compared to $4.59 billion, or 14.4%, of total loans at December 31, 2009. These loans are originated as adjustable rate mortgage loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan term, or offered on a 30-year fixed-rate loan, with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will adjust to include both principal and interest and will amortize over the remaining term so the loan will be repaid at the end of its original life. These loans are underwritten using the fully-amortizing payment amount. Non-performing interest-only loans amounted to $179.3 million, or 20.6%, of non-performing loans at December 31, 2010 as compared to non-performing interest-only loans of $82.2 million, or 13.1%, of non-performing loans at December 31, 2009.
In addition to our full documentation loan program, we originate and purchase loans to certain eligible borrowers as limited documentation loans. Generally the maximum loan amount for limited documentation loans is $750,000 and these loans are subject to higher interest rates than our full documentation loan products. We require applicants for limited documentation loans to complete a Freddie Mac/Fannie Mae loan application and request income, asset and credit history information from the borrower. Additionally, we verify asset holdings and obtain credit reports from outside vendors on all borrowers to ascertain the credit history of the borrower. Applicants with delinquent credit histories usually do not qualify for the limited documentation processing, although delinquencies that are adequately explained will not prohibit processing as a limited documentation loan. We reserve the right to verify income and do require asset verification but we may elect not to verify or corroborate certain income information where we believe circumstances warrant. We also allow certain borrowers to obtain mortgage loans without disclosing income levels and without any verification of income. In these cases, we require verification of the borrowers’ assets. We collect and analyze data relating to limited documentation loans that we originate. Originated loans overall represent 62.9% of our one- to four-family first mortgage loans. As part of our wholesale loan program, we have allowed sellers to include limited documentation loans in each pool of purchased mortgage loans but limit the amount of these loans to be no more than 10% of the principal balance of the purchased pool. In addition, these loans must have a maximum LTV of 70% and meet other characteristics such as maximum loan size. However, we have not tracked wholesale limited documentation loans on our mortgage loan system. Included in our loan portfolio at December 31, 2010 are $3.38 billion of originated amortizing limited documentation loans and $938.8 million of originated limited documentation interest-only loans. Non-performing loans at December 31, 2010 include $91.5 million of originated amortizing limited documentation loans and $58.3 million of originated interest-only limited documentation loans.

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The following table presents the geographic distribution of our total loan portfolio, as well as the geographic distribution of our non-performing loans at December 31:
                                 
    2010   2009
            Non-performing           Non-performing
    Total loans   loans   Total loans   loans
New Jersey
    44.0 %     45.7 %     43.0 %     41.6 %
New York
    19.9       18.7       18.2       18.0  
Connecticut
    14.5       6.5       12.6       4.2  
 
Total New York metropolitan area
    78.4       70.9       73.8       63.8  
 
 
                               
Virginia
    3.5       4.6       4.6       6.2  
Illinois
    3.0       4.9       3.9       5.6  
Maryland
    2.7       4.4       3.5       5.1  
Massachusetts
    1.9       1.6       2.7       2.3  
Pennsylvania
    3.1       1.2       2.0       1.9  
Minnesota
    1.3       1.8       1.4       1.8  
Michigan
    1.1       2.5       1.3       4.2  
All others
    5.0       8.1       6.8       9.1  
 
Total outside New York metropolitan area
    21.6       29.1       26.2       36.2  
 
 
    100.0 %     100.0 %     100.0 %     100.0 %
 
Non-Performing Assets
The following table presents information regarding non-performing assets as of the dates indicated.
                                         
  At December 31,
    2010     2009     2008     2007     2006  
  (Dollars in thousands)
Non-accrual loans:
                                       
Residential first mortgage loans
  $ 794,106     $ 581,786     $ 200,642     $ 69,904     $ 20,053  
Multi-family and commercial mortgages
    1,117       1,414       1,854       2,028        
Construction loans
    7,560       6,624       7,610       647       3,098  
Consumer and other loans
    4,320       1,916       626       956       1,217  
 
                             
Total non-accrual loans
    807,103       591,740       210,732       73,535       24,368  
Accruing loans delinquent 90 days or more
    64,156       35,955       6,842       5,867       5,630  
 
Total non-performing loans
    871,259       627,695       217,574       79,402       29,998  
Foreclosed real estate, net
    45,693       16,736       15,532       4,055       3,161  
 
Total non-performing assets
  $ 916,952     $ 644,431     $ 233,106     $ 83,457     $ 33,159  
 
                             
Non-performing loans to total loans
    2.82 %     1.98 %     0.74 %     0.33 %     0.16 %
Non-performing assets to total assets
    1.50       1.07       0.43       0.19       0.09  

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The following table presents information regarding our non-performing residential first mortgage loans at December 31:
                 
    2010     2009  
    (Dollars in thousands)  
Non-accrual residential first mortgage loans:
               
Amortizing residential first mortgage loans
  $ 614,758     $ 499,550  
Interest-only residential first mortgage loans
    179,348       82,236  
The following table is a comparison of our delinquent loans at December 31, 2010 and 2009:
                                                 
    30-59 Days     60-89 Days     90 Days or More  
    Number     Principal     Number     Principal     Number     Principal  
    of     Balance     of     Balance     of     Balance  
    Loans     of Loans     Loans     of Loans     Loans     of Loans  
  (Dollars in thousands)
2010
                                               
One- to four-family first mortgages
    1,012     $ 390,469       460     $ 181,370       2,144     $ 794,106  
FHA/VA first mortgages
    96       20,594       40       9,730       234       64,156  
Multi-family and commercial mortgages
    4       3,199       2       1,199       4       1,117  
Construction loans
                            6       7,560  
Consumer and other loans
    45       4,644       14       946       42       4,320  
 
Total
    1,157     $ 418,906       516     $ 193,245       2,430     $ 871,259  
 
Delinquent loans to total loans
            1.35 %             0.62 %             2.82 %
 
                                               
2009
                                               
One- to four-family first mortgages
    1,053     $ 404,392       408     $ 171,913       1,480     $ 581,786  
FHA/VA first mortgages
    83       20,682       35       8,650       115       31,855  
Multi-family and commercial mortgages
    2       1,357       2       1,088       1       1,414  
Construction loans
                            6       9,764  
Consumer and other loans
    43       4,440       14       882       34       2,876  
 
Total
    1,181     $ 430,871       459     $ 182,533       1,636     $ 627,695  
 
Delinquent loans to total loans
            1.36 %             0.57 %             1.98 %
Upon request, we will generally agree to a short-term payment plan for certain residential mortgage loan borrowers. Many of these customers are current as to their mortgage payments, but may be anticipating a short-term cash flow need and want to protect their credit history. The extent of these plans is generally limited to a six-month deferral of principal payments only. Pursuant to these short-term payment plans, we do not modify mortgage notes, recast legal documents, extend maturities or reduce interest rates. We also do not forgive any interest or principal. We have not classified these loans as troubled debt restructurings since we collect all principal and interest, the deferral period is short and any reduction in the present value of cash flows is due to the insignificant delay in the timing of principal payments. The principal balance of loans with payment plans at December 31, 2010 amounted to $81.3 million, including $54.4 million of loans that are

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current, $13.9 million that are 30 to 59 days past due, $4.7 million that are 60 to 89 days past due and $8.3 million that are 90 days or more past due.
Loans modified in a troubled debt restructuring totaled $11.1 million at December 31, 2010. There were none at December 31, 2009. These loans were current at the time of the restructuring and have complied with the terms of their restructure agreement and are considered performing loans at December 31, 2010.
In addition to non-performing loans, we had $194.8 million of potential problem loans at December 31, 2010 as compared to $189.9 million at December 31, 2009. This amount includes loans which are 60-89 days delinquent (other than loans guaranteed by the Federal Housing Administration (the “FHA”) and certain other internally classified loans.
Potential problem loans are summarized as follows:
                 
    December 31, 2010   December 31, 2009
    (In thousands)
One- to four-family first mortgages
  $ 181,370     $ 171,913  
Multi-family and commercial mortgages
    12,448       17,076  
Consumer and other loans
    946       882  
 
Total potential problem loans
  $ 194,764     $ 189,871  
 
Allowance for Loan Losses
The following table presents the activity in our ALL at or for the dates indicated.
                         
    For the Year Ended December 31,  
    2010     2009     2008  
 
                       
Balance at beginning of period
  $ 140,074     $ 49,797     $ 34,741  
 
                 
Provision for loan losses
    195,000       137,500       19,500  
Charge-offs:
                       
First mortgage loans
    (110,669 )     (48,097 )     (4,458 )
Consumer and other loans
    (102 )     (36 )     (64 )
 
                 
Total charge-offs
    (110,771 )     (48,133 )     (4,522 )
Recoveries
    12,271       910       78  
 
                 
Net charge-offs
    (98,500 )     (47,223 )     (4,444 )
 
                 
Balance at end of period
  $ 236,574     $ 140,074     $ 49,797  
 
                 
 
                       
Allowance for loan losses to total loans
    0.77 %     0.44 %     0.17  
Allowance for loan losses to non-performing loans
    27.15       22.32       22.89  
Net charge-offs as a percentage of average loans
    0.31       0.15       0.02  

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The following table presents our allocation of the ALL by loan category and the percentage of loans in each category to total loans at the dates indicated.
                                 
    At December 31, 2010     At December 31, 2009  
            Percentage             Percentage  
            of Loans in             of Loans in  
            Category to             Category to  
    Amount     Total Loans     Amount     Total Loans  
    (Dollars in thousands)  
 
                               
First mortgage loans:
                               
One- to four-family
  $ 227,224       98.79 %   $ 133,927       98.69 %
Other first mortgages
    6,147       0.19       3,169       0.21  
 
                       
Total first mortgage loans
    233,371       98.98       137,096       98.90  
 
                               
Consumer and other loans
    3,203       1.02       2,978       1.10  
 
                       
Total allowance for loan losses
  $ 236,574       100.00 %   $ 140,074       100.00 %
 
                       
Investments
We invest primarily in mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, as well as other securities issued by GSEs. These securities account for substantially all of our securities. We do not purchase unrated or private label mortgage-backed securities or other higher risk securities such as those backed by sub-prime loans. There were no debt securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the security.
We have two collateralized borrowings in the form of repurchase agreements totaling $100.0 million with Lehman Brothers, Inc. Lehman Brothers, Inc. is currently in liquidation under the Securities Industry Protection Act. Mortgage-backed securities with an amortized cost of approximately $114.5 million are pledged as collateral for these borrowings and we have demanded the return of this collateral. We believe that we have the legal right to setoff our obligation to repay the borrowings against our right to the return of the mortgage-backed securities pledged as collateral. As a result, we believe that our potential economic loss from Lehman Brother’s failure to return the collateral is limited to the excess market value of the collateral over the $100 million repurchase price. We intend to pursue full recovery of the pledged collateral in accordance with the contractual terms of the repurchase agreements. There can be no assurances that the final settlement of this transaction will result in the full recovery of the collateral or the full amount of the claim. We have not recognized a loss in our financial statements related to these repurchase agreements as we have concluded that a loss is neither probable nor estimable at December 31, 2010.
Liquidity and Capital Resources
The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan and security purchases, deposit withdrawals, repayment of borrowings and operating expenses. Our primary sources of funds are deposits, borrowings, the proceeds from principal and interest payments on loans and mortgage-backed securities, the maturities and calls of investment securities and funds provided by our operations. Deposit flows, calls of investment securities and borrowed funds, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, national and local economic conditions and competition in the marketplace. These factors reduce the predictability of the receipt of these sources of funds. Our membership in the FHLB provides us access to additional sources of borrowed funds, which is generally limited to approximately twenty times the amount of FHLB stock owned.
On December 16, 2009, we filed an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission (the “SEC”), which was declared effective immediately upon filing. This shelf

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registration statement allows us to periodically offer and sell, from time to time, in one or more offerings, individually or in any combination, common stock, preferred stock, debt securities, capital securities, guarantees, warrants to purchase common stock or preferred stock and units consisting of one or more of the foregoing. The shelf registration statement provides us with greater capital management flexibility and enables us to access the capital markets in order to pursue growth opportunities that may become available to us in the future or should there be any changes in the regulatory environment that call for increased capital requirements. Although the shelf registration statement does not limit the amount of the foregoing items that we may offer and sell pursuant to the shelf registration statement, our ability and any decision to do so is subject to market conditions and our capital needs. In addition, our ability to issue debt through the capital markets may also be dependent on our ability to obtain an acceptable credit rating from one or more nationally recognized credit rating agencies.
Our primary investing activities are the origination and purchase of one-to four-family real estate loans and consumer and other loans, the purchase of mortgage-backed securities, and the purchase of investment securities. These activities are funded primarily by borrowings, deposit growth and principal and interest payments on loans, mortgage-backed securities and investment securities. We originated $5.83 billion and purchased $764.3 million of loans during 2010 as compared to $6.06 billion and $3.16 billion during 2009. Loan origination activity continues to be strong as a result of an increase in mortgage refinancing caused by market interest rates that remain at near-historic lows. Our loan purchase activity has significantly declined as the GSEs have been actively purchasing loans as part of their efforts to keep mortgage rates low to support the housing market during the recent economic recession. As a result, the sellers from whom we have historically purchased loans are selling to the GSEs. We expect that the amount of loan purchases may continue to be at reduced levels for the near-term. Principal repayments on loans amounted to $7.26 billion for 2010 as compared to $6.77 billion for 2009. At December 31, 2010, commitments to originate and purchase mortgage loans amounted to $519.0 million and $500,000, respectively as compared to $538.0 million and $157.5 million, respectively at December 31, 2009.
Purchases of mortgage-backed securities during 2010, including securities purchased with settlement dates in 2011, were $15.49 billion as compared to $7.11 billion during 2009. The increase in the purchases of mortgage-backed securities was due primarily to the reinvestment of proceeds from the principal repayments and sales of mortgage-backed securities during 2010. Principal repayments on mortgage-backed securities amounted to $8.37 billion for 2010 as compared to $4.73 billion for 2009. The increase in principal repayments was due primarily to the refinancing activity caused by market interest rates that are at near-historic lows. The increase in repayments is also due to the principal repayment of $1.13 billion of mortgage-backed securities by the Federal Home Loan Mortgage Corporation (“FHLMC”) during the first quarter of 2010. These principal repayments represented the balances of non-performing loans that were included in mortgage-backed securities that they issued. During 2010, we sold mortgage-backed securities from our available for sale portfolio with an amortized cost of $3.92 billion resulting in a gain of $152.6 million. We also sold $761.6 million of mortgage-backed securities from our available for sale portfolio during 2009, resulting in a gain of $24.0 million.
We purchased $5.80 billion of investment securities during 2010 as compared to $5.87 billion during 2009. Proceeds from the calls of investment securities amounted to $7.07 billion during 2010 as compared to $4.02 billion for 2009.
At December 31, 2010, we had mortgage-backed securities and investment securities with an amortized cost of $17.18 billion that were used as collateral for securities sold under agreements to repurchase and at that date we had $10.88 billion of unencumbered securities.
As part of the membership requirements of the FHLB, we are required to hold a certain dollar amount of FHLB common stock based on our mortgage-related assets and borrowings from the FHLB. During 2010, we had a net redemption of $2.8 million of FHLB common stock compared with net purchases of $9.2 million during 2009.

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Our primary financing activities consist of gathering deposits, engaging in wholesale borrowings, repurchases of our common stock and the payment of dividends.
Total deposits increased $595.1 million during 2010 as compared to an increase of $6.12 billion for 2009. Deposit flows are typically affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets, and other factors. We lowered our deposit rates in 2010 to slow our deposit growth from the 2009 levels since the low yields that are available to us for mortgage-related assets and investment securities have made a growth strategy less prudent until market conditions improve. Time deposits scheduled to mature within one year were $10.60 billion at December 31, 2010. These time deposits have a weighted average rate of 1.32%. These time deposits are scheduled to mature as follows: $4.58 billion with an average cost of 1.18% in the first quarter of 2011, $2.96 billion with an average cost of 1.19% in the second quarter of 2011, $1.40 billion with an average cost of 1.44% in the third quarter of 2011 and $1.66 billion with an average cost of 1.82% in the fourth quarter of 2011. We anticipate that we will have sufficient resources to meet this current funding commitment. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain with us as renewed time deposits or as transfers to other deposit products at the prevailing interest rate.
We have, in the past, primarily used wholesale borrowings to fund our investing activities. However, we were able to fund our growth during 2010 with deposits. Our borrowings have traditionally consisted of structured putable borrowings with ten year final maturities and initial non-put periods of one to five years. We have used this type of borrowing in the past primarily to fund our loan growth because these borrowings have a longer duration than shorter-term non-putable borrowings and have a lower cost than a non-putable borrowing with a maturity date similar to the initial put date of the putable borrowing. Since market interest rates have remained very low for an extended period of time, we have not had any lenders put borrowings back to us. As a result, many of our borrowings have become putable within three months. At December 31, 2010, we had $22.83 billion of borrowed funds with a weighted-average rate of 3.90% and with put dates within one year. We anticipate that none of these borrowings will be put back assuming current market interest rates remain stable. We believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be put back will not increase substantially unless interest rates were to increase by at least 200 basis points. In addition, a significant concentration of our borrowed funds involve the FHLB. At December 31, 2010, $14.88 billion or 50.1% of our total borrowed funds are with the FHLB. Our borrowing agreement with the FHLB requires the FHLB to offer another lending product, which we would expect would be at prevailing market interest rates, to replace any borrowings that were put back. In the event our structured borrowings are put back, we anticipate that we will have sufficient resources to meet this funding commitment by borrowing new funds at the prevailing market interest rate as the market for reverse repurchase agreements remains active and the FHLB is obligated to offer replacement financing for any borrowing it may put back. We may also use funds generated by deposit growth or use proceeds from securities sales to meet the funding required by any puts of borrowed funds. At December 31, 2010 we had $450.0 million of borrowings with a weighted average rate of 3.71% that are scheduled to mature within one year.
To better manage our liquidity and reduce the level of interest rate risk posed by this type of borrowing, we began to modify these borrowings in 2009 to extend or eliminate the put dates. During 2010, we modified $4.03 billion of borrowings to extend the put dates of the borrowings by between three and five years. We are examining various strategies to position our balance sheet for the future as market conditions change and allow for more profitable growth. As a result, we expect to further restructure a portion of our funding mix. The restructuring may include the continued modification of putable borrowings to extend or eliminate the

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put dates, the extinguishment of certain borrowings, the refinancing of certain borrowings or a combination of these actions. The fair value of our borrowings, which is generally the value at which borrowings are extinguished, was approximately 111% of carrying value at December 31, 2010. Any restructuring could result in a decrease in the size of the balance sheet and a material charge to earnings.
Our liquidity management process is sufficient to meet our daily funding needs and cover both expected and unexpected deviations from normal daily operations. The primary tools we use for measuring and managing liquidity risk include cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets, and a formal, well developed contingency funding plan.
Cash dividends paid during 2010 were $295.8 million. We have not purchased any of our common shares during the year ended December 31, 2010 pursuant to stock repurchase programs. At December 31, 2010, there remained 50,123,550 shares available for purchase under existing stock repurchase programs.
The primary source of liquidity for Hudson City Bancorp, the holding company of Hudson City Savings, is capital distributions from Hudson City Savings. During 2010, Hudson City Bancorp received $320.0 million in dividend payments from Hudson City Savings. The primary use of these funds is the payment of dividends to our shareholders and, when appropriate as part of our capital management strategy, the repurchase of our outstanding common stock. Hudson City Bancorp’s ability to continue these activities is dependent upon capital distributions from Hudson City Savings. Applicable federal law may limit the amount of capital distributions Hudson City Savings may make. At December 31, 2010, Hudson City Bancorp had total cash and due from banks of $239.6 million.
At December 31, 2010, Hudson City Savings exceeded all applicable regulatory capital requirements. Hudson City Savings’ tangible capital ratio, leverage (core) capital ratio and total risk-based capital ratio were 7.95%, 7.95% and 22.74%, respectively. Although our regulatory capital ratios are in excess of the applicable requirements to be considered “well capitalized” for bank regulatory purposes, we believe the current regulatory environment will require Hudson City to maintain a cushion above these requirements.
Off-Balance Sheet Arrangements and Contractual Obligations
Hudson City Bancorp is a party to certain off-balance sheet arrangements, which occur in the normal course of our business, to meet the credit needs of our customers and the growth initiatives of the Bank. These arrangements are primarily commitments to originate and purchase mortgage loans, and to purchase mortgage-backed securities. We are also obligated under a number of non-cancelable operating leases.
The following table summarizes contractual obligations of Hudson City by contractual payment period, as of December 31, 2010.
                                         
    Payments Due By Period  
            Less Than     One Year to     Three Years to     More Than  
Contractual Obligation   Total     One Year     Three Years     Five Years     Five Years  
    (In thousands)  
 
                                       
Mortgage loan originations
  $ 519,004     $ 519,004     $     $     $  
Mortgage loan purchases
    500       500                    
Mortgage-backed security purchases
    2,606,620       2,606,620                    
Repayment of borrowed funds
    29,675,000       450,000       500,000       3,525,000       25,200,000  
Operating leases
    146,857       9,268       18,911       18,247       100,431  
 
Total
  $ 32,947,981     $ 3,585,392     $ 518,911     $ 3,543,247     $ 25,300,431  
 
                             
Commitments to extend credit are agreements to lend money to a customer as long as there is no violation of any condition established in the contract. Commitments to fund first mortgage loans generally have fixed expiration dates of approximately 90 days and other termination clauses. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Hudson City Savings evaluates each customer’s credit-worthiness on a case-by-case basis.

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Additionally, we have available home equity, overdraft and commercial/construction lines of credit, which do not have fixed expiration dates, of approximately $188.5 million, $2.8 million, and $8.6 million. We are not obligated to advance further amounts on credit lines if the customer is delinquent, or otherwise in violation of the agreement. The commitments to purchase first mortgage loans and mortgage-backed securities had a normal period from trade date to settlement date of approximately 60 days.
Recent Accounting Pronouncements
In July 2010, FASB issued an accounting standards update regarding disclosures about the credit quality of financing receivables and the allowance for credit losses. This update amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This update is effective for interim and annual reporting periods ending on or after December 15, 2010. We have provided the disclosures required by this accounting standards update in the footnotes to the consolidated financial statements as of December 31, 2010.
In April 2010, FASB issued an accounting standards update regarding the effect of a loan modification when the loan is part of a pool that is accounted for as a single asset. This update clarifies that modifications of loans that are accounted for within a pool under Subtopic 310-30, which provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition, do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments do not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40. This update was effective in the first interim or annual period ending on or after July 15, 2010. This accounting standard update did not have a material impact on our financial condition, results of operations or financial statement disclosures.
In January 2010, FASB issued an accounting standards update regarding disclosure requirements for fair value measurement. This update provides amendments to fair value measurement that require new disclosures related to transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. The update also provides amendments clarifying level of disaggregation and disclosures about inputs and valuation techniques along with conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. This update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The effective portions of this accounting standards update did not affect our financial condition, results of operations or financial statement disclosures, and we do not expect that the remaining portions of this accounting standard update will have a material impact on our financial condition, results of operations or financial statement disclosures.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements of Hudson City Bancorp have been prepared in accordance with GAAP. GAAP generally requires the

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measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than do the effects of inflation.
Critical Accounting Policies
We have identified the accounting policies below as critical to understanding our financial results. In addition, Note 2 to the Audited Consolidated Financial Statements contains a summary of our significant accounting policies. We believe our policies with respect to the methodology for our determination of the ALL, the measurement of stock-based compensation expense, securities impairment, goodwill impairment and the measurement of the funded status and cost of our pension and other post-retirement benefit plans involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are continually reviewed by management, and are periodically reviewed with the Audit Committee and our Board of Directors.
Allowance for Loan Losses
The ALL has been determined in accordance with GAAP, under which we are required to maintain an adequate ALL at December 31, 2010. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our ALL is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties resulting in a loan concentration in residential first mortgage loans at December 31, 2010. As a result of our lending practices, we also have a concentration of loans secured by real property located primarily in New Jersey, New York and Connecticut. At December 31, 2010, approximately 78.4% of our total loans were in the New York metropolitan area. Additionally, the states of Virginia, Illinois, Pennsylvania, Maryland, Massachusetts, Minnesota and Michigan accounted for 3.5%, 3.0%, 3.1%, 2.7%, 1.9%, 1.3%, and 1.1%, respectively, of total loans. The remaining 5.0% of the loan portfolio is secured by real estate primarily in the remainder of our lending areas. Based on the composition of our loan portfolio and the growth in our loan portfolio, we believe the primary risks inherent in our portfolio are the continued weakened economic conditions due to the recent U.S. recession, continued high levels of unemployment, rising interest rates in the markets we lend and a continuing decline in real estate market values. Any one or a combination of these adverse trends may adversely affect our loan portfolio resulting in increased delinquencies, non-performing assets, loan losses and future levels of loan loss provisions. We consider these trends in market conditions in determining the ALL.
Due to the nature of our loan portfolio, our evaluation of the adequacy of our ALL is performed primarily on a “pooled” basis. Each month we prepare an analysis which categorizes the entire loan portfolio by certain risk characteristics such as loan type (one- to four-family, multi-family, commercial, construction, etc.), loan source (originated or purchased) and payment status (i.e., current or number of days delinquent). Loans with known potential losses are categorized separately. We assign potential loss factors to the payment status categories on the basis of our assessment of the potential risk inherent in each loan type. These factors are periodically reviewed for appropriateness giving consideration to charge-off history, delinquency trends, portfolio growth and the status of the regional economy and housing market, in order to ascertain that the loss factors cover probable and estimable losses inherent in the portfolio. Based on our recent loss experience on non-performing loans, we increased certain loss factors used in our quantitative analysis of the ALL for our one- to four-family first mortgage loans during 2010. We use this analysis, as a tool, together with principal

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balances and delinquency reports, to evaluate the adequacy of the ALL. Other key factors we consider in this process are current real estate market conditions in geographic areas where our loans are located, changes in the trend of non-performing loans, the results of our foreclosed property transactions, the current state of the local and national economy, changes in interest rates and loan portfolio growth. Any one or a combination of these adverse trends may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of provisions.
We maintain the ALL through provisions for loan losses that we charge to income. We charge losses on loans against the ALL when we believe the collection of loan principal is unlikely. We establish the provision for loan losses after considering the results of our review as described above. We apply this process and methodology in a consistent manner and we reassess and modify the estimation methods and assumptions used in response to changing conditions. Such changes, if any, are approved by our AQC each quarter.
Hudson City Savings defines the population of potential impaired loans to be all non-accrual construction, commercial real estate and multi-family loans. Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the fair value of the collateral or the present value of the loan’s expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and consumer loans, are specifically excluded from the impaired loan analysis.
We believe that we have established and maintained the ALL at adequate levels. Additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Although management uses the best information available, the level of the ALL remains an estimate that is subject to significant judgment and short-term change.
Stock-Based Compensation
We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value for all awards granted, modified, repurchased or cancelled after January 1, 2006 and for the portion of outstanding awards for which the requisite service was not rendered as of January 1, 2006, in accordance with Accounting Standard Codification (the “ASC”) 718-10. We have made annual grants of performance-based stock options since 2006 that vest if certain financial performance measures are met. In accordance with ASC 718-10-30-6, we assess the probability of achieving these financial performance measures and recognize the cost of these performance-based grants if it is probable that the financial performance measures will be met. This probability assessment is subjective in nature and may change over the assessment period for the performance measures.
We estimate the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are based on our analysis of our historical option exercise experience and our judgments regarding future option exercise experience and market conditions. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets.
The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction of changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.

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Pension and Other Post-retirement Benefit Assumptions
Non-contributory retirement and post-retirement defined benefit plans are maintained for certain employees, including retired employees hired on or before July 31, 2005 who have met other eligibility requirements of the plans. We adopted ASC 715, Retirement Benefits. This ASC requires an employer to: (a) recognize in its statement of financial condition an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize, in comprehensive income, changes in the funded status of a defined benefit post-retirement plan in the year in which the changes occur.
We provide our actuary with certain rate assumptions used in measuring our benefit obligation. We monitor these rates in relation to the current market interest rate environment and update our actuarial analysis accordingly. The most significant of these is the discount rate used to calculate the period-end present value of the benefit obligations, and the expense to be included in the following year’s financial statements. A lower discount rate will result in a higher benefit obligation and expense, while a higher discount rate will result in a lower benefit obligation and expense. The discount rate assumption was determined based on a cash flow/yield curve model specific to our pension and post-retirement plans. We compare this rate to certain market indices, such as long-term treasury bonds, or the Moody’s bond indices, for reasonableness. A discount rate of 5.75% was selected for the December 31, 2010 measurement date and 6.00% was selected for the 2010 expense calculation.
For our pension plan, we also assumed an annual rate of salary increase of 4.00% for future periods. This rate is corresponding to actual salary increases experienced over prior years. We assumed a return on plan assets of 8.25% for future periods. We actuarially determine the return on plan assets based on actual plan experience over the previous ten years. The actual return on plan assets was 8.5% for 2010 and 12.9% in 2009. There can be no assurances with respect to actual return on plan assets in the future. We continually review and evaluate all actuarial assumptions affecting the pension plan, including assumed return on assets.
For our post-retirement benefit plan, the assumed health care cost trend rate used to measure the expected cost of other benefits for 2010 was 8.50%. The rate was assumed to decrease gradually to 4.75% for 2016 and remain at that level thereafter. Changes to the assumed health care cost trend rate are expected to have an immaterial impact as we capped our obligations to contribute to the premium cost of coverage to the post-retirement health benefit plan at the 2007 premium level.
Securities Impairment
Our available-for-sale securities portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in shareholders’ equity. Debt securities which we have the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The fair values for our securities are obtained from an independent nationally recognized pricing service.
Substantially all of our securities portfolio is comprised of mortgage-backed securities and debt securities issued by GSEs. The fair value of these securities is primarily impacted by changes in interest rates. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience.
In April 2009, the FASB issued guidance which changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of the impairment to be recognized in earnings. This staff position requires that an entity assess whether an impairment of a debt security is other-than-temporary and, as part of that assessment, determine its intent and ability to hold the security. If the entity

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intends to sell the debt security, an other-than-temporary impairment shall be considered to have occurred. In addition, an other-than-temporary impairment shall be considered to have occurred if it is more likely than not that it will be required to sell the security before recovery of its amortized cost.
We conduct a periodic review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is other-than-temporary. Our evaluation of other-than-temporary impairment considers the duration and severity of the impairment, our intent and ability to hold the securities, whether it is more likely than not that we will be required to sell the security before recovery of the amortized cost and our assessments of the reason for the decline in value and the likelihood of a near-term recovery. The unrealized losses on securities in our portfolio were due primarily to changes in market interest rates subsequent to purchase. In addition, we only purchase securities issued by GSEs. As a result, the unrealized losses on our securities were not considered to be other-than-temporary and, accordingly, no impairment loss was recognized during 2010.
Impairment of Goodwill
FASB guidance requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually using a fair-value based two-step approach. Goodwill and other intangible assets amounted to $156.7 million and were recorded as a result of Hudson City Bancorp’s acquisition of Sound Federal Bancorp, Inc. in 2006.
The first step (“Step 1”) used to identify potential impairment involves comparing each reporting unit’s estimated fair value to its carrying amount, including goodwill. As a community-oriented bank, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers and these operations constitute the Company’s only segment for financial reporting purposes. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and the second step (“Step 2”) is performed to measure the amount. Step 2 involves calculating an implied fair value of goodwill for each reporting unit for which impairment was indicated in Step 1. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination by measuring the excess of the estimated fair value of the reporting unit, as determined in Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles, as if the reporting unit was being acquired at the impairment test date. Subsequent reversal of goodwill impairment losses is not permitted.
Quoted market prices in active markets are the best evidence of fair value and are used as the basis for measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. We utilized quoted market prices as of our impairment test dates as well as control premiums in determining the estimated fair value of our reporting unit. We also used market multiples based on recent acquisition activity to calculate our estimated fair value. In determining the appropriate control premium, management took into consideration, among other factors, control premiums used in comparable transactions. As a result of our analysis we have concluded that the fair value of goodwill, for purposes of the goodwill impairment analysis, is in excess of its carrying amount. Therefore, we did not recognize any impairment of goodwill or other intangible assets for the years ended December 31, 2010, 2009 and 2008.

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Management of Market Risk
General
As a financial institution, our primary component of market risk is interest rate volatility. Our net income is primarily based on net interest income, and fluctuations in interest rates will ultimately impact the level of both income and expense recorded on a large portion of our assets and liabilities. Fluctuations in interest rates will also affect the market value of our interest-earning assets and interest-bearing liabilities, other than those that possess a short term to maturity. Due to the nature of our operations, we are not subject to foreign currency exchange or commodity price risk. We do not own any trading assets. We did not engage in any hedging transactions that use derivative instruments (such as interest rate swaps and caps) during 2010 and did not have any such hedging transactions in place at December 31, 2010. Our mortgage loan portfolio, which comprises 50.3% of our balance sheet, is subject to the risks associated with the economy in the New York metropolitan area, the general economy of the United States and the recent pressure on housing prices. We continually analyze our asset quality and believe our allowance for loan losses is adequate to cover known or potential losses.
Management of Interest Rate Risk
The primary objectives of our interest rate risk management strategy are to:
    evaluate the interest rate risk inherent in our balance sheet accounts;
 
    determine the appropriate level of interest rate risk given our business plan, the current business environment and our capital and liquidity requirements; and
 
    manage interest rate risk in a manner consistent with the approved guidelines and policies set by our Board of Directors.
We seek to manage our asset/liability mix to help minimize the impact that interest rate fluctuations may have on our earnings. To achieve the objectives of managing interest rate risk, our Asset/Liability Committee meets weekly to discuss and monitor the market interest rate environment compared to interest rates that are offered on our products. This committee consists of the Chief Executive Officer, the President and Chief Operating Officer, the Chief Financial Officer and other senior officers of the institution. The Asset/Liability Committee presents reports to the Board of Directors at its regular meetings and, on a quarterly basis, presents a comprehensive report addressing the results of activities and strategies and the effect that changes in interest rates will have on our results of operations and the present value of our equity.
Historically, our lending activities have emphasized one- to four-family fixed-rate first and second mortgage loans, while purchasing variable-rate or hybrid mortgage-backed securities to offset our predominantly fixed-rate loan portfolio. The current prevailing interest rate environment and the desires of our customers have resulted in a demand for long-term hybrid and fixed-rate mortgage loans. These fixed-rate interest earning assets may have an adverse impact on our earnings in a rising rate environment as the interest rate on these interest-earning assets would not reprice to current market interest rates as fast as the interest rates on our interest-bearing deposits and putable borrowed funds. In the past several years, we have attempted to originate and purchase a larger percentage of variable-rate mortgage-related assets in order to better manage our interest rate risk. Variable-rate mortgage-related assets include those loans or securities with a contractual annual rate adjustment after an initial fixed-rate period of one to ten years. These variable-rate instruments are more rate-sensitive, given the potential interest rate adjustment, than the long-term fixed-rate loans that we have traditionally held in our portfolio. This growth in variable-rate mortgage-related assets has helped reduce our exposure to interest rate fluctuations and is expected to benefit our long-term profitability, as the rate earned on the mortgage loan will increase as prevailing market rates increase. However, this strategy to originate a higher

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percentage of variable-rate instruments may have an initial adverse impact on our net interest income and net interest margin in the short-term, as variable-rate interest-earning assets generally have initial interest rates lower than alternative fixed-rate investments.
Variable-rate/hybrid products constituted 49.8% of loan originations and purchases and 95.9% of mortgage-backed security purchases made during 2010. In aggregate, 81.7% of our mortgage-related asset originations and purchases were variable-rate or hybrid instruments. Our percentage of fixed-rate mortgage-related assets to total mortgage-related assets was 44.9% as of December 31, 2010 compared with 53.6% as of December 31, 2009. However, included in the variable-rate/hybrid total are mortgage-related assets whose contractual next rate change date is over five years. If these instruments were classified as fixed-rate, the percentage of fixed-rate mortgage-related assets to total mortgage-related assets would be 65.9% as of December 31, 2010. Overall, our percentage of fixed-rate interest-earning assets to total interest-earning assets was 40.5% at December 31, 2010 compared with 49.6% as of December 31, 2009.
Our primary sources of funds have traditionally been deposits, consisting primarily of time deposits and interest-bearing demand accounts, and borrowings. Our deposits have substantially shorter terms to maturity than our mortgage loan portfolio and borrowed funds. The Bank currently has $9.89 billion of non-maturity deposits and $10.60 billion of time deposits scheduled to mature within the next 12 months. The borrowings have been generally long-term to maturity, in an effort to offset our short-term deposit liabilities and assist in managing our interest rate risk. These long-term borrowings have put options that could shorten their maturities in a changing interest rate environment. If we experience a significant rising interest rate environment where interest rates increase above the interest rate for the borrowings, these borrowings will likely be put at their next put date and our cost to replace these borrowings would likely increase. Of our borrowings outstanding at December 31, 2010, $29.08 billion were structured putable borrowings. Of these, $24.13 billion had quarterly put options and $4.95 billion had one-time put options. We currently have $23.28 billion of borrowings that have the potential to be put back to us or will mature within the next 12 months, including $22.83 billion of putable borrowings with a weighted-average rate of 3.90% of which $19.03 billion could be put back to us within 3 months. Given the current market rate environment, we believe none of these borrowings will be put during the next twelve months. If interest rates were to increase 200 and 300 basis points, and no other factors affecting the put determination changed, the Bank would expect approximately $450.0 million and $7.75 billion, respectively, to be put back to us within the next 12 months. In addition, a significant concentration of our borrowed funds involve the FHLB. At December 31, 2010, $14.88 billion or 50.1% of our total borrowed funds are with the FHLB. Our borrowing agreement with the FHLB requires the FHLB to offer another lending product, which we would expect would be at prevailing market interest rates, to replace any borrowings that were put back.
The difference between rates on the yield curve, or the shape of the yield curve, impacts our net interest income. The FOMC noted that economic activity has continued to improve during the fourth quarter of 2010. The FOMC also noted that the housing sector has shown signs of improvement. However, the national unemployment rate has remained elevated at 9.4% for December 2010 as compared to 9.6% in September 2010 and 9.9% in December 2009. The S&P/Case-Shiller Home Price Index for the New York metropolitan area, where most of our lending activity occurs, declined by approximately 1.5% in 2010 and by 6.3% in 2009. The S&P/Case-Shiller U.S. National Home Price Index decreased by 2.1% in 2010 and by 3.1% in 2009. Lower household wealth and tight credit conditions in addition to the increase in the national unemployment rate has resulted in the FOMC maintaining the overnight lending rate at zero to 0.25% during the fourth quarter of 2010, with plans to maintain this level for an “extended period.”
As a result, short-term market interest rates have remained at low levels during 2010 while the longer-term market interest rates have fluctuated with market conditions, but generally decreased over the year. During 2010, the 10-year US treasury ranged between 2.38% and 3.99%, decreasing 54 basis points during 2010 and ending the year at 3.29%. These short-term rate conditions allowed us to continue to re-price down our shorter-term deposits thereby reducing our cost of funds. While our deposits continued to reprice to lower rates during

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2010, the cost of our borrowed funds increased reflecting the modification of certain of these borrowings and the lack of repricing opportunity due to the extension to maturity of the putable borrowings in this low rate environment. The overall lower longer-term market interest rates resulted in lower rates on our primary investments of mortgage loans and mortgage-backed securities. In addition, the low market interest rates resulted in accelerated prepayment speeds on these assets as customers sought to refinance their current debt to the lower market rates.
Due to our investment and financing decisions, the more positive the slope of the yield curve the more favorable the environment is for our ability to generate net interest income. Our interest-bearing liabilities generally reflect movements in short- and intermediate-term rates, while our interest-earning assets, a majority of which have initial terms to maturity or repricing greater than one year, generally reflect movements in intermediate- and long-term interest rates. A positive slope of the yield curve allows us to invest in interest-earning assets at a wider spread to the cost of interest-bearing liabilities. However, though the market yield curve is still relatively steep, we have experienced during 2010 a more stable short-term rate environment as compared to a declining long-term rate environment. Due to these changes in market rates, our net interest margin decreased for the fourth quarter and full year of 2010 to 1.73% and 2.01%, respectively, from 2.30% and 2.22%, respectively, for the three and twelve-month periods ended December 31, 2009.
Also impacting our net interest income and net interest rate spread is the level of prepayment activity on our interest-sensitive assets. The actual amount of time before mortgage loans and mortgage-backed securities are repaid can be significantly impacted by changes in market interest rates and mortgage prepayment rates. Mortgage prepayment rates will vary due to a number of factors, including the regional economy in the area where the underlying mortgages were originated, availability of credit, seasonal factors and demographic variables. However, the major factors affecting prepayment rates are prevailing interest rates, related mortgage refinancing opportunities and competition. Generally, the level of prepayment activity directly affects the yield earned on those assets, as the payments received on the interest-earning assets will be reinvested at the prevailing lower market interest rate. Prepayment rates are generally inversely related to the prevailing market interest rate, thus, as market interest rates increase, prepayment rates tend to decrease. Prepayment rates on our mortgage-related assets have increased during 2010, due to the current low market interest rate environment and have continued at these elevated levels into 2011. We believe the higher level of prepayment activity may continue as market interest rates are expected to remain at the current low levels through at least the first half of 2011. Accordingly, we have used higher levels of prepayment activity in our interest rate risk modeling presented below, based on the recent experience of our portfolios, though with decreasing speeds over the life of the instruments.
Calls of investment securities and borrowed funds are also impacted by the level of market interest rates. The level of calls of investment securities are generally inversely related to the prevailing market interest rates, meaning as rates decrease the likelihood of a security being called would increase. The level of call activity generally affects the yield earned on these assets, as the payment received on the security would be reinvested at the prevailing lower market interest rate. During 2010 we saw an increase in call activity on our investment securities as short-term market interest rates remained at low levels and long-term market rates decreased during the first three quarters of the year. The rate increases during the fourth quarter of 2010 have decreased the amount of call activity on our investment securities. We do not anticipate significant levels of calls of investment securities due to the anticipated higher levels of longer-term market interest rates and the significant turnover of our portfolio during 2010 to instruments with lower interest rates. Accordingly, we have limited amounts of calls reflected in the interest rate risk modeling presented below.
Our borrowings have traditionally consisted of structured putable borrowings with ten year final maturities and initial non-put periods of one to five years. We have used this type of borrowing primarily to fund our loan growth because they have a longer duration than shorter-term non-putable borrowings and have a lower cost than a non-putable borrowing with a maturity date similar to the initial put date of the putable borrowing. The likelihood of a borrowing being put back is directly related to the current market interest rates, meaning the

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higher that interest rates move, the more likely the borrowing would be put back. The level of put activity generally affects the cost of our borrowed funds, as the put of a borrowing would generally necessitate the re-borrowing of the funds or deposit growth at the higher current market interest rates. During 2010 we experienced no put activity on our borrowed funds due to the continued low levels of short-term market interest rates.
In order to effectively manage our interest rate risk and liquidity risk resulting from our current putable borrowing position, we are pursuing a variety of strategies to reduce borrowings that are putable within 12 months. We intend to continue focusing on funding any future asset growth primarily with customer deposits. We also intend to use customer deposits to payoff certain borrowings as they mature. Using customer deposits in this manner will allow us to achieve a greater balance between deposits and borrowings. During 2009 and 2010, we were able to fund our asset growth and payments on maturing borrowings in this manner. This growth was primarily in time deposits with maturities of one year or more and non-maturity money market accounts. For our interest rate risk modeling, time deposits are presented at their maturity date, while non-maturity deposits are presented based on a decay rate calculated from our experience.
We may use borrowed funds as a supplemental funding source for short-term liquidity if deposit growth decreases. These borrowings would be a combination of short-term borrowings with maturities of three to six months and longer-term fixed-maturity borrowings with terms of two to five years. We also may modify (maintain the borrowing with adjusted terms), restructure (payoff the borrowing and replace with a new borrowing) or extinguish (payoff the borrowing and fund with deposit growth or security sales) certain borrowings to manage our interest rate risk. During 2010, we modified approximately $4.03 billion of putable borrowings to extend the put dates of the borrowings by between three and four years as part of this strategy.
Interest Rate Risk Modeling
Simulation Model. We use simulation models as our primary means to calculate and monitor the interest rate risk inherent in our portfolio. These models report changes to net interest income and the net present value of equity in different interest rate environments, assuming either an incremental or instantaneous and permanent interest rate shock to all interest rate-sensitive assets and liabilities. We assume maturing or called instruments are reinvested into the same type of product, with the rate earned or paid reset to our currently offered rate for loans and deposits, or the current market rate for securities and borrowed funds. We have not reported the minus 200 or minus 300 basis point interest rate shock scenarios in either of our simulation model analyses, as we believe, given the current interest rate environment and historical interest rate levels, the resulting information would not be meaningful.

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Net Interest Income. As a primary means of managing interest rate risk, we monitor the impact of interest rate changes on our net interest income over the next twelve-month period. This model does not purport to provide estimates of net interest income over the next twelve-month period, but attempts to assess the impact of interest rate changes on our net interest income. The following table reports the changes to our net interest income over the next 12 months ending December 31, 2010 assuming either incremental or instantaneous changes in interest rates for the given rate shock scenarios. The incremental interest rate changes occur over a 12 month period.
                 
    Percent Change in Net Interest Income
Change in Interest Rates   Incremental Change   Instantaneous Change
(Basis points)    
300
    (0.89 )%     (19.61 )%
200
    (0.65 )     (4.02 )
100
    (0.43 )     (1.07 )
50
    (0.24 )     (0.31 )
(50)
    0.30       (4.63 )
(100)
    (0.02 )     (10.58 )
Of note in the positive shock scenarios:
    the negative change to net interest income is primarily due to our interest-bearing liabilities resetting to higher rates faster than our interest-earning assets as the prepayment speeds on our mortgage-related assets and potential calls of investment securities decrease as market rates increase,
 
    the large increase in the negative change in the plus 300 basis point instantaneous shock scenario is primarily due to the large amount of anticipated puts of our borrowed funds with replacement funding at higher interest rates, and
 
    the lesser impact in the incremental analysis, particularly in the plus 300 basis point analysis, is primarily due to the borrowings not being put back to the Bank until the end of the analysis period.
Of note in the negative shock scenarios:
    the decrease in net interest income is due to the accelerated prepayment speeds on our mortgage-related assets and the re-investment of the proceeds into lower yielding instruments, and
 
    the decrease is also due to the lack of change in the cost of our borrowed funds as they will not be put back in the lower interest rate environment and extend to maturity.
Net Present Value of Equity. We also monitor our interest rate risk by monitoring changes in the net present value of equity in the different rate environments. The net present value of equity is the difference between the estimated fair value of interest rate-sensitive assets and liabilities. The changes in market value of assets and liabilities due to changes in interest rates reflect the interest sensitivity of those assets and liabilities as their values are derived from the characteristics of the asset or liability (i.e., fixed-rate, adjustable-rate, caps, floors) relative to the current interest rate environment. For example, in a rising interest rate environment the fair market value of a fixed-rate asset will decline, whereas the fair market value of an adjustable-rate asset, depending on its repricing characteristics, may not decline. Increases in the market value of assets will increase the present value of equity whereas decreases in the market value of assets will decrease the present value of equity. Conversely, increases in the market value of liabilities will decrease the present value of equity whereas decreases in the market value of liabilities will increase the present value of equity.

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The following table presents the estimated net present value of equity over a range of interest rate change scenarios at December 31, 2010. The present value ratio shown in the table is the net present value of equity as a percent of the present value of total assets in each of the different rate environments. Our current policy sets a minimum ratio of the net present value of equity to the fair value of assets in the current interest rate environment (no rate shock) of 7.00% and a minimum present value ratio of 5.00% in the plus 200 basis point interest rate shock scenario.
                 
Change in   Present   Basis Point
Interest Rates   Value Ratio   Change
(Basis points)                
300
    2.46 %     (367 )
200
    4.65       (148 )
100
    5.99       (14 )
50
    6.23       10  
0
    6.13        
(50)
    5.53       (60 )
(100)
    4.34       (179 )
Of note in the positive shock scenarios:
    the decreases in the net present value ratio and the sensitivity measure reflect the decrease in the value of our mortgage-related assets to below par as the prepayment speeds will slow on this portfolio, and
 
    the decrease also reflects that the value of our borrowing portfolio will remain above par due to put options.
Of note in the negative shock scenarios:
    the decrease in the present value ratio in the negative basis point change was primarily due to higher pricing of our borrowed funds as the structures will increase in duration, and
 
    the value of our mortgage-related assets will move closer to par as the prepayment speeds increase thus shortening the duration of these portfolios.
The methods we use in simulation modeling are inherently imprecise. This type of modeling requires that we make assumptions that may not reflect the manner in which actual yields and costs respond to changes in market interest rates. For example, we assume the composition of the interest rate-sensitive assets and liabilities will remain constant over the period being measured and that all interest rate shocks will be uniformly reflected across the yield curve, regardless of the duration to maturity or repricing. The table assumes that we will take no action in response to the changes in interest rates. In addition, prepayment estimates and other assumptions within the model are subjective in nature, involve uncertainties, and, therefore, cannot be determined with precision. Accordingly, although the previous two tables may provide an estimate of our interest rate risk at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in interest rates on our net interest income or present value of equity.
As indicated above, the Bank is currently out of compliance with the Board established limits on the minimum ratio of the net present value of equity to the fair value of assets in the current interest environment and the plus 200 basis point interest rate shock scenario. In addition, we believe our interest rate risk position would be considered significant based on the OTS’ written guidelines regarding NPV analysis. We are working to develop strategies to bring the Bank into compliance with our Board approved exposure limits and to reduce our interest rate risk exposure to be consistent with the OTS’ guidelines. To address our interest rate risk exposure, we are studying the feasibility of restructuring a portion of our borrowings to further strengthen our balance sheet and improve net interest margin going forward. The restructuring may include the modification of putable borrowings to extend or eliminate the put dates, the extinguishment of certain borrowings, the refinancing of certain borrowings or a combination of these actions. The fair value of our borrowings, which is generally the value at which borrowings are extinguished, was approximately 111% of carrying value at December 31, 2010. Any restructuring could result in a decrease in the size of the balance sheet and a material charge to earnings.
As a result of the enhanced regulatory scrutiny, our interest rate risk position, our funding concentration in structured borrowings, our significant growth since 2005 and certain regulatory compliance matters, we expect to become subject to an informal regulatory enforcement action in the form of a memorandum of understanding (“MOU”) with the OTS. Under an MOU, the Bank may be required to reduce its level of interest rate risk and funding concentration, adopt certain policies and procedures to achieve such reductions.
Gap Analysis. The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate-sensitive” and by monitoring a financial institution’s interest rate sensitivity “gap.” An asset or liability is said to be “interest rate-sensitive” within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period.
A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing within a specific time period exceeds the amount of interest-earning assets maturing or repricing within that same period. A gap is considered positive when the amount of interest-earning assets maturing or repricing within a specific time period exceeds the amount of interest-bearing liabilities maturing or repricing within that same time period.

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During a period of rising interest rates, a financial institution with a negative gap position would be expected, absent the effects of other factors, to experience a greater increase in the costs of its interest-bearing liabilities relative to the yields of its interest-earning assets and thus a decrease in the institution’s net interest income. An institution with a positive gap position would be expected, absent the effect of other factors, to experience the opposite result. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to reduce net interest income.
The following table presents the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2010, which we anticipate to reprice or mature in each of the future time periods shown. Except for prepayment or call activity and non-maturity deposit decay rates, we determined the amounts of assets and liabilities that reprice or mature during a particular period in accordance with the earlier of the term to rate reset or the contractual maturity of the asset or liability. Assumptions used for decay rates are based on the Bank’s experience with the particular deposit type. Prepayment speeds on our mortgage-related assets are based on recent experience, but slowed to reflect anticipated rate increase and product run-off. Callable investment securities and borrowed funds are reported at the anticipated call date, for those that are callable within one year, or at their contractual maturity date. Investment securities with step-up features, totaling $3.90 billion, are reported at the earlier of their next step-up date or anticipated call date. We reported $80.0 million of investment securities at their anticipated call date. We have reported no borrowings at their anticipated put date due to the low interest rate environment. We have excluded non-accrual mortgage loans of $803.0 million and non-accrual other loans of $3.4 million from the table.
                                                         
    At December 31, 2010  
                            More than     More than              
            More than     More than     two years     three years              
    Six months     six months     one year to     to three     to five     More than        
    or less     to one year     two years     years     years     five years     Total  
    (Dollars in thousands)  
 
                                                       
Interest-earning assets:
                                                       
First mortgage loans
  $ 3,948,861     $ 3,385,498     $ 4,953,385     $ 4,501,158     $ 2,843,518     $ 10,170,894     $ 29,803,314  
Consumer and other loans
    98,832       2,444       14,371       42,502       12,636       143,454       314,239  
Federal funds sold
    493,628                                     493,628  
Mortgage-backed securities
    4,847,756       3,534,515       5,063,093       3,965,771       3,030,570       3,593,204       24,034,909  
FHLB stock
    871,940                                     871,940  
Investment securities
    7,148       80,000       1,350,000       1,250,000       1,300,000       41,653       4,028,801  
 
Total interest-earning assets
    10,268,165       7,002,457       11,380,849       9,759,431       7,186,724       13,949,205       59,546,831  
 
 
                                                       
Interest-bearing liabilities:
                                                       
Savings accounts
    64,560       64,560       86,081       86,081       215,202       344,322       860,806  
Interest-bearing demand accounts
    209,724       209,724       311,825       311,825       538,115       571,248       2,152,461  
Money market accounts
    631,008       631,008       1,262,016       1,262,016       2,208,528       315,503       6,310,079  
Time deposits
    7,541,784       3,058,978       2,520,987       555,282       1,605,519             15,282,550  
Borrowed funds
    300,000       150,000       250,000       250,000       3,525,000       25,200,000       29,675,000  
 
Total interest-bearing liabilities
    8,747,076       4,114,270       4,430,909       2,465,204       8,092,364       26,431,073       54,280,896  
 
 
                                                       
Interest rate sensitivity gap
  $ 1,521,089     $ 2,888,187     $ 6,949,940     $ 7,294,227     $ (905,640 )   $ (12,481,868 )   $ 5,265,935  
 
                                         
 
                                                       
Cumulative interest rate sensitivity gap
  $ 1,521,089     $ 4,409,276     $ 11,359,216     $ 18,653,443     $ 17,747,803     $ 5,265,935          
 
                                           
 
                                                       
Cumulative interest rate sensitivity gap as a percent of total assets
    2.49 %     7.21 %     18.57 %     30.50 %     29.02 %     8.61 %        
 
                                                       
Cumulative interest-earning assets as a percent of interest-bearing liabilities
    117.39 %     134.28 %     165.69 %     194.41 %     163.73 %     109.70 %        

Page 47


 

The cumulative one-year gap as a percent of total assets was positive 7.21% at December 31, 2010 compared with positive 10.20% at September 30, 2010 and negative 3.70% at December 31, 2009.
Of note regarding the gap analysis:
    the move from a negative one-year gap as of December 31, 2009 to a positive one-year gap as of December 31, 2010 reflects the higher prepay speeds on our mortgage-related assets, thus reporting in the shorter time categories, and the shift of our short-term time deposits to longer-term maturities or to longer duration non-maturity deposits, and
 
    the decrease in the positive one-year gap from the September 30, 2010 analysis reflects the lack of anticipated calls of our investment securities in this higher market interest rate environment.
The methods used in the gap table are also inherently imprecise. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Certain assets, such as adjustable-rate loans and mortgage-backed securities, have features that limit changes in interest rates on a short-term basis and over the life of the loan. If interest rates change, prepayment and early withdrawal levels would likely deviate from those assumed in calculating the table. Finally, the ability of borrowers to make payments on their adjustable-rate loans may decrease if interest rates increase.

Page 48


 

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Hudson City Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition of Hudson City Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hudson City Bancorp, Inc. and subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
-s- KPMG LLP LOGO
New York, New York
February 28, 2011

Page 49


 

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Hudson City Bancorp, Inc.:
We have audited the internal control over financial reporting of Hudson City Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Hudson City Bancorp, Inc. and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of the Company as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated February 28, 2011 expressed an unqualified opinion on those consolidated financial statements.
-s- KPMG
New York, New York
February 28, 2011

Page 50


 

Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
                 
    December 31,     December 31,  
    2010     2009  
    (In thousands, except share and per share amounts)  
 
               
Assets:
               
Cash and due from banks
  $ 175,769     $ 198,752  
Federal funds sold
    493,628       362,449  
 
Total cash and cash equivalents
    669,397       561,201  
Securities available for sale:
               
Mortgage-backed securities
    18,120,537       11,116,531  
Investment securities
    89,795       1,095,240  
Securities held to maturity:
               
Mortgage-backed securities (fair value of $6,199,507 and $10,324,831 at December 31, 2010 and 2009, respectively)
    5,914,372       9,963,554  
Investment securities (fair value of $3,867,488 and $4,071,005 at December 31, 2010 and 2009, respectively)
    3,939,006       4,187,704  
 
Total securities
    28,063,710       26,363,029  
Loans
    30,923,897       31,779,921  
Deferred loan costs
    86,633       81,307  
Allowance for loan losses
    (236,574 )     (140,074 )
 
Net loans
    30,773,956       31,721,154  
Federal Home Loan Bank of New York stock
    871,940       874,768  
Foreclosed real estate, net
    45,693       16,736  
Accrued interest receivable
    245,546       304,091  
Banking premises and equipment, net
    69,444       70,116  
Goodwill
    152,109       152,109  
Other assets
    274,238       204,556  
 
Total Assets
  $ 61,166,033     $ 60,267,760  
 
           
Liabilities and Shareholders’ Equity:
               
Deposits:
               
Interest-bearing
  $ 24,605,896     $ 23,992,007  
Noninterest-bearing
    567,230       586,041  
 
Total deposits
    25,173,126       24,578,048  
Repurchase agreements
    14,800,000       15,100,000  
Federal Home Loan Bank of New York advances
    14,875,000       14,875,000  
 
Total borrowed funds
    29,675,000       29,975,000  
Due to brokers for securities purchases
    538,200       100,000  
Accrued expenses and other liabilities
    269,469       275,560  
 
Total liabilities
    55,655,795       54,928,608  
 
Commitments and Contingencies (Notes 1, 7, 9 and 14) Common stock, $0.01 par value, 3,200,000,000 shares authorized; 741,466,555 shares issued; 526,718,310 and 526,493,676 shares outstanding at December 31, 2010 and 2009, respectively
    7,415       7,415  
Additional paid-in capital
    4,705,255       4,683,414  
Retained earnings
    2,642,338       2,401,606  
Treasury stock, at cost; 214,748,245 and 214,972,879 shares at December 31, 2010 and 2009, respectively
    (1,725,946 )     (1,727,579 )
Unallocated common stock held by the employee stock ownership plan
    (204,230 )     (210,237 )
Accumulated other comprehensive income, net of tax
    85,406       184,533  
 
Total shareholders’ equity
    5,510,238       5,339,152  
 
Total Liabilities and Shareholders’ Equity
  $ 61,166,033     $ 60,267,760  
 
           
See accompanying notes to consolidated financial statements.

Page 51


 

Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In thousands, except per share data)  
Interest and Dividend Income:
                       
First mortgage loans
  $ 1,667,027     $ 1,678,789     $ 1,523,521  
Consumer and other loans
    18,409       21,676       26,184  
Mortgage-backed securities held to maturity
    356,023       493,549       497,912  
Mortgage-backed securities available for sale
    495,572       490,109       377,096  
Investment securities held to maturity
    179,632       86,581       13,390  
Investment securities available for sale
    19,112       126,793       162,818  
Dividends on Federal Home Loan Bank of New York stock
    46,107       43,103       48,009  
Federal funds sold
    2,614       1,186       4,295  
 
Total interest and dividend income
    2,784,496       2,941,786       2,653,225  
 
 
Interest Expense:
                       
Deposits
    376,347       483,468       581,357  
Borrowed funds
    1,217,322       1,214,840       1,129,891  
 
Total interest expense
    1,593,669       1,698,308       1,711,248  
 
Net interest income
    1,190,827       1,243,478       941,977  
Provision for Loan Losses
    195,000       137,500       19,500  
 
Net interest income after provision for loan losses
    995,827       1,105,978       922,477  
 
Non-Interest Income:
                       
Service charges and other income
    10,369       9,399       8,485  
Gains on securities transactions
    152,625       24,185        
 
Total non-interest income
    162,994       33,584       8,485  
 
Non-Interest Expense:
                       
Compensation and employee benefits
    133,803       137,071       127,198  
Net occupancy expense
    32,689       32,270       30,457  
Federal deposit insurance assessment
    55,957       35,094       4,320  
FDIC special assessment
          21,098        
Other expense
    43,939       40,063       36,101  
 
Total non-interest expense
    266,388       265,596       198,076  
 
Income before income tax expense
    892,433       873,966       732,886  
Income Tax Expense
    355,227       346,722       287,328  
 
Net income
  $ 537,206     $ 527,244     $ 445,558  
 
                 
Basic Earnings Per Share
  $ 1.09     $ 1.08     $ 0.92  
 
                 
Diluted Earnings Per Share
  $ 1.09     $ 1.07     $ 0.90  
 
                 
See accompanying notes to consolidated financial statements.

Page 52


 

Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In thousands, except share amounts)  
 
Common Stock
  $ 7,415     $ 7,415     $ 7,415  
 
Additional paid-in capital:
                       
Balance at beginning of year
    4,683,414       4,641,571       4,578,578  
Stock option plan expense
    11,138       12,869       15,043  
Tax benefit from stock plans
    810       24,834       36,119  
Allocation of ESOP stock
    6,239       6,319       10,471  
RRP stock granted
    (145 )     (6,771 )      
Vesting of RRP stock
    3,799       4,592       1,360  
 
Balance at end of year
    4,705,255       4,683,414       4,641,571  
 
Retained Earnings:
                       
Balance at beginning of year
    2,401,606       2,196,235       2,002,049  
Net income
    537,206       527,244       445,558  
Dividends paid on common stock ($0.60, $0.59, and $0.45 per share, respectively)
    (295,757 )     (288,408 )     (217,995 )
Exercise of stock options
    (717 )     (33,465 )     (33,377 )
 
Balance at end of year
    2,642,338       2,401,606       2,196,235  
 
Treasury Stock:
                       
Balance at beginning of year
    (1,727,579 )     (1,737,838 )     (1,771,106 )
Purchase of common stock
    (464 )     (43,477 )     (17,045 )
Exercise of stock options
    1,952       46,965       50,313  
RRP stock granted
    145       6,771        
 
Balance at end of year
    (1,725,946 )     (1,727,579 )     (1,737,838 )
 
Unallocated common stock held by the ESOP:
                       
Balance at beginning of year
    (210,237 )     (216,244 )     (222,251 )
Allocation of ESOP stock
    6,007       6,007       6,007  
 
Balance at end of year
    (204,230 )     (210,237 )     (216,244 )
 
Accumulated other comprehensive income (loss):
                       
Balance at beginning of year
    184,533       47,657       16,622  
 
                 
Net change in unrealized gains on securities available for sale arising during the year, net of tax expense of $1,236 for 2010, $100,466 for 2009 and $37,961 for 2008
    1,790       145,473       54,967  
Reclassification adjustment for gains included in net income, net of tax expense of $62,347 for 2010, $9,880 for 2009 and $0 for 2008
    (90,278 )     (14,305 )      
Pension and other postretirement benefits adjustment, net of tax benefit (expense) of $7,348 for 2010, ($3,792) for 2009 and
                       
$16,528 for 2008
    (10,639 )     5,708       (23,932 )
 
                 
Other comprehensive income, net of tax
    (99,127 )     136,876       31,035  
 
Balance at end of year
    85,406       184,533       47,657  
 
Total Shareholders’ Equity
  $ 5,510,238     $ 5,339,152     $ 4,938,796  
 
                 
Summary of comprehensive income
                       
Net income
  $ 537,206     $ 527,244     $ 445,558  
Other comprehensive (loss) income, net of tax
    (99,127 )     136,876       31,035  
 
                 
Total comprehensive income
  $ 438,079     $ 664,120     $ 476,593  
 
                 
See accompanying notes to consolidated financial statements.

Page 53


 

Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In thousands)  
Cash Flows from Operating Activities:
                       
Net income
  $ 537,206     $ 527,244     $ 445,558  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation, accretion and amortization expense
    116,696       65,984       26,329  
Provision for loan losses
    195,000       137,500       19,500  
Gains on securities transactions, net
    (152,625 )     (24,185 )      
Share-based compensation, including committed ESOP shares
    27,183       29,787       32,881  
Deferred tax benefit
    (55,803 )     (46,700 )     (12,868 )
Decrease (increase) in accrued interest receivable
    58,545       (5,046 )     (53,932 )
Decrease (increase) in other assets
    34,507       (164,846 )     (21,053 )
(Decrease) increase in accrued expenses and other liabilities
    (5,627 )     2,878       18,029  
 
Net Cash Provided by Operating Activities
    755,082       522,616       454,444  
 
Cash Flows from Investing Activities:
                       
Originations of loans
    (5,826,008 )     (6,063,870 )     (5,040,221 )
Purchases of loans
    (764,335 )     (3,161,401 )     (3,061,859 )
Payments on loans
    7,261,911       6,768,470       2,820,381  
Principal collection of mortgage-backed securities held to maturity
    4,198,619       2,609,338       1,348,304  
Purchases of mortgage-backed securities held to maturity
    (172,434 )     (3,017,730 )     (1,360,861 )
Principal collection of mortgage-backed securities available for sale
    4,167,652       2,123,330       956,710  
Proceeds from sales of mortgage-backed securities available for sale
    4,070,045       785,594        
Purchases of mortgage-backed securities available for sale
    (14,776,371 )     (4,088,367 )     (5,820,531 )
Proceeds from maturities and calls of investment securities held to maturity
    6,049,235       400,000       1,358,485  
Purchases of investment securities held to maturity
    (5,902,176 )     (4,440,329 )      
Proceeds from maturities and calls of investment securities available for sale
    1,025,000       3,622,225       1,449,906  
Proceeds from sales of investment securities available for sale
          316        
Purchases of investment securities available for sale
          (1,331,300 )     (2,100,000 )
Purchases of Federal Home Loan Bank of New York stock
    (8,422 )     (78,273 )     (193,277 )
Redemption of Federal Home Loan Bank of New York stock
    11,250       69,075       23,058  
Purchases of premises and equipment, net
    (8,031 )     (6,316 )     (8,565 )
Net proceeds from sale of foreclosed real estate
    26,277       15,557       5,618  
 
Net Cash Used in Investing Activities
    (647,788 )     (5,793,681 )     (9,622,852 )
 
Cash Flows from Financing Activities:
                       
Net increase in deposits
    595,078       6,114,006       3,310,660  
Proceeds from borrowed funds
          750,000       6,650,000  
Principal payments on borrowed funds
    (300,000 )     (1,000,000 )     (566,000 )
Dividends paid
    (295,757 )     (288,408 )     (217,995 )
Purchases of treasury stock
    (464 )     (43,477 )     (17,045 )
Exercise of stock options
    1,235       13,500       16,936  
Tax benefit from stock plans
    810       24,834       36,119  
 
Net Cash Provided by Financing Activities
    902       5,570,455       9,212,675  
 
Net Increase in Cash and Cash Equivalents
    108,196       299,390       44,267  
Cash and Cash Equivalents at Beginning of Year
    561,201       261,811       217,544  
 
Cash and Cash Equivalents at End of Year
  $ 669,397     $ 561,201     $ 261,811  
 
                 
Supplemental Disclosures:
                       
Interest paid
  $ 1,586,485     $ 1,696,279     $ 1,689,934  
 
                 
Loans transferred to foreclosed real estate
  $ 73,132     $ 26,581     $ 18,892  
 
                 
Income taxes paid
  $ 448,983     $ 350,712     $ 282,009  
 
                 
See accompanying notes to consolidated financial statements.

Page 54


 

Notes to Consolidated Financial Statements
1. Organization
Hudson City Bancorp, Inc. (“Hudson City Bancorp” or the “Company”) is a Delaware corporation and is the savings and loan holding company for Hudson City Savings Bank and its subsidiaries (“Hudson City Savings”). Each of Hudson City Savings and the Company is currently subject to the regulation and examination of the OTS.
On July 21, 2010, President Obama signed the Reform Act. The Reform Act, among other things, effectively merges the OTS into the OCC, with the OCC assuming all functions and authority from the OTS relating to federally chartered savings banks, and the FRB assuming all functions and authority from the OTS relating to savings and loan holding companies. Pursuant to the Reform Act, the OTS will be merged into the OCC as early as July 2011 at which time Hudson City Savings will be regulated by the OCC and the Company will be regulated by the FRB.
2. Summary of Significant Accounting Policies
Basis of Presentation
The following are the significant accounting and reporting policies applied by Hudson City Bancorp and its wholly-owned subsidiary, Hudson City Savings, in the preparation of the accompanying consolidated financial statements. The consolidated financial statements have been prepared in conformity with GAAP. All significant intercompany transactions and balances have been eliminated in consolidation. As used in these consolidated financial statements, “Hudson City” refers to Hudson City Bancorp, Inc. or Hudson City Bancorp, Inc. and its consolidated subsidiary, depending on the context. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and revenues and expenses for the period. Actual results could differ from these estimates. The ALL is a material estimate that is particularly susceptible to near-term change. The current economic environment has increased the degree of uncertainty inherent in this material estimate. In addition, bank regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies have the ability to require us, as they can require all banks, to increase our provision for loan losses or to recognize further charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance required by these regulatory agencies could adversely affect our financial condition and results of operations.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. Cash reserves are required to be maintained on deposit with the Federal Reserve Bank of New York based on deposits. The amount of the required reserves for the years ended December 31, 2010 and 2009 was $19.3 million and $24.5 million, respectively.
Mortgage-Backed Securities
Mortgage-backed securities include GSEs and U.S. Government agency pass-through certificates, which represent participating interests in pools of long-term first mortgage loans originated and serviced by third-party issuers of the securities, and real estate mortgage investment conduits (“REMICs”), which are securities derived by reallocating cash flows from mortgage pass-through securities or from pools of mortgage loans held by a trust. REMICs are a form of, and are often referred to as, collateralized mortgage obligations.

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Notes to Consolidated Financial Statements
Mortgage-backed securities are classified as either held to maturity or available for sale. For the years ended December 31, 2010, 2009 and 2008, we did not maintain a trading portfolio. Mortgage-backed securities classified as held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Amortization and accretion is reflected as an adjustment to interest income over the life of the security, adjusted for estimated prepayments, using the effective interest method. Hudson City has both the ability and the positive intent to hold these investment securities to maturity. Mortgage-backed securities available for sale are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of other comprehensive income or loss, which is included in shareholders’ equity. Amortization and accretion of premiums and discounts are reflected as an adjustment to interest income over the life of the security, adjusted for estimated prepayments, using the effective interest method. Realized gains and losses are recognized when securities are sold using the specific identification method. The estimated fair value of substantially all of these securities is determined by the use of market prices obtained from independent third-party pricing services. We conduct a periodic review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is other-than-temporary. Our evaluation of other-than-temporary impairment considers the duration and severity of the impairment, our intent to sell the security and whether it is more likely than not that we will be required to sell before full recovery of our investment or maturity. For mortgage-backed securities deemed to be other-than-temporarily impaired, the security is written down to a new cost basis with the estimated credit loss charged to income as a component of non-interest expense and the non-credit related impairment loss charged to other comprehensive income. See “Critical Accounting Policies — Securities Impairment”.
Investment Securities
Investment securities are classified as either held to maturity or available for sale. For the years ended December 31, 2010, 2009 and 2008, we did not maintain a trading portfolio. Investment securities classified as held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Amortization and accretion is reflected as an adjustment to interest income over the life of the security using the effective interest method. Hudson City has both the ability and the positive intent to hold these investment securities to maturity. Securities available for sale are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income or loss, which is included in shareholders’ equity. Amortization and accretion of premiums and discounts are reflected as an adjustment to interest income over the life of the security using the effective interest method. Realized gains and losses are recognized when securities are sold or called using the specific identification method. The estimated fair value of substantially all of these securities is determined by the use of quoted market prices obtained from independent third-party pricing services. We conduct a periodic review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is other-than-temporary. Our evaluation of other-than-temporary impairment considers the duration and severity of the impairment, our intent to sell the security and whether it is more likely than not that we will be required to sell before full recovery of our investment or maturity. For debt securities deemed to be other-than-temporarily impaired, the security is written down to a new cost basis with the estimated credit loss charged to income as a component of non-interest expense and the non-credit related impairment loss charged to other comprehensive income. For equity securities that are deemed to be other-than-temporarily impaired, the security is written down to a new cost basis and the resulting loss is charged to income as a component of non-interest expense. See “Critical Accounting Policies — Securities Impairment”.
Loans
Loans are stated at their principal amounts outstanding. Interest income on loans is accrued and credited to income as earned. Net loan origination fees and broker costs are deferred and amortized to interest income over the life of the loan using the effective interest method. Amortization and accretion of premiums and discounts is

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Notes to Consolidated Financial Statements
reflected as an adjustment to interest income over the life of the purchased loan using the effective interest method.
Existing customers in good credit standing are permitted to modify the terms of their mortgage loan, for a fee, to the terms of the currently offered fixed-rate product with a similar or reduced period to maturity than the current remaining period of their existing loan. The modified terms of these loans are at least as favorable to us as the terms of mortgage loans we offer to new customers. The fee assessed for modifying the mortgage loan is deferred and accreted over the life of the modified loan using the effective interest method. Such accretion is reflected as an adjustment to interest income. We have determined that the modification of the terms of the loan (i.e. the change in rate and period to maturity), represents a more than minor change to the loan. Accordingly, pre-modification deferred fees or costs associated with the mortgage loan are recognized in interest income at the time of the modification.
A loan is considered delinquent when we have not received a payment within 30 days of its contractual due date. The accrual of income on loans that are not guaranteed by a U.S. Government agency is generally discontinued when interest or principal payments are 90 days in arrears or when the timely collection of such income is doubtful. Loans on which the accrual of income has been discontinued are designated as non-accrual loans and outstanding interest previously credited to income is reversed. Interest income on non-accrual loans and impaired loans is recognized in the period collected unless the ultimate collection of principal is considered doubtful. A non-accrual loan is returned to accrual status when factors indicating doubtful collection no longer exist.
Hudson City defines the population of potential impaired loans to be all non-accrual commercial real estate and multi-family loans. Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the fair value of the collateral or the present value of the loan’s expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and consumer loans, are specifically excluded from the impaired loan portfolio.
Allowance for Loan Losses
The allowance for loan losses has been determined in accordance with GAAP, under which we are required to maintain adequate allowances for loan losses. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our ALL is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties resulting in a loan concentration in residential first mortgage loans at December 31, 2010. As a result of our lending practices, we also have a concentration of loans secured by real property located in New Jersey, New York and Connecticut that is 78.4% of our total loans. Based on the composition of our loan portfolio and the growth in our loan portfolio, we believe the primary risks inherent in our portfolio are increases in interest rates, a decline in the economy, rising unemployment levels and a decline in real estate market values. Any one or a combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, charge-offs and future levels of loan loss provisions. Our AQC considers these trends in market conditions, as well as other factors, in estimating the ALL.
Due to the nature of our loan portfolio, our evaluation of the adequacy of our ALL is performed primarily on a “pooled” basis. Each month we prepare an analysis which categorizes the entire loan portfolio by certain risk characteristics such as loan type (one- to four-family, multi-family, commercial, construction, etc.), loan source and payment status (i.e., current or number of days delinquent). Loans with known potential losses are

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Notes to Consolidated Financial Statements
categorized separately. We assign potential loss factors to the payment status categories on the basis of our assessment of the potential risk inherent in each loan type. These factors are periodically reviewed for appropriateness giving consideration to charge-off history, delinquency trends, portfolio growth and the status of the regional economy and housing market, in order to ascertain that the loss factors cover probable and estimable losses inherent in the portfolio. Based on our recent loss experience on non-performing loans, we increased certain loss factors used in our quantitative analysis of the ALL for certain loan types during 2010.
On occasion, we agree to modify the contractual terms of a borrower’s loan. In instances where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. Loans modified in a troubled debt restructuring are placed on non-accrual status until we determine that future collection of principal and interest is reasonably assured. Loans modified in a troubled debt restructuring which have complied with the terms of their restructure agreement for a satisfactory period of time are excluded from non-performing assets.
We maintain the ALL through provisions for loan losses that we charge to income. We charge losses on loans against the ALL when we believe the collection of loan principal is unlikely. We establish the provision for loan losses based on our systematic process which reflects various asset quality trends and recent charge-off experience. We apply this process and methodology in a consistent manner and we reassess and modify the estimation methods and assumptions used in response to changing conditions.
Federal Home Loan Bank of New York Stock
As a member of the FHLB, we are required to acquire and hold shares of FHLB Class B stock. Our holding requirement varies based on our activities, primarily our outstanding borrowings, with the FHLB. Our investment in FHLB stock is carried at cost. We conduct a periodic review and evaluation of our FHLB stock to determine if any impairment exists.
Foreclosed Real Estate
Foreclosed real estate is property acquired through foreclosure or deed in lieu of foreclosure. Write-downs to fair value (net of estimated cost to sell) at the time of acquisition are charged to the ALL. After acquisition, foreclosed properties are held for sale and carried at the lower of fair value less estimated selling costs. Fair value is estimated through current appraisals, where practical, or an inspection and a comparison of the property securing the loan with similar properties in the area by either a licensed appraiser or real estate broker. Subsequent provisions for losses, which may result from the ongoing periodic valuations of these properties, are charged to income in the period in which they are identified. Carrying costs, such as maintenance and taxes, are charged to operating expenses as incurred.
Banking Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements and furniture, fixtures and equipment are carried at cost, less accumulated depreciation and leasehold amortization. Buildings are depreciated over their estimated useful lives using the straight-line method. Furniture, fixtures and equipment are depreciated over their estimated useful lives using the double-declining balance method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the respective leases. The costs for major improvements and renovations are capitalized, while maintenance, repairs and minor improvements are charged to operating expenses as incurred. Gains and losses on dispositions are reflected currently as other non-interest income or expense.

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Notes to Consolidated Financial Statements
Goodwill and Other Intangible Assets
FASB guidance requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually using a fair-value based two-step approach. Goodwill and other intangible assets amounted to $156.7 million and were recorded as a result of Hudson City Bancorp’s acquisition of Sound Federal Bancorp, Inc. in 2006. The other intangible assets are amortizing intangible assets and as such are evaluated for impairment in accordance with FASB guidance.
The first step (“Step 1”) used to identify potential impairment involves comparing each reporting unit’s estimated fair value to its carrying amount, including goodwill. As a community-oriented bank, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers and these operations constitute the Company’s only segment for financial reporting purposes. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and the second step (“Step 2”) is performed to measure the amount. Step 2 involves calculating an implied fair value of goodwill for each reporting unit for which impairment was indicated in Step 1. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination by measuring the excess of the estimated fair value of the reporting unit, as determined in Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles, as if the reporting unit was being acquired at the impairment test date. Subsequent reversal of goodwill impairment losses is not permitted.
Quoted market prices in active markets are the best evidence of fair value and are used as the basis for measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. We utilized quoted market prices as of our impairment test dates as well as control premiums in determining the estimated fair value of our reporting unit. We also used market multiples based on recent acquisition activity to calculate our estimated fair value. In determining the appropriate control premium, management took into consideration, among other factors, control premiums used in comparable transactions. As a result of our analysis we have concluded that the fair value of goodwill, for purposes of the goodwill impairment analysis, is in excess of it’s carrying amount. Therefore, we did not recognize any impairment of goodwill or other intangible assets for the years ended December 31, 2010, 2009 and 2008.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Certain tax benefits attributable to stock options and restricted stock are credited to additional paid-in capital. Tax positions taken, or expected to be taken, in a tax return and which meet recognition thresholds, are recognized in our financial statements based on measurement attributes prescribed in accounting guidance. Accruals of interest and penalties related to unrecognized tax benefits are recognized in income tax expense.

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Notes to Consolidated Financial Statements
Employee Benefit Plans
Hudson City maintains certain noncontributory retirement and postretirement benefit plans, which cover employees hired prior to August 1, 2005 who have met the eligibility requirements of the plans. Certain health care and life insurance benefits are provided for retired employees. The expected cost of benefits provided for retired employees is actuarially determined and accrued ratably from the date of hire to the date the employee is fully eligible to receive the benefits.
The accounting guidance related to retirement benefits requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize, in comprehensive income, changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. The accounting guidance requires that plan assets and benefit obligations be measured as of the date of the employer’s fiscal year-end statement of financial condition. This requirement became effective for the Company as of December 31, 2008. We have historically used our fiscal year-end as the measurement date for plan assets and benefit obligations and therefore the measurement date provisions of the FASB guidance did not affect us.
The ESOP is accounted for in accordance with FASB guidance related to employee stock ownership plans. The funds borrowed by the ESOP from Hudson City Bancorp to purchase Hudson City Bancorp common stock are being repaid from Hudson City Savings’ contributions and dividends paid on unallocated ESOP shares over a period of up to 40 years. Hudson City common stock not allocated to participants is recorded as a reduction of stockholders’ equity at cost. Compensation expense for the ESOP is based on the average market price of our stock during each quarter.
Stock-Based Compensation
Effective January 1, 2006, Hudson City Bancorp adopted FASB guidance using the modified prospective method. Stock-based compensation expense is recognized for new stock-based awards granted, modified, repurchased or cancelled after January 1, 2006, and the remaining portion of the requisite service under previously granted unvested awards outstanding as of January 1, 2006 based upon the grant-date fair value of those awards.
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) is accounted for in accordance with FASB guidance related to Split-Dollar Life Insurance Agreements. The cash surrender value of BOLI is recorded on our consolidated statement of financial condition as an asset and the change in the cash surrender value is recorded as non-interest income. The amount by which any death benefits received exceeds a policy’s cash surrender value is recorded in non-interest income at the time of receipt. A liability is also recorded on our consolidated statement of financial condition for postretirement death benefits provided by the split-dollar endorsement policy. A corresponding expense is recorded in non-interest expense for the accrual of benefits over the period during which employees provide services to earn the benefits.
Borrowed Funds
Hudson City enters into sales of securities under agreements to repurchase with selected brokers and the FHLB. These agreements are recorded as financing transactions as Hudson City maintains effective control over the transferred securities. The dollar amount of the securities underlying the agreements continues to be carried in Hudson City’s securities portfolio. The obligations to repurchase the securities are reported as a liability in the consolidated statements of financial condition. The securities underlying the agreements are delivered to the

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Notes to Consolidated Financial Statements
party with whom each transaction is executed. They agree to resell to Hudson City the same securities at the maturity or call of the agreement. Hudson City retains the right of substitution of the underlying securities throughout the terms of the agreements.
Hudson City has also obtained advances from the FHLB, which are generally secured by a blanket lien against our mortgage portfolio. Total borrowings with the FHLB are generally limited to approximately twenty times the amount of FHLB stock owned or the fair value of our mortgage portfolio, whichever is greater.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes items such as changes in unrealized gains and losses on securities available for sale, net of tax and changes in the unrecognized prior service costs or credits of defined benefit pension and other postretirement plans, net of tax. Comprehensive income is presented in the consolidated statements of changes in shareholders’ equity.
Segment Information
FASB guidance requires public companies to report certain financial information about significant revenue-producing segments of the business for which such information is available and utilized by the chief operating decision maker. As a community-oriented financial institution, substantially all of our operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute our only operating segment for financial reporting purposes.
Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or resulted in the issuance of common stock. These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. Shares issued and shares reacquired during any period are weighted for the portion of the period that they were outstanding.
In computing both basic and diluted earnings per share, the weighted average number of common shares outstanding includes the ESOP shares previously allocated to participants and shares committed to be released for allocation to participants and the recognition and retention plans (“RRP”) shares which have vested or have been allocated to participants. ESOP and RRP shares that have been purchased but have not been committed to be released or have not vested are excluded from the computation of basic and diluted earnings per share.
3. Stock Repurchase Programs
We have previously announced several stock repurchase programs. Under our stock repurchase programs, shares of Hudson City Bancorp common stock may be purchased in the open market or through other privately negotiated transactions, depending on market conditions. The repurchased shares are held as treasury stock for general corporate use. We did not purchase any of our common shares pursuant to the repurchase programs during the year ended December 31, 2010. Included in treasury stock are vested shares related to stock awards that were surrendered for withholding taxes. These shares are included in treasury stock purchases in the consolidated statements of cash flows and amounted to 34,923, 19,355, and 24,262 shares for 2010, 2009 and 2008, respectively. During the years ended December 31, 2009 and 2008 we purchased 3,970,605 and 1,124,262 shares of our common stock at an aggregate cost of $43.5 million and $17.0 million, respectively. As

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Notes to Consolidated Financial Statements
of December 31, 2010, there remained 50,123,550 shares that may be purchased under the existing stock repurchase programs.
4. Mortgage-Backed Securities
The amortized cost and estimated fair market value of mortgage-backed securities at December 31 are as follows:
                                 
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair Market  
    Cost     Gains     Losses     Value  
 
    (In thousands)  
 
                               
2010
                               
Held to Maturity:
                               
GNMA pass-through certificates
  $ 98,887     $ 2,802     $     $ 101,689  
FNMA pass-through certificates
    1,622,994       87,271             1,710,265  
FHLMC pass-through certificates
    2,943,565       148,248             3,091,813  
FHLMC and FNMA — REMICs
    1,248,926       46,846       (32 )     1,295,740  
 
Total held to maturity
  $ 5,914,372     $ 285,167     $ (32 )   $ 6,199,507  
 
                       
Available for Sale:
                               
GNMA pass-through certificates
  $ 1,560,755     $ 27,214     $ (7,487 )   $ 1,580,482  
FNMA pass-through certificates
    10,333,033       122,305       (57,550 )     10,397,788  
FHLMC pass-through certificates
    5,521,741       129,547       (32,116 )     5,619,172  
FHLMC and FNMA — REMICs
    509,755       13,340             523,095  
 
Total available for sale
  $ 17,925,284     $ 292,406     $ (97,153 )   $ 18,120,537  
 
                       
2009
                               
Held to Maturity:
                               
GNMA pass-through certificates
  $ 112,019     $ 2,769     $ (1 )   $ 114,787  
FNMA pass-through certificates
    2,510,095       106,509             2,616,604  
FHLMC pass-through certificates
    4,764,429       231,356       (3 )     4,995,782  
FHLMC and FNMA — REMICs
    2,577,011       37,119       (16,472 )     2,597,658  
 
Total held to maturity
  $ 9,963,554     $ 377,753     $ (16,476 )   $ 10,324,831  
 
                       
Available for Sale:
                               
GNMA pass-through certificates
  $ 1,257,590     $ 13,365     $ (881 )   $ 1,270,074  
FNMA pass-through certificates
    3,782,198       128,429       (3,259 )     3,907,368  
FHLMC pass-through certificates
    4,655,629       232,697             4,888,326  
FHLMC and FNMA — REMICs
    1,057,007       5,938       (12,182 )     1,050,763  
 
Total available for sale
  $ 10,752,424     $ 380,429     $ (16,322 )   $ 11,116,531  
 
                       

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Notes to Consolidated Financial Statements
The following tables summarize the fair values and unrealized losses of mortgage-backed securities with an unrealized loss at December 31, 2010 and 2009, segregated between securities that had been in a continuous unrealized loss position for less than twelve months or longer than twelve months at the respective dates.
                                                 
    Less Than 12 Months     12 Months or Longer     Total    
 
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
 
                    (In thousands)                  
2010
                                               
Held to Maturity:
                                               
GNMA pass-through certificates
  $     $     $     $     $     $  
FHLMC pass-through certificates
                                   
FHLMC and FNMA — REMIC’s
    7,373       (24 )     3,163       (8 )     10,536       (32 )
 
Total held to maturity
    7,373       (24 )     3,163       (8 )     10,536       (32 )
 
Available for Sale:
                                               
GNMA pass-through certificates
    424,575       (7,487 )                 424,575       (7,487 )
FNMA pass-through certificates
    4,375,620       (57,550 )                 4,375,620       (57,550 )
FHLMC pass-through certificates
    2,425,458       (32,116 )                 2,425,458       (32,116 )
 
Total available for sale
    7,225,653       (97,153 )                 7,225,653       (97,153 )
 
Total
  $ 7,233,026     $ (97,177 )   $ 3,163     $ (8 )   $ 7,236,189     $ (97,185 )
 
                                   
 
                                               
2009
                                               
Held to Maturity:
                                               
GNMA pass-through certificates
  $     $     $ 582     $ (1 )   $ 582     $ (1 )
FHLMC pass-through certificates
    642       (2 )     52       (1 )     694       (3 )
FHLMC and FNMA — REMIC’s
    617,463       (10,747 )     171,031       (5,725 )     788,494       (16,472 )
 
Total held to maturity
    618,105       (10,749 )     171,665       (5,727 )     789,770       (16,476 )
 
Available for Sale:
                                               
GNMA pass-through certificates
    156,668       (878 )     19,690       (3 )     176,358       (881 )
FNMA pass-through certificates
    694,543       (3,259 )                 694,543       (3,259 )
FHLMC and FNMA — REMIC’s
    476,797       (12,182 )                 476,797       (12,182 )
 
Total available for sale
    1,328,008       (16,319 )     19,690       (3 )     1,347,698       (16,322 )
 
Total
  $ 1,946,113     $ (27,068 )   $ 191,355     $ (5,730 )   $ 2,137,468     $ (32,798 )
 
                                   
The unrealized losses are primarily due to the changes in market interest rates subsequent to purchase. At December 31, 2010, a total of 99 securities were in an unrealized loss position (54 at December 31, 2009). We only purchase securities issued by GSEs and do not own any unrated or private label securities or other high-risk securities such as those backed by sub-prime loans. We do not consider these investments to be other-than-temporarily impaired at December 31, 2010 and December 31, 2009 since the decline in market value is attributable to changes in interest rates and not credit quality and the Company does not intend to sell and does not believe that it is more likely than not that we will be required to sell these investments until there is a full recovery of the unrealized loss, which may be at maturity. As a result no impairment loss has been recognized during the years ended December 31, 2010, 2009 and 2008, respectively.

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Notes to Consolidated Financial Statements
The amortized cost and estimated fair market value of mortgage-backed securities held to maturity and available for sale at December 31, 2010, by contractual maturity, are shown below. The table does not include the effect of prepayments or scheduled principal amortization.
                 
            Estimated  
    Amortized     Fair Market  
    Cost     Value  
 
    (In thousands)  
Held to Maturity:
               
Due in one year or less
  $ 24     $ 24  
Due after one year through five years
    609       657  
Due after five years through ten years
    10,759       11,531  
Due after ten years
    5,902,980       6,187,295  
 
Total held to maturity
  $ 5,914,372     $ 6,199,507  
 
           
Available for Sale:
               
Due after ten years
  $ 17,925,284     $ 18,120,537  
 
Total available for sale
  $ 17,925,284     $ 18,120,537  
 
           
Sales of mortgage-backed securities available-for-sale amounted to $3.92 billion and $761.6 million during 2010 and 2009, respectively. There were no sales of mortgage-backed securities available-for-sale or held-to-maturity during 2008. Realized gains on the sales of mortgage-backed securities amounted to $152.6 million and $24.0 million during 2010 and 2009, respectively.
As of December 31, 2010, mortgage-backed securities with an amortized cost of $14.65 billion were pledged as collateral for securities sold under agreements to repurchase.
5. Investment Securities
The amortized cost and estimated fair market value of investment securities at December 31 are as follows:
                                 
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair Market  
    Cost     Gains     Losses     Value  
 
    (In thousands)  
2010
                               
Held to Maturity:
                               
United States government-sponsored enterprises debt
  $ 3,939,006     $ 3,698     $ (75,216 )   $ 3,867,488  
 
Total held to maturity
  $ 3,939,006     $ 3,698     $ (75,216 )   $ 3,867,488  
 
                       
 
                               
Available for Sale:
                               
United States government-sponsored enterprises debt
  $ 80,000     $ 2,647     $     $ 82,647  
Equity securities
    6,767       381             7,148  
 
Total available for sale
  $ 86,767     $ 3,028     $     $ 89,795  
 
                       
 
                               
2009
                               
Held to Maturity:
                               
United States government-sponsored enterprises debt
  $ 4,187,599     $ 915     $ (117,614 )   $ 4,070,900  
Municipal bonds
    105                   105  
 
Total held to maturity
  $ 4,187,704     $ 915     $ (117,614 )   $ 4,071,005  
 
                       
 
                               
Available for Sale:
                               
United States government-sponsored enterprises debt
  $ 1,104,699     $ 1,890     $ (18,424 )   $ 1,088,165  
Equity securities
    6,770       305             7,075  
 
Total available for sale
  $ 1,111,469     $ 2,195     $ (18,424 )   $ 1,095,240  
 
                       

Page 64


 

Notes to Consolidated Financial Statements
The following tables summarize the fair values and unrealized losses of investment securities with an unrealized loss at December 31, 2010 and 2009, and if the unrealized loss position was for a continuous period of less than twelve months or longer than twelve months at the respective dates.
                                                 
    Less Than 12 Months     12 Months or Longer     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
 
    (In thousands)
2010
                                               
Held to Maturity:
                                               
United States government-sponsored enterprises debt
  $ 3,524,781     $ (75,216 )   $     $     $ 3,524,781     $ (75,216 )
 
Total held to maturity
    3,524,781       (75,216 )                 3,524,781       (75,216 )
 
Total
  $ 3,524,781     $ (75,216 )   $     $     $ 3,524,781     $ (75,216 )
 
                                   
 
                                               
2009
                                               
Held to Maturity:
                                               
United States government-sponsored enterprises debt
  $ 3,930,974     $ (117,614 )   $     $     $ 3,930,974     $ (117,614 )
 
Total held to maturity
    3,930,974       (117,614 )                 3,930,974       (117,614 )
 
Available for Sale:
                                               
United States government-sponsored enterprises debt
    472,545       (7,263 )     263,730       (11,161 )     736,275       (18,424 )
 
Total available for sale
    472,545       (7,263 )     263,730       (11,161 )     736,275       (18,424 )
 
Total
  $ 4,403,519     $ (124,877 )   $ 263,730     $ (11,161 )   $ 4,667,249     $ (136,038 )
 
                                   
The unrealized losses are primarily due to changes in market interest rates subsequent to purchase. At December 31, 2010, a total of 16 securities were in an unrealized loss position (47 at December 31, 2009). We only purchase securities issued by GSEs and do not own any unrated or private label securities or other high-risk securities such as those backed by sub-prime loans. We do not consider these investments to be other-than-temporarily impaired at December 31, 2010 and December 31, 2009 since the decline in market value is attributable to changes in interest rates and not credit quality and the Company does not intend to sell and does not believe that it is more likely than not that we will be required to sell these investments until there is a full recovery of the unrealized loss, which may be at maturity. As a result no impairment loss has been recognized during the years ended December 31, 2010, 2009 and 2008, respectively.

Page 65


 

Notes to Consolidated Financial Statements
The amortized cost and estimated fair market value of investment securities held to maturity and available for sale at December 31, 2010, by contractual maturity, are shown below. The expected maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations. Equity securities have been excluded from this table.
                 
            Estimated  
    Amortized     Fair Market  
    Cost     Value  
 
    (In thousands)
 
               
Held to Maturity:
               
Due after ten years
  $ 3,939,006     $ 3,867,488  
 
Total held to maturity
  $ 3,939,006     $ 3,867,488  
 
           
Available for Sale:
               
Due after ten years
  $ 80,000     $ 82,647  
 
Total available for sale
  $ 80,000     $ 82,647  
 
           
There were sales of $168,000 of investment securities available-for-sale during 2009 (none during 2010 and 2008). Gross realized gains on sales and calls of investment securities available for sale were $148,000 during 2009 (none during 2010 and 2008). The carrying value of securities pledged as required security for deposits and for other purposes required by law amounted to $21.6 million and $20.1 million at December 31, 2010 and 2009, respectively.
As of December 31, 2010, investment securities with an amortized cost of $2.53 billion were pledged as collateral for securities sold under agreements to repurchase.
6. Loans and Allowance for Loan Losses
Loans at December 31 are summarized as follows:
                 
    2010     2009  
 
    (In thousands)
 
               
First mortgage loans:
               
One- to four-family
               
Amortizing
  $ 24,912,935     $ 26,490,454  
Interest-only
    5,136,463       4,586,375  
FHA/VA
    499,724       285,003  
Multi-family and commercial
    48,067       54,694  
Construction
    9,081       13,030  
 
Total first mortgage loans
    30,606,270       31,429,556  
 
Consumer and other loans:
               
Fixed—rate second mortgages
    160,896       201,375  
Home equity credit lines
    137,467       127,987  
Other
    19,264       21,003  
 
Total consumer and other loans
    317,627       350,365  
 
Total loans
  $ 30,923,897     $ 31,779,921  
 
           

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Notes to Consolidated Financial Statements
The following tables present the composition of our loan portfolio by credit quality indicator at the date indicated:
Credit Risk Profile based on Payment Activity
At December 31, 2010

(In thousands)
                                                         
    One-to four- family     Other first        
    first mortgage loans     Mortgages     Consumer and Other  
                                    Fixed-rate              
                    Multi-family             second     Home Equity        
    Amortizing     Interest-only     and Commercial     Construction     mortgages     credit lines     Other  
Performing
  $ 24,733,745     $ 4,957,115     $ 46,950     $ 1,521     $ 160,456     $ 135,111     $ 17,740  
Non-performing
    678,914       179,348       1,117       7,560       440       2,356       1,524  
 
                                         
Total
  $ 25,412,659     $ 5,136,463     $ 48,067     $ 9,081     $ 160,896     $ 137,467     $ 19,264  
 
                                         
Credit Risk Profile by Internally Assigned Grade
At December 31, 2010

(In thousands)
                                                         
    One-to four- family     Other first        
    first mortgage loans     Mortgages     Consumer and Other  
                    Multi-family             Fixed-rate        
                    and             second     Home Equity          
    Amortizing     Interest-only     Commercial     Construction     mortgages     credit lines     Other  
Pass
  $ 24,646,101     $ 4,927,545     $ 37,697     $ 1,521     $ 160,216     $ 134,408     $ 17,737  
Special mention
    151,800       29,570       1,199             240       703       3  
Substandard
    614,758       179,348       1,117       7,560       440       2,356       1,524  
Doubtful
                8,054                          
 
                                         
Total
  $ 25,412,659     $ 5,136,463     $ 48,067     $ 9,081     $ 160,896     $ 137,467     $ 19,264  
 
                                         
Loan classifications are defined as follows:
    Pass — These loans are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.
 
    Special Mention — These loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects.
 
    Substandard — These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.
 
    Doubtful — These loans have all the weaknesses inherent in a loan classified substandard with the added characteristic that the weaknesses make the full recovery of our principal balance highly questionable and improbable on the basis of currently known facts, conditions, and values. The likelihood of a loss on

Page 67


 

Notes to Consolidated Financial Statements
      an asset or portion of an asset classified Doubtful is high. Its classification as Loss is not appropriate, however, because pending events are expected to materially affect the amount of loss.
    Loss — These loans are considered uncollectible and of such little value that a charge-off is warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery will occur.
We evaluate the classification of our one-to four- family mortgage loans, consumer loans and other loans primarily on a pooled basis by delinquency. Loans that are past due 60 to 89 days are classified as special mention and loans that are past due 90 days or more are classified as substandard. We generally obtain updated valuations for one- to four- family mortgage loans by the time a loan becomes 180 days past due. If necessary, we charge-off an amount to reduce the carrying value of the loan to the value of the underlying property, less estimated selling costs. Since we record the charge-off when we receive the updated valuation, we typically do not have any residential first mortgages classified as doubtful or loss. We evaluate multi-family, commercial and construction loans individually and base our classification on the debt service capability of the underlying property as well as secondary sources of repayment such as the borrower’s and any guarantor’s ability and willingness to provide debt service.
Originating loans secured by residential real estate is our primary business. Our financial results may be adversely affected by changes in prevailing economic conditions, either nationally or in our local New Jersey and metropolitan New York market areas, including decreases in real estate values, adverse employment conditions, the monetary and fiscal policies of the federal and state government and other significant external events. As a result of our lending practices, we have a concentration of loans secured by real property located primarily in New Jersey, New York and Connecticut. At December 31, 2010, approximately 78.4% of our total loans are in the New York metropolitan area.
Included in our loan portfolio at December 31, 2010 and 2009 are $5.14 billion and $4.59 billion, respectively, of interest-only loans. These loans are originated as adjustable-rate mortgage (“ARM”) loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan term, or offered on a 30-year fixed-rate loan with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will adjust to include both principal and interest and will amortize over the remaining term so the loan will be repaid at the end of its original life. We had $179.3 million and $82.2 million of non-performing interest-only loans at December 31, 2010 and 2009, respectively.
In addition to our full documentation loan program, we originate loans to certain eligible borrowers as limited documentation loans. We have originated these types of loans for over 15 years. Loans eligible for limited documentation processing are ARM loans, interest-only first mortgage loans and 10-, 15-, 20-, 30- and 40-year fixed-rate loans to owner-occupied primary and second home applicants. These loans are available in amounts up to 70% of the lower of the appraised value or purchase price of the property. Generally the maximum loan amount for limited documentation loans is $750,000 and these loans are subject to higher interest rates than our full documentation loan products. We also allow certain borrowers to obtain mortgage loans without verification of income. However, in these cases, we do verify the borrowers’ assets. These loans are subject to somewhat higher interest rates than our regular products, and are generally limited to a maximum loan-to-value ratio of 60%. Limited documentation and no income verification loans have an inherently higher level of risk compared to loans with full documentation. We had $149.8 million and $68.0 million of originated non-performing reduced-documentation loans at December 31, 2010 and 2009, respectively.

Page 68


 

Notes to Consolidated Financial Statements
The following table is a comparison of our delinquent loans by class as of the date indicated:
                                                         
                                                    90 Days  
                    90 Days     Total     Current     Total     or more  
At December 31, 2010   30-59 Days     60-89 Days     or more     Past Due     Loans     Loans     accruing  
 
    (Dollars in thousands)  
One- to four-family first mortgages:
                                                       
Amortizing
  $ 363,583     $ 161,530     $ 678,914     $ 1,204,027     $ 24,208,632     $ 25,412,659     $ 64,156  
Interest-only
    47,479       29,570       179,348       256,397       4,880,066       5,136,463        
Multi-family and commercial mortgages
    3,199       1,199       1,117       5,515       42,552       48,067        
Construction loans
                7,560       7,560       1,521       9,081        
Consumer and other loans:
                                    159,320       160,896        
Fixed-rate second mortgages
    896       240       440       1,576                          
Home equity lines of credit
    2,419       703       2,356       5,478       131,989       137,467        
Other
    1,330       3       1,524       2,857       16,407       19,264        
 
                                         
Total
  $ 418,906     $ 193,245     $ 871,259     $ 1,483,410     $ 29,440,487     $ 30,923,897     $ 64,156  
 
                                         
Loans that are past due 90 days or more and still accruing interest are loans that are guaranteed by the FHA.
Upon request, we will generally agree to a short-term payment plan for certain residential mortgage loan borrowers. Many of these customers are current as to their mortgage payments, but may be anticipating a short-term cash flow need and want to protect their credit history. The extent of these plans is generally limited to a six-month deferral of principal payments only. Pursuant to these short-term payment plans, we do not modify mortgage notes, recast legal documents, extend maturities or reduce interest rates. We also do not forgive any interest or principal. We have not classified these loans as troubled debt restructurings since we collect all principal and interest, the deferral period is short and any reduction in the present value of cash flows is due to the insignificant delay in the timing of principal payments. The principal balance of loans with payment plans at December 31, 2010 amounted to $81.3 million, including $54.4 million of loans that are current, $13.9 million that are 30 to 59 days past due, $4.7 million that are 60 to 89 days past due and $8.3 million that are 90 days or more past due.
Loans modified in a troubled debt restructuring totaled $11.1 million at December 31, 2010. There were none at December 31, 2009. These loans were current at the time of the restructuring and have complied with the terms of their restructure agreement.

Page 69


 

Notes to Consolidated Financial Statements
The following table presents the geographic distribution of our loan portfolio as a percentage of total loans and of our non-performing loans as a percentage of total non-performing loans.
                                 
    At December 31, 2010   At December 31, 2009
    Total loans   Non-performing loans   Total loans   Non-performing loans
 
                               
New Jersey
    44.0 %     45.7 %     43.0 %     41.6 %
New York
    19.9       18.7       18.2       18.0  
Connecticut
    14.5       6.5       12.6       4.2  
 
                               
Total New York metropolitan area
    78.4       70.9       73.8       63.8  
 
                               
 
                               
Virginia
    3.5       4.6       4.6       6.2  
Illinois
    3.0       4.9       3.9       5.6  
Maryland
    2.7       4.4       3.5       5.1  
Massachusetts
    1.9       1.6       2.7       2.3  
Pennsylvania
    3.1       1.2       2.0       1.9  
Minnesota
    1.3       1.8       1.4       1.8  
Michigan
    1.1       2.5       1.3       4.2  
All others
    5.0       8.1       6.8       9.1  
 
                               
Total Outside New York metropolitan area
    21.6 %     29.1 %     26.2 %     36.2 %
 
                               
 
    100.0       100.0       100.0       100.0  
 
                               
The ultimate ability to collect the loan portfolio is subject to changes in the real estate market and future economic conditions. During 2010 and 2009, there was a decline in the housing and real estate markets, both nationally and locally. Housing market conditions in our lending market areas weakened during 2010 and 2009 as evidenced by reduced levels of sales, increasing inventories of houses on the market, declining house prices, an increase in the length of time houses remain on the market and rising unemployment levels.
Although we believe that we have established and maintained the ALL at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. While we continue to adhere to prudent underwriting standards, we are geographically concentrated in the New York metropolitan area of the United States and, therefore, are not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing industry. Continued decreases in real estate values could adversely affect the value of property used as collateral for our loans. No assurance can be given in any particular case that our loan-to-value ratios will provide full protection in the event of borrower default. Adverse changes in the economy and increases in the unemployment rate may have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings. A further increase in loan delinquencies would decrease our net interest income and may adversely impact our loss experience on non-performing loans which may result in an increase in the loss factors used in our quantitative analysis of the ALL, causing increases in our provision and ALL. Although we use the best information available, the level of the ALL remains an estimate that is subject to significant judgment and short-term change.
We generally obtain new collateral values by the time a loan becomes 180 days delinquent. If the estimated fair value of the collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs. As a result, certain losses inherent in our non-performing loans are being recognized as charge-offs which may result in a lower ratio of the ALL to non-performing loans when accompanied by a concurrent increase in total non-performing loans (i.e. due to the addition of new non-performing loans). Net charge-offs amounted to $98.5 million for 2010 as compared to $47.2 million in 2009. These charge-offs were primarily due to the results of our reappraisal process for our non-performing residential first mortgage loans with only 71 loans disposed of

Page 70


 

Notes to Consolidated Financial Statements
through the foreclosure process during 2010 with a final net gain on sale (after previous charge-offs of $8.9 million) of approximately $508,000. Write-downs on foreclosed real estate amounted to $3.2 million for 2010. The results of our reappraisal process and our recent charge-off history are also considered in the determination of the ALL. At December 31, 2010 the average LTV ratio (using appraised values at the time of origination) of our non-performing loans was 75% and was 61% for our total mortgage loan portfolio. Thus, the ratio of the ALL to non-performing loans needs to be viewed in the context of the underlying LTVs of the non-performing loans and the relative decline in home values.
As part of our estimation of the ALL, we monitor changes in the values of homes in each market using indices published by various organizations including the FHFA and Case-Shiller. Our Asset Quality Committee uses these indices and a stratification of our loan portfolio by state as part of its quarterly determination of the ALL. We generally obtain updated collateral values by the time a loan becomes 180 days delinquent which we believe identifies potential charge-offs more accurately than a house price index that is based on a wide geographic area and includes many different types of houses. However, we use the house price indices to identify geographic areas experiencing weaknesses in housing markets to determine if an overall adjustment to the ALL is required based on loans we have in those geographic areas and to determine if changes in the loss factors used in the ALL quantitative analysis are necessary. Our quantitative analysis of the ALL accounts for increases in non-performing loans by applying progressively higher risk factors to loans as they become more delinquent. Based on our recent loss experience on non-performing loans, we increased certain loss factors used in our quantitative analysis of the ALL for our one- to four-family first mortgage loans during 2010. If our future loss experience requires additional increases in our loss factors, this may result in increased levels of loan loss provisions.
In addition to our quantitative systematic methodology, we also use qualitative analyses to determine the adequacy of our ALL. Our qualitative analyses include further evaluation of economic factors, such as trends in the unemployment rate, as well as a ratio analysis to evaluate the overall measurement of the ALL. This analysis includes a review of delinquency ratios, net charge-off ratios and the ratio of the ALL to both non-performing loans and total loans. This qualitative review is used to reassess the overall determination of the ALL and to ensure that directional changes in the ALL and the provision for loan losses are supported by relevant internal and external data.
We consider the average LTV of our non-performing loans and our total portfolio in relation to the overall changes in house prices in our lending markets when determining the ALL. This provides us with a “macro” indication of the severity of potential losses that might be expected. Since substantially all our portfolio consists of first mortgage loans on residential properties, the LTV is particularly important to us when a loan becomes non-performing. The weighted average LTV in our one- to four-family mortgage loan portfolio at December 31, 2010 was 61%, using appraised values at the time of origination. The average LTV ratio of our non-performing loans was 75% at December 31, 2010. Based on the valuation indices, house prices have declined in the New York metropolitan area, where 70.9% of our non-performing loans were located at December 31, 2010, by approximately 22% from the peak of the market in 2006 through November 2010 and by 31% nationwide during that period. Changes in house values may affect our loss experience which may require that we change the loss factors used in our quantitative analysis of the ALL. There can be no assurance whether significant further declines in house values may occur and result in higher loss experience and increased levels of charge-offs and loan loss provisions.
There were no loans held for sale at December 31, 2010 and 2009.

Page 71


 

Notes to Consolidated Financial Statements
The following is a summary of loans, by class, on which the accrual of income has been discontinued and loans that are contractually past due 90 days or more but have not been classified as non-accrual at December 31:
                 
    2010     2009  
    (In thousands)  
Non-accrual loans:
               
One-to four-family amortizing loans
  $ 614,758     $ 499,550  
One-to four-family interest-only loans
    179,348       82,236  
Multi-family and commercial mortgages
    1,117       1,414  
Construction loans
    7,560       6,624  
Fixed-rate second mortgages
    440       354  
Home equity lines of credit
    2,356       1,480  
Other loans
    1,524       82  
 
           
Total non-accrual loans
    807,103       591,740  
Accruing loans delinquent 90 days or more
    64,156       35,955  
 
           
Total non-performing loans
  $ 871,259     $ 627,695  
 
           
The total amount of interest income on non-accrual loans that would have been recognized if interest on all such loans had been recorded based upon original contract terms amounted to approximately $48.7 million. The total amount of interest income received during the year on non-accrual loans amounted to approximately $4.5 million during 2010. Hudson City is not committed to lend additional funds to borrowers on non-accrual status.
The following table presents our loans evaluated for impairment by class at the date indicated:
                                         
            Unpaid             Average     Interest  
    Recorded     Principal     Related     Recorded     Income  
At December 31, 2010   Investment     Balance     Allowance     Investment     Recognized  
    (In thousands)  
With an allowance:
                                       
Multi-family and commercial mortgages
  $ 5,712     $ 9,161     $ 3,449     $ 9,159     $ 485  
Construction loans
    5,863       7,560       1,697       6,949        
 
                             
Total
  $ 11,575     $ 16,721     $ 5,146     $ 16,108     $ 485  
 
                             
At December 31, 2010 and 2009, loans evaluated for impairment in accordance with FASB guidance amounted to $16.7 million and $11.2 million, respectively. Based on this evaluation, the ALL related to loans classified as impaired at December 31, 2010 and 2009 amounted to $5.1 million and $2.1 million, respectively. Interest income received during the year on loans classified as impaired was immaterial.

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Notes to Consolidated Financial Statements
An analysis of the ALL at December 31 follows:
                         
    2010     2009     2008  
    (In thousands)  
 
                       
Balance at beginning of year
  $ 140,074     $ 49,797     $ 34,741  
 
                 
Charge-offs
    (110,771 )     (48,133 )     (4,522 )
Recoveries
    12,271       910       78  
 
Net charge-offs
    (98,500 )     (47,223 )     (4,444 )
 
Provision for loan losses
    195,000       137,500       19,500  
 
Balance at end of year
  $ 236,574     $ 140,074     $ 49,797  
 
                 
The following table presents the activity in our ALL by portfolio segment at the year indicated.
                                         
    At December 31, 2010  
    One-to four-     Multi-family                      
    Family     and Commercial             Consumer and        
    Mortgages     Mortgages     Construction     Other Loans     Total  
    (In thousands)  
Balance at beginning of year
  $ 133,927     $ 1,304     $ 1,865     $ 2,978     $ 140,074  
 
Provision for loan losses
    191,697       3,115       (137 )     325       195,000  
Charge-offs
    (110,669 )                 (102 )     (110,771 )
Recoveries
    12,269                   2       12,271  
 
Net (charge-offs) recoveries
    (98,400 )                 (100 )     (98,500 )
 
                             
Balance at end of year
  $ 227,224     $ 4,419     $ 1,728     $ 3,203     $ 236,574  
 
                             
 
                                       
Loan portfolio:
                                       
Balance at end of year
                                       
Individually evaluated for impairment
  $     $ 9,161     $ 7,560     $     $ 16,721  
Collectively evaluated for impairment
    30,549,122       38,906       1,521       317,627       30,907,176  
7. Banking Premises and Equipment, net
A summary of the net carrying value of banking premises and equipment at December 31 is as follows:
                 
    2010     2009  
    (In thousands)  
Land
  $ 5,806     $ 5,806  
Buildings
    56,127       55,100  
Leasehold improvements
    45,812       43,550  
Furniture, fixtures and equipment
    83,278       78,998  
 
Total acquisition cost
    191,023       183,454  
Accumulated depreciation and amortization
    (121,579 )     (113,338 )
 
Total banking premises and equipment, net
  $ 69,444     $ 70,116  
 
           
Amounts charged to net occupancy expense for depreciation and amortization of banking premises and equipment amounted to $8.7 million, $9.7 million and $10.2 million in 2010, 2009 and 2008, respectively.
Hudson City has entered into non-cancelable operating lease agreements with respect to banking premises and equipment. It is expected that many agreements will be renewed at expiration in the normal course of business.

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Notes to Consolidated Financial Statements
Future minimum rental commitments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows:
         
Year   Amount  
    (In thousands)  
2011
  $ 9,268  
2012
    9,462  
2013
    9,449  
2014
    9,267  
2015
    8,980  
Thereafter
    100,431  
 
Total
  $ 146,857  
 
     
Net occupancy expense included gross rental expense for bank premises of $11.2 million, $10.4 million, and $9.4 million in 2010, 2009, and 2008, respectively, and rental income of $334,000, $356,000, and $324,000 for the respective years.
8. Deposits
Deposits at December 31 are summarized as follows:
                                                 
    2010     2009  
                    Weighted                     Weighted  
    Balance     Percent     Average Rate     Balance     Percent     Average Rate  
    (Dollars in thousands)  
Savings
  $ 860,806       3.42 %     0.64 %   $ 786,559       3.20 %     0.74 %
Noninterest-bearing demand
    567,230       2.25             586,041       2.38        
Interest-bearing demand
    2,152,460       8.55       0.73       2,075,175       8.44       1.36  
Money market
    6,310,080       25.07       1.04       5,058,842       20.59       1.38  
Time deposits
    15,282,550       60.71       1.67       16,071,431       65.39       2.01  
 
Total deposits
  $ 25,173,126       100.00 %     1.36 %   $ 24,578,048       100.00 %     1.74 %
 
                                       
Time deposits of $100,000 or more amounted to $5.78 billion and $5.94 billion at December 31, 2010 and 2009, respectively. Interest expense on time deposits of $100,000 or more for the years ended December 31, 2010, 2009 and 2008 was $100.8 million, $112.1 million, and $119.9 million, respectively. Included in noninterest-bearing demand accounts are mortgage escrow deposits of $97.6 million and $100.0 million at December 31, 2010 and 2009, respectively.
Scheduled maturities of time deposits at December 31, 2010 are as follows:
         
Year   Amount  
    (In thousands)  
2011
  $ 10,601  
2012
    2,521  
2013
    555  
2014
    504  
2015
    1,102  
 
     
Total
  $ 15,283  
 
     

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Notes to Consolidated Financial Statements
9. Borrowed Funds
Borrowed funds at December 31 are summarized as follows:
                                 
    2010     2009  
            Weighted             Weighted  
            Average             Average  
    Principal     Rate     Principal     Rate  
    (Dollars in thousands)  
 
                               
Securities sold under agreements to repurchase:
                               
FHLB
  $ 2,150,000       4.29 %   $ 2,400,000       4.44 %
Other brokers
    12,650,000       4.00       12,700,000       3.93  
 
Total securities sold under agreements to repurchase
    14,800,000       4.04       15,100,000       4.01  
 
                               
Advances from the FHLB
    14,875,000       3.99       14,875,000       3.99  
 
Total borrowed funds
  $ 29,675,000       4.02 %   $ 29,975,000       4.00 %
 
                           
Accrued interest payable
  $ 151,215             $ 141,828          
The average balances of borrowings and the maximum amount outstanding at any month-end are as follows:
                         
    At or for the Year Ended December 31,  
    2010     2009     2008  
    (Dollars in thousands)  
 
                       
Repurchase Agreements:
                       
Average balance outstanding during the year
  $ 15,034,110     $ 15,100,221     $ 13,465,540  
 
                 
Maximum balance outstanding at any month-end during the year
  $ 15,100,000     $ 15,100,000     $ 15,100,000  
 
                 
Weighted average rate during the period
    4.10 %     4.05 %     4.17 %
 
                 
 
                       
FHLB Advances:
                       
Average balance outstanding during the year
  $ 14,875,000     $ 15,035,798     $ 13,737,057  
 
                 
Maximum balance outstanding at any month-end during the year
  $ 14,875,000     $ 15,575,000     $ 15,125,000  
 
                 
Weighted average rate during the period
    4.04 %     4.01 %     4.14 %
 
                 

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Notes to Consolidated Financial Statements
Substantially all of our borrowed funds may be put back to us at the discretion of the issuer after an initial no-put period. At December 31, 2010, borrowed funds had scheduled maturities and potential put dates as follows:
                                 
    Borrowings by Scheduled     Borrowings by Earlier of Scheduled  
    Maturity Date     Maturity or Next Potential Put Date  
            Weighted             Weighted  
            Average             Average  
Year   Principal     Rate     Principal     Rate  
  (Dollars in thousands)  
 
                               
2011
  $ 450,000       3.71 %   $ 23,275,000       3.90 %
2012
    250,000       3.55       1,050,000       4.15  
2013
    250,000       5.30       1,325,000       4.69  
2014
    350,000       3.37       3,825,000       4.47  
2015
    3,175,000       3.85       200,000       3.91  
2016
    5,375,000       4.35              
2017
    8,425,000       4.17              
2018
    6,300,000       3.19              
2019
    1,725,000       4.62              
2020
    3,375,000       4.53              
     
Total
  $ 29,675,000       4.02 %   $ 29,675,000       4.02 %
 
                           
The amortized cost and fair value of the underlying securities used as collateral for securities sold under agreements to repurchase, at or for the years ended December 31 are as follows:
                         
    At December 31,  
    2010     2009     2008  
    (In thousands)  
 
                       
Amortized cost of collateral:
                       
United States government-sponsored enterprise securities
  $ 2,529,995     $ 2,429,640     $ 2,150,000  
Mortgage-backed securities
    14,653,221       14,482,533       15,572,838  
 
Total amortized cost of collateral
  $ 17,183,216     $ 16,912,173     $ 17,722,838  
 
                 
 
                       
Fair value of collateral:
                       
United States government-sponsored enterprise securities
  $ 2,475,720     $ 2,363,328     $ 2,159,471  
Mortgage-backed securities
    15,125,185       15,115,964       15,759,490  
 
Total fair value of collateral
  $ 17,600,905     $ 17,479,292     $ 17,918,961  
 
                 
We have two collateralized borrowings in the form of repurchase agreements totaling $100.0 million with Lehman Brothers, Inc. Lehman Brothers, Inc. is currently in liquidation under the Securities Industry Protection Act. Mortgage-backed securities with an amortized cost of approximately $114.5 million are pledged as collateral for these borrowings and we have demanded the return of this collateral. We believe that we have the legal right to setoff our obligation to repay the borrowings against our right to the return of the mortgage-backed securities pledged as collateral. As a result, we believe that our potential economic loss from Lehman Brother’s failure to return the collateral is limited to the excess market value of the collateral over the $100 million repurchase price. We intend to pursue full recovery of the pledged collateral in accordance with the contractual terms of the repurchase agreements. There can be no assurances that the final settlement of this transaction will result in the full recovery of the collateral or the full amount of the claim. We have not recognized a loss in our

Page 76


 

Notes to Consolidated Financial Statements
financial statements related to these repurchase agreements as we have concluded that a loss is neither probable nor estimable at December 31, 2010.
At December 31, 2010, we had unused lines of credit available from the FHLB, other than repurchase agreements, of up to $500.0 million. These lines of credit are renewed on an annual basis by the FHLB. Our advances from the FHLB are secured by our investment in FHLB stock and by a blanket security agreement. This agreement requires us to maintain as collateral certain qualifying assets (such as one- to-four family residential mortgage loans) with a fair value, as defined, at least equal to 110% of any outstanding advances.
10. Employee Benefit Plans
a) Retirement and Other Postretirement Benefits
Non-contributory retirement and postretirement plans are maintained to cover employees hired prior to August 1, 2005, including retired employees, who have met the eligibility requirements of the plans. Benefits under the qualified and non-qualified defined benefit retirement plans are based primarily on years of service and compensation. In 2005, participation in the non-contributory retirement plan was restricted to those employees hired on or before July 31, 2005. Employees hired on or after August 1, 2005 will not participate in the plan. Also in 2005, the plan for postretirement benefits, other than pensions, was changed to restrict participation to those employees hired on or before July 31, 2005, and placed a cap on the premium value of the non-contributory coverage provided at the 2007 premium rate, beginning in 2008, for those eligible employees who retire after December 31, 2005.
Funding of the qualified retirement plan is actuarially determined on an annual basis. It is our policy to fund the qualified retirement plan sufficiently to meet the minimum requirements set forth in the Employee Retirement Income Security Act of 1974. The non-qualified retirement plan, for certain executive officers, is unfunded and had a projected benefit obligation of $19.5 million at December 31, 2010 and $17.1 million at December 31, 2009. Certain health care and life insurance benefits are provided to eligible retired employees (“other benefits”). Participants generally become eligible for retiree health care and life insurance benefits after 10 years of service. The measurement date for year-end disclosure information is December 31 and the measurement date for net periodic benefit cost is January 1.

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Notes to Consolidated Financial Statements
The following table shows the change in benefit obligation, the change in plan assets, and the funded status for the retirement plans and other benefits at December 31:
                                 
    Retirement Plans     Other Benefits  
    2010     2009     2010     2009  
 
    (In thousands)  
Change in Benefit Obligation:
                               
Benefit obligation at beginning of year
  $ 141,828     $ 132,134     $ 34,221     $ 37,820  
Service cost
    4,043       4,001       489       583  
Interest cost
    8,339       7,776       1,668       1,884  
Participant contributions
                144       46  
Actuarial loss (gain)
    6,278       2,403       14,135       (4,197 )
Benefits paid
    (4,473 )     (4,486 )     (2,404 )     (1,915 )
Medicare subsidy
                102        
 
Benefit obligation at end of year
    156,015       141,828       48,355       34,221  
 
Change in Plan Assets:
                               
Fair value of plan assets at beginning of year
    143,768       96,327              
Actual return on plan assets
    12,249       16,595              
Employer contributions
    332       35,332       2,260       1,869  
Participant contributions
                144       46  
Benefits paid
    (4,473 )     (4,486 )     (2,404 )     (1,915 )
 
Fair value of plan assets at end of year
    151,876       143,768              
 
Funded status
  $ (4,139 )   $ 1,940     $ (48,355 )   $ (34,221 )
 
                       
Funded status amounts recognized in the consolidated statements of financial condition at December 31 consist of:
                                 
    Retirement Plans   Other Benefits
    2010   2009   2010   2009
    (In thousands)
Other assets
  $     $ 1,940     $     $  
Accrued expenses and other liabilities
    4,139             48,355       34,221  
Pre-tax amounts recognized as components of total accumulated other comprehensive income at December 31 consist of:
                                 
    Retirement Plans     Other Benefits  
    2010     2009     2010     2009  
    (In thousands)  
Net actuarial loss
  $ 50,565     $ 47,981     $ 22,413     $ 8,301  
Prior service cost (credit)
    1,900       2,239       (20,905 )     (22,470 )
 
Total
  $ 52,465     $ 50,220     $ 1,508     $ (14,169 )
 
                       
The accumulated benefit obligation for all defined benefit retirement plans was $133.4 million and $120.9 million at December 31, 2010 and 2009, respectively.

Page 78


 

Notes to Consolidated Financial Statements
Net periodic benefit cost for the years ended December 31 included the following components:
                                                 
    Retirement Plans     Other Benefits  
    2010     2009     2008     2010     2009     2008  
    (In thousands)  
Net periodic benefit cost:
                                               
Service cost
  $ 4,043     $ 4,001     $ 3,285     $ 489     $ 583     $ 1,122  
Interest cost
    8,339       7,776       6,675       1,668       1,884       2,272  
Expected return on assets
    (11,659 )     (8,575 )     (8,530 )                  
Amortization of:
                                               
Net actuarial loss
    3,106       3,686       252       23       301       687  
Prior service cost (credit)
    339       338       325       (1,565 )     (1,565 )     (1,565 )
 
Net periodic benefit cost
    4,168       7,226       2,007       615       1,203       2,516  
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
                                               
Net actuarial loss (gain)
    5,690       (4,081 )     41,275       14,135       (2,659 )     (1,116 )
Prior service cost (credit)
                                   
Amortization of net actuarial loss
    (3,106 )     (3,686 )     (252 )     (23 )     (301 )     (687 )
Amortization of prior service cost
    (339 )     (338 )     (325 )     1,565       1,565       1,565  
 
Total recognized in other comprehensive income
    2,245       (8,105 )     40,698       15,677       (1,395 )     (238 )
 
Total recognized in net periodic benefit cost and other comprehensive income
  $ 6,413     $ (879 )   $ 42,705     $ 16,292     $ (192 )   $ 2,278  
 
                                   
The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2011 are $3.8 million and $347,000 respectively. The estimated net actuarial loss and prior service credit for other defined benefit post-retirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2011 are $1.3 million and ($1.6) million, respectively.
The following are the weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:
                                                 
    Retirement Plans   Other Benefits
    2010   2009   2008   2010   2009   2008
 
Discount rate
    6.00 %     5.75 %     6.00 %     5.75 %     5.75 %     6.00 %
Expected return on assets
    8.25       8.25       8.25                    
Rate of compensation increase
    4.00       4.25       4.25                    
The following are the weighted-average assumptions used to determine benefit obligations at December 31:
                                 
    Retirement Plans   Other Benefits
    2010   2009   2010   2009
 
Discount rate
    5.75 %     6.00 %     5.50 %     5.75 %
Rate of compensation increase
    4.00       4.00              

Page 79


 

Notes to Consolidated Financial Statements
The overall expected return on assets assumption is based on the historical performance of the pension fund. The average return over the past ten years was determined for the market value of assets, which is the value used in the calculation of annual net periodic benefit cost.
The assumed health care cost trend rate used to measure the expected cost of other benefits for 2010 was 8.5%. The rate was assumed to decrease gradually to 4.75% for 2016 and remain at that level thereafter.
A 1% change in the assumed health care cost trend rate would have the following effects on other benefits:
                 
    1% Increase   1% Decrease
    (In thousands)
Effect on total service cost and interest cost
  $ 47     $ 0  
Effect on other benefit obligations
    938       (505 )
Funds in Hudson City’s qualified retirement plan are invested in a commingled asset allocation fund (the “Fund”) of a well-established asset management company and in Hudson City Bancorp, Inc. common stock. The purpose of the Fund is to provide a diversified portfolio of equities, fixed income instruments and cash. The plan trustee, in its absolute discretion, manages the Fund. The Fund is maintained with the objective of providing investment results that outperform a static mix of 55% equity, 35% bond and 10% cash, as well as the median manager of balanced funds. In order to achieve the Fund’s return objective, the Fund will combine fundamental analysis and a quantitative proprietary model to allocate and reallocate assets among the three broad investment categories of equities, money market instruments and other fixed income obligations. As market and economic conditions change, these ratios will be adjusted in moderate increments of about five percentage points. It is intended that the equity portion will represent approximately 40% to 70%, the bond portion approximately 25% to 55% and the money market portion 0% to 25%. Performance results are reviewed at least annually with the asset management company of the Fund.
Equity securities held by the Fund include Hudson City Bancorp common stock in the amount of $8.9 million (5.9% of total plan assets) as of December 31, 2010, and $9.6 million (6.7% of total plan assets) as of December 31, 2009. This stock was purchased at an aggregate cost of $6.0 million using a cash contribution made by Hudson City Savings in July 2003. Our plan may not purchase our common stock if, after the purchase, the fair value of our common stock held by the plan equals or exceeds 10% of the fair value of plan assets. We review with the plan administrator the rebalancing of plan assets if the fair value of our common stock held by the plan exceeds 20% of the fair value of the total plan assets.

Page 80


 

Notes to Consolidated Financial Statements
The following table presents the fair value of the retirement plan’s assets at December 31, 2010 and 2009 by asset class:
                                 
            Fair Value Measurements at December 31, 2010  
            Quoted Prices in Active     Significant Other     Significant  
    Carrying     Markets for Identical     Observable Inputs     Unobservable  
Asset Class   Value     Assets (Level 1)     (Level 2)     Inputs (Level 3)  
    (In thousands)  
Cash
    13,599       13,599              
Guaranteed deposit fund (a)
    11,977                   11,977  
Equity Securities (b)
    81,017       81,017              
Fixed income securities (c)
    45,283             45,283        
 
                       
 
  $ 151,876     $ 94,616     $ 45,283     $ 11,977  
 
                       
                                 
            Fair Value Measurements at December 31, 2009  
            Quoted Prices in Active     Significant Other     Significant  
    Carrying     Markets for Identical     Observable Inputs     Unobservable  
Asset Class   Value     Assets (Level 1)     (Level 2)     Inputs (Level 3)  
    (In thousands)  
Cash
    8,732       8,732              
Guaranteed deposit fund (a)
    12,059                   12,059  
Equity Securities (d)
    78,475       78,475              
Fixed income securities (e)
    44,502             44,502        
 
                       
 
  $ 143,768     $ 87,207     $ 44,502     $ 12,059  
 
                       
 
(a)   The Guaranteed Deposit Fund (the “Fund”) is an investment in the general account of the Prudential Retirement Insurance and Annuity Company and represents an insurance claim supported by all general account assets. The Fund’s assets are intermediate-term, high-grade fixed income securities consisting of commercial mortgages, private placement bonds, publicly-traded debt securities and asset-backed securities.
 
(b)   This class includes a mutual fund that invests primarily in stocks representative of the whole U.S. stock market. The objectives of this mutual fund is to outperform the U.S. stock markets. This class also includes $8.9 million of Hudson City Bancorp, Inc. common stock at December 31, 2010.
 
(c)   This class includes investments in U.S. Treasuries, MBSs issued by GSEs, investment-grade corporate bonds and sovereign debt.
 
(d)   This class includes mutual funds that invest primarily in the Russell 1000 Growth Index and Russell 1000 Value Index. The objectives of the mutual funds are to outperform these indices. The mutual funds also invest in other equity securities, derivative instruments and cash-equivalent securities or funds. This class also includes $9.6 million of Hudson City Bancorp, Inc. common stock at December 31, 2009.
 
(e)   This class includes a mutual fund that invests in international, emerging markets and high-yield fixed income markets.

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Notes to Consolidated Financial Statements
The following table presents a reconciliation of Level 3 assets measured at fair value at December 31:
                 
    Fair Value Measurements Using
    Significant Unobservable Inputs (Level 3)
    (In thousands)
    Guaranteed Deposit Fund
    2010     2009  
Beginning balance
  $ 12,059     $ 12,273  
Purchases, sales, issuances and settlements (net)
    (82 )     (214 )
Transfer into level 3
           
 
           
Ending balance
  $ 11,977     $ 12,059  
 
           
We made no contributions to our retirement plans during 2010. We do not expect to make a contribution during 2011.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid under the current provisions of the plans.
                 
    Retirement   Other
Year   Plans   Benefits
    (In thousands)

       
2011
  $ 5,772     $ 2,781  
2012
    6,097       2,937  
2013
    7,471       3,160  
2014
    8,044       3,291  
2015
    8,797       3,481  
2016 through 2020
    54,396       18,602  
b) Employee Stock Ownership Plan
The ESOP is a tax-qualified plan designed to invest primarily in Hudson City common stock that provides employees with the opportunity to receive an employer-funded retirement benefit based primarily on the value of Hudson City common stock. Employees are generally eligible to participate in the ESOP after one year of service providing they worked at least 1,000 hours during the plan year and attained age 21. Participants who do not have at least 1,000 hours of service during the plan year or are not employed on the last working day of a plan year are generally not eligible for an allocation of stock for such year. The ESOP was authorized to purchase 27,879,385 shares following our initial public offering and an additional 15,719,223 shares following our second-step conversion. The ESOP administrator did purchase, in aggregate, 43,598,608 shares of Hudson City common stock at an average price of $5.69 per share with loans from Hudson City Bancorp.
The combined outstanding loan principal at December 31, 2010 was $229.3 million. Those shares purchased were pledged as collateral for the loan and are released from the pledge for allocation to participants as loan payments are made. The loan will be repaid and the shares purchased will be allocated to employees in equal installments of 962,185 shares per year over a forty-year period. The annual allocation of shares is based on the ratio of a participant’s eligible compensation, as defined in the ESOP document, as a percentage of total eligible compensation of all participants in the ESOP. Dividends on allocated and unallocated shares, to the extent that they exceed the scheduled principal and interest payments on the ESOP loan, are paid to participants in cash.

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Notes to Consolidated Financial Statements
Through December 31, 2010, a total of 10,884,329 shares have been allocated or committed to be allocated to participants. Unallocated ESOP shares held in suspense totaled 32,714,279 at December 31, 2010 and had a fair market value of $416.8 million. ESOP compensation expense for the years ended December 31, 2010, 2009 and 2008 was $21.2 million, $20.8 million, and $23.0 million, respectively.
The ESOP restoration plan is a non-qualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the employee stock ownership plan’s benefit formula. The supplemental cash payments consist of payments representing shares that cannot be allocated to participants under the ESOP due to the legal limitations imposed on tax-qualified plans and, in the case of participants who retire before the repayment in full of the ESOP’s loan, payments representing the shares that would have been allocated if employment had continued through the full term of the loan. We accrue for these benefits over the period during which employees provide services to earn these benefits. At December 31, 2010 and 2009, we had accrued $33.4 million and $33.3 million, respectively for the ESOP restoration plan. Compensation expense related to this plan amounted to $539,000, $3.7 million and $6.5 million in 2010, 2009, and 2008, respectively.
c) Restricted Stock Plans
Hudson City Bancorp granted stock awards pursuant to the RRP established in January 2000 and the Stock Incentive Plan (the “SIP Plan”) established in January 2006. The purpose of both plans is to promote the growth and profitability of Hudson City Bancorp by providing directors, officers and employees with an equity interest in Hudson City Bancorp as an incentive to achieve corporate goals. The plans have invested primarily in shares of Hudson City common stock that were used to make restricted stock awards. Expense for both plans in the amount of the fair value of the common stock at the date of grant is recognized ratably over the vesting period.
The RRP were authorized, in the aggregate, to purchase not more than 14,901,480 shares of common stock, and have purchased 14,887,855 shares on the open market at an average price of $2.91 per share. Generally, restricted stock grants are held in escrow for the benefit of the award recipient until vested. Awards outstanding generally vest in five annual installments commencing one year from the date of the award. As of December 31, 2010, common stock that had not been awarded totaled 13,625 shares.
During 2009, the Compensation Committee authorized performance-based stock awards (the “2009 stock awards”) pursuant to the SIP Plan for 847,750 shares of our common stock. These shares were issued from treasury stock and will vest in annual installments over a three-year period if certain performance measures are met and employment continues through the vesting date. None of these shares may be sold or transferred before the January 2012 vesting date. We have determined that it is probable these performance measures will be met and have therefore recorded compensation expense for the 2009 stock awards in 2010. Expense for the 2009 stock awards is recognized over the vesting period and is based on the fair value of the shares on the grant date which was $12.03. In addition to the 2009 stock awards, grants were made in 2010 (the “2010 stock awards”) pursuant to the SIP Plan for 18,000 shares of our common stock. Expense for the 2010 stock awards is recognized over the vesting period of three years and is based on the fair value of the shares on the grant date which was $13.12. Expense attributable to both plans amounted to $3.8 million, $4.6 million and $1.4 million for the years ended December 31, 2010, 2009 and 2008, respectively.

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Notes to Consolidated Financial Statements
A summary of the status of the granted, but unvested shares under the RRP and SIP Plan as of December 31, and changes during those years, is presented below:
                                                 
                    Restricted Stock Awards    
    2010   2009   2008
            Weighted           Weighted           Weighted
            Average           Average           Average
    Number of   Grant Date   Number of   Grant Date   Number of   Grant Date
    Shares   Fair Value   Shares   Fair Value   Shares   Fair Value
Outstanding at beginning of period
    959,956     $ 12.00       224,417     $ 11.73       350,576     $ 11.74  
Granted
    18,000       13.12       847,750       12.03              
Vested
    (394,789 )     11.94       (112,211 )     11.73       (126,159 )     11.75  
Outstanding at end of period
    583,167     $ 12.06       959,956     $ 12.00       224,417     $ 11.73  
 
                                               
The per share weighted-average vesting date fair value of the shares vested during 2010, 2009, and 2008 was $13.16, $12.56, and $18.47, respectively.
d) Stock Option Plans
In accordance with FASB guidance on stock compensation, compensation expense is recognized based upon the grant-date fair value of those awards.
Each stock option granted entitles the holder to purchase one share of Hudson City’s common stock at an exercise price not less than the fair market value of a share of common stock at the date of grant. Options granted generally vest over a five year period from the date of grant and will expire no later than 10 years following the grant date. Under the Hudson City stock option plans existing prior to 2006, 36,323,960 shares of Hudson City Bancorp, Inc. common stock have been reserved for issuance. Directors and employees have been granted 36,503,507 stock options, including 240,819 shares previously issued, but forfeited by plan participants prior to exercise.
In June 2006, our shareholders approved the Hudson City Bancorp, Inc. 2006 SIP Plan authorizing us to grant up to 30,000,000 shares of common stock. In July 2006, the Compensation Committee of the Board of Directors of Hudson City Bancorp (the “Committee”), authorized grants to each non-employee director, executive officers and other employees to purchase shares of the Company’s common stock, pursuant to the SIP Plan. Grants of stock options made through December 31, 2009 pursuant to the SIP Plan amounted to 18,887,500 options at an exercise price equal to the fair value of our common stock on the grant date, based on quoted market prices. Of these options, 5,535,000 have vesting periods ranging from one to five years and an expiration period of ten years. The remaining 13,352,500 shares have vesting periods ranging from two to three years if certain financial performance measures are met. Subject to review and verification by the Committee, we believe we attained these performance measures and have therefore recorded compensation expense for these grants.
During 2010, the Committee authorized stock option grants (the “2010 grants”) pursuant to the SIP Plan for 4,232,500 options at an exercise price equal to the fair value of our common stock on the grant date, based on quoted market prices. Of these options, 3,700,000 will vest in January 2013 if certain financial performance measures are met and employment continues through the vesting date (the “2010 Performance Options”). The remaining 532,500 options will vest between January 2011 (the “2010 Retention Options”) and July 2011. The 2010 grants have an expiration period of ten years. We have determined that it is probable these performance measures will be met and have therefore recorded compensation expense for the 2010 grants in 2010.

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Notes to Consolidated Financial Statements
The fair values of the option grants were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
                                                 
    2010     2009     2008  
    Retention     Performance     Retention     Performance     Retention     Performance  
    Options     Options     Options     Options     Options     Options  
Expected dividend yield
    4.57 %     4.57 %     4.80 %     4.80 %     2.30 %     2.30 %
Expected volatility
    41.30       34.58       33.43       29.08       19.59       20.75  
Risk-free interest rate
    1.65       2.55       1.29       1.75       2.41       2.88  
Expected option life
  3.6 years   5.6 years   3.5 years   5.5 years   3.5 years   5.5 years
Fair value of options granted
  $ 3.00     $ 2.87     $ 2.05     $ 1.92     $ 2.14     $ 2.85  
The dividend yield assumptions were based on our current declared dividend as a percentage of the stock price on the grant date. The expected volatility assumptions were calculated based on the weighting of our historical and rolling volatility for the expected term of the option grants. The risk-free interest rate was determined by reference to the continuously compounded yield on Treasury obligations for the expected term. The expected option life was based on historic optionee behavior for prior option grant awards.
Compensation expense related to our outstanding stock options amounted to $11.1 million, $12.9 million and $15.0 million for the years ended December 31, 2010, 2009 and 2008, respectively.
A summary of the status of the granted, but unexercised stock options as of December 31, and changes during those years, is presented below:
                                                 
    2010   2009   2008
            Weighted           Weighted           Weighted
    Number of   Average   Number of   Average   Number of   Average
    Stock   Exercise   Stock   Exercise   Stock   Exercise
    Options   Price   Options   Price   Options   Price
Outstanding at beginning
                                               
of year
    24,262,692     $ 12.51       26,728,119     $ 10.35       29,080,114     $ 7.91  
Granted
    4,232,500       13.13       3,375,000       12.11       4,025,000       15.96  
Exercised
    (242,807 )     5.08       (5,840,427 )     2.30       (6,325,277 )     2.69  
Forfeited
    (122,500 )     14.06                   (51,718 )     13.10  
Outstanding at end of year
    28,129,885     $ 12.68       24,262,692     $ 12.51       26,728,119     $ 10.35  
Shares issued upon the exercise of stock options are issued from treasury stock. Hudson City has an adequate number of treasury shares available for sale for future stock option exercises. The total intrinsic value of the options exercised during 2010, 2009 and 2008 was $1.9 million, $63.0 million, and $92.4 million, respectively.

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Notes to Consolidated Financial Statements
The following table summarizes information about our stock options outstanding at December 31, 2010:
                                     
Options Outstanding   Options Exercisable
        Weighted                
        Average   Weighted           Weighted
Number   Remaining   Average   Number   Average
Of Options   Contractual   Exercise   Of Options   Exercise
Outstanding   Life   Price   Exercisable   Price
 
  820,736     10 months   $ 3.59       820,736     $ 3.59  
  52,801     1 year     4.20       52,801       4.20  
  614,440     1 year     5.53       614,440       5.53  
  118,371     2 years     5.96       118,371       5.96  
  206,480     2 years     6.35       206,480       6.35  
  448,840     3 years     10.33       448,840       10.33  
  415,784     4 years     11.17       415,784       11.17  
  305,592     3 years     11.91       305,592       11.91  
  2,299,341     3 years     12.22       2,299,341       12.22  
  7,880,000     5.5 years     12.76       6,720,000       12.76  
  350,000     6.5 years     13.35       350,000       13.35  
  3,110,000     6 years     13.78       3,060,000       13.78  
  3,625,000     7 years     15.69       150,000       15.69  
  350,000     7 years     18.84       350,000       18.84  
  350,000     8 years     12.81       350,000       12.81  
  2,975,000     8 years     12.03       150,000       12.03  
  3,870,000     9 years     13.10              
  300,000     9 years     13.62              
  37,500     9 years     12.10              
 
  28,129,885             $ 12.68       16,412,385     $ 12.03  
                                     
The total intrinsic value of the options outstanding and options exercisable were $1.7 million and $11.7 million, respectively, as of December 31, 2010. At December 31, 2010, unearned compensation costs related to all nonvested awards of options and restricted stock not yet recognized totaled $13.8 million, and will be recognized over a weighted-average period of approximately 2.6 years.
e) Stock Unit Awards
Hudson City Bancorp granted stock unit awards to a newly appointed member of the Board of Directors in July 2010. The award is a cash award of $250,000 which is then converted to common stock equivalents (stock units) of 20,661 shares. Expense for the 2010 stock unit award is recognized over the vesting period of three years and is based on the fair value of the shares on the grant date which was $12.10. Expense attributable to the stock unit award amounted to $42,000 for the year ended December 31, 2010.
f) Incentive Plans
A tax-qualified profit sharing and savings plan is maintained based on Hudson City’s profitability. All employees are eligible after one year of employment and the attainment of age 21. Expense related to this plan was $2.5 million, $3.0 million, and $2.0 million in 2010, 2009 and 2008, respectively.
Certain incentive plans are maintained to recognize key executives who are able to make substantial contributions to the long-term success and financial strength of Hudson City. At the end of each performance

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Notes to Consolidated Financial Statements
period, the value of the award is determined in accordance with established criteria. Participants can elect cash payment or elect to defer the award until retirement. The expense related to these plans was $6.8 million, $7.3 million, and $6.2 million in 2010, 2009 and 2008, respectively.
11. Income Taxes
Income tax expense (benefit) is summarized as follows for the years ended December 31:
                         
    2010     2009     2008  
 
    (In thousands)  
Federal:
                       
Current
  $ 334,736     $ 323,152     $ 255,511  
Deferred
    (44,256 )     (36,368 )     (9,372 )
 
Total federal
    290,480       286,784       246,139  
 
State:
                       
Current
    76,294       70,270       44,685  
Deferred
    (11,547 )     (10,332 )     (3,496 )
 
Total state
    64,747       59,938       41,189  
 
Total income tax expense
  $ 355,227     $ 346,722     $ 287,328  
 
                 
Not included in the above table are deferred income tax expense amounts of $68.5 million, $94.4 million and $21.4 million for 2010, 2009 and 2008, respectively, which represent the deferred income taxes relating to the changes in accumulated other comprehensive income (loss).
The amounts reported as income tax expense vary from the amounts that would be reported by applying the statutory federal income tax rate to income before income taxes due to the following:
                         
    2010     2009     2008  
 
    (Dollars in thousands)  
Income before income tax expense
  $ 892,433     $ 873,966     $ 732,886  
Statutory income tax rate
    35 %     35 %     35 %
 
Computed expected income tax expense
    312,352       305,888       256,510  
State income taxes, net of federal income tax benefit
    42,086       38,960       26,773  
ESOP fair market value adjustment
    2,183       2,212       3,665  
Other, net
    (1,394 )     (338 )     380  
 
Income tax expense
  $ 355,227     $ 346,722     $ 287,328  
 
                 

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Notes to Consolidated Financial Statements
The net deferred tax asset consists of the following at December 31:
                 
    2010     2009  
 
    (In thousands)  
Deferred tax asset:
               
Postretirement benefits
  $ 42,804     $ 41,873  
Allowance for loan losses
    95,470       56,621  
Mortgage premium amortization
    4,623       6,281  
Non-qualified benefit plans
    50,734       44,393  
ESOP expense
    10,105       8,700  
Fair value adjustment on mortgages recorded in Acquisition
    2,313       2,826  
Interest on non-accrual loans
    23,725       11,483  
Other
    5,106       7,359  
 
 
    234,880       179,536  
 
Deferred tax liabilities:
               
Postretirement benefits
    24,275       30,340  
Net unrealized gain on securities available for sale
    80,998       142,109  
Fair value adjustments related to the Acquisition:
               
Core deposit intangible
    1,881       2,544  
Buildings
    1,469       1,648  
Other
    59       83  
 
 
    108,682       176,724  
 
Net deferred tax asset (included in other assets)
  $ 126,198     $ 2,812  
 
           
The net deferred tax asset represents the anticipated federal and state tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. In management’s opinion, in view of Hudson City’s previous, current and projected future earnings trends, such net deferred tax asset will more likely than not be fully realized. Accordingly, no valuation allowance was deemed to be required at December 31, 2010 and 2009.
In July 2006, FASB issued guidance which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. Accrued estimated penalties and interest on unrecognized tax benefits were approximately $1.3 million and $645,000 at December 31, 2010 and 2009, respectively. Estimated penalties and interest of $626,000, $(270,000), and $470,000 are included in income tax expense at December 31, 2010, 2009, and 2008, respectively. The Company’s tax returns are subject to examination in the normal course by federal tax authorities for the years 2006 through 2010 and by state authorities for the years 2006 through 2010.

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Notes to Consolidated Financial Statements
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31 is as follows:
                 
    2010     2009  
    (In thousands)  
Balance at January 1
  $ 4,053     $ 3,212  
Additions based on tax positions related to the current year
    1,754       3,156  
Additions for tax positions of prior years
           
Reductions for tax positions of prior years
    (450 )     (2,315 )
 
           
Balance at December 31
  $ 5,357     $ 4,053  
 
           
Retained earnings at December 31, 2010 included approximately $58.0 million for which no deferred income taxes have been provided. This amount represents the base year allocation of income to bad debt deduction for tax purposes. Under FASB guidance, this amount is treated as a permanent difference and deferred taxes are not recognized unless it appears that the amount will be reduced and result in taxable income in the foreseeable future. Events that would result in taxation of these reserves include failure to qualify as a bank for tax purposes or distributions in excess of Hudson City Savings’ current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. The unrecognized deferred tax liability with respect to our base-year deduction amounted to $23.5 million at December 31, 2010 and 2009.
12. Fair Value Measurements and Disclosures
a) Fair Value Measurements
The ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 applies only to fair value measurements already required or permitted by other accounting standards and does not impose requirements for additional fair value measures. ASC Topic 820 was issued to increase consistency and comparability in reporting fair values.
We use fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. We did not have any liabilities that were measured at fair value at December 31, 2010. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as foreclosed real estate owned, certain impaired loans and goodwill. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.
In accordance with ASC Topic 820, we group our assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

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Notes to Consolidated Financial Statements
Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing
models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.
We base our fair values on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. ASC Topic 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Assets that we measure on a recurring basis are limited to our available-for-sale securities portfolio. Our available-for-sale portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity. Substantially all of our available-for-sale portfolio consists of mortgage-backed securities and investment securities issued by government-sponsored enterprises. The fair values for substantially all of these securities are obtained from an independent nationally recognized pricing service. Based on the nature of our securities, our independent pricing service provides us with prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available for the majority of securities in our portfolio. Various modeling techniques are used to determine pricing for our mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. We also own equity securities with a carrying value of $7.1 million at December 31, 2010 and 2009, respectively, for which fair values are obtained from quoted market prices in active markets and, as such, are classified as Level 1.

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Notes to Consolidated Financial Statements
The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a recurring basis at December 31, 2010 and 2009.
                                 
            Fair Value at December 31, 2010 using  
            Quoted Prices in Active<