10-Q 1 y86807e10vq.htm FORM 10-Q e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2010
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number: 0-26001
Hudson City Bancorp, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware   22-3640393
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
West 80 Century Road
Paramus, New Jersey
  07652
     
(Address of Principal Executive Offices)   (Zip Code)
(201) 967-1900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ       No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o       No þ
As of November 2, 2010, the registrant had 526,603,530 shares of common stock, $0.01 par value, outstanding.
 
 

 


 

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 EX-31.1
 EX-31.2
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and 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 corresponding 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 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 the 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 recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, may adversely affect our business;
  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 including, without limitation, our application to convert Hudson City Savings Bank to a national bank, 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;
  difficulties associated with achieving or predicting expected future financial results;
  our ability to 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 filing. We do not intend to update any of the forward-looking statements after the date of this Form 10-Q or to conform these statements to actual events.

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PART I — FINANCIAL INFORMATION
Item 1. — Financial Statements
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
                 
    September 30,     December 31,  
    2010     2009  
(In thousands, except share and per share amounts)   (unaudited)          
Assets:
               
Cash and due from banks
  $ 147,614     $ 198,752  
Federal funds sold and other overnight deposits
    485,479       362,449  
 
           
Total cash and cash equivalents
    633,093       561,201  
Securities available for sale:
               
Mortgage-backed securities
    14,961,441       11,116,531  
Investment securities
    90,797       1,095,240  
Securities held to maturity:
               
Mortgage-backed securities (fair value of $7,134,252 at September 30, 2010 and $10,324,831 at December 31, 2009)
    6,777,579       9,963,554  
Investment securities (fair value of $4,967,621 at September 30, 2010 and $4,071,005 at December 31, 2009)
    4,939,922       4,187,704  
 
           
Total securities
    26,769,739       26,363,029  
Loans
    31,749,402       31,779,921  
Net deferred loan costs
    93,442       81,307  
Allowance for loan losses
    (216,283 )     (140,074 )
 
           
Net loans
    31,626,561       31,721,154  
Federal Home Loan Bank of New York stock
    878,690       874,768  
Foreclosed real estate, net
    40,276       16,736  
Accrued interest receivable
    273,606       304,091  
Banking premises and equipment, net
    70,456       70,116  
Goodwill
    152,109       152,109  
Other assets
    172,102       204,556  
 
           
Total Assets
  $ 60,616,632     $ 60,267,760  
 
           
 
               
Liabilities and Shareholders’ Equity:
               
Deposits:
               
Interest-bearing
  $ 24,323,915     $ 23,992,007  
Noninterest-bearing
    590,706       586,041  
 
           
Total deposits
    24,914,621       24,578,048  
Repurchase agreements
    14,950,000       15,100,000  
Federal Home Loan Bank of New York advances
    14,875,000       14,875,000  
 
           
Total borrowed funds
    29,825,000       29,975,000  
Due to brokers
          100,000  
Accrued expenses and other liabilities
    254,241       275,560  
 
           
Total liabilities
    54,993,862       54,928,608  
 
           
 
               
Common stock, $0.01 par value, 3,200,000,000 shares authorized; 741,466,555 shares issued; 526,630,332 shares outstanding at September 30, 2010 and 526,493,676 shares outstanding at December 31, 2009
    7,415       7,415  
Additional paid-in capital
    4,699,677       4,683,414  
Retained earnings
    2,595,547       2,401,606  
Treasury stock, at cost; 214,836,223 shares at September 30, 2010 and 214,972,879 shares at December 31, 2009
    (1,726,653 )     (1,727,579 )
Unallocated common stock held by the employee stock ownership plan
    (205,732 )     (210,237 )
Accumulated other comprehensive income, net of tax
    252,516       184,533  
 
           
Total shareholders’ equity
    5,622,770       5,339,152  
 
           
Total Liabilities and Shareholders’ Equity
  $ 60,616,632     $ 60,267,760  
 
           
See accompanying notes to unaudited consolidated financial statements

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Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
    (In thousands, except per share data)  
Interest and Dividend Income:
                               
First mortgage loans
  $ 417,071     $ 424,521     $ 1,271,476     $ 1,252,011  
Consumer and other loans
    4,525       5,212       13,938       16,629  
Mortgage-backed securities held to maturity
    82,783       128,996       285,228       368,212  
Mortgage-backed securities available for sale
    123,841       114,821       375,223       374,995  
Investment securities held to maturity
    47,415       30,835       144,106       44,920  
Investment securities available for sale
    2,443       27,155       17,992       107,074  
Dividends on Federal Home Loan Bank of New York stock
    10,128       12,281       31,668       30,698  
Federal funds sold and other overnight deposits
    604       344       1,629       707  
 
                       
 
                               
Total interest and dividend income
    688,810       744,165       2,141,260       2,195,246  
 
                       
 
                               
Interest Expense:
                               
Deposits
    90,526       112,925       290,115       375,003  
Borrowed funds
    307,950       305,783       912,152       908,558  
 
                       
 
                               
Total interest expense
    398,476       418,708       1,202,267       1,283,561  
 
                       
 
                               
Net interest income
    290,334       325,457       938,993       911,685  
 
                               
Provision for Loan Losses
    50,000       40,000       150,000       92,500  
 
                       
 
                               
Net interest income after provision for loan losses
  240,334     285,457       788,993       819,185  
 
                       
 
                               
Non-Interest Income:
                               
Service charges and other income
    2,842       2,513       7,656       7,207  
Gain on securities transactions, net
    31,017             92,411       24,185  
 
                       
Total non-interest income
    33,859       2,513       100,067       31,392  
 
                       
 
                               
Non-Interest Expense:
                               
Compensation and employee benefits
    32,054       34,043       99,005       103,166  
Net occupancy expense
    8,275       7,965       24,546       24,260  
Federal deposit insurance assessment
    15,000       10,930       40,927       23,294  
FDIC special assessment
                      21,098  
Other expense
    10,377       9,982       32,355       30,843  
 
                       
Total non-interest expense
    65,706       62,920       196,833       202,661  
 
                       
 
                               
Income before income tax expense
    208,487       225,050       692,227       647,916  
 
                               
Income tax expense
    83,918       89,964       276,182       257,248  
 
                       
 
                               
Net income
  $ 124,569     $ 135,086     $ 416,045     $ 390,668  
 
                       
 
                               
Basic earnings per share
  $ 0.25     $ 0.28     $ 0.84     $ 0.80  
 
                       
 
                               
Diluted earnings per share
  $ 0.25     $ 0.27     $ 0.84     $ 0.80  
 
                       
 
                               
Weighted Average Number of Common Shares Outstanding:
                               
Basic
    493,164,078       489,545,739       492,873,570       488,048,312  
 
                               
Diluted
    493,983,690       491,992,378       494,489,274       491,356,241  
See accompanying notes to unaudited consolidated financial statements

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Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
                 
    For the Nine Months  
    Ended September 30,  
    2010     2009  
    (In thousands, except per share data)  
Common stock
  $ 7,415     $ 7,415  
 
           
 
               
Additional paid-in capital:
               
Balance at beginning of year
    4,683,414       4,641,571  
Stock option plan expense
    8,191       9,901  
Tax benefit from stock plans
    406       18,003  
Allocation of ESOP stock
    4,861       4,633  
RRP stock granted
    (145 )     (6,771 )
Vesting of RRP stock
    2,950       3,471  
 
           
Balance at end of period
    4,699,677       4,670,808  
 
           
 
               
Retained earnings:
               
Balance at beginning of year
    2,401,606       2,196,235  
Net income
    416,045       390,668  
Dividends paid on common stock ($0.45 and $0.44 per share, respectively)
    (221,817 )     (214,926 )
Exercise of stock options
    (287 )     (24,150 )
 
           
Balance at end of period
    2,595,547       2,347,827  
 
           
 
               
Treasury stock:
               
Balance at beginning of year
    (1,727,579 )     (1,737,838 )
Purchase of common stock
          (43,477 )
Exercise of stock options
    1,245       34,077  
Vesting of RRP stock
    (464 )      
RRP stock granted
    145       6,771  
 
           
Balance at end of period
    (1,726,653 )     (1,740,467 )
 
           
 
               
Unallocated common stock held by the ESOP:
               
Balance at beginning of year
    (210,237 )     (216,244 )
Allocation of ESOP stock
    4,505       4,506  
 
           
Balance at end of period
    (205,732 )     (211,738 )
 
           
 
               
Accumulated other comprehensive income(loss):
               
Balance at beginning of year
    184,533       47,657  
 
           
Net unrealized gains on securities available for sale arising during period, net of tax expense of $84,161 and $112,963 in 2010 and 2009, respectively
    121,863       163,568  
Reclassification adjustment for gains in net income, net of tax of expense of $37,750 and $9,880 in 2010 and 2009, respectively
    (54,661 )     (14,305 )
Pension and other postretirement benefits adjustment, net of tax(expense) benefit of ($539) and $403 for 2010 and 2009, respectively
    781       (584 )
 
           
Other comprehensive income, net of tax
    67,983       148,679  
 
           
Balance at end of period
    252,516       196,336  
 
               
 
           
Total shareholders’ equity
  $ 5,622,770     $ 5,270,181  
 
           
 
               
Summary of comprehensive income
               
Net income
  $ 416,045     $ 390,668  
Other comprehensive income, net of tax
    67,983       148,679  
 
           
Total comprehensive income
  $ 484,028     $ 539,347  
 
           
See accompanying notes to unaudited consolidated financial statements.

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Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
                 
    For the Nine Months  
    Ended September 30,  
    2010     2009  
    (In thousands)  
Cash Flows from Operating Activities:
               
Net income
  $ 416,045     $ 390,668  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, accretion and amortization expense
    73,287       48,690  
Provision for loan losses
    150,000       92,500  
Gains on securities transactions, net
    (92,411 )     (24,185 )
Share-based compensation, including committed ESOP shares
    20,043       22,511  
Deferred tax benefit
    (42,386 )     (29,580 )
Decrease (increase) in accrued interest receivable
    30,485       (11,475 )
Decrease (increase) in other assets
    27,185       (11,166 )
Decrease in accrued expenses and other liabilities
    (20,538 )     (25,868 )
 
           
Net Cash Provided by Operating Activities
    561,710       452,095  
 
           
 
               
Cash Flows from Investing Activities:
               
Originations of loans
    (4,278,071 )     (4,656,065 )
Purchases of loans
    (580,145 )     (2,451,388 )
Principal payments on loans
    4,744,510       5,340,970  
Principal collection of mortgage-backed securities held to maturity
    3,340,264       1,827,195  
Purchases of mortgage-backed securities held to maturity
    (172,434 )     (3,017,731 )
Principal collection of mortgage-backed securities available for sale
    3,022,528       1,604,549  
Purchases of mortgage-backed securities available for sale
    (8,705,622 )     (1,992,789 )
Proceeds from sales of mortgage backed securities available for sale
    1,992,002       785,594  
Proceeds from maturities and calls of investment securities held to maturity
    5,049,235       50,000  
Purchases of investment securities held to maturity
    (5,902,176 )     (3,040,329 )
Proceeds from maturities and calls of investment securities available for sale
    1,025,000       2,622,225  
Proceeds from sales of investment securities available for sale
          317  
Purchases of investment securities available for sale
          (1,331,300 )
Purchases of Federal Home Loan Bank of New York stock
    (8,422 )     (78,272 )
Redemption of Federal Home Loan Bank of New York stock
    4,500       66,825  
Purchases of premises and equipment, net
    (6,860 )     (4,881 )
Net proceeds from sale of foreclosed real estate
    19,753       12,218  
 
           
Net Cash Used in Investment Activities
    (455,938 )     (4,262,862 )
 
           
 
               
Cash Flows from Financing Activities:
               
Net increase in deposits
    336,573       4,649,907  
Proceeds from borrowed funds
          750,000  
Principal payments on borrowed funds
    (150,000 )     (950,000 )
Dividends paid
    (221,817 )     (214,926 )
Purchases of treasury stock
          (43,477 )
Exercise of stock options
    958       9,927  
Tax benefit from stock plans
    406       18,003  
 
           
Net Cash (Used in) provided by Financing Activities
    (33,880 )     4,219,434  
 
           
 
               
Net Increase in Cash and Cash Equivalents
    71,892       408,667  
 
               
Cash and Cash Equivalents at Beginning of Year
    561,201       261,811  
 
           
 
               
Cash and Cash Equivalents at End of Period
  $ 633,093     $ 670,478  
 
           
 
               
Supplemental Disclosures:
               
Interest paid
  $ 1,194,875     $ 1,282,653  
 
           
Loans transferred to foreclosed real estate
  $ 56,533     $ 14,998  
 
           
Income tax payments
  $ 360,058     $ 279,347  
 
           
See accompanying notes to unaudited consolidated financial statements.

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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 Office of Thrift Supervision (“OTS”).
On March 4, 2010, Hudson City Savings filed an application (the “Application”) with the Office of the Comptroller of the Currency (“OCC”) to convert from a federally chartered stock savings bank to a national bank (the “Conversion”). If the Application is approved, Hudson City Savings will no longer be a federal savings bank subject to the regulation and examination of the OTS and will become a national bank subject to the regulation and examination of the OCC. In addition, the Company will cease being a savings and loan holding company subject to the regulation and supervision of the OTS and will become a bank holding company subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (the “FRB”). We cannot provide assurance as to whether the Application will be approved or the timing of any approval.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (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.
Whether the aforementioned Application is approved by the OCC or upon implementation of the Reform Act, Hudson City Savings will be regulated by the OCC and the Company will be regulated by the FRB.
2. Basis of Presentation
The accompanying consolidated financial statements include the accounts of Hudson City Bancorp and its wholly-owned subsidiary, Hudson City Savings.
In our opinion, all the adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2010. 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 the results of operations for the period. Actual results could differ from these estimates. The allowance for loan losses (“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.
Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the preparation of the Form 10-Q. The consolidated financial statements presented should be read in conjunction with Hudson City Bancorp’s audited consolidated financial statements and notes to consolidated financial statements included in Hudson City Bancorp’s 2009 Annual Report to Shareholders and incorporated by reference into Hudson City Bancorp’s 2009 Annual Report on Form 10-K.

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3. Earnings Per Share
The following is a summary of our earnings per share calculations and reconciliation of basic to diluted earnings per share.
                                                 
    For the Three Months Ended September 30,  
    2010     2009  
                    Per                     Per  
            Average     Share             Average     Share  
    Income     Shares     Amount     Income     Shares     Amount  
    (In thousands, except per share data)  
Net income
  $ 124,569                     $ 135,086                  
 
                                           
Basic earnings per share:
                                               
Income available to common stockholders
  $ 124,569       493,164     $ 0.25     $ 135,086       489,546     $ 0.28  
 
                                           
Effect of dilutive common stock equivalents
          820                     2,446          
 
                                       
 
                                               
Diluted earnings per share:
                                               
Income available to common stockholders
  $ 124,569       493,984     $ 0.25     $ 135,086       491,992     $ 0.27  
 
                                   
                                                 
    For the Nine Months Ended September 30,  
    2010     2009  
                    Per                     Per  
            Average     Share             Average     Share  
    Income     Shares     Amount     Income     Shares     Amount  
    (In thousands, except per share data)  
Net income
  $ 416,045                     $ 390,668                  
 
                                           
Basic earnings per share:
                                               
Income available to common stockholders
  $ 416,045       492,874     $ 0.84     $ 390,668       488,048     $ 0.80  
 
                                           
Effect of dilutive common stock equivalents
          1,615                     3,308          
 
                                       
 
                                               
Diluted earnings per share:
                                               
Income available to common stockholders
  $ 416,045       494,489     $ 0.84     $ 390,668       491,356     $ 0.80  
 
                                   

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4. Securities
The amortized cost and estimated fair market value of investment securities and mortgage-backed securities available-for-sale at September 30, 2010 and December 31, 2009 are as follows:
                                 
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair Market  
    Cost     Gains     Losses     Value  
    (In thousands)  
September 30, 2010
                               
Investment Securities:
                               
United States government -sponsored enterprises debt
  $ 80,000     $ 3,483     $     $ 83,483  
Equity securities
    6,767       547             7,314  
 
                       
Total investment securities available for sale
    86,767       4,030             90,797  
 
                       
 
                               
Mortgage-backed securities:
                               
GNMA pass-through certificates
    1,917,530       53,548             1,971,078  
FNMA pass-through certificates
    7,346,785       202,695             7,549,480  
FHLMC pass-through certificates
    4,511,226       181,954             4,693,180  
FHLMC and FNMA — REMICs
    728,436       21,125       (1,858 )     747,703  
 
                       
Total mortgage-backed securities available for sale
  $ 14,503,977     $ 459,322     $ (1,858 )   $ 14,961,441  
 
                       
 
                               
December 31, 2009
                               
Investment securities:
                               
United States government -sponsored enterprises debt
  $ 1,104,699     $ 1,890     $ (18,424 )   $ 1,088,165  
Equity securities
    6,770       305             7,075  
 
                       
Total investment securities available for sale
    1,111,469       2,195       (18,424 )     1,095,240  
 
                       
 
                               
Mortgage-backed securities:
                               
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 mortgage-backed securities available for sale
  $ 10,752,424     $ 380,429     $ (16,322 )   $ 11,116,531  
 
                       

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The amortized cost and estimated fair market value of investment securities and mortgage-backed securities held to maturity at September 30, 2010 and December 31, 2009 are as follows:
                                 
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair Market  
    Cost     Gains     Losses     Value  
    (In thousands)  
September 30, 2010
                               
Investment securities:
                               
United States government -sponsored enterprises debt
  $ 4,939,922     $ 27,699     $     $ 4,967,621  
 
                       
Total investment securities held to maturity
    4,939,922       27,699             4,967,621  
 
                       
 
                               
Mortgage-backed securities:
                               
GNMA pass-through certificates
    101,909       3,243             105,152  
FNMA pass-through certificates
    1,782,463       97,112             1,879,575  
FHLMC pass-through certificates
    3,239,926       176,227             3,416,153  
FHLMC and FNMA — REMICs
    1,653,281       80,091             1,733,372  
 
                       
Total mortgage-backed securities held to maturity
  $ 6,777,579     $ 356,673     $     $ 7,134,252  
 
                       
 
                               
December 31, 2009
                               
Investment securities:
                               
United States government -sponsored enterprises debt
  $ 4,187,599     $ 915     $ (117,614 )   $ 4,070,900  
Municipal bonds
    105                   105  
 
                       
Total investment securities held to maturity
    4,187,704       915       (117,614 )     4,071,005  
 
                       
 
                               
Mortgage-backed securities:
                               
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 mortgage-backed securities held to maturity
  $ 9,963,554     $ 377,753     $ (16,476 )   $ 10,324,831  
 
                       

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The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are deemed to be temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2010 and December 31, 2009.
                                                 
    Less Than 12 Months     12 Months or Longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
    (In thousands)  
September 30, 2010
                                               
 
                                               
Available for sale:
                                               
FHLMC and FNMA — REMIC’s
                97,249       (1,858 )     97,249       (1,858 )
 
                                   
Total temporarily impaired securities available for sale
                97,249       (1,858 )     97,249       (1,858 )
 
                                   
Total
  $     $     $ 97,249     $ (1,858 )   $ 97,249     $ (1,858 )
 
                                   
 
                                               
December 31, 2009
                                               
 
                                               
Held to maturity:
                                               
United States goverment -sponsored enterprises debt
  $ 3,930,974     $ (117,614 )   $     $     $ 3,930,974     $ (117,614 )
GNMA pass-through certificates
                582       (1 )     582       (1 )
FHLMC pass-through certificates
    642       (2 )     52       (1 )     694       (3 )
FHLMC and FNMA — REMICs
    617,463       (10,747 )     171,031       (5,725 )     788,494       (16,472 )
 
                                   
Total temporarily impaired securities held to maturity
    4,549,079       (128,363 )     171,665       (5,727 )     4,720,744       (134,090 )
 
                                   
 
                                               
Available for sale:
                                               
United States goverment -sponsored enterprises debt
    472,545       (7,263 )     263,730       (11,161 )     736,275       (18,424 )
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 — REMICs
    476,797       (12,182 )                 476,797       (12,182 )
 
                                   
Total temporarily impaired securities available for sale
    1,800,553       (23,582 )     283,420       (11,164 )     2,083,973       (34,746 )
 
                                   
Total
  $ 6,349,632     $ (151,945 )   $ 455,085     $ (16,891 )   $ 6,804,717     $ (168,836 )
 
                                   
The unrealized losses are primarily due to the changes in market interest rates subsequent to purchase. We only purchase securities issued by U.S. government-sponsored enterprises (“GSEs”) and do not own any unrated or private label securities or other high-risk securities such as those backed by sub-prime loans. Accordingly, it is expected that the securities would not be settled at a price less than the Company’s amortized cost basis. We consider these investments to be temporarily impaired at September 30, 2010 and December 31, 2009 since the decline in market value is primarily attributable to changes in interest rates and not credit quality, the Company has the intent and ability to hold these investments until there is a full recovery of the unrealized loss, which may be at maturity, and it is not more likely than not that we will be required to sell the securities before the anticipated recovery of the remaining amortized cost basis. As a result no impairment loss was recognized during the nine months ended September 30, 2010 or for the year ended December 31, 2009.

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The amortized cost and estimated fair market value of our securities held to maturity and available-for-sale at September 30, 2010, by contractual maturity, are shown below. The table does not include the effect of prepayments or scheduled principal amortization. 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.
                         
    Amortized Cost     Estimated  
    Mortgage-backed     Investment     Fair Market  
    securities     securities     Value  
    (In thousands)  
September 30, 2010
                       
 
                       
Held to Maturity:
                       
Due in one year or less
  $ 34     $     $ 35  
Due after one year through five years
    457             487  
Due after five years through ten years
    11,587       400,000       413,310  
Due after ten years
    6,765,501       4,539,922       11,688,041  
 
                 
Total held to maturity
  $ 6,777,579     $ 4,939,922     $ 12,101,873  
 
                 
 
                       
Available for Sale:
                       
Due after ten years
    14,503,977       80,000       15,044,924  
 
                 
Total available for sale
  $ 14,503,977     $ 80,000     $ 15,044,924  
 
                 
Sales of mortgage-backed securities available-for-sale amounted to $1.90 billion and $761.6 million for the nine months ended September 30, 2010 and 2009, respectively, resulting in realized gains of $92.4 million and $24.0 million for the same respective periods. There were no sales of investment securities available-for-sale or held to maturity during the nine months ended September 30, 2010. There were sales of $168,000 of investment securities available-for-sale during the nine months ended September 30, 2009. Gross realized gains on sales and calls of investment securities available-for-sale were $148,000 during the first nine months of 2009. Gains and losses on the sale of all securities are determined using the specific identification method.
5. Stock Repurchase Programs
Under our previously announced stock repurchase programs, shares of Hudson City Bancorp common stock may be purchased in the open market and through other privately negotiated transactions, depending on market conditions. The repurchased shares are held as treasury stock, which may be reissued for general corporate use. We have not purchased any of our common shares during the nine months ended September 30, 2010. As of September 30, 2010, there remained 50,123,550 shares that may be purchased under the existing stock repurchase programs.
6. Fair Value Measurements
     a) Fair Value Measurements
The Accounting Standards Codification (“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

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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 September 30, 2010 and December 31, 2009. 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.
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 GSEs. 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 $7.3 million and $7.1 million at September 30, 2010 and December 31, 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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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 September 30, 2010 and December 31, 2009.
                                 
            Fair Value Measurements at September 30, 2010 using  
            Quoted Prices in Active     Significant Other     Significant  
    Carrying     Markets for Identical     Observable Inputs     Unobservable Inputs  
Description   Value     Assets (Level 1)     (Level 2)     (Level 3)  
                    (In thousands)          
Available for sale debt securities:
                               
Mortgage-backed securities
  $ 14,961,441     $     $ 14,961,441     $  
U.S. government-sponsored enterprises debt
    83,483             83,483        
 
                       
Total available for sale debt securities
  $ 15,044,924     $     $ 15,044,924     $  
 
                       
 
                               
Available for sale equity securities:
                               
Financial services industry
  $ 7,314     $ 7,314     $     $  
 
                       
Total available for sale equity securities
    7,314       7,314              
 
                       
Total available for sale securities
  $ 15,052,238     $ 7,314     $ 15,044,924     $  
 
                       
                                 
            Fair Value Measurements at December 31, 2009 using  
            Quoted Prices in Active     Significant Other     Significant  
    Carrying     Markets for Identical     Observable Inputs     Unobservable Inputs  
Description   Value     Assets (Level 1)     (Level 2)     (Level 3)  
                    (In thousands)          
Available for sale debt securities:
                               
Mortgage-backed securities
  $ 11,116,531     $     $ 11,116,531     $  
U.S. government-sponsored enterprises debt
    1,088,165             1,088,165        
 
                       
Total available for sale debt securities
    12,204,696             12,204,696        
 
                       
 
                               
Available for sale equity securities:
                               
Financial services industry
  $ 7,075     $ 7,075     $     $  
 
                       
Total available for sale equity securities
    7,075       7,075              
 
                       
Total available for sale securities
  $ 12,211,771     $ 7,075     $ 12,204,696     $  
 
                       
Assets that were measured at fair value on a non-recurring basis at September 30, 2010 were limited to non-performing commercial and construction loans that are collateral dependent and foreclosed real estate. Commercial and construction loans evaluated for impairment in accordance with Financial Accounting Standards Board (“FASB”) guidance amounted to $11.5 million and $11.2 million at September 30, 2010 and December 31, 2009, respectively. Based on this evaluation, we established an allowance for loan losses of $2.7 million and $2.1 million for those respective periods. The provision for loan losses related to these loans amounted to $579,000 and $1.3 million for the first nine months of 2010 and 2009, respectively. These impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the fair value of the collateral, less estimated selling costs. Since all of our impaired loans at September 30, 2010 are secured by real estate, 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 and, as such, are classified as Level 3.

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Foreclosed real estate represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of cost or 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 and, as such, foreclosed real estate properties are classified as Level 3. Foreclosed real estate at September 30, 2010 and December 31, 2009 amounted to $40.3 million and $16.7 million, respectively. During the first nine months of 2010 and 2009, charge-offs to the allowance for loan losses related to loans that were transferred to foreclosed real estate amounted to $4.1 million and $2.9 million, respectively. Write downs and net loss on sale related to foreclosed real estate that were charged to non-interest expense amounted to $1.2 million and $2.0 million for those respective periods.
The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at September 30, 2010 and December 31, 2009.
                                 
    Fair Value Measurements at September 30, 2010 using  
    Quoted Prices in Active     Significant Other     Significant     Total  
    Markets for Identical     Observable Inputs     Unobservable Inputs     Gains  
Description   Assets (Level 1)     (Level 2)     (Level 3)     (Losses)  
            (In thousands)                  
Impaired loans
  $     $     $ 11,534     $  
Foreclosed real estate
                40,276       (1,155 )
                                 
    Fair Value Measurments at December 31, 2009 using  
    Quoted Prices in Active     Significant Other     Significant     Total  
    Markets for Identical     Observable Inputs     Unobservable Inputs     Gains  
Description   Assets (Level 1)     (Level 2)     (Level 3)     (Losses)  
            (In thousands)                  
Impaired loans
  $     $     $ 11,178     $  
Foreclosed real estate
                16,736       (2,365 )
     b) Fair Value Disclosures
The fair value of financial instruments represents the estimated amounts at which the asset or liability could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, certain tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into any of the estimates.
Carrying amounts of cash, due from banks and federal funds sold are considered to approximate fair value. The carrying value of Federal Home Loan Bank of New York (“FHLB”) stock equals cost. The fair value of FHLB stock is based on redemption at par value.
The fair value of one- to four-family mortgages and home equity loans are generally estimated using the present value of expected future cash flows, assuming future prepayments and using market rates for new loans with comparable credit risk. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.

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For time deposits and fixed-maturity borrowed funds, the fair value is estimated by discounting estimated future cash flows using currently offered rates. Structured borrowed funds are valued using an option valuation model which uses assumptions for anticipated calls of borrowings based on market interest rates and weighted-average life. For deposit liabilities payable on demand, the fair value is the carrying value at the reporting date. There is no material difference between the fair value and the carrying amounts recognized with respect to our off-balance sheet commitments.
Other important elements that are not deemed to be financial assets or liabilities and, therefore, not considered in these estimates include the value of Hudson City Bancorp’s retail branch delivery system, its existing core deposit base and banking premises and equipment.
The estimated fair value of Hudson City Bancorp’s financial instruments are summarized as follows:
                                 
    September 30, 2010     December 31, 2009  
    Carrying     Estimated     Carrying     Estimated  
    Amount     Fair Value     Amount     Fair Value  
    (In thousands)  
Assets:
                               
Cash and due from banks
  $ 147,614     $ 147,614     $ 198,752     $ 198,752  
Federal funds sold
    485,479       485,479       362,449       362,449  
Investment securities held to maturity
    4,939,922       4,967,621       4,187,704       4,071,005  
Investment securities available for sale
    90,797       90,797       1,095,240       1,095,240  
Federal Home Loan Bank of New York stock
    878,690       878,690       874,768       874,768  
Mortgage-backed securities held to maturity
    6,777,579       7,134,252       9,963,554       10,324,831  
Mortgage-backed securities available for sale
    14,961,441       14,961,441       11,116,531       11,116,531  
Loans
    31,626,561       33,337,678       31,721,154       32,758,247  
Liabilities:
                               
Deposits
    24,914,621       25,384,187       24,578,048       24,913,407  
Borrowed funds
    29,825,000       34,039,146       29,975,000       32,485,513  
7. Postretirement Benefit Plans
We maintain non-contributory retirement and post-retirement plans 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. 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, which is maintained for certain employees, is unfunded.
In 2005, we limited participation in the non-contributory retirement plan and the post-retirement benefit plan to those employees hired on or before July 31, 2005. We also placed a cap on paid medical expenses at the 2007 rate, beginning in 2008, for those eligible employees who retire after December 31, 2005. As part of our acquisition of Sound Federal Bancorp, Inc. (“Sound Federal”) in 2006, participation in the Sound Federal retirement plans and the accrual of benefits for such plans were frozen as of the acquisition date.

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The components of the net periodic expense for the plans were as follows:
                                 
    For the Three Months Ended September 30,  
    Retirement Plans     Other Benefits  
    2010     2009     2010     2009  
    (In thousands)  
Service cost
  $ 1,018     $ 1,003     $ 152     $ 234  
Interest cost
    2,076       1,863       476       529  
Expected return on assets
    (2,914 )     (1,939 )            
Amortization of:
                               
Net loss
    680       824       66       128  
Unrecognized prior service cost
    85       85       (391 )     (391 )
 
                       
Net periodic benefit cost
  $ 945     $ 1,836     $ 303     $ 500  
 
                       
                                 
    For the Nine Months Ended September 30,  
    Retirement Plans     Other Benefits  
    2010     2009     2010     2009  
    (In thousands)  
Service cost
  $ 3,054     $ 3,009     $ 456     $ 702  
Interest cost
    6,228       5,589       1,428       1,587  
Expected return on assets
    (8,742 )     (5,817 )            
Amortization of:
                               
Net loss
    2,040       2,472       198       384  
Unrecognized prior service cost
    255       255       (1,173 )     (1,173 )
 
                       
Net periodic benefit cost
  $ 2,835     $ 5,508     $ 909     $ 1,500  
 
                       
We made no contributions to the pension plans during the nine months ended September 30, 2010. During the nine months ended September 30, 2009, we made contributions of $35.0 million to the pension plans.
8. Stock-Based Compensation
Stock Option Plans
A summary of the changes in outstanding stock options is as follows:
                                 
    For the Nine Months Ended September 30,  
    2010     2009  
    Number of     Weighted     Number of     Weighted  
    Stock     Average     Stock     Average  
    Options     Exercise Price     Options     Exercise Price  
Outstanding at beginning of period
    24,262,692     $ 12.51       26,728,119     $ 10.35  
Granted
    4,232,500       13.13       3,375,000       12.11  
Exercised
    (154,829 )     6.18       (4,240,913 )     2.33  
Forfeited
    (122,500 )     14.06              
 
                           
Outstanding at end of period
    28,217,863       12.65       25,862,206       11.89  
 
                           

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In June 2006, our shareholders approved the Hudson City Bancorp, Inc. 2006 Stock Incentive Plan (the “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.
The fair value of the 2010 grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions. The dividend yield assumption for the 2010 grants was based on our current declared dividend as a percentage of the stock price on the grant date. The expected volatility assumption was 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.
As a result of low employee turnover, the assumption regarding the forfeiture rate of option grants had no effect on the fair value estimate.
                 
    2010     2010  
    Retention Options     Performance Options  
Expected dividend yield
    4.57 %     4.57 %
Expected volatility
    41.30 %     34.58 %
Risk-free interest rate
    1.65 %     2.55 %
Expected option life
  3.6 years     5.6 years  
Fair value of options granted
  $ 3.00     $ 2.87  
Compensation expense related to our outstanding stock options amounted to $3.0 million for both the three months ended September 30, 2010 and 2009, respectively, and $8.2 million and $9.9 million, for the nine months ended September 30, 2010 and 2009, respectively.
Stock Awards
During 2009, the Committee granted 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 their January 2012 vesting date. We have determined that it is probable these performance measures will

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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. Total compensation expense for stock awards amounted to $890,000 and $1.2 million for the three months ended September 30, 2010 and 2009, respectively, and $3.0 million and $3.5 million, for the nine months ended September 30, 2010 and 2009, respectively.
9. 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 do not expect that this accounting standard update will have a material impact on our financial condition, results of operations or financial statement disclosures.
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.

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Item 2. — 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 by growing our franchise through the origination and purchase of one- to four-family mortgage loans. We have traditionally funded this loan production with customer deposits and borrowings. During the first nine months of 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 calls of our borrowings. Our results of operations may also be affected significantly by national 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 pace of recovery in output and employment has slowed in recent months. 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 9.6% in September 2010 as compared to 9.5% in June 2010 and 10.0% in December 2009. The FOMC decided to maintain the overnight lending rate at zero to 0.25% during the third quarter of 2010. As a result, short-term market interest rates have remained at low levels during the third quarter of 2010. This allowed us to continue to re-price our deposits thereby reducing our cost of funds. The yields on mortgage-related assets have also remained at low levels as the 10-year treasury fell to 2.5% during the third quarter of 2010. Our net interest rate spread decreased to 1.73% for the third quarter of 2010 as compared to 1.89% for the linked second quarter of 2010 and 2.04% for the third quarter of 2009. Our net interest margin decreased to 1.97% for the third quarter of 2010 as compared to 2.13% for the linked second quarter of 2010 and 2.31% for the third quarter of 2009. While our deposits continued to reprice to lower rates during the third quarter of 2010, the cost of our borrowings increased slightly due to the modification of certain borrowings. 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 87.4% of our average interest-earning assets during the 2010 third quarter.
On March 4, 2010, Hudson City Savings filed the Application with the OCC to convert from a federally chartered stock savings bank to a national bank. If the Application is approved, Hudson City Savings will no longer be a federal savings bank subject to the regulation and examination of the OTS and will become a national bank subject to the regulation and examination of the OCC. In addition, the Company will cease being a savings and loan holding company subject to the regulation and supervision of the OTS and will become a bank holding company subject to the regulation and supervision of the Board of

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Governors of the FRB. We cannot provide assurance as to whether the Application will be approved or the timing of any such approval.
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. 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 of our operations. Whether the aforementioned Application is approved by the OCC or upon implementation of the Reform Act, Hudson City Savings will be regulated by the OCC and the Company will be regulated by the FRB.
Net income amounted to $124.6 million for the third quarter of 2010, as compared to $135.1 million for the third quarter of 2009. The decrease in net income for the third quarter of 2010 is the result of a decrease in net interest income reflecting a lower net interest margin, an increase in the provision for loan losses and higher deposit insurance fees, offset in part by an increase in realized gains from securities transactions. Net income increased 6.5% for the first nine months of 2010 to $416.0 million as compared to $390.7 million for the first nine months of 2009. The increase in net income for the nine month period reflects an increase in net interest income, an increase in realized gains from securities transactions and the absence of the FDIC special assessment offset, in part, by significantly higher deposit insurance fees as well as a higher provision for loan losses.
For the quarter ended September 30, 2010, our annualized return on average assets and average shareholders’ equity were 0.82% and 8.86%, respectively, as compared to 0.93% and 10.34%, respectively, for the corresponding period in 2009. For the nine months ended September 30, 2010, our annualized return on average assets and average shareholders’ equity were 0.91% and 10.07%, respectively, as compared to 0.92% and 10.17%, respectively, for the corresponding period in 2009. The decreases in our return on average equity and average assets are due primarily to the increase in the average balances of shareholders’ equity and total assets for the three and nine months ended September 30, 2010 as compared to the same periods in 2009. In addition, the decreases in our return on average equity and average assets for the quarter ended September 30, 2010 as compared to the same period in 2009 are also due to a decrease in net income for the same corresponding periods.
Net interest income decreased $35.2 million, or 10.8%, to $290.3 million for the third quarter of 2010 as compared to $325.5 million for the third quarter of 2009. Net interest income decreased primarily as a result of a decrease in the weighted-average yield of our interest-earning assets. During the third quarter of 2010, our net interest rate spread decreased 31 basis points to 1.73% and our net interest margin decreased 34 basis points to 1.97% for the third quarter of 2010 from 2.31% for the third quarter of 2009. Our net interest margin decreased during the third quarter of 2010 as the average yield on interest-earning assets and the average cost of interest-bearing liabilities both decreased while the average balance of interest-earning assets increased. Net interest income increased $27.3 million, or 3.0%, to $939.0 million for the first nine months of 2010 as compared to $911.7 million for the same period in 2009. During the first nine months of 2010, our net interest rate spread decreased 3 basis points to 1.86% and our net interest margin decreased 8 basis points to 2.10% as compared to 2.18% for the same period in 2009.
Market interest rates on mortgage-related assets remained at near-historic lows primarily due to the FRB’s program to purchase mortgage-backed securities to keep mortgage rates low and provide stimulus to the housing markets. In addition, over the past few years, we have faced increased competition for mortgage

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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 artificially 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 GSE’s 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 the likelihood of nominal balance sheet growth, a reduction of net interest income.
The provision for loan losses amounted to $50.0 million for the third quarter of 2010 and $150.0 million for the nine months ended September 30, 2010 as compared to $40.0 million and $92.5 million for the same respective periods in 2009. The increase in the provision for loan losses for the quarter ended September 30, 2010 and the resulting increase in ALL is due primarily to the increase in non-performing loans during the first nine months of 2010, continuing elevated levels of unemployment and an increase in net 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. Non-performing loans were $837.5 million or 2.64% of total loans at September 30, 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 unemployment levels have 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 the first nine months of 2010 and resulted in an increase in our ALL.
Total non-interest income was $33.9 million for the third quarter of 2010 as compared to $2.5 million for the same quarter in 2009. Included in non-interest income were net gains on securities transactions of $31.0 million, which resulted from the sale of $810.7 million of mortgage-backed securities available-for-sale. Total non-interest income for the nine months ended September 30, 2010 was $100.1 million compared with $31.4 million for the comparable period in 2009. Included in non-interest income for the nine months ended September 30, 2010 were net gains on securities transactions of $92.4 million which resulted from the sale of $1.90 billion of mortgage-backed securities available-for-sale. Included in non-interest income for the nine months ended September 30, 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 $2.8 million, or 4.5%, to $65.7 million for the third quarter of 2010 from $62.9 million for the third quarter of 2009. The increase is primarily due to an increase of $4.1 million in Federal deposit insurance expense due primarily to an increase in total deposits. The increase in Federal deposit insurance expense was partially offset by a $2.0 million decrease in compensation and employee benefits expense. Total non-interest expense decreased $5.9 million, or 2.9%, to $196.8 million for the first nine months of 2010 from $202.7 million for the first nine months of 2009 due primarily to the absence of the FDIC special assessment of $21.1 million and a $4.2 million decrease in compensation and employee benefits expense, primarily due to a decrease in stock benefit plan expense. These decreases were partially offset by an increase of $17.6 million in Federal deposit insurance expense.
Our assets grew by 0.6% to $60.62 billion at September 30, 2010 from $60.27 billion at December 31, 2009. However, total assets decreased $316.5 million from June 30, 2010. Our growth rate slowed

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during the first nine months of 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 $94.6 million to $31.63 billion at September 30, 2010 from $31.72 billion at December 31, 2009. Our loan production was $4.86 billion for the first nine months of 2010 substantially offset by $4.74 billion in principal repayments. 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 has also caused increased levels of repayments to continue in 2010 as some of our customers refinanced with other banks.
Total securities increased $406.7 million to $26.77 billion at September 30, 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 $8.88 billion and $5.90 billion, respectively, partially offset by principal collections on mortgage-backed securities of $6.36 billion and sales of mortgage-backed securities with an amortized cost of $1.90 billion and calls of investment securities of $6.07 billion. The securities purchased were all issued by GSEs. Total securities decreased $182.6 million from June 30, 2010 as we slowed our growth rate 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.
The increase in our total assets during the first nine months of 2010 was funded primarily by growth in customer deposits. Deposits increased $336.6 million to $24.91 billion at September 30, 2010 from $24.58 billion at December 31, 2009. The increase in deposits was attributable to growth in our time deposits and money market accounts. Borrowed funds decreased $150.0 million to $29.83 billion at September 30, 2010.
Comparison of Financial Condition at September 30, 2010 and December 31, 2009
During the first nine months of 2010, our total assets increased $348.9 million, or 0.6%, to $60.62 billion at September 30, 2010 from $60.27 billion at December 31, 2009. The increase in total assets reflected a $658.9 million increase in total mortgage-backed securities partially offset by a $252.2 million decrease in investment securities and a $94.6 million decrease in net loans. Total assets decreased $615.0 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 during the second and third quarters 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 portfolio and to continue our recent growth strategy. Accordingly, we are likely to maintain our relative balance sheet size or experience only

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nominal growth, and we may even experience some balance sheet shrinkage, while current economic and regulatory conditions prevail.
Our net loans decreased $94.6 million during the nine months ended September 30, 2010 to $31.63 billion. The decrease in loans primarily reflects the elevated levels of loan repayments during 2010 as a result of continued low market interest rates. 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 purchases of mortgage loans. During the first nine months of 2010, we originated $4.28 billion and purchased $580.1 million of loans, compared to originations of $4.66 billion and purchases of $2.45 billion for the same period in 2009. The origination and purchases of loans were offset by principal repayments of $4.74 billion in the first nine months of 2010 as compared to $5.34 billion for the first nine months of 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 has also caused increased levels of repayments to continue 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 selling to the GSEs. We expect that the amount of loan purchases may continue to be at reduced levels for the near-term.
Our first mortgage loan originations and purchases during the first nine months of 2010 were substantially all in one- to four-family mortgage loans. Approximately 56.0% of mortgage loan originations for the first nine months of 2010 were variable-rate loans as compared to approximately 45.0% for the comparable period in 2009. Approximately 71.0% of mortgage loans purchased for the nine months ended September 30, 2010 were fixed-rate mortgage loans. Fixed-rate mortgage loans accounted for 66.8% of our first mortgage loan portfolio at September 30, 2010 and 69.1% at December 31, 2009.
Non-performing loans amounted to $837.5 million, or 2.64%, of total loans at September 30, 2010 as compared to $627.7 million, or 1.98%, of total loans at December 31, 2009.
Total mortgage-backed securities increased $658.9 million to $21.74 billion at September 30, 2010 from $21.08 billion at December 31, 2009. This increase in total mortgage-backed securities resulted from the purchase of $8.88 billion of mortgage-backed securities issued by GSEs, substantially all of which were hybrid adjustable-rate securities. These securities 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 $6.36 billion and sales of $1.90 billion. At September 30, 2010, variable-rate mortgage-backed securities accounted for 81.6% 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 $252.2 million to $5.03 billion at September 30, 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 $6.07 billion, substantially offset by purchases of $5.90 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 $71.9 million to $633.1 million at September 30, 2010 as compared to $561.2 million at December 31, 2009. Other assets decreased $32.5 million to $172.1 million at September 30, 2010 as compared to $204.6 million at December 31, 2009.
Total liabilities increased $65.3 million to $54.99 billion at September 30, 2010 from $54.93 billion at December 31, 2009 due to an increase in deposits partially offset by a $150.0 million decrease in borrowed funds and a $100.0 million decrease in amounts due to brokers.
Total deposits increased $336.6 million, or 1.4%, to $24.91 billion at September 30, 2010 as compared to $24.58 billion at December 31, 2009. The increase in total deposits reflected a $413.8 million increase in our interest-bearing transaction accounts and savings accounts and a $37.6 million increase in our time deposits. These increases were partially offset by a decrease of $119.5 million in our money market accounts. The increase in our interest-bearing transaction accounts is primarily due to a $322.7 million increase in our High Value checking account product. 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. Our deposit growth slowed during the first nine months of 2010. During the third quarter of 2010, deposits decreased by $253.8 million from June 30, 2010 and have decreased 474.2 million since March 31, 2010. We lowered our deposit rates 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 September 30, 2010 as compared to 131 branches at December 31, 2009.
Borrowings amounted to $29.83 billion at September 30, 2010 as compared to $29.98 billion at December 31, 2009. During the first nine months of 2010, we modified $4.03 billion of borrowings to extend the call dates of the borrowings by between three and five years. Borrowed funds at September 30, 2010 were comprised of $14.88 billion of FHLB advances and $14.95 billion of securities sold under agreements to repurchase.
Substantially all of our borrowings are callable quarterly at the discretion of the lender after an initial no-call period of one to five years with a final maturity of ten years. We have historically used this type of borrowing to fund a portion of the growth in interest-earning assets. At September 30, 2010, we had $22.58 billion of borrowed funds with call dates within one year. If interest rates were to decrease, or remain consistent with current rates, we believe these borrowings would probably not be called 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 called at their next call 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 called will not increase substantially unless interest rates were to increase by at least 300 basis points.
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

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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 or estimable at September 30, 2010.
Other liabilities decreased to $254.2 million at September 30, 2010 from $275.6 million at December 31, 2009. The decrease is primarily the result of a decrease in accrued taxes of $33.0 million.
Total shareholders’ equity increased $283.6 million to $5.62 billion at September 30, 2010 as compared to $5.34 billion at December 31, 2009. The increase was primarily due to net income of $416.0 million for the nine months ended September 30, 2010 and a $68.0 million increase in accumulated other comprehensive income primarily due to an increase in the net unrealized gain on securities available-for-sale. These increases to shareholders’ equity were partially offset by cash dividends paid to common shareholders of $221.8 million. The accumulated other comprehensive income of $252.5 million at September 30, 2010 included a $273.0 million after-tax net unrealized gain on securities available-for-sale ($461.5 million pre-tax) partially offset by a $20.5 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans.
As of September 30, 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 the first nine months of 2010. Our capital ratios remain in excess of the regulatory requirements for a well-capitalized bank. See “Liquidity and Capital Resources.”
At September 30, 2010, our shareholders’ equity to asset ratio was 9.28% compared with 8.86% at December 31, 2009. The ratio of average shareholders’ equity to average assets was 9.05% for both the nine months ended September 30, 2010 and 2009, respectively. 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 $11.40 at September 30, 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 $11.08 as of September 30, 2010 and $10.53 at December 31, 2009.

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Comparison of Operating Results for the Three-Month Periods Ended September 30, 2010 and 2009
Average Balance Sheet. The following table presents the average balance sheets, average yields and costs and certain other information for the three months ended September 30, 2010 and 2009. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and 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 to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual 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 discounts and premiums that are amortized or accreted to interest income.
                                                 
    For the Three Months Ended September 30,  
    2010     2009  
                    Average                     Average  
    Average             Yield/     Average             Yield/  
    Balance     Interest     Cost     Balance     Interest     Cost  
                    (Dollars in thousands)                  
Assets:
                                               
Interest-earnings assets:
                                               
First mortgage loans, net (1)
  $ 31,561,184     $ 417,071       5.29 %   $ 30,445,939     $ 424,521       5.58 %
Consumer and other loans
    342,374       4,525       5.29       369,556       5,212       5.64  
Federal funds sold and other overnight deposits
    1,104,738       604       0.22       475,094       344       0.29  
Mortgage-backed securities at amortized cost
    20,402,928       206,624       4.05       19,762,620       243,817       4.93  
Federal Home Loan Bank stock
    881,380       10,128       4.60       878,827       12,281       5.59  
Investment securities, at amortized cost
    5,196,235       49,858       3.84       4,996,795       57,990       4.64  
 
                                       
Total interest-earning assets
    59,488,839       688,810       4.63       56,928,831       744,165       5.23  
 
                                       
 
                                               
Noninterest-earnings assets (4)
    1,469,928                       1,249,336                  
 
                                           
Total Assets
  $ 60,958,767                     $ 58,178,167                  
 
                                           
 
                                               
Liabilities and Shareholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Savings accounts
  $ 861,079       1,524       0.70     $ 759,757       1,437       0.75  
Interest-bearing transaction accounts
    2,430,111       5,651       0.92       1,831,426       7,351       1.59  
Money market accounts
    5,069,129       11,687       0.91       4,109,583       17,606       1.70  
Time deposits
    16,232,326       71,664       1.75       15,311,050       86,531       2.24  
 
                                       
Total interest-bearing deposits
    24,592,645       90,526       1.46       22,011,816       112,925       2.04  
 
                                       
Repurchase agreements
    15,057,609       156,609       4.13       15,100,000       154,175       4.05  
Federal Home Loan Bank of New York advances
    14,875,000       151,341       4.04       14,965,217       151,608       4.02  
 
                                       
Total borrowed funds
    29,932,609       307,950       4.08       30,065,217       305,783       4.04  
 
                                       
Total interest-bearing liabilities
    54,525,254       398,476       2.90       52,077,033       418,708       3.19  
 
                                       
 
                                               
Noninterest-bearing liabilities:
                                               
Noninterest-bearing deposits
    543,667                       542,273                  
Other noninterest-bearing liabilities
    264,696                       330,793                  
 
                                           
Total noninterest-bearing liabilities
    808,363                       873,066                  
 
                                           
 
                                               
Total liabilities
    55,333,617                       52,950,099                  
Shareholders’ equity
    5,625,150                       5,228,068                  
 
                                           
Total Liabilities and Shareholders’ Equity
  $ 60,958,767                     $ 58,178,167                  
 
                                           
 
                                               
Net interest income/net interest rate spread (2)
          $ 290,334       1.73             $ 325,457       2.04  
 
                                           
Net interest-earning assets/net interest margin (3)
  $ 4,963,585               1.97 %   $ 4,851,798               2.31 %
 
                                           
Ratio of interest-earning assets to interest-bearing liabilities
                    1.09 x                     1.09 x
 
(1)   Amount includes deferred loan costs and non-performing loans and is net of the allowance for loan losses.
 
(2)   Determined by subtracting the annualized weighted average cost of total interest-bearing liabilities from the annualized weighted average yield on total interest-earning assets.
 
(3)   Determined by dividing annualized net interest income by total average interest-earning assets.
 
(4)   Includes the average balance of principal receivable related to FHLMC mortgage-backed securities of $209.5 million and $181.3 million
 
    for the quarters ended September 30, 2010 and 2009, respectively.

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General. Net income was $124.6 million for the third quarter of 2010, a decrease of $10.5 million, or 7.8%, compared with net income of $135.1 million for the third quarter of 2009. Both basic and diluted earnings per common share were $0.25 for the third quarter of 2010 as compared to basic and diluted earnings per share of $0.28 and $0.27, respectively, for the third quarter of 2009. For the third quarter of 2010, our annualized return on average shareholders’ equity was 8.86%, compared with 10.34% for the corresponding period in 2009. Our annualized return on average assets for the third quarter of 2010 was 0.82% as compared to 0.93% for the third quarter of 2009. The decrease in the annualized return on average equity and assets is primarily due to the decrease in net income and increase in average equity and assets during the third quarter of 2010.
Interest and Dividend Income. Total interest and dividend income for the third quarter of 2010 decreased $55.4 million, or 7.4%, to $688.8 million from $744.2 million for the third quarter of 2009. The decrease in total interest and dividend income was primarily due to a decrease of 60 basis points in the annualized weighted-average yield on total interest-earning assets to 4.63% for the quarter ended September 30, 2010 from 5.23% for the same quarter in 2009. The decrease in the annualized weighted-average yield was partially offset by an increase in the average balance of total interest-earning assets of $2.56 billion, or 4.5%, to $59.49 billion for the third quarter of 2010 as compared to $56.93 billion for the third quarter of 2009.
Interest on first mortgage loans decreased $7.4 million to $417.1 million for the third quarter of 2010 as compared to $424.5 million for the same quarter in 2009. This was primarily due to a 29 basis point decrease in the weighted-average yield to 5.29% from 5.58% for the 2009 third quarter. The decrease in the weighted-average yield was partially offset by a $1.12 billion increase in the average balance of first mortgage loans to $31.56 billion, reflecting our historical emphasis on the growth of our mortgage loan portfolio. During 2010 our mortgage loan portfolio decreased slightly as refinancing activity resulted in continued elevated levels of loan repayments and the weak real estate markets resulted in decreased home purchase mortgage activity. In addition, 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. 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 the first nine months of 2010, existing mortgage customers refinanced or modified approximately $2.11 billion in mortgage loans with a weighted average rate of 5.82% to a new weighted average rate of 4.94%. During the first nine months of 2009, customers refinanced or modified approximately $2.08 billion in mortgage loans with a weighted average rate of 6.21% to a new weighted average rate of 5.42%. 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 $687,000 to $4.5 million for the third quarter of 2010 from $5.2 million for the third quarter of 2009. The average balance of consumer and other loans decreased $27.2 million to $342.4 million for the third quarter of 2010 as compared to $369.6 million for the third quarter of 2009 and the average yield earned decreased 35 basis points to 5.29% as compared to 5.64% for the same respective periods.

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Interest on mortgage-backed securities decreased $37.2 million to $206.6 million for the third quarter of 2010 from $243.8 million for the third quarter of 2009. This decrease was due primarily to an 88 basis point decrease in the weighted-average yield to 4.05% for the third quarter of 2010 from 4.93% for the third quarter of 2009. The decrease in the weighted-average yield was partially offset by a $640.3 million increase in the average balance of mortgage-backed securities to $20.40 billion during the third quarter of 2010 as compared to $19.76 billion for the third quarter of 2009.
The increases in the average balances of mortgage-backed securities were due to purchases of primarily variable-rate hybrid securities. These securities typically have a fixed interest rate for three, five or ten years. After this initial fixed-rate term, the interest rates adjust annually. We purchase these securities as part of our overall management of interest rate risk and to provide us with a source of monthly cash flows. The decrease in the weighted average yield on mortgage-backed securities is a result of lower yields on securities 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 $8.1 million to $49.9 million for the third quarter of 2010 as compared to $58.0 million for the same period in 2009. This decrease was due primarily to a decrease in the weighted-average yield of investment securities of 80 basis points to 3.84% for the third quarter of 2010 as compared to 4.64% for the third quarter of 2009. The decrease in the weighted-average yield on investment securities was partially offset by a $199.4 million increase in the average balance of investment securities to $5.20 billion for the third quarter of 2010 from $5.00 billion for the third quarter of 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 decreased $2.2 million, or 17.9%, to $10.1 million for the third quarter of 2010 as compared to $12.3 million for the third quarter of 2009. This decrease was due primarily to a 99 basis point decrease in the average dividend yield earned to 4.60% as compared to 5.59% for the third quarter of 2009. The decrease in dividend income was partially offset by a $2.6 million increase in the average balance to $881.4 million for the third quarter of 2010 as compared to $878.8 million for the same period in 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 $604,000 for the third quarter of 2010 as compared to $344,000 for the third quarter of 2009. The average balance of Federal funds sold amounted to $1.10 billion for the third quarter of 2010 as compared to $475.1 million for the third quarter of 2009. The yield earned on Federal funds sold was 0.22% for the 2010 third quarter and 0.29% for the 2009 third quarter. 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.
Interest Expense. Total interest expense for the quarter ended September 30, 2010 decreased $20.2 million, or 4.8%, to $398.5 million from $418.7 million for the quarter ended September 30, 2009. This decrease was primarily due to a 29 basis point decrease in the weighted-average cost of total interest-bearing liabilities to 2.90% for the quarter ended September 30, 2010 compared with 3.19% for the quarter ended September 30, 2009. The decrease was partially offset by a $2.45 billion, or 4.7%, increase in the average balance of total interest-bearing liabilities to $54.53 billion for the quarter ended September 30, 2010 compared with $52.08 billion for the third quarter of 2009. This increase in interest-bearing liabilities was primarily used to fund asset growth.

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Interest expense on our time deposit accounts decreased $14.8 million to $71.7 million for the third quarter of 2010 as compared to $86.5 million for the third quarter of 2009. This decrease was due to a decrease in the annualized weighted-average cost of 49 basis points to 1.75% for the third quarter of 2010 compared with 2.24% for the third quarter of 2009 as maturing time deposits were renewed or replaced by new time deposits at lower rates. This decrease was partially offset by a $921.3 million increase in the average balance of time deposit accounts to $16.23 billion for the third quarter of 2010 as compared to $15.31 billion for the third quarter of 2009. Interest expense on money market accounts decreased $5.9 million to $11.7 million for the third quarter of 2010 from $17.6 million for the same period in 2009. This decrease was due to a decrease in the annualized weighted-average cost of 79 basis points to 0.91% for the third quarter of 2010 compared with 1.70% for the third quarter of 2009. This decrease was partially offset by an increase in the average balance of $959.5 million to $5.07 billion for the third quarter of 2010 as compared to $4.11 billion for the third quarter of 2009. Interest expense on our interest-bearing transaction accounts decreased $1.7 million to $5.7 million for the third quarter of 2010 from $7.4 million for the same period in 2009. The decrease is due to a 67 basis point decrease in the annualized weighted-average cost to 0.92%, partially offset by a $598.7 million increase in the average balance to $2.43 billion for the third quarter of 2010 as compared to $1.83 billion for the third quarter of 2009.
The increases in the average balances of interest-bearing deposits reflect our expanded branch network and our historical efforts to grow deposits in our existing branches by offering competitive rates. 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. However, total deposits decreased $474.2 million from March 31, 2010. We lowered our deposit rates in order 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. The decrease in the average cost of deposits for 2010 reflected lower market interest rates.
Interest expense on borrowed funds increased $2.2 million to $308.0 million for the third quarter of 2010 as compared to $305.8 million for the third quarter of 2009. This increase was primarily due to a 4 basis point increase in the weighted-average cost of borrowed funds to 4.08% for the third quarter of 2010 as compared to 4.04% for the third quarter of 2009. This increase was partially offset by a $132.6 million decrease in the average balance of borrowed funds to $29.93 billion for the third quarter of 2010 as compared to $30.07 billion for the third quarter of 2009. The slight increase in the average cost of our borrowings is due primarily to our strategy of modifying current borrowings to extend the call dates. The interest rates on modified borrowings are typically between 10 and 25 basis points higher than the interest rate on original borrowings. During the first nine months of 2010, we modified $4.03 billion of borrowings to extend the call dates of the borrowings by between three and five years. During the year ended December 31, 2009 we modified approximately $1.73 billion of these borrowings. We will continue to explore further modifications of similar borrowings as part of our overall interest rate risk management strategies.
We have historically used borrowings to fund a portion of the growth in interest-earning assets. However, we were able to fund substantially all of our growth in 2009 and for the first nine months of 2010 with deposits. Substantially all of our borrowings are callable quarterly at the discretion of the lender after an initial non-call period of one to 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 called will not increase substantially unless interest rates were to increase by at least 300 basis points. See “Liquidity and Capital Resources.”

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Net Interest Income. Net interest income decreased $35.2 million, or 10.8%, to $290.3 million for the third quarter of 2010 compared with $325.5 million for the third quarter of 2009. Our net interest rate spread decreased 31 basis points to 1.73% for the three months ended September 30, 2010 as compared to 2.04% for the same period in 2009. Our net interest margin decreased 34 basis points to 1.97% for the third quarter of 2010 from 2.31% for the same quarter in 2009. The decrease in our net interest income, net interest rate spread and net interest margin was primarily due to the decrease in the weighted-average yield of our interest-earning assets. While our deposits continued to reprice to lower rates during the third quarter of 2010, the low market interest rates 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 87.4% of our average interest-earning assets during the third quarter of 2010.
Provision for Loan Losses. The provision for loan losses amounted to $50.0 million for the quarter ended September 30, 2010 as compared to $40.0 million for the quarter ended September 30, 2009. The ALL amounted to $216.3 million at September 30, 2010 and $140.1 million at December 31, 2009. The increase in the provision for loan losses for the quarter ended September 30, 2010 and the resulting increase in the ALL is due primarily to the increase in non-performing loans during the quarter, 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 the first nine months of 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, recent collateral valuations, conditions in the real estate and housing markets, current economic conditions, particularly continued elevated 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 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 60.4%, 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 third quarter of 2010, we concluded that home values in the Northeast quadrant of the United States, where most of our lending activity occurs, continued to decline from 2009 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.
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, increases in corporate borrowing rates, falling home prices, increasing home foreclosures and rising levels of unemployment. Economic conditions have improved but at a slower pace than anticipated during the third quarter of 2010. Home sale activity decreased during the third quarter of 2010 while unemployment remained at elevated levels. 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 the third quarter of 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 $837.5 million at September 30, 2010 as compared to $790.1 million at June 30, 2010 and $627.7 million at December 31, 2009. Non-performing loans at September 30, 2010 included $821.3 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 2.64% at September 30, 2010 compared with 2.46% at June 30, 2010 and 1.98% at December 31, 2009. Our recent increases in non-performing loans appear to be directly related to the elevated level of unemployment in our market areas. Loans delinquent 30 to 59 days amounted to $432.7 million at September 30, 2010 as compared to $396.5 million at June 30, 2010 and $430.9 million at December 31, 2009. Loans delinquent 60 to 89 days amounted to $188.6 million at September 30, 2010 as compared to $168.6 million at June 30, 2010 and $182.5 million at December 31, 2009. Foreclosed real estate amounted to $40.3 million at September 30, 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 have helped to moderate our charge-offs.
At September 30, 2010, the ratio of the ALL to non-performing loans was 25.83% as compared to 24.42% at June 30, 2010 and 22.32% at December 31, 2009. The ratio of the ALL to total loans was 0.68% at September 30, 2010 as compared to 0.60% at June 30, 2010 and 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 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.
Charge-offs on our non-performing loans increased in 2009 and during the first nine months of 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 $26.7 million for the third quarter of 2010 as compared to $22.8 million for the second quarter of 2010 and $24.2 million for the first quarter of 2010. These charge-offs were primarily due to the results of our reappraisal process for our non-performing residential first mortgage loans with only 58 loans disposed of through the foreclosure process during the first nine months of 2010 with a final realized gain on sale (after previous charge-offs and write-downs) of approximately $1.2 million. Write-downs on foreclosed real estate amounted to $2.3 million for the first nine months of 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 Office of Federal Housing Enterprise Oversight and Case-Shiller. 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 do not apply different loss factors based on geographic locations since, at September 30, 2010, 77.0% of our loan portfolio and 69.4% of our non-performing loans are located in the New York metropolitan area. In addition, we obtain updated

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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 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 the loss factors used in our quantitative analysis of the ALL for certain loan types during the first nine months of 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 12.2% during the first nine months of 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 September 30, 2010 was 60.4%, 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 71.7% at September 30, 2010. Based on the valuation indices, house prices have declined in the New York metropolitan area, where 69.4% of our non-performing loans were located at September 30, 2010, by approximately 19% from the peak of the market in 2006 through July 2010 and by 29% nationwide during that period. During the first seven months of 2010, house prices increased by 1.6% in the New

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York metropolitan area and increased 1.2% 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 allowance for loan losses. 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.
Net charge-offs amounted to $26.7 million for the third quarter of 2010 as compared to net charge-offs of $13.2 million for the corresponding period in 2009. For the nine months ended September 30, 2010, net charge-offs amounted to $73.8 million as compared to $27.5 million for the same period in 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 24 to 30 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 which has resulted in self-imposed moratoriums by these servicers on their foreclosures and greater court and state attorney general scrutiny, our foreclosure process and timing to completion of foreclosures may be further delayed. If real estate prices 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 September 30, 2010 and December 31, 2009, commercial and construction loans evaluated for impairment in accordance with FASB guidance amounted to $11.5 million and $11.2 million, respectively. Based on this evaluation, we established an ALL of $2.7 million for loans classified as impaired at September 30, 2010 compared to $2.1 million at December 31, 2009.
The markets in which we lend have experienced significant declines in real estate values which we have taken into account in evaluating our ALL. 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. No assurance can be given in any particular case that our LTV ratios will provide full protection in the event of borrower default. 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 was $33.9 million for the third quarter 2010 as compared to $2.5 million for the same quarter in 2009. Included in non-interest income for the three month period ended September 30, 2010 were net gains on securities transactions of $31.0 million which resulted from the sale of $810.7 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

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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 $2.8 million, or 4.5%, to $65.7 million for the third quarter of 2010 from $62.9 million for the third quarter of 2009. The increase is primarily due to an increase of $4.1 million in Federal deposit insurance expense due primarily to an increase in total deposits. On October 19, 2010, the Board of Directors of the FDIC adopted a new Restoration Plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Reform Act. Among other things, the Restoration Plan provides that the FDIC will forego the uniform three basis point increase in initial assessments rates that was previously scheduled to take effect on January 1, 2011 and will maintain the current assessment rate schedule for all insured depository institutions until the reserve ratio reaches 1.15%. The FDIC intends to pursue further rulemaking in 2011 regarding the requirement under the Reform Act that the FDIC offset the effect on institutions with less than $10 billion in assets of the requirement that the reserve ratio reach 1.35% by September 30, 2020, rather than 1.15% by the end of 2016 (as required under the prior restoration plan), so that more of the cost of raising the reserve ratio to 1.35% will be borne by institutions with more than $10 billion in assets, such as the Company.
The increase in Federal deposit insurance expense was partially offset by a $2.0 million decrease in compensation and employee benefits expense. The decrease in compensation and employee benefits expense included a $2.2 million decrease in expense related to our stock benefit plans and a $1.0 million decrease in pension expense. These decreases were partially offset by a $1.3 million increase in costs related to our health plan and a $367,000 increase in compensation costs. At September 30, 2010, we had 1,573 full-time equivalent employees as compared to 1,483 at September 30, 2009. We expect to incrementally add staff as we identify areas of operations for which compliance needs will increase as a result of our past growth and the increased regulatory burden, particularly on larger financial institutions, imposed by the Reform Act. Included in other non-interest expense for the third quarter of 2010 were gains on the sale of foreclosed real estate (net of write-downs on foreclosed real estate) of $391,000 as compared to net losses of $481,000 for the third quarter of 2009.
Our efficiency ratio was 20.27% for the third quarter of 2010 as compared to 19.18% for the third quarter of 2009. The efficiency ratio is calculated by dividing non-interest expense, by the sum of net interest income and non-interest income. Our annualized ratio of non-interest expense to average total assets for both the third quarter of 2010 and 2009 was 0.43%.
Income Taxes. Income tax expense amounted to $83.9 million for the third quarter of 2010 compared with $90.0 million for the same quarter in 2009. Our effective tax rate for the third quarter of 2010 was 40.25% compared with 39.98% for the third quarter of 2009.

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Comparison of Operating Results for the Nine Month Periods Ended September 30, 2010 and 2009
Average Balance Sheet. The following table presents the average balance sheets, average yields and costs and certain other information for the nine months ended September 30, 2010 and 2009. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and 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 to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual 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 discounts and premiums that are amortized or accreted to interest income.
                                                 
    For the Nine Months Ended September 30,  
    2010     2009  
                    Average                     Average  
    Average             Yield/     Average             Yield/  
    Balance     Interest     Cost     Balance     Interest     Cost  
    (Dollars in thousands)  
Assets:
                                               
Interest-earnings assets:
                                               
First mortgage loans, net (1)
  $ 31,557,701     $ 1,271,476       5.37 %   $ 29,832,820     $ 1,252,011       5.60 %
Consumer and other loans
    350,193       13,938       5.31       385,774       16,629       5.75  
Federal funds sold and other overnight deposits
    927,964       1,629       0.23       460,265       707       0.21  
Mortgage-backed securities at amortized cost
    20,412,325       660,451       4.31       19,574,806       743,207       5.06  
Federal Home Loan Bank stock
    879,680       31,668       4.80       876,773       30,698       4.67  
Investment securities, at amortized cost
    5,202,508       162,098       4.15       4,294,557       151,994       4.72  
 
                                       
Total interest-earning assets
    59,330,371       2,141,260       4.81       55,424,995       2,195,246       5.28  
 
                                       
Noninterest-earnings assets (4)
    1,566,867                       1,170,312                  
 
                                           
Total Assets
  $ 60,897,238                     $ 56,595,307                  
 
                                           
Liabilities and Shareholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Savings accounts
  $ 831,128       4,546       0.73     $ 740,889       4,179       0.75  
Interest-bearing transaction accounts
    2,337,134       19,448       1.11       1,732,510       24,459       1.89  
Money market accounts
    5,170,008       41,375       1.07       3,498,955       50,564       1.93  
Time deposits
    16,257,836       224,746       1.85       14,464,413       295,801       2.73  
 
                                       
Total interest-bearing deposits
    24,596,106       290,115       1.58       20,436,767       375,003       2.45  
 
                                       
Repurchase agreements
    15,085,714       463,030       4.10       15,100,295       457,252       4.05  
Federal Home Loan Bank of New York advances
    14,875,000       449,122       4.04       15,076,250       451,306       4.00  
 
                                       
Total borrowed funds
    29,960,714       912,152       4.07       30,176,545       908,558       4.03  
 
                                       
Total interest-bearing liabilities
    54,556,820       1,202,267       2.95       50,613,312       1,283,561       3.39  
 
                                       
 
Noninterest-bearing liabilities:
                                               
Noninterest-bearing deposits
    539,435                       537,326                  
Other noninterest-bearing liabilities
    289,828                       324,534                  
 
                                           
Total noninterest-bearing liabilities
    829,263                       861,860                  
 
                                           
Total liabilities
    55,386,083                       51,475,172                  
Shareholders’ equity
    5,511,155                       5,120,135                  
 
                                           
Total Liabilities and Shareholders’ Equity
  $ 60,897,238                     $ 56,595,307                  
 
                                           
Net interest income/net interest rate spread (2)
          $ 938,993       1.86             $ 911,685       1.89  
 
                                           
Net interest-earning assets/net interest margin (3)
  $ 4,773,551               2.10 %   $ 4,811,683               2.18 %
 
                                           
Ratio of interest-earning assets to interest-bearing liabilities
                    1.09 x                   1.10 x
 
(1)   Amount includes deferred loan costs and non-performing loans and is net of the ALL.
 
(2)   Determined by subtracting the annualized weighted average cost of total interest-bearing liabilities from the annualized weighted average yield on total interest-earning assets.
 
(3)   Determined by dividing annualized net interest income by total average interest-earning assets.
 
(4)   Includes the average balance of principal receivable related to FHLMC mortgage-backed securities of $323.7 million and $163.3 million
 
    for the nine months ended September 30, 2010 and 2009, respectively.

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General. Net income was $416.0 million for the first nine months of 2010, an increase of $25.3 million, or 6.5%, compared with net income of $390.7 million for the first nine months of 2009. Basic and diluted earnings per common share were both $0.84 for the first nine months of 2010 as compared to $0.80 for both basic and diluted earnings per share for the first nine months of 2009. For the nine months ended September 30, 2010, our annualized return on average shareholders’ equity was 10.07%, compared with 10.17% for the corresponding period in 2009. Our annualized return on average assets for the first nine months of 2010 was 0.91% as compared to 0.92% for the first nine months of 2009. The decrease in the annualized return on average equity and assets is primarily due to the increase in average equity and assets during the first nine months of 2010.
Interest and Dividend Income. Total interest and dividend income for the first nine months of 2010 decreased $54.0 million, or 2.5%, to $2.14 billion compared with $2.20 billion for the first nine months of 2009. The decrease in total interest and dividend income was primarily due to a decrease of 47 basis points in the annualized weighted-average yield to 4.81% for the nine months ended September 30, 2010 as compared to 5.28% for the same period in 2009. The decrease in the annualized weighted-average yield was partially offset by an increase in the average balance of total interest-earning assets of $3.91 billion, or 7.0%, to $59.33 billion for the nine months ended September 30, 2010 as compared to $55.42 billion for the comparable period in 2009.
Interest on first mortgage loans increased $19.5 million to $1.27 billion for the first nine months of 2010 as compared to $1.25 billion for the corresponding period in 2009. This was primarily due to a $1.72 billion increase in the average balance of first mortgage loans to $31.56 billion, which reflected our historical emphasis on the growth of our mortgage loan portfolio and the increase in mortgage originations due to refinancing activity as a result of the current low interest rate environment. The increase in the average balance of first mortgage loans was partially offset by a 23 basis point decrease in the weighted-average yield to 5.37% for the nine months ended September 30, 2010 as compared to 5.60% for the same period in 2009. 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 the first nine months of 2010, existing mortgage customers refinanced or modified approximately $2.11 billion in mortgage loans with a weighted average rate of 5.82% to a new weighted average rate of 4.94%.
Interest on consumer and other loans decreased $2.7 million to $13.9 million for the first nine months of 2010 from $16.6 million for the first nine months of 2009. The average balance of consumer and other loans decreased $35.6 million to $350.2 million for the first nine months of 2010 as compared to $385.8 million for the first nine months of 2009 and the average yield earned decreased 44 basis points to 5.31% as compared to 5.75% for the same respective periods.
Interest on mortgage-backed securities decreased $82.7 million to $660.5 million for the first nine months of 2010 as compared to $743.2 million for the first nine months of 2009. This decrease was due primarily to a 75 basis point decrease in the weighted-average yield to 4.31% for the first nine months of 2010 from 5.06% for the first nine months of 2009. The decrease in the weighted-average yield was partially offset by an $837.5 million increase in the average balance of mortgage-backed securities to $20.41 billion during the first nine months of 2010 as compared to $19.57 billion for the first nine months of 2009.
The increases in the average balances of mortgage-backed securities were due to purchases of primarily variable-rate hybrid securities. These securities typically have a fixed interest rate for three, five or ten years. After this initial fixed-rate term, the interest rates adjust annually. We purchase these types of securities as part of our overall management of interest rate risk and to provide us with a source of monthly cash flows. The decrease in the weighted average yield on mortgage-backed securities is a result

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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 increased $10.1 million to $162.1 million during the first nine months of 2010 as compared to $152.0 million for the first nine months of 2009. This increase was due primarily to a $908.0 million increase in the average balance of investment securities to $5.20 billion for the first nine months of 2010 from $4.29 billion for the first nine months of 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. 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 57 basis points to 4.15% for the nine months ended September 30, 2010 as compared to 4.72% for the same period in 2009. This decrease in the average yield earned reflects current market interest rates.
Dividends on FHLB stock increased $970,000, or 3.2%, to $31.7 million for the first nine months of 2010 as compared to $30.7 million for the same period in 2009. This increase was due primarily to a 13 basis point increase in the average dividend yield earned to 4.80% for the first nine months of 2010 as compared to 4.67% for the same period in 2009. The increase in dividend income was also due to a $2.9 million increase in the average balance to $879.7 million for the first nine months of 2010 as compared to $876.8 million for the same period in 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 $1.6 million for the first nine months of 2010 as compared to $707,000 for the comparable period in 2009. The average balance of Federal funds sold amounted to $928.0 million for the first nine months of 2010 as compared to $460.3 million for the same period in 2009. The yield earned on Federal funds sold was 0.23% for the nine months ended September 30, 2010 and 0.21% for the nine months ended September 30, 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.
Interest Expense. Total interest expense for the nine months ended September 30, 2010 decreased $81.3 million, or 6.3%, to $1.20 billion from $1.28 billion for the nine months ended September 30, 2009. This decrease was primarily due to a 44 basis point decrease in the weighted-average cost of total interest-bearing liabilities to 2.95% for the nine months ended September 30, 2010 compared with 3.39% for the nine months ended September 30, 2009. The decrease was partially offset by a $3.95 billion, or 7.8%, increase in the average balance of total interest-bearing liabilities to $54.56 billion for the nine months ended September 30, 2010 compared with $50.61 billion for the first nine months of 2009. This increase in the average balance of interest-bearing liabilities was primarily used to fund the increase in average interest-earning assets.
Interest expense on our time deposit accounts decreased $71.1 million to $224.7 million for the first nine months of 2010 from $295.8 million for the first nine months of 2009. This decrease was due to a decrease in the annualized weighted-average cost of 88 basis points to 1.85% for the first nine months of 2010 from 2.73% for the first nine months of 2009 as maturing time deposits were renewed or replaced by new time deposits at lower rates. This decrease was partially offset by a $1.80 billion increase in the average balance of time deposit accounts to $16.26 billion for the first nine months of 2010 from $14.46 billion for the first nine months of 2009. Interest expense on money market accounts decreased $9.2 million to $41.4 million for the first nine months of 2010 from $50.6 million for the same period in 2009. This decrease was due to a decrease in the annualized weighted-average cost of 86 basis points to 1.07% for the first nine months of 2010 from 1.93% for the first nine months of 2009. This decrease was

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partially offset by an increase in the average balance of $1.67 billion to $5.17 billion for the third quarter of 2010 as compared to $3.50 billion for the third quarter of 2009. Interest expense on our interest-bearing transaction accounts decreased $5.1 million to $19.4 million for the first nine months of 2010 compared with $24.5 million for the same period in 2009. The decrease is due to a 78 basis point decrease in the annualized weighted-average cost to 1.11%, partially offset by a $604.6 million increase in the average balance to $2.34 billion for the first nine months of 2010 as compared to $1.73 billion for the corresponding period in 2009.
The increases in the average balances of interest-bearing deposits reflect our expanded branch network and our historical efforts to grow deposits in our existing branches by offering competitive rates. 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. However, total deposits have decreased $474.2 million since March 31, 2010. We lowered our deposit rates to slow our deposit growth from 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. The decrease in the average cost of deposits in 2010 reflected lower market interest rates.
Interest expense on borrowed funds increased $3.6 million to $912.2 million for the nine months ended September 30, 2010 as compared to $908.6 million for the comparable period in 2009. This increase was primarily due to a 4 basis point increase in the weighted-average cost of borrowed funds to 4.07% for the first nine months of 2010 as compared to 4.03% for the first nine months of 2009 reflecting the incremental cost of the debt modifications. This increase was partially offset by a $215.8 million decrease in the average balance of borrowed funds to $29.96 billion for the first nine months of 2010 as compared to $30.18 billion for the first nine months of 2009. During the first nine months of 2010, we modified $4.03 billion of borrowings to extend the call dates of the borrowings by between three and five years. During 2009, we modified approximately $1.73 billion of these borrowings.
We have historically used borrowings to fund a portion of the growth in interest-earning assets. However, we were able to fund substantially all of our growth in 2009 and for the first nine months of 2010 with deposits. Substantially all of our borrowings are callable quarterly at the discretion of the lender after an initial non-call period of one to 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 called will not increase substantially unless interest rates were to increase by at least 300 basis points. See “Liquidity and Capital Resources.”
Net Interest Income. Net interest income increased $27.3 million, or 3.0%, to $939.0 million for the first nine months of 2010 compared with $911.7 million for the first nine months of 2009. Our net interest rate spread decreased 3 basis points to 1.86% for the first nine months of 2010 from 1.89% for the corresponding period in 2009. Our net interest margin decreased 8 basis points to 2.10% for the first nine months of 2010 from 2.18% for the corresponding period in 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 87.6% of the average balance of interest-earning assets for the nine months ended September 30, 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 deposit costs but to a lesser extent than the decrease in mortgage yields, resulting in a decrease in our net interest rate spread and net interest margin for the nine months ended September 30, 2010.

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Provision for Loan Losses. The provision for loan losses amounted to $150.0 million for the nine months ended September 30, 2010 as compared to $92.5 million for the nine months ended September 30, 2009. The ALL amounted to $216.3 million at September 30, 2010 and $140.1 million at December 31, 2009. The increase in the provision for loan losses for the quarter ended September 30, 2010 and the resulting increase in the ALL is due primarily to the increase in non-performing loans during the first nine months of 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 the first nine months of 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 continued elevated levels of unemployment, and growth in the loan portfolio. See “Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009 — Provision for Loan Losses”.
Non-Interest Income. Total non-interest income for the nine months ended September 30, 2010 was $100.1 million compared with $31.4 million for the comparable period in 2009. Included in non-interest income for the nine months ended September 30, 2010 were net gains on securities transactions of $92.4 million which resulted from the sale of $1.90 billion of mortgage-backed securities available-for-sale. Included in non-interest income for the nine months ended September 30, 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 decreased $5.9 million, or 2.9%, to $196.8 million for the nine months ended September 30, 2010 from $202.7 million for the nine months ended September 30, 2009. The decrease is primarily due to the absence of the FDIC special assessment of $21.1 million that was assessed during the second quarter of 2009 and a $4.2 million decrease in compensation and employee benefits expense. These decreases were partially offset by an increase of $17.6 million in Federal deposit insurance expense. 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 primarily as a result of a restoration plan implemented by the FDIC to recapitalize the Deposit Insurance Fund. The decrease in compensation and employee benefits expense included a $4.6 million decrease in expense related to our stock benefit plans and a $3.0 million decrease in pension expense. These decreases were partially offset by a $3.6 million increase in compensation costs due primarily to normal increases in salary as well as additional full time employees. Included in other non-interest expense for the nine months ended September 30, 2010 were write-downs on foreclosed real estate and net losses on the sale of foreclosed real estate, of $1.2 million as compared to $2.0 million for the comparable period in 2009.
Our efficiency ratio was 18.94% for the nine months ended September 30, 2010 as compared to 21.49% for the nine months ended September 30, 2009. The efficiency ratio is calculated by dividing non-interest expense, by the sum of net interest income and non-interest income. Our annualized ratio of non-interest expense to average total assets for the first nine months of 2010 was 0.43% as compared to 0.48% for the first nine months of 2009.

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Income Taxes. Income tax expense amounted to $276.2 million for the first nine months of 2010 compared with $257.2 million for the corresponding period in 2009. Our effective tax rate for the first nine months of 2010 was 39.90% compared with 39.70% for the first nine months of 2009.
Asset Quality
Credit Quality
One of our key operating objectives has been, and continues to be, to maintain a high level of asset quality. Through a variety of strategies we have been proactive in addressing problem loans and non-performing assets. These strategies, as well as our concentration on one- to four-family mortgage lending and our maintenance of sound credit standards for new loan originations have helped us to maintain the strength of our financial condition. Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties located in the Northeast quadrant of the United States. We define the Northeast quadrant of the country generally as 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 the dates indicated:
                                 
    September 30, 2010     December 31, 2009  
            Percent             Percent  
    Amount     of Total     Amount     of Total  
            (Dollars in thousands)          
First mortgage loans:
                               
One- to four-family:
                               
Amortizing
  $ 25,812,333       81.30 %   $ 26,490,454       83.36 %
Interest-only
    5,166,553       16.27       4,586,375       14.43  
FHA/VA
    380,108       1.20       285,003       0.90  
Multi-family and commercial
    50,421       0.16       54,694       0.17  
Construction
    10,519       0.03       13,030       0.04  
 
                       
Total first mortgage loans
    31,419,934       98.96       31,429,556       98.90  
 
                       
 
                               
Consumer and other loans
                               
Fixed-rate second mortgages
    171,875       0.54       201,375       0.63  
Home equity credit lines
    138,606       0.44       127,987       0.40  
Other
    18,987       0.06       21,003       0.07  
 
                       
Total consumer and other loans
    329,468       1.04       350,365       1.10  
 
                       
Total loans
    31,749,402       100.00 %     31,779,921       100.00 %
 
                           
 
                               
Deferred loan costs
    93,442               81,307          
Allowance for loan losses
    (216,283 )             (140,074 )        
 
                           
Net loans
  $ 31,626,561             $ 31,721,154          
 
                           
At September 30, 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

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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 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 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 September 30, 2010 are interest-only loans of approximately $5.17 billion, or 16.3%, 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 $162.5 million, or 19.4%, of non-performing loans at September 30, 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 FreddieMac/FannieMae 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 are able to provide data relating to limited documentation loans that we originate. Originated loans overall represent 60.6% of our one- to four- family first mortgage loans. As part of our wholesale loan program, we allow 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 September 30, 2010 are $3.30 billion of originated amortizing limited documentation loans

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and $911.6 million of originated limited documentation interest-only loans. Non-performing loans at September 30, 2010 include $86.0 million of originated amortizing limited documentation loans and $53.6 million of originated interest-only limited documentation loans.
The following table presents the geographic distribution of our total loan portfolio, as well as the geographic distribution of our non-performing loans:
                                 
    At September 30, 2010     At December 31, 2009  
    Total loans     Non-performing loans     Total loans     Non-performing loans  
New Jersey
    43.0 %     43.8 %     43.0 %     41.6 %
New York
    19.6       19.3       18.2       18.0  
Connecticut
    14.4       6.3       12.6       4.2  
 
                       
Total New York metropolitan area
    77.0       69.4       73.8       63.8  
 
                       
 
                               
Virginia
    3.8       5.3       4.6       6.2  
Illinois
    3.3       4.9       3.9       5.6  
Maryland
    2.9       4.6       3.5       5.1  
Massachusetts
    2.2       1.9       2.7       2.3  
Pennsylvania
    2.6       1.6       2.0       1.9  
Minnesota
    1.4       2.0       1.4       1.8  
Michigan
    1.1       2.8       1.3       4.2  
All others
    5.7       7.5       6.8       9.1  
 
                       
Total outside New York metropolitan area
    23.0       30.6       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 September 30, 2010     At December 31, 2009  
    (Dollars in thousands)  
Non-accrual first mortgage loans
  $ 604,520     $ 500,964  
Non-accrual interest-only mortgage loans
    162,495       82,236  
Non-accrual construction loans
    7,886       6,624  
Non-accrual consumer and other loans
    3,726       1,916  
Accruing loans delinquent 90 days or more:
               
FHA Loans
    57,941       31,855  
Other loans
    902       4,100  
 
           
Total non-performing loans
    837,470       627,695  
Foreclosed real estate, net
    40,276       16,736  
 
           
Total non-performing assets
  $ 877,746     $ 644,431  
 
           
 
Non-performing loans to total loans
    2.64 %     1.98 %
Non-performing assets to total assets
    1.45       1.07  

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Non-performing assets amounted to $877.7 million at September 30, 2010 as compared to $644.4 million at December 31, 2009. Non-performing loans increased $209.8 million to $837.5 million at September 30, 2010 as compared to $627.7 million at December 31, 2009. The increase in non-performing loans appears to be directly related to the elevated level of unemployment in our market areas. The ratio of non-performing loans to total loans was 2.64% at September 30, 2010 compared with 1.98% at December 31, 2009.
The following table is a comparison of our delinquent loans at September 30, 2010 and December 31, 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)  
At September 30, 2010                                                
One- to four-family first mortgages
    1,059     $ 411,879       441     $ 178,929       2,033     $ 763,367  
FHA/VA first mortgages
    80       17,689       35       7,696       208       57,941  
Multi-family and commercial mortgages
    2       681                   4       3,648  
Construction loans
                1       490       6       7,886  
Consumer and other loans
    39       2,477       13       1,529       40       4,628  
 
                                   
Total
    1,180     $ 432,726       490     $ 188,644       2,291     $ 837,470  
 
                                   
Delinquent loans to total loans
            1.36 %             0.59 %             2.64 %
 
                                               
At December 31, 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 %
In addition to non-performing loans, we had $196.1 million of potential problem loans at September 30, 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 FHA) and certain other internally classified loans. We will in certain cases grant customers a short-term deferment of principal payments on one- to four- family mortgage loans. However, we generally do not modify the contractual terms of loans for borrowers experiencing financial difficulty where such modifications would represent a troubled debt restructuring. Potential problem loans are summarized as follows:
                 
    September 30, 2010     December 31,2009  
    (In thousands)  
One- to four-family first mortgages
  $ 178,929     $ 171,913  
Multi-family and commercial mortgages
    13,056       17,076  
Construction loans
    2,633        
Consumer and other loans
    1,529       882  
 
           
Total potential problem loans
  $ 196,147     $ 189,871  
 
           

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Allowance for Loan Losses
The following table presents the activity in our allowance for loan losses at or for the dates indicated.
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
            (Dollars in thousands)          
Balance at beginning of period
  $ 192,983     $ 88,053     $ 140,074     $ 49,797  
 
                       
Provision for loan losses
    50,000       40,000       150,000       92,500  
Charge-offs:
                               
First mortgage loans
    (29,958 )     (13,483 )     (78,902 )     (27,783 )
Consumer and other loans
    (16 )     (8 )     (99 )     (17 )
 
                       
Total charge-offs
    (29,974 )     (13,491 )     (79,001 )     (27,800 )
Recoveries
    3,274       271       5,210       336  
 
                       
Net charge-offs
    (26,700 )     (13,220 )     (73,791 )     (27,464 )
 
                       
Balance at end of period
  $ 216,283     $ 114,833     $ 216,283     $ 114,833  
 
                       
 
                               
Allowance for loan losses to total loans
    0.68 %     0.37 %     0.68 %     0.37 %
Allowance for loan losses to non-performing loans
    25.83       22.19       25.83       22.19  
Net charge-offs as a percentage of average loans (1)
    0.33       0.17       0.31       0.12  
 
(1)   Ratio is annualized
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 September 30, 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
  $ 206,323       98.77 %   $ 133,927       98.69 %
Other first mortgages
    6,657       0.19       3,169       0.21  
 
                       
Total first mortgage loans
    212,980       98.96       137,096       98.90  
 
                               
Consumer and other loans
    3,303       1.04       2,978       1.10  
 
                       
Total allowance for loan losses
  $ 216,283       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

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currently believes it is not probable that it will collect all amounts due according to the contractual terms of the security.
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 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 in neither probable or estimable at September 30, 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. We also have the ability to access the capital markets, depending on market conditions.
On December 16, 2009, we filed an automatic shelf registration statement on Form S-3 with the SEC, which was declared effective immediately upon filing. This shelf 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 readily 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. At this time, we do not have any immediate plans or current commitments to sell securities under the self registration statement.
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 $4.28 billion and purchased $580.1 million of loans during the first nine months of 2010 as compared to

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$4.66 billion and $2.45 billion during the first nine months of 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 $4.74 billion for the first nine months of 2010 as compared to $5.34 billion for the same period in 2009. At September 30, 2010, commitments to originate and purchase mortgage loans amounted to $676.0 million and $700,000, respectively as compared to $469.0 million and $243.1 million, respectively at September 30, 2009.
Purchases of mortgage-backed securities during the first nine months of 2010 were $8.88 billion as compared to $5.01 billion during the first nine months of 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 the first nine months of 2010. Principal repayments on mortgage-backed securities amounted to $6.36 billion for the first nine months of 2010 as compared to $3.43 billion for the same period in 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. We sold $1.90 billion of mortgage-backed securities during the first nine months of 2010, resulting in a gain of $92.4 million. We also sold $761.6 million of mortgage-backed securities during the first nine months of 2009, resulting in a gain of $24.0 million.
We purchased $5.90 billion of investment securities during the first nine months of 2010 as compared to $4.37 billion during the first nine months of 2009. Proceeds from the calls of investment securities amounted to $6.07 billion during the first nine months of 2010 as compared to $2.67 billion for the corresponding period in 2009.
At September 30, 2010, we had mortgage-backed securities and investment securities with an amortized cost of $17.46 billion that were used as collateral for securities sold under agreements to repurchase and at that date we had $8.85 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 the first nine months of 2010, we had net purchases of $3.9 million of FHLB common stock. During the first nine months of 2009 we had net purchases of $11.4 million.
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 $336.6 million during the first nine months of 2010 as compared to an increase of $4.65 billion for the first nine months of 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. However, total deposits have decreased $474.2 million from March 31, 2010. We have lowered our deposit rates to slow our

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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 $10.69 billion at September 30, 2010. These time deposits have a weighted average rate of 1.32%. These time deposits are scheduled to mature as follows: $4.05 billion with an average cost of 1.20% in the fourth quarter of 2010, $3.42 billion with an average cost of 1.33% in the first quarter of 2011, $1.90 billion with an average cost of 1.44% in the second quarter of 2011 and $1.32 billion with an average cost of 1.49% in the third quarter of 2011. The current yields offered for our six month, one year and two year time deposits are 0.75%, 1.00% and 1.50%, respectively. In addition, our money market savings account is currently yielding 1.35%. 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 historically used wholesale borrowings to fund our investing and financing activities. However, we were able to fund our growth during the first nine months of 2010 with deposits. At September 30, 2010, we had $22.58 billion of borrowed funds with a weighted-average rate of 3.91% and with call dates within one year. We anticipate that none of these borrowings will be called 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 called will not increase substantially unless interest rates were to increase by at least 300 basis points. However, in the event borrowings are called, we anticipate that we will have sufficient resources to meet this funding commitment by borrowing new funds at the prevailing market interest rate, using funds generated by deposit growth or by using proceeds from securities sales. In addition, at September 30, 2010 we had $600.0 million of borrowings with a weighted average rate of 4.18% that are scheduled to mature within one year.
Our borrowings have traditionally consisted of structured callable borrowings with ten year final maturities and initial non-call 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-callable borrowings and have a slightly lower cost than a non-callable borrowing with a maturity date similar to the initial call date of the callable borrowing. In addition, a significant concentration of our borrowed funds involve the FHLB. At September 30, 2010, $17.18 billion or 57.6% of our total borrowed funds are with the FHLB. Our borrowing agreement with the FHLB requires the FHLB to offer another lending product at market interest rates to replace any called borrowings.
Our policies and procedures with respect to managing funding and liquidity risk are established to ensure our safe and sound operation in compliance with applicable bank regulatory requirements. Our liquidity management process is sufficient to meet our daily funding needs and cover both expected and unexpected deviations from normal daily operations. Processes are in place to appropriately identify, measure, monitor and control liquidity and funding risk. 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.
In order to effectively manage our interest rate risk and liquidity risk resulting from our current callable borrowing position, we are pursuing a variety of strategies to reduce callable borrowings while positioning the Company for future growth. We intend to continue focusing on funding our future growth primarily with customer deposits, using borrowed funds as a supplemental funding source if deposit growth is insufficient to support these growth plans. Funding our future growth primarily with deposits will allow us to achieve a greater balance between deposits and borrowings. We also intend to modify certain borrowings to extend their call dates, which we began to do during 2009. During the first nine months of 2010, we modified approximately $4.03 billion of callable borrowings to extend the call dates of the borrowings by between three and five years as part of this strategy. In addition, we are considering prepayment of certain borrowings; however, at this time, we have no immediate plans to make any such prepayments.
Cash dividends paid during the first nine months of 2010 were $221.8 million. We have not purchased any of our common shares during the nine months ended September 30, 2010. At September 30, 2010, there remained 50,123,550 shares available for purchase under existing stock repurchase programs.

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The primary source of liquidity for Hudson City Bancorp, the holding company of Hudson City Savings, is capital distributions from Hudson City Savings. During the first nine months of 2010, Hudson City Bancorp received $240.0 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 September 30, 2010, Hudson City Bancorp had total cash and due from banks of $233.8 million.
At September 30, 2010, Hudson City Savings exceeded all regulatory capital requirements. Hudson City Savings’ tangible capital ratio, leverage (core) capital ratio and total risk-based capital ratio were 7.91%, 7.91% and 22.42%, respectively.
Off-Balance Sheet Arrangements and Contractual Obligations
We are 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 Hudson City Savings. These arrangements are primarily commitments to originate and purchase mortgage loans, and to purchase securities. We are also obligated to repay borrowings at the earlier of maturity date or call date. At September 30, 2010, we had $22.58 billion of borrowed funds with call dates within one year. We anticipate that none of these borrowings will be called 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 called will not increase substantially unless interest rates were to increase by at least 300 basis points. We also have obligations pursuant to a number of non-cancelable operating leases.
The following table reports the amounts of our contractual obligations as of September 30, 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
  $ 676,000     $ 676,000     $     $     $  
Mortgage loan purchases
    700       700                    
Mortgage-backed security purchases
    2,142,000       2,142,000                    
Repayment of borrowed funds
    29,825,000       600,000       500,000       2,250,000       26,475,000  
Operating leases
    147,372       9,273       18,691       18,080       101,328  
 
                             
Total
  $ 32,791,072     $ 3,427,973     $ 518,691     $ 2,268,080     $ 26,576,328  
 
                             
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. Additionally, we have available home equity, commercial lines of credit, and overdraft lines of credit, which do not have fixed expiration dates, of approximately $187.9 million, $8.7 million, and $2.8 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 90 days and 60 days, respectively.

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Critical Accounting Policies
Note 2 to our Audited Consolidated Financial Statements, included in our 2009 Annual Report to Shareholders and incorporated by reference into our 2009 Annual Report on Form 10-K, 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 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 U.S. generally accepted accounting principles, under which we are required to maintain an adequate ALL at September 30, 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 September 30, 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 September 30, 2010, approximately 77.0% of our total loans are in the New York metropolitan area. Additionally, the states of Virginia, Illinois, Maryland, Massachusetts, Pennsylvania, Minnesota, and Michigan accounted for 3.8%, 3.3%, 2.9%, 2.2%, 2.6%, 1.4% and 1.1%, respectively of total loans. The remaining 5.7% of the loan portfolio is secured by real estate primarily in the remainder of the Northeast quadrant of the United States. 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 the loss factors used in our quantitative analysis of the ALL for certain loan types during the third quarter of

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2010. We use this analysis, as a tool, together with principal 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 guidance. We have made annual grants of performance-based stock options since 2006 that vest if certain financial performance measures are met. In accordance with accounting guidance, 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,

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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.
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 6.00% was selected for the December 31, 2009 measurement date and 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 12.9% for 2009. The assumed return on plan assets of 8.25% is based on expected returns in future periods. 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 2009 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.

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Substantially all of our securities portfolio is comprised of mortgage-backed securities and debt securities issued by a GSE. 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 guidance 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 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 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 the first nine months of 2010.
Item 3. — Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk is presented as of December 31, 2009 in Hudson City Bancorp’s Annual Report on Form 10-K. The following is an update of the discussion provided therein.
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 all interest-earning assets, 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 the first nine months of 2010 and did not have any such hedging transactions in place at September 30, 2010 although we may elect to do so in the future as part of our overall interest rate risk management strategy. Our mortgage loan and mortgage-backed security portfolios, which comprise 87.7% of our balance sheet, are subject to risks associated with the economy in the New York metropolitan area, the general economy of the United States and the continuing pressure on housing prices. We continually analyze our asset quality and believe our allowance for loan losses is adequate to cover known and potential losses.
The difference between rates on the yield curve, or the shape of the yield curve, impacts our net interest income. The FOMC noted that the economic outlook softened somewhat in the third quarter of 2010 but that the economy is continuing to grow although at a slower pace than anticipated. The national unemployment rate was 9.6% in September 2010 as compared to 9.5% in June 2010 and 10.0% in December 2009. Although there has been recent improvement in certain economic indicators, the FOMC decided to maintain the overnight lending rate at zero to 0.25% during the third quarter of 2010. As a result of the FOMC policy decisions and the general tenor of the economy, short-term market interest rates have remained at the low levels that have been experienced during the first nine months of 2010

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while longer-term market interest rates have decreased, thus flattening the slope of the market yield curve. Due to our investment and financing decisions, a flatter slope of the yield curve results in a less favorable environment for us 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.
The current interest rate environment has allowed us to continue to re-price lower our short-term time and non-maturity deposits, thereby reducing our cost of funds, and has also allowed us to price medium-term time deposits (2-5 year maturities) at lower rates and extend the weighted-average remaining maturity on this portfolio. The yields on mortgage-related assets have also remained at relatively low levels as the 10 year Treasury fell to 2.5% during the third quarter of 2010 and the GSEs have actively purchased loans in an effect to keep mortgage rates down and support the housing market. Our net interest rate spread decreased to 1.73% for the third quarter of 2010 as compared to 1.89% for the linked second quarter of 2010 and 2.04% for the third quarter of 2009 and our net interest margin decreased to 1.97% for the third quarter of 2010 as compared to 2.13% for the linked second quarter of 2010 and 2.31% for the third quarter of 2009. While our deposits continued to reprice to lower rates during the third quarter of 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 interest rate environment. In addition, the low market interest rates 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 87.4% of our average interest-earning assets during the third quarter of 2010.
The impact of interest rate changes on our interest income is generally felt in later periods than the impact on our interest expense due to differences in the timing of the recognition of items on our balance sheet. The timing of the recognition of interest-earning assets on our balance sheet generally lags the current market rates by 60 to 90 days due to the normal time period between commitment and settlement dates. In contrast, the recognition of interest-bearing liabilities on our balance sheet generally reflects current market interest rates as we generally fund purchases at the time of settlement.
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 decrease, prepayment rates tend to increase. Prepayment rates on our mortgage-related assets have increased during 2009 and the first nine months of 2010 due to the current low market interest rate environment. We believe the higher level of prepayment activity may continue as market interest rates are expected to remain at the current low levels into 2011.

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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 rate, 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 the first nine months of 2010 we saw an increase in call activity on our investment securities as market interest rates remained at these historic lows. We anticipate continued calls of investment securities due to the anticipated continuation of the low current market interest rate environment.
Our borrowings have traditionally consisted of structured callable borrowings with ten year final maturities and initial non-call periods of one to five years. We have used this type of borrowing primarily to fund our growth because these borrowings have a longer duration than shorter-term non-callable borrowings and have a lower cost than a non-callable borrowing with a maturity date similar to the initial call date of the callable borrowing. The likelihood of a borrowing being called is directly related to the current market interest rates, meaning the higher that interest rates move, the more likely the borrowing would be called. The level of call activity generally affects the cost of our borrowed funds, as the call of a borrowing would generally necessitate re-funding, either through a new borrowing or deposit growth, at the higher current market interest rate. During the first nine months of 2010 we experienced no call activity on our borrowed funds due to the continued low levels of market interest rates. At September 30, 2010, we had $22.58 billion of borrowed funds, with a weighted-average rate of 3.91%, with call dates within one year as compared to $22.25 billion at December 31, 2009. We anticipate that none of these borrowings will be called assuming current market interest rates remain stable or increase modestly. We believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be called will not increase substantially unless interest rates were to increase by at least 300 basis points. However, in the event borrowings are called, we anticipate that we will have sufficient resources to meet this funding commitment by borrowing new funds at the prevailing market interest rate or by repaying the borrowings, using funds generated by deposit growth or by using proceeds from securities sales.
During 2009 and the first nine months of 2010, we were able to fund our asset growth with deposit inflows. In order to effectively manage our interest rate risk and liquidity risk resulting from our current callable borrowing position, we are pursuing a variety of strategies to reduce borrowings callable within 12 months. We intend to continue funding any future growth primarily with customer deposits. We also intend to use customer deposits to payoff borrowings as they mature. Using customer deposits in this manner will allow us to achieve a greater balance between deposits and borrowings. If necessary for any future growth or to provide for short-term liquidity needs, we may borrow a combination of short-term borrowings with maturities of three to nine months and longer-term fixed-maturity borrowings with terms of two to five years. We also intend to continue to modify certain borrowings, either extending their call dates or repurchasing the call options. During the first nine months of 2010, we modified approximately $4.03 billion of callable borrowings and extended the call dates of these modified borrowings by at least four years. In addition, we are considering prepayment of certain borrowings; however, at this time, we have no immediate plans to make any such prepayments.
Simulation Model. Hudson City continues to monitor the impact of interest rate volatility in the same manner as at December 31, 2009, utilizing simulation models as a means of analyzing the impact of interest rate changes on our net interest income and net present value of equity. We have not reported the minus 100 or 200 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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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 rather, attempts to assess the impact on our net interest income of interest rate changes. The following table reports the changes to our net interest income over the next 12 months ending September 30, 2011 assuming incremental (equal percent change in each quarter) changes in interest rates or instantaneous changes in interest rates for the given rate shock scenarios.
                 
Change in   Percent Change in Net Interest Income
Interest Rates   Incremental Change   Instantaneous Change
(Basis points)                
200
    2.13 %     7.22 %
100
    0.94       7.85  
50
    0.44       4.77  
(50)
    (0.41 )     (3.78 )
The preceding table indicates that at September 30, 2010, in the event of a 200 basis point incremental increase in interest rates, we would expect to experience a 2.13% increase in net interest income from the base case. This compares to a 1.66% decrease at December 31, 2009. The table also indicates that if market rates were to instantaneously increase 200 basis points we would expect to experience a 7.22% increase to net interest income from the base case analysis compared with a 6.02% decrease at December 31, 2009.
The current period positive change to net interest income in the increasing interest rate scenarios in both these analyses was primarily due to the increased income from our mortgage-related assets due to higher reinvestment rates. This is partially offset by a lower increase in interest expense from deposits due to a lower aggregate principal balance of deposits compared to our interest-earning assets, and limited change in borrowing expense due to the current low interest rate environment and the fact these borrowings will not be significantly put back to us through the 200 basis point analysis. The change from the December 31, 2009 analysis reflects the flattening of the market rate curve and the lower rate environment.
The preceding table also indicates that at September 30, 2010, in the event of a 50 basis point incremental decrease in interest rates over the next 12 months, we would expect to experience a 0.41% decrease from the base case in net interest income. This compares to the 0.01% increase at December 31, 2009. In this analysis, where the rates change over the 12 month period, the decrease in interest income, due to accelerated prepayments and calls, is greater than the decrease in deposits while borrowing expense does not change. The table also indicates that if market rates were to decrease 50 basis points instantaneously we would expect to experience a 3.78% decrease in net interest income from the base case compared with a 4.83% decrease at December 31, 2009. This decrease is primarily due to the instantaneous acceleration of prepayment speeds on our mortgage-related assets and calls of our investment securities in the lower shocked environment, and the subsequent replacement of these instruments at the lower prevailing market rate.
We also monitor our interest rate risk by modeling changes in the present value of equity in the different interest rate environments. The 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, rate caps, rate

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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.
The following table presents the estimated present value of equity over a range of interest rate change scenarios at September 30, 2010. The present value ratio shown in the table is the present value of equity as a percent of the present value of total assets in each of the different interest rate environments.
                 
Change in   Present   Basis Point
Interest Rates   Value Ratio   Change
 
(Basis points)                
200
    6.04 %     58  
100
    6.54       108  
50
    6.21       75  
0
    5.46          
(50)
    4.23       (123 )
In the 200 basis point increase scenario, the present value ratio was 6.04% at September 30, 2010 as compared to 4.81% at December 31, 2009. The change in the present value ratio was positive 58 basis points at September 30, 2010 as compared to negative 258 basis points at December 31, 2009. The increase in the present value ratio and the decrease of the sensitivity measure from the base case in the current period positive 200 basis point shock scenario reflect the decrease in the value of our borrowed funds from the base case elevated price level due to pricing to maturity and the elevated levels of pricing of our mortgage related assets in this low rate environment. If rates were to increase 300 basis points, the present value ratio would be 4.32% with a decrease from the base case of 114 basis points. In the 50 basis point decrease scenario, the present value ratio was 4.23% at September 30, 2010 as compared to 7.07% at December 31, 2009. The change in the present value ratio was negative 123 basis points at September 30, 2010 as compared to negative 32 basis points at December 31, 2009. The decrease in the present value ratio in the current period negative 50 basis point shock scenario reflects the higher valuation of borrowings as lower market rates would further decrease the likelihood that these borrowings will be called.
The changes from the December 31, 2009 analysis (decrease in base case and negative 50 basis point scenario and the increase in the positive 200 basis point scenario) reflect the flattening of the interest rate curve that has occurred during 2010. The long end of the curve has decreased thus causing our borrowings to increase in price while our mortgage-related assets have not increased proportionally due to elevated prepayment speeds. This has resulted in the lower net present value ratio in the base case and negative 50 basis point scenario. However, the lower base case market rate means our borrowings have farther to decrease in price before being put back to us, resulting in an increase in the positive rate scenarios from the December 31, 2009 analysis.
The methods we used 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

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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.

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GAP Analysis. The following table presents the amounts of our interest-earning assets and interest-bearing liabilities outstanding at September 30, 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 the same as those used in the preparation of our December 31, 2009 model. Prepayment speeds on our mortgage loans and mortgage-backed securities have increased from our December 31, 2009 analysis to reflect actual prepayment speeds for these items. Investment securities with step-up features, totaling $2.90 billion, are reported at the earlier of their next step-up date. 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. We reported $2.00 billion of investment securities at their anticipated call date. We have reported no borrowings at their anticipated call date due to the low interest rate environment. We have excluded non-accrual mortgage loans of $769.9 million, non-accrual other loans of $4.6 million.
                                                         
    At September 30, 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
  $ 3,809,203     $ 3,283,507     $ 4,840,347     $ 4,246,723     $ 3,074,144     $ 11,394,110     $ 30,648,034  
Consumer and other loans
    90,745       5,097       14,473       47,913       11,815       156,826       326,869  
Federal funds sold
    485,479                                     485,479  
Mortgage-backed securities
    4,770,384       3,731,996       5,293,611       3,869,256       2,301,107       1,772,666       21,739,020  
FHLB stock
    878,690                                     878,690  
Investment securities
    2,007,315             1,350,000       1,050,000       500,000       123,404       5,030,719  
 
Total interest-earning assets
    12,041,816       7,020,600       11,498,431       9,213,892       5,887,066       13,447,006       59,108,811  
 
 
                                                       
Interest-bearing liabilities:
                                                       
Savings accounts
    64,797       64,797       86,396       86,396       215,990       345,585       863,961  
Interest-bearing demand accounts
    235,578       235,578       350,570       350,570       602,924       636,477       2,411,697  
Money market accounts
    493,923       493,923       987,846       987,846       1,728,731       246,962       4,939,231  
Time deposits
    7,468,475       3,219,948       3,062,711       871,825       1,486,067             16,109,026  
Borrowed funds
    300,000       300,000       150,000       350,000       2,250,000       26,475,000       29,825,000  
 
Total interest-bearing liabilities
    8,562,773       4,314,246       4,637,523       2,646,637       6,283,712       27,704,024       54,148,915  
 
 
                                                       
Interest rate sensitivity gap
  $ 3,479,043     $ 2,706,354     $ 6,860,908     $ 6,567,255     $ (396,646 )   $ (14,257,018 )   $ 4,959,896  
 
                                         
 
                                                       
Cumulative interest rate sensitivity gap
  $ 3,479,043     $ 6,185,397     $ 13,046,305     $ 19,613,560     $ 19,216,914     $ 4,959,896          
 
                                         
 
                                                       
Cumulative interest rate sensitivity gap as a percent of total assets
    5.74 %     10.20 %     21.52 %     32.36 %     31.70 %     8.18 %        
 
                                                       
Cumulative interest-earning assets as a percent of interest-bearing liabilities
    140.63 %     148.03 %     174.49 %     197.28 %     172.67 %     109.16 %        
The cumulative one-year gap as a percent of total assets was positive 10.20% at September 30, 2010 compared with negative 3.70% at December 31, 2009. The change to a positive cumulative one-year gap primarily reflects the accelerated prepayment speeds on our mortgage-related assets, the increase in the amount of agency bonds assumed to be called and the extension of our time deposits to longer-term maturities. The proceeds from the assumed call of $2.00 billion in agency bonds will likely be reinvested in agency hybrid

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adjustable-rate securities. As a result of the expected reinvestment of these proceeds, our one-year interest rate sensitivity gap may decrease in future periods.
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.
Item 4. — Controls and Procedures
Ronald E. Hermance, Jr., our Chairman, President and Chief Executive Officer, and James C. Kranz, our Executive Vice President and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2010. Based upon their evaluation, they each found that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file and submit under the Exchange Act was recorded, processed, summarized and reported as and when required and that such information was accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures.
There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. — Legal Proceedings
We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are immaterial to our financial condition and results of operations.
Item 1A. — Risk Factors
For a summary of risk factors relevant to our operations, please see Part I, Item 1A in our 2009 Annual Report on Form 10-K and our June 30, 2010 Form 10-Q. There has been no material change in risk factors since June 30, 2010, except as described below.
The recently publicized foreclosure issues affecting the nation’s largest mortgage loan servicers could impact our foreclosure process and timing to completion of foreclosures.
Several of the nation’s largest mortgage loan servicers have experienced highly publicized compliance issues with respect to their foreclosure processes. As a result, these servicers have self imposed moratoriums on their foreclosures and have been the subject of state attorney general scrutiny and consumer lawsuits. These difficulties and the potential legal and regulatory responses could impact the foreclosure process and timing to completion of foreclosures for residential mortgage lenders generally,

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including the Company. Over the past few years, foreclosure timelines have increased in general due to, among other reasons, processing delays associated with the significant increase in the number of foreclosure cases as a result of the economic crisis and voluntary (and in some cases mandatory) programs intended to permit or require lenders to consider loan modifications or other alternatives to foreclosure. Further increases in the foreclosure timeline may have an adverse effect on collateral values and our ability to maximize our recoveries.
Our ability to originate mortgage loans for portfolio has been adversely affected by the increased competition resulting from the unprecedented involvement of the U.S. government and GSEs in the residential mortgage market.
Over the past few years, we have faced increased competition for mortgage loans due to the unprecedented involvement of the GSEs in the mortgage market. This involvement is a result of the recent economic crisis and has caused the interest rate for thirty year fixed rate mortgage loans that conform to the GSEs’ loan purchase guidelines to remain artificially low. We originate and purchase such conforming loans and retain them for portfolio. In addition, the U.S. Congress recently extended through September 2011 the expanded GSE conforming loan limits in many of our operating markets, allowing larger balance loans to be acquired by the GSEs, and more loans in our portfolio qualified under the expanding conforming loan limits and were refinanced into fixed rate mortgages. As a result of these factors, we expect that our one-to-four family loan repayments will remain at elevated levels, making it difficult for us to grow our mortgage loan portfolio and balance sheet.
Our concentration in FHLB borrowings, particularly borrowings callable at the option of the FHLB, could adversely affect our cost of funds and net interest margin if interest rates were to increase significantly.
At September 30, 2010, we had $17.18 billion of borrowing from the FHLB, or 57.6% of our total borrowings and 31.2% of our total liabilities. In addition, at that date $16.73 billion of our FHLB borrowings are callable by the FHLB on a quarterly basis. Although we believe that under current market conditions none of these borrowings would be called and that the likelihood they would be called would not increase substantially unless interest rates were to increase by 300 basis points, we are at risk that the FHLB may decide to call these borrowings earlier than we anticipate. Our borrowing agreement with the FHLB requires the FHLB to offer another leading product at market interest rates to replace any called borrowings. Should the FHLB call a substantial portion of these borrowings during a short time period we may experience a significant increase in our cost of funds and a decline in our net interest income.
We do not expect to experience more than nominal growth in the current economic environment and bank regulatory environment.
Since our second step conversion and public offering in 2005 we have experienced approximately 21% annualized growth through year end 2009. During the first nine months of 2010 our assets increased $348.9 million, or 0.6%. However, since March 31, 2010, our assets decreased $615.0 million. Although our regulatory capital ratios are in excess of the requirements to be considered “well capitalized’ for bank regulatory purposes, we believe the current regulatory environment, marked by both legislative and regulatory reactions to the recent recession and financial crisis, would necessitate maintaining a reasonable cushion above the applicable regulatory requirements to be considered “well capitalized.”

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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 portfolio and to continue our recent growth strategy. Accordingly, we are likely to maintain our relative balance sheet size or experience only nominal growth, and we may even experience some balance sheet shrinkage, while current economic and regulatory conditions prevail.
We experienced a contraction in our net interest margin during the three and nine month periods ended September 30, 2010 and expect to continue to experience a contraction in our net interest margin if current market conditions continue.
Our net interest margin for the three months ended September 30, 2010 was 1.97% compared to 2.13% for the three months ended June 30, 2010 and 2.31% for the three months ended September 30, 2009. Similarly, our net interest margin was 1.86% for the nine months ended September 30, 2010 compared to 1.89% for the nine months ended September 30, 2009. The respective declines in our net interest margin were due to the declines in the average yields on our interest earning assets outpacing the declines in our average cost of funds over similar time frames. The decline in our average yields reflects the combination of the overall low interest rate environment, the GSEs efforts to keep mortgage rates low to support the housing market and the continuation of the trend of homeowners to refinance their mortgage loans in the low rate environment. The efforts by the GSEs has also had the effect of reducing our sources for purchasing loans in the secondary market as the sellers from whom we have historically purchased loans are selling to the GSEs. The United States Congress recently extended to September 2011 the time period within which the GSE’s may purchase loans under an expanded limit on principal balances that qualify as conforming loans. Further, on November 3, 2010, the FOMC announced that the FRB will purchase approximately $600 billion of longer-term U.S. government securities, thus likely to put downward pressure on long-term interest rates, including interest rates on mortgage- related assets. 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 the likelihood of nominal balance sheet growth, a reduction of net interest income.
Enhanced regulatory scrutiny in the wake of the recent financial crisis and the Reform Act combined with our significant growth will require us to enhance certain aspects of our operations to ensure our ongoing compliance with regulatory requirements.
The recent economic recession and financial crisis, which has been marked by hundreds of bank failures, has resulted in significant government reaction both in terms of legislative actions and enhanced regulatory scrutiny. Legislative action has included adoption and implementation of the Troubled Asset Relief Program resulting in the significant investment of public monies in financial institutions, and the enactment of the Reform Act which will impose significant new regulatory burdens on us. We believe the regulatory response to the financial crisis, the legislative directives to the banking regulators and related public reaction has resulted in significantly greater regulatory supervision of financial institutions, particularly larger institutions such as Hudson City. Our growth since our initial public offering in 1999, and particularly since our second step conversion in 2005, has resulted in our becoming one of the 40 largest domestic insured depository institutions by asset size. We have enhanced systems and added to staff to keep up with the ordinary operational and regulatory burden normally associated with a growing institution. We expect these efforts to be further enhanced, as we are faced with a greater regulatory burden under the Reform Act and the enhanced regulatory scrutiny based on our size in the current environment. As a result, we expect to enhance our operational and compliance functions in a number of areas in order to meet the expected regulatory

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scrutiny. This may result in additional investment in both technology and staffing that is likely to increase our non-interest expense.
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds
The following table reports information regarding repurchases of our common stock during the third quarter of 2010 and the stock repurchase plans approved by our Board of Directors.
                                 
                            Maximum  
                    Total Number of     Number of Shares  
    Total             Shares Purchased     that May Yet Be  
    Number of     Average     as Part of Publicly     Purchased Under  
    Shares     Price Paid     Announced Plans     the Plans or  
Period   Purchased     per Share     or Programs     Programs (1)  
 
July 1-July 31, 2010
        $             50,123,550  
August 1-August 31, 2010
                      50,123,550  
September 1-September 30, 2010
                      50,123,550  
 
                           
Total
                         
 
                           
 
(1)   On July 25, 2007, Hudson City Bancorp announced the adoption of its eighth Stock Repurchase Program, which authorized the repurchase of up to 51,400,000 shares of common stock. This program has no expiration date.
Item 3. — Defaults Upon Senior Securities
Not applicable.
Item 4. — (Removed and Reserved)
Item 5. — Other Information
Not applicable.
Item 6. — Exhibits
     
Exhibit Number   Exhibit
31.1
  Certification of Chief Executive Officer
 
   
31.2
  Certification of Chief Financial Officer
 
   
32.1
  Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *
 
   
101
  The following information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed with the SEC on November 8, 2010, has been formatted in eXtensible Business Reporting Language: (i) Consolidated Statements of Financial Condition at September 30, 2010 and December 31, 2009, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2009, (iii) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2010 and 2009 , (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 and (v) Notes to the Unaudited Consolidated Financial Statements (detail tagged). *
 
*   Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Hudson City Bancorp, Inc.
 
 
Date: November 8, 2010  By:   /s/ Ronald E. Hermance, Jr.    
    Ronald E. Hermance, Jr.   
    Chairman, President and
Chief Executive Officer
(Principal Executive Officer) 
 
 
     
Date: November 8, 2010   By:   /s/ James C. Kranz    
    James C. Kranz   
    Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) 
 
 

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